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Fair Values of Financial Instruments | 12 Months Ended
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Dec. 31, 2011
Fair Values of Financial Instruments |
FAIR VALUES OF FINANCIAL INSTRUMENTS | NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS Management uses its best judgment in estimating the fair value of the Company's financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year ends and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year end. The fair value hierarchy 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 are 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 December 31, 2011 and 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 |
December 31, 2011 |  |  |  |  |  |  |  |  |  |  |  |
Available for Sale: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Government agencies |  | $ | 13,398 |  |  | $ | — |  |  | $ | 13,398 |  |  | $ | — |
States and political subdivisions |  |  | 56,746 |  |  |  | — |  |  |  | 56,746 |  |  |  | — |
Corporate obligations |  |  | 8,809 |  |  |  | — |  |  |  | 8,809 |  |  |  | — |
Mortgage-backed securities - |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
government sponsored entities |  |  | 70,965 |  |  |  | — |  |  |  | 70,965 |  |  |  | — |
Equity securities - financial services |  |  | 345 |  |  |  | 345 |  |  |  | — |  |  |  | — |
Total available for sale |  | $ | 150,263 |  |  | $ | 345 |  |  | $ | 149,918 |  |  | $ | — |
December 31, 2010 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Available for Sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. 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 entities |  |  | 60,928 |  |  |  | — |  |  |  | 60,928 |  |  |  | — |
Equity securities - financial services |  |  | 604 |  |  |  | 604 |  |  |  | — |  |  |  | — |
Total available for sale |  | $ | 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 December 31, 2011 and 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 |
December 31, 2011 |  |  |  |  |  |  |  |  |  |  |  |
Impaired Loans |  | $ | 12,399 |  |  | $ | — |  |  | $ | — |  |  | $ | 12,399 |
Foreclosed real estate owned |  |  | 2,910 |  |  |  | — |  |  |  | — |  |  |  | 2,910 |
|  | $ | 15,309 |  |  | $ | — |  |  | $ | — |  |  | $ | 15,309 |
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 December 31, 2011 and 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) and held to maturity (carried at amortized cost) 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 3). In the absence of such evidence, management's best estimate is used. Management's best estimate consists of both internal and external support on certain Level 3 investments. 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 measures 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 lowest level of input that is significant to the fair value measurements. As of December 31, 2011, the fair value investment in impaired loans totaled $12,399,000 which included two loans for $6,823,000 for which a valuation allowance had been provided based on the estimated value of the collateral or the present value of estimated cash flows, and twenty loans for $6,807,000 which did not require a valuation allowance since the estimated realizable value of the collateral exceeded the recorded investment in the loan. As of December 31, 2011, the Company has recognized charge-offs against the allowance for loan losses on these impaired loans in the amount of $698,000 over the life of the loans. As of December 31, 2010, the fair value investment in impaired loans totaled $13,104,000 which includes three loans for $8.6 million for which a valuation allowance has been provided based on current collateral values and seven loans for $6.1 million which do not require a valuation allowance since the current collateral value exceeds the loan value. As of December 31, 2010, the Company has recognized charge-offs against the allowance for loan losses on impaired loans in the amount of $700,000 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 3 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. The FHLB has incurred losses in both 2009 and 2010 and has suspended the payment of dividends and has allowed some stock redemptions; however, the FHLB has shown positive results during 2011. The losses are primarily attributable to impairment of investment securities associated with the extreme economic conditions in place during the previous several years. Management evaluated the stock and concluded that the stock was not impaired for the periods presented herein. More consideration was given to the long-term prospects for the FHLB as opposed to the recent stress caused by the extreme economic conditions the world is facing. Management also considered that the FHLB's regulatory capital ratios have increased from the prior year, liquidity appears adequate, and the new shares of FHLB stock continue to change hands at the $100 par value. 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 December 31, 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 December 31, 2011 and December 31, 2010.
|  | December 31, 2011 |  |  | December 31, 2010 |
|  | Carrying |  |  | Fair |  |  | Carrying |  |  | Fair |
|  | Amount |  |  | Value |  |  | Amount |  |  | Value |
|  | (In Thousands) |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks, interest bearing deposits with banks and federal funds sold |  | $ | 21,423 |  |  | $ | 21,423 |  |  | $ | 16,625 |  |  | $ | 16,625 |
Securities |  |  | 150,434 |  |  |  | 150,440 |  |  |  | 145,985 |  |  |  | 145,994 |
Loans receivable, net |  |  | 452,449 |  |  |  | 463,118 |  |  |  | 351,239 |  |  |  | 358,873 |
Mortgage servicing rights |  |  | 302 |  |  |  | 308 |  |  |  | 250 |  |  |  | 274 |
Investment in FHLB stock |  |  | 3,593 |  |  |  | 3,593 |  |  |  | 3,361 |  |  |  | 3,361 |
Bank owned life insurance |  |  | 11,887 |  |  |  | 11,887 |  |  |  | 8,249 |  |  |  | 8,249 |
Accrued interest receivable |  |  | 2,468 |  |  |  | 2,468 |  |  |  | 2,166 |  |  |  | 2,166 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 525,767 |  |  |  | 527,707 |  |  |  | 393,865 |  |  |  | 395,157 |
Short-term borrowings |  |  | 21,794 |  |  |  | 21,794 |  |  |  | 33,309 |  |  |  | 33,309 |
Other borrowings |  |  | 27,670 |  |  |  | 30,002 |  |  |  | 38,000 |  |  |  | 40,413 |
Accrued interest payable |  |  | 1,321 |  |  |  | 1,321 |  |  |  | 1,536 |  |  |  | 1,536 |
Off-balance sheet financial instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commitments to extend credit and outstanding letters of credit |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=6925170&loc=d3e19296-110258 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 159 -Paragraph 17-22, 27, 28 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=6947722&loc=d3e13433-108611 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15C, 15D -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=6947722&loc=d3e13504-108611 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15A -Subparagraph a-d -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=6947722&loc=d3e13537-108611 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44A, 44B -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6925170&loc=d3e19207-110258 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 3, 10, 14, 15 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15B -Subparagraph a, b -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 157 -Paragraph 32, 33, 34 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. + Details
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