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FAIR VALUE OF ASSETS AND LIABILITIES
 6 Months Ended
Jun. 30, 2012
Fair Value Disclosures [Abstract]  
Fair Value Disclosures [Text Block]

NOTE H – FAIR VALUE OF ASSETS AND LIABILITIES

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:

 

Level 1 Quoted prices in active markets for identical assets or liabilities
   
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
   
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

 

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis, recognized in the accompanying balance sheets, as well as the general classifications of such assets pursuant to the valuation hierarchy.

 

Available-for-Sale Securities

 

The fair values of available-for-sale securities are determined by various valuation methodologies. Level 1 securities include money market mutual funds. Level 1 inputs included quoted prices in an active market. Level 2 securities include U.S. government agencies, mortgage-backed securities, and obligations of political and state subdivisions. Level 2 inputs do not include quoted prices for individual securities in active markets; however, they do include inputs that are either directly or indirectly observable for the individual security being valued. Such observable inputs include interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, credit risks and default rates. Also included are inputs derived principally from or corroborated by observable market data by correlation or other means.

 

The following table presents the fair value measurements of assets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2012 and December 31, 2011.

 

Interest Rate Contracts

 

The fair values of interest rate contracts are based upon the estimated amount the Company would receive or pay to terminate the contracts or agreements, taking into account underlying interest rates, credit worthiness of underlying customers for credit derivatives and, when appropriate, the creditworthiness of the counterparties.

 

($'s in thousands)   Fair Values at     Fair Value Measurements Using:  
Description   6/30/2012     Level 1     Level 2     Level 3  
Available-for-Sale Securities:                                
U.S. Treasury and Government                                
    Agencies   $ 14,611     $ -     $ 14,611     $ -  
Mortgage-backed securities     67,727       -       67,727       -  
State and political subdivisions     16,817       -       16,817       -  
Money Market Mutual Fund     3,359       3,359       -       -  
Equity securities     23       -       23       -  
Interest rate contracts     149       -       149       -  

  

($'s in thousands)   Fair Values at     Fair Value Measurements Using:  
Description   12/31/2011     Level 1     Level 2     Level 3  
Available-for-Sale Securities:                                
U.S. Treasury and Government Agencies   $ 25,424     $ -     $ 25,424     $ -  
Mortgage-backed securities     67,698       -       67,698       -  
State and political subdivisions     16,793       -       16,793       -  
Money Market Mutual Funds     2,040       2,040       -       -  
Equity Securities     23       -       23       -  

 

Level 1 – Quoted Prices in Active Markets for Identical Assets

Level 2 – Significant Other Observable Inputs

Level 3 – Significant Unobservable Inputs

 

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

 

Impaired Loans (Collateral-dependent)

 

Loans for which it is probable the Company will not collect all principal and interest due according to contractual terms are measured for impairment. If the impaired loan is collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining an independent appraisal of the collateral and applying a discount factor to the value based on the Company’s loan review policy. All impaired loans held by the Company were collateral dependent at June 30, 2012 and December 31, 2011.

 

Mortgage Servicing Rights

 

Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models associated with the servicing rights and discounting the cash flows using discount market rates. The servicing portfolio has been valued using all relevant positive and negative cash flows including servicing fees, miscellaneous income and float; marginal costs of servicing; the cost of carry of advances; and foreclosure losses; and applying certain prevailing assumptions used in the marketplace. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy.

 

Foreclosed Assets Held For Sale

 

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value (based on current appraised value) at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Management has determined fair value measurements on other real estate owned primarily through evaluations of appraisals performed, and current and past offers for the other real estate under evaluation.

 

Software

 

The Company reviews the carrying value of software for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors.

 

The following table presents the fair value measurements of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2012 and December 31, 2011 ($’s in thousands):

 

($'s in thousands)   Fair Values at     Fair Value Measurements Using:  
Description   6/30/2012     Level 1     Level 2     Level 3  
Impaired loans   $ 5,046     $ -     $ -     $ 5,046  
Mortgage servicing rights     3,359       -       -       3,359  
Foreclosed assets     1,122       -       -       1,122  

 

($'s in thousands)   Fair Values at     Fair Value Measurements Using:  
Description   12/31/2011     Level 1     Level 2     Level 3  
Impaired loans   $ 5,575     $ -     $ -     $ 5,575  
Mortgage servicing rights     2,820       -       -       2,820  
Foreclosed assets     877       -       -       877  
Software     159       -       -       159  

 

Unobservable (Level 3) Inputs

 

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements.

 

  Fair Value at     Valuation            Range (Weighted  
($'s in thousands)   6/30/2012     Technique     Unobservable Inputs     Average)  
                         
Collateral-dependent impaired loans   $ 5,046       Market comparable properties       Comparability adjustments (%)       Not available  
                                 
Foreclosed assets     1,122       Market comparable properties       Marketability discount       10.0 %
                                 
Mortgage servicing rights     3,359       Discounted cash flow       Discount Rate       8.5 %
                Constant prepayment rate        17.9 %
                P&I earnings credit        0.25 %
                T&I earnings credit         1.1 %
                Inflation for cost of servicing         1.5 %

 

There were no changes in the inputs or methodologies used to determine fair value at June 30, 2012 as compared to December 31, 2011.

 

The following table presents estimated fair values of the Company’s other financial instruments carried at other than fair value. The fair values of certain of these instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments, and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate.

 

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value.

 

Cash and Cash Equivalents and Federal Reserve and Federal Home Loan Bank Stock and Accrued Interest Payable and Receivable

 

The carrying amount approximates the fair value.

 

Loans

 

The estimated fair value for loans receivable, including loans held for sale, net, is based on estimates of the rate State Bank would charge for similar loans at June 30, 2012 and December 31, 2011, applied for the time period until the loans are assumed to re-price or be paid.

 

Deposits & Other Borrowings

 

Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount approximates the fair value. The estimated fair value for fixed-maturity time deposits, as well as borrowings, is based on estimates of the rate State Bank could pay on similar instruments with similar terms and maturities at June 30, 2012 and December 31, 2011.

 

The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The estimated fair value for other financial instruments and off-balance-sheet loan commitments approximate cost at June 30, 2012 and are not considered significant to this presentation.

 

June 30, 2012   Carrying     Fair Value Measurments Using  
$'s in thousands   Amount     (Level 1)     (Level 2)     (Level 3)  
                         
Financial assets                                
Cash and cash equivalents   $ 14,636     $ 14,636     $ -     $ -  
Loans held for sale     10,595       -       10,915       -  
Loans, net of allowance for loan losses     445,492       -       -       451,079  
Federal Reserve and FHLB Bank stock     3,748       -       3,748       -  
Accrued interest receivable     1,597       -       1,597       -  
                                 
Financial liabilities                                
Deposits   $ 518,661     $ -     $ 522,162     $ -  
Short-term borrowings     15,824       -       15,830       -  
Notes payable     2,249       -       2,279       -  
FHLB advances     17,500       -       18,295       -  
Trust preferred securities     20,620       -       8,652       -  
Accrued interest payable     3,836       -       3,836       -  

 

 

December 31, 2011   Carrying     Fair Value Measurments Using  
$'s in thousands   Amount     (Level 1)     (Level 2)     (Level 3)  
                         
Financial assets                                
Cash and cash equivalents   $ 14,846     $ 14,846     $ -     $ -  
Loans held for sale     5,238       -       5,334       -  
Loans, net of allowance for loan losses     436,025       -       -       443,727  
Federal Reserve and FHLB Bank stock, at cost     3,685       -       3,685       -  
Interest receivable     1,635       -       1,635       -  
                                 
Financial liabilities                                
Deposits   $ 518,765     $ -     $ 521,654     $ -  
Short-term borrowings     18,779       -       18,903       -  
Notes payable     2,788       -       2,815       -  
Federal Home Loan Bank advances     12,776       -       13,149       -  
Trust preferred securities     20,620       -       8,320       -  
Interest payable     2,954       -       2,954       -