Fair Value Measurements

6 Months Ended

Jun. 30, 2012

Fair Value Measurements [Abstract]

Fair Value Measurements

7.         Fair Value Measurements

Fair value estimates are based on quoted market prices, if available, quoted market prices of similar assets or liabilities, or the present value of expected future cash flows and other valuation techniques.  These valuations are significantly affected by discount rates, cash flow assumptions and risk assumptions used.  Therefore, fair value estimates may not be substantiated by comparison to independent markets and are not intended to reflect the proceeds that may be realizable in an immediate settlement of the instruments.

            Fair value is determined at one point in time and is not representative of future value.  These amounts do not reflect the total value of a going concern organization.  Management does not have the intention to dispose of a significant portion of its assets and liabilities and therefore, the unrealized gains or losses should not be interpreted as a forecast of future earnings and cash flows.

            The following is a discussion of assets and liabilities measured at fair value on a recurring basis and valuation techniques applied:

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.

            We may be required from time to time to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP.  These adjustments to fair value usually result from application of lower-of-cost-or market accounting or write-downs of individual assets.

Impaired loans (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 Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

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.

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, 2012 and December 31, 2011 are as follows:

	Fair Value Measurement Using
Description	Total		(Level 1)	(Level 2)	(Level 3)
(In thousands)
June 30, 2012
Available for Sale:
U.S. Government agencies		$2,005	$-	$2,005	$-
States and political subdivisions		56,769	-	56,769	-
Corporate obligations		8,845	-	8,845	-
Mortgage-backed securities-government   sponsored agencies		76,889	-	76,889	-
Equity securities-financial services		212	212	-	­  ______-
Total		$144,720	$212	$144,508	$             -
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 agencies		70,965	-	70,965	-
Equity securities-financial services		345	345	_____-_	­_______-
Total		$150,263	$345	$149,918	$             -

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, 2012 and December 31, 2011 are as follows:

		Fair Value Measurement  using
(In thousands)
Description	Total	(Level 1)	(Level 2)	(Level 3)
June 30, 2012
Impaired Loans	$12,990	$-	$-	$12,990
Foreclosed Real Estate Owned	1,268	-	-	1,268
	$14,258	$-	$-	$14,258
December 31, 2011
Impaired Loans	$12,399	$ -	$ -	$12,399
Foreclosed Real Estate Owned	2,910	-	-	2,910
	$15,309	$ -	$ -	$15,309

There were no assets measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value at June 30, 2012.

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Norwood has utilized Level 3 inputs to determine fair value:

	Quantitative Information about Level 3 Fair Value Measurements
(In thousands)	Fair Value Estimate	Valuation Techniques	Unobservable Input	Range(Weighted Average)
June 30, 2012
Impaired loans	$12,990	Appraisal of collateral(1)	Appraisal adjustments(2) Liquidation expenses(2)	0-20% 20%
Foreclosed real estate owned	$1,268	Appraisal of collateral(1)(3)

1) Fair value is generally determined through independent appraisals of the underlying collateral, which

      generally include various level 3 inputs which are not identifiable, less any associated allowance.

(

(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and

       estimated liquidation expenses.  The range and weighted average of liquidation expenses and other

       appraisal adjustments are presented as a percent of the appraisal.

(3) Includes qualitative adjustments by management and estimated liquidation expenses.

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, 2012 and December 31, 2011.

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.

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. The fair value of impaired loans are generally based on the fair value of the loan's collateral.

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.

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.

Bank owned life insurance (carried at cost):

            The fair value is equal to the cash surrender value of the Bank-owned life insurance.

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, 2012 and December 31, 2011. (In thousands)

	Fair Value Measurements at June 30, 2012
	Carrying Amount	Fair Value	Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and due from banks, interest-bearing deposits with banks and federal funds sold	$24,396	$24,396	$24,396	$-	$-
Securities	144,892	144,897	212	144,685	-
Loans receivable, net	473,646	483,418	-	-	483,418
Mortgage servicing rights	288	286	286	-	-
Investment in FHLB stock	3,243	3,243	3,243	-	-
Bank owned life insurance	12,119	12,119	12,119	-	-
Accrued interest receivable	2,416	2,416	2,416	-	-
Financial liabilities:
Deposits	534,157	535,878	319,552	-	216,326
Short-term borrowings	27,192	27,192	27,192	-	-
Other borrowings	27,579	30,947	-	-	30,947
Accrued interest payable	1,335	1,335	1,335	-	-
Off-balance sheet financial instruments:  Commitments to extend credit and outstanding letters of credit	-	-	-	-	-

	Fair Value Measurements at December 31, 2011
	Carrying Amount	Fair Value
Financial assets:
Cash and due from banks, interest-   bearing deposits with banks and   federal funds sold	$21,423	$21,423
Securities	150,434	150,440
Loans receivable, net	452,449	463,118
Mortgage servicing rights	302	308
Investment in FHLB stock	3,593	3,593
Bank owned life insurance	11,887	11,887
Accrued interest receivable	2,468	2,468
Financial liabilities:
Deposits	525,767	527,707
Short-term borrowings	21,794	21,794
Other borrowings	27,670	30,002
Accrued interest payable	1,321	1,321
Off-balance sheet financial instruments:  Commitments to extend credit and         outstanding letters of credit	-	-