Fair Value of Assets and Liabilities

9 Months Ended

Sep. 30, 2011

Fair Value of Assets and Liabilities [Abstract]

Fair Value of Assets and Liabilities [Text Block]

Note 8 -- Fair Value of Assets and Liabilities

ACS Topic 820, “Fair Value Measurements,” defines fair value as 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.  Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

In accordance with Topic 820, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.  These levels are:

Level 1 Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange.  Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 Valuations for assets and liabilities traded in less active dealer or broker markets.  Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active 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.

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

Available-for-Sale Securities. The fair value of available-for-sale securities is determined by various valuation methodologies.  Where quoted market prices are available in an active market, securities are classified within Level 1. Level 1 securities include exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models or quoted prices of securities with similar characteristics.  For these investments the inputs used by the pricing service to determine fair value may include one or a combination of observable inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bid offers and reference data market research publications and are classified within level 2 of the valuation hierarchy. Level 2 securities include U.S. Treasury securities, obligations of U.S. government corporations and agencies, obligations of states and political subdivisions, mortgage-backed securities, collateralized mortgage obligations and corporate bonds. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include subordinated tranches of collateralized mortgage obligations and investments in trust preferred securities.

The trust preferred securities are collateralized debt obligation securities that are backed by trust preferred securities issued by banks, thrifts, and insurance companies. The market for these securities at September 30, 2011 is not active and markets for similar securities are also not active. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which trust preferred securities trade and then by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive and will continue to be, as a result of the Dodd-Frank Act’s elimination of trust preferred securities from Tier 1 capital for certain holding companies. There are currently very few market participants who are willing and or able to transact for these securities. The market values for these securities are very depressed relative to historical levels.

Given conditions in the debt markets today and the absence of observable transactions in the secondary and new issue markets, we determined:

·   The few observable transactions and market quotations that are available are not reliable for purposes of determining fair value at September 30, 2011,

·   An income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than the market approach valuation technique used at prior measurement dates, and

·   The trust preferred securities held by the Company will be classified within Level 3 of the fair value hierarchy because we determined that significant adjustments are required to determine fair value at the measurement date.

The following table presents the Company’s assets that are measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall as of September 30, 2011 and December 31, 2010 (in thousands):

			Fair Value Measurements Using
September 30, 2011	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	169,488	$	-	$	169,488	$	-
Obligations of states and political subdivisions		36,362		-		36,362		-
Mortgage-backed securities		234,034		-		233,973		61
Trust preferred securities		703		-		-		703
Other securities		9,162		32		9,130		-
Total available-for-sale securities	$	449,749	$	32	$	448,953	$	764

December 31, 2010
Available-for-sale securities:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	152,381	$	-	$	152,381	$	-
Obligations of states and political subdivisions		26,914		-		26,914		-
Mortgage-backed securities		160,931		-		160,863		68
Trust preferred securities		581		-		-		581
Other securities		2,009		31		1,978		-
Total available-for-sale securities	$	342,816	$	31	$	342,136	$	649

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The change in fair value of assets measured on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2011 and 2010 is summarized as follows (in thousands):

	Available-for-Sale Securities
September 30, 2011	Mortgage-backed Securities			Trust Preferred Securities			Total
Beginning balance	$	68		$	581		$	649
Transfers into Level 3		-			-			-
Transfers out of Level 3		-			-			-
Total gains or losses
Included in net income		-			(584	)		(584	)
Included in other comprehensive income (loss)		-			723			723
Purchases, issuances, sales and settlements
Purchases		-			-			-
Issuances		-			-			-
Sales		-			-			-
Settlements		(7	)		(17	)		(24	)
Ending balance	$	61		$	703		$	764
Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets and liabilities still held at the reporting date	$	-		$	(584	)	$	(584	)

	Available-for-Sale Securities
September 30, 2010	Mortgage-backed Securities			Trust Preferred Securities			Total
Beginning balance	$	75		$	3,155		$	3,230
Transfers into Level 3		-			-			-
Transfers out of Level 3		-			-			-
Total gains or losses
Included in net income		-			(1,403	)		(1,403	)
Included in other comprehensive income (loss)		1			(196	)		(195	)
Purchases, issuances, sales and settlements
Purchases		-			-			-
Issuances		-			-			-
Sales		-			-			-
Settlements		(6	)		256			250
Ending balance	$	70		$	1,812		$	1,882
Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets and liabilities still held at the reporting date	$	-		$	(1,403	)	$	(1,403	)

Following is a description of the valuation methodologies 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 that the Company will not collect all principal and interest due according to contractual terms are measured for impairment.  Allowable methods for determining the amount of impairment and estimating fair value include using the fair value of the collateral for collateral dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

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Management establishes a specific allowance for loans that have an estimated fair value that is below the carrying value. The total carrying amount of loans for which a specific allowance has been established as of September 30, 2011 was $5,214,000 and a fair value of $4,355,000 resulting in specific loss exposures of $859,000.

When there is little prospect of collecting principal or interest, loans, or portions of loans, may be charged-off to the allowance for loan losses.  Losses are recognized in the period an obligation becomes uncollectible.  The recognition of a loss does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan even though partial recovery may be affected in the future.

Foreclosed Assets Held For Sale. Other real estate owned acquired through loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined that fair value declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Operating costs associated with the assets after acquisition are also recorded as noninterest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other noninterest expense. The total carrying amount of other real estate owned as of September 30, 2011 was $4,858,000. Other real estate owned included in the total carrying amount and measured at fair value on a nonrecurring basis during the period amounted to $3,509,000.

The following table presents the fair value measurement 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 September 30, 2011 and December 31, 2010 (in thousands):

	Fair Value Measurements Using
September 30, 2011	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans (collateral dependent)	$	4,355	$	-	$	-	$	4,355
Foreclosed assets held for sale		3,509		-		-		3,509

December 31, 2010
Impaired loans (collateral dependent)	$	3,854	$	-	$	-	$	3,854
Foreclosed assets held for sale		940		-		-		940

Other. 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, certificates of deposit investments and Federal Reserve and Federal Home Loan Bank Stock

The carrying amount approximates fair value.

Held-to-maturity Securities

Fair value is based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans

For loans with floating interest rates, it is assumed that the estimated fair values generally approximate the carrying amount balances.  Fixed rate loans have been valued using a discounted present value of projected cash flow. The discount rate used in these calculations is the current rate at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.  The carrying amount of accrued interest approximates its fair value.

Deposits

Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount of these deposits approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

Short-term Borrowings and Interest Payable

The carrying amount approximates fair value.

Long-term Debt and Federal Home Loan Bank Advances

Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.

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The following table presents estimated fair values of the Company’s financial instruments at September 30, 2011 and December 31, 2010 in accordance with FAS 107-1 and APB 28-1, codified with ASC 805.

	September 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial Assets
Cash and due from banks	$	68,471	$	68,471	$	151,493	$	151,493
Federal funds sold		80,968		80,968		80,000		80,000
Certificates of deposit investments		12,781		12,767		10,000		9,996
Available-for-sale securities		449,749		449,749		342,816		342,816
Held-to-maturity securities		50		51		50		53
Loans held for sale		1,458		1,458		114		114
Loans net of allowance for loan losses		803,604		805,961		794,074		799,039
Interest receivable		6,685		6,685		6,390		6,390
Federal Reserve Bank stock		1,520		1,520		1,520		1,520
Federal Home Loan Bank stock		3,727		3,727		3,727		3,727
Financial Liabilities
Deposits	$	1,198,889	$	1,200,782	$	1,212,710	$	1,214,025
Securities sold under agreements to repurchase		116,395		116,400		94,057		94,058
Interest payable		492		492		701		701
Federal Home Loan Bank borrowings		19,750		20,762		22,750		23,953
Junior subordinated debentures		20,620		8,911		20,620		11,438