Fair Value Of Financial Instruments

6 Months Ended

Jun. 30, 2012

Fair Value Of Financial Instruments [Abstract]

Fair Value Of Financial Instruments

NOTE 10 – FAIR VALUE OF FINANCIAL INSTRUMENTS

Management uses its best judgment in estimating the fair value of our consolidated 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 we could have realized in a sale transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective period ends, and have not been re-evaluated or updated for purposes of these 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 period end.

Under FASB ASC 820, Fair Value Measurement and Disclosures, there is a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined by the FASB ASC 820 hierarchy are as follows:

Level I - Quoted prices are available in active markets for identical assets or liabilities as of the reporting date.

Level II - Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date. The nature of these asset and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.

Level III - Assets and liabilities that have little to no pricing observability as of the reporting date. These items do not have two-way markets and are measured using management's best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

The following table summarizes the valuation of our financial assets measured on a recurring basis by the above FASB

ASC 820 pricing observability levels:

				Quoted Prices in		Significant
				Active Markets		Other	Significant
		Fair		for Identical		Observable	Unobservable
		Value		Assets		Inputs	Inputs
(Dollars in thousands)		Measurements		(Level I)		(Level II)	(Level III)
June 30, 2012:
State and political subdivisions	$	27,969	$	-	$	27,969	$	-
Mortgage-backed securities:
U.S. government-sponsored enterprises		86,194		-		86,194		-
Equity securities-financial services industry and other		1,345		1,195		150		-
	$	115,508	$	1,195	$	114,313	$	-
December 31, 2011:
State and political subdivisions	$	20,570	$	-	$	20,570	$	-
Mortgage-backed securities:
U.S. government-sponsored enterprises		71,998		-		71,998		-
Private mortgage-backed securities		2,477		-		2,477		-
Equity securities-financial services industry and other		1,316		1,173		143		-
	$	96,361	$	1,173	$	95,188	$	-

Our available-for-sale and held-to-maturity securities portfolios contain investments, which were all rated within our investment policy guidelines at time of purchase and upon review of the entire portfolio all securities are marketable and have observable pricing inputs.

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level are as follows:

			Quoted Prices		Significant
			In Active		Other			Significant
		Fair	Markets for		Observable			Unobservable
		Value	Identical Assets		Inputs			Inputs
(Dollars in thousands)		Measurements	(Level I)		(Level II)			(Level III)
June 30, 2012:
Impaired loans	$	12,433	$	-	$	-	$	12,433
Foreclosed real estate		5,064		-				5,064
December 31, 2011:
Impaired loans	$	11,571	$	-	$	-	$	11,571
Foreclosed real estate		4,959		-		-		4,959

The following table presents additional qualitative information about assets measured at fair value on a nonrecurring basis and for which Level 3 inputs were used to determine fair value:

		Qualitative Information about Level 3 Fair Value Measurements
		Fair				Range
		Value	Valuation	Unobservable		(Weighted
(Dollars in thousands)		Estimate	Techniques	Input		Average)
June 30, 2012:
Impaired loans	$	12,433	Appraisal of	Appraisal		0.00% to -66.3%
			collateral	adjustments (1)		(-11.3	%)
				Selling
				expenses (1)	-7.0%	(-7.0	%)
Foreclosed real estate		5,064	Appraisal of
			collateral

(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated selling expenses. The range and weighted average of selling expenses and other appraisal adjustments are presented as a percent of the appraisal.

.

The following methods and assumptions were used to estimate the fair value of our financial instruments at June 30, 2012, and December 31, 2011:

Cash and Cash Equivalents (Carried at Cost): The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair value.

Time Deposits with Other Banks (Carried at Cost): Fair value for fixed-rate time 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. We generally purchase amounts below the insured limit, limiting the amount of credit risk on these time deposits.

Securities: The fair value of securities, available-for-sale (carried at fair value) is determined by obtaining quoted market prices on nationally recognized securities exchanges (Level I), 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) were used to support fair values of certain Level 3 investments.

Loans Receivable (Carried at Cost): The fair values of loans are estimated using discounted cash flow analyses, using the market rates on 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 and 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 (Carried at the Lower of Cost or Fair Value): Impaired loans are those that are accounted for under FASB ASC 310, Accounting by Creditors for Impairment of a Loan, in which we have 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 in Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Federal Home Loan Bank Stock (Carried at Cost): The carrying amount of restricted investment in bank stock approximates fair value and considers the limited marketability of such securities.

Foreclosed Real Estate (Carried at the Lower of Cost or Fair Value): Foreclosed real estate is recorded at estimated fair value, less estimated costs to sell when the property is acquired. Fair value is generally based on independent appraisals and is considered a Level 3 fair value input.

Deposit Liabilities (Carried at Cost): The fair values disclosed for demand, savings and club 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.

Borrowings (Carried at Cost): Fair values of Federal Home Loan Bank, ("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.

Junior Subordinated Debentures (Carried at Cost): Fair values of junior subordinated debt are estimated using discounted cash flow analysis, based on market rates currently offered on such debt with similar credit risk characteristics, terms and remaining maturity.

Accrued Interest Receivable and Accrued Interest Payable (Carried at Cost): The carrying amounts of accrued interest receivable and payable approximate their fair values.

Off-Balance Sheet Instruments (Disclosed at Cost): Fair values for our 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 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 our assets and liabilities. The following information is an estimate of the fair value of a limited portion of our assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between our disclosures and those of other companies may not be meaningful.

The estimated fair values of our financial instruments at June 30, 2012, and December 31, 2011 were as follows:

						Quoted Prices in		Significant
						Active Markets		Other	Significant
	June 30, 2012					for Identical		Observable	Unobservable
		Carrying		Fair		Assets		Inputs	Inputs
(Dollars in thousands)		Amount		Value		(Level I)		(Level II)	(Level III)
Financial assets:
Cash and cash equivalents	$	12,531	$	12,531	$	12,531	$	-	$	-
Time deposits with other banks		100		100		100		-		-
Securities available for sale		115,508		115,508		1,195		114,313		-
Securities held to maturity		5,168		5,316		-		5,316		-
Federal Home Loan Bank stock		1,943		1,943		1,943		-		-
Loans receivable, net of allowance		340,624		352,675		-		-		352,675
Accrued interest receivable		1,688		1,688		1,688		-		-
Financial liabilities:
Deposits		430,082		429,110		321,415		107,695		-
Borrowings		26,000		29,333		-		29,333		-
Junior subordinated debentures		12,887		6,418		-		6,418		-
Accrued interest payable		264		264		264		-		-

						Quoted Prices in		Significant
						Active Markets		Other	Significant
		December 31, 2011				for Identical		Observable	Unobservable
		Carrying		Fair		Assets		Inputs	Inputs
(Dollars in thousands)		Amount		Value		(Level I)		(Level II)	(Level III)
Financial assets:
Cash and cash equivalents	$	37,500	$	37,500	$	37,500	$	-	$	-
Time deposits with other banks		100		100		100		-		-
Securities available for sale		96,361		96,361		1,173		95,188		-
Securities held to maturity		4,220		4,345		-		4,345		-
Federal Home Loan Bank stock		1,837		1,837		-		-		-
Loans receivable, net of allowance		332,495		334,403		-		-		334,403
Accrued interest receivable		1,735		1,735		1,735		-		-
Financial liabilities:
Deposits		425,376		428,098		314,571		113,527		-
Borrowings		26,000		29,696		-		29,696		-
Junior subordinated debentures		12,887		6,613		-		6,613		-
Accrued interest payable		301		301		301		-		-