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Fair Value Measurements
 6 Months Ended
Jun. 30, 2011
Fair Value Measurements  
Fair Value Measurements
 
9.           Fair Value Measurements

Generally accepted accounting principles in the United States of America established a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy are as follows:

 
Level 1:
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
     
 
Level 2:
Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
     
 
Level 3:
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

An asset's or liability's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2011 and December 31, 2010 are as follows:

 
Fair Value Measurement Reporting Date Using
  
 
 
 
 
Description
 
 
 
Total
    
(Level 1)
Quoted Prices in
Active Markets
For Identical
Assets
    
(Level 2)
Significant Other
Observable
Inputs
    
(Level 3)
Significant Unobservable
Inputs
  
     (In thousands)  
June 30, 2011
                        
Available for Sale:
                        
US Government agencies
   $ 31,472     $ -     $ 31,472     $ -  
States and political subdivisions
     51,308       -       51,308       -  
Corporate obligations
     7,998       -       7,998       -  
Mortgage-backed securities-government
  sponsored agencies
     60,910       -       60,910       -  
Equity securities-financial services
     587       587       -    
-
  
Total
   $ 152,275     $ 587     $ 151,688     $ -  
                                 
December 31, 2010
                                
Available for Sale:
                                
US Government agencies
   $ 30,268     $ -     $ 30,268     $ -  
States and political subdivisions
     49,766       -       49,766       -  
Corporate obligations
     4,249       -       4,249       -  
Mortgage-backed securities-government
  sponsored agencies
     60,928       -       60,928       -  
Equity securities-financial services
     604       604    
-
    
-
  
Total
   $ 145,815     $ 604     $ 145,211     $ -  

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2011 and December 31, 2010 are as follows:

      Fair Value Measurement Reporting Date using  
         
(Level 1)
    
(Level 2)
        
(In thousands)
        
Quoted Prices in
    
Significant
    
(Level 3)
  
         
Active Markets
    
Other
    
Significant
  
         
For Identical
    
Observable
    
Unobservable
  
Description
  
Total
    
Assets
    
Inputs
    
Inputs
  
June 30, 2011
      
Impaired Loans
   $ 14,612     $ -     $ -     $ 14,612  
Foreclosed Real Estate Owned
     1,755       -       -       1,755  
    $ 16,367     $ -     $ -     $ 16,367  
                                 
December 31, 2010
                                
Impaired Loans
   $ 13,104     $ -     $ 7,038     $ 6,066  
Foreclosed Real Estate Owned
     748       -       748       -  
    $ 13,852     $ -     $ 7,786     $ 6,066  


The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company's assets and liabilities.  Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company's disclosures and those of other companies may not be meaningful.  The following methods and assumptions were used to estimate the fair values of the Company's financial instruments at June 30, 2011 and December 31, 2010.

Cash and cash equivalents (carried at cost):

The carrying amounts reported in the consolidated balance sheet for cash and short-term instruments approximate those assets' fair values.
 
Securities:

The fair value of securities available for sale (carried at fair value) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted prices.  For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 2).  Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) are used to support fair values of certain (Level 3) investments, if applicable.

Loans receivable (carried at cost):

The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans.  Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal.  Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

Impaired loans (generally carried at fair value):

The Company measured impairment generally based on the fair value of the loan's collateral.  Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds.  These assets are included as either Level 2 or Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.  As of June 30, 2011, the fair value investment in impaired loans totaled $14.6 million which includes four loans for $10.8 million for which a valuation allowance has been provided based on current collateral values and ten loans for $5.5 million which do not require a valuation allowance since the current collateral value exceeds the loan value.  As of June 30, 2011, the Company has recognized charge-offs against the allowance for loan losses on impaired loans in the amount of $1,450,000 over the life of the loans.

Mortgage servicing rights (generally carried at cost)

The Company utilizes a third party provider to estimate the fair value of certain loan servicing rights.  Fair value for the purpose of this measurement is defined as the amount at which the asset could be exchanged in a current transaction between willing parties, other than in a forced liquidation.

Foreclosed real estate owned (carried at fair value):

Real estate properties acquired through, or in lieu of loan foreclosure are to be sold and are carried at fair value less estimated cost to sell.  Fair value is based upon independent market prices, appraised value of the collateral or management's estimation of the value of the collateral.  These assets are included in Level 2 fair value based upon the lowest level of input that is significant to the fair value measurement.

Restricted investment in Federal Home Loan Bank stock (carried at cost):

The Company, as a member of the Federal Home Loan Bank (FHLB) system is required to maintain an investment in capital stock of its district FHLB according to a predetermined formula. This restricted stock has no quoted market value and is carried at cost.

In December 2008, the FHLB of Pittsburgh notified member banks that it was suspending dividend payments and the repurchase of excess capital stock.  In October, 2010, the FHLB of Pittsburgh repurchased a portion of member bank's excess stock, but notified member banks that decisions regarding future capital stock repurchases will be made on a quarterly basis.  Subsequent repurchases have been executed in the first and second quarters of 2011.
 
Management evaluates the restricted stock for impairment.  Management's determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value.  The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB.  Management believes no impairment charge is necessary related to FHLB stock as of June 30, 2011.

Accrued interest receivable and payable (carried at cost):

The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.

Deposit liabilities (carried at cost):

The fair values disclosed for demand deposits (e.g. interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts).  Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Short-term borrowings (carried at cost):

The carrying amounts of short-term borrowings approximate their fair values.

Other borrowings (carried at cost):

Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity.  These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.

Off-balance sheet financial instruments (disclosed at cost):

Fair values for the Company's off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties' credit standing.

The estimated fair values of the Bank's financial instruments were as follows at June 30, 2011 and December 31, 2010.
 
   
June 30, 2011
    
December 31, 2010
  
   
Carrying
Amount
    
Fair
Value
    
Carrying
Amount
    
Fair
Value
  
   
(In Thousands)
  
Financial assets:
                        
Cash and due from banks, interest-
  bearing deposits with banks and
  federal funds sold
   $ 45,211     $ 45,211     $ 16,625     $ 16,625  
Securities
     152,445       152,453       145,985       145,994  
Loans receivable, net
     459,379       472,687       351,239       358,873  
Mortgage servicing rights
     301       314       250       274  
Investment in FHLB stock
     3,981       3,981       3,361       3,361  
Accrued interest receivable
     2,539       2,539       2,166       2,166  
                                 
Financial liabilities:
                                
Deposits
     538,289       541,633       393,865       395,157  
Short-term borrowings
     32,181       32,181       33,309       33,309  
Other borrowings
     42,761       44,911       38,000       40,413  
Accrued interest payable
     1,473       1,473       1,536       1,536  
                                 
Off-balance sheet financial instruments:
 Commitments to extend credit and
     outstanding letters of credit
       -         -         -         -