Fair Value Measurements

9 Months Ended

Sep. 30, 2011

Fair Value Measurements

Fair Value Measurements

Note 10 – Fair Value Measurements

Management uses its best judgment in estimating the fair value of the Corporation'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 Corporation could have realized in a sales transaction on the dates indicated.  The estimated fair value amounts have been measured as of their respective quarter-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 quarter-end.

FASB ASC Topic 825, Financial Instruments, requires disclosure of the fair value of financial assets and liabilities, including those financial assets and liabilities that are not measured and reported at fair value on a recurring and non-recurring basis.

The fair value of the Corporation's financial instruments are as follows:

	September 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
(Dollars in thousands)	Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents	$	35,401	$	35,401	$	22,106	$	22,106
Investment securities available for sale		131,588		131,588		117,616		117,616
Restricted stock		5,285		5,285		6,159		6,159
Net loans		757,411		768,183		739,841		750,944
Accrued interest receivable		2,854		2,854		3,662		3,662
Mortgage servicing rights		389		389		603		603
Financial liabilities:
Deposits	$	789,346	$	792,957	$	734,331	$	737,274
Securities sold under agreements to repurchase		63,216		63,216		51,164		51,164
Long-term debt		48,892		51,778		70,885		74,695
Accrued interest payable		831		831		757		757
Interest rate swaps		1,850		1,850		1,752		1,752

The preceding information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation'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 Corporation'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 Corporation's financial instruments reported above at September 30, 2011 and December 31, 2010:

Cash and cash equivalents:  For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Investment securities available for sale: The fair value of investment securities is determined in accordance with the methods described under FASB ASC Topic 820, Fair Value Measurements and Disclosures, as discussed in the fair value hierarchy.

Restricted stock:  The carrying value of restricted stock approximates its fair value based on redemption provisions for the restricted stock.

Net loans:  The fair value of fixed-rate loans is estimated for each major type of loan (e.g. real estate, commercial, industrial and agricultural and consumer) by discounting the future cash flows associated with such loans using rates currently offered for loans with similar terms to borrowers of comparable credit quality.  The model considers scheduled principal maturities, repricing characteristics, prepayment assumptions and interest cash flows.  The discount rates used are estimated based upon consideration of a number of factors including the treasury yield curve, expense and service charge factors. For variable rate loans that reprice frequently and have no significant change in credit quality, carrying values approximate the fair value.

Accrued interest receivable: The carrying amount is a reasonable estimate of fair value.

Mortgage servicing rights: The fair value of mortgage servicing rights, upon initial recognition, is estimated using a valuation model that calculates the present value of estimated future net servicing income. The model incorporates assumptions, such as loan default rates, costs to service, and prepayment speeds. Mortgage servicing rights are carried at the lower of cost or fair value after initial recognition.

Deposits, Securities sold under agreements to repurchase and Long-term debt: The fair value of demand deposits, savings accounts, and money market deposits is the amount payable on demand at the reporting date.  The fair value of fixed-rate certificates of deposit and long-term debt is estimated by discounting the future cash flows using rates approximating those currently offered for certificates of deposit and borrowings with similar remaining maturities.  For securities sold under agreements to repurchase, the carrying value approximates a reasonable estimate of the fair value.

Accrued interest payable: The carrying amount is a reasonable estimate of fair value.

Interest rate swaps: The fair value of the interest rate swaps is determined in accordance with the methods described under FASB ASC Topic 820, as discussed below.

Fair Value Hierarchy

 FASB ASC Topic 820, Fair Value Measurements and Disclosures established a fair value hierarchy that 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 under FASB ASC Topic 820 are as follows:

Level 1: Valuation is based on unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Corporation's assumptions regarding what market participants would assume when pricing a financial instrument.

For financial assets and liabilities measured at fair value on a recurring basis, there were no transfers of financial assets or liabilities between Level 1 and Level 2 during the period ending September 30, 2011.

For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy are as follows:

(Dollars in Thousands)	Fair Value at September 30, 2011
	Level 1		Level 2		Level 3		Total
Asset  Description
Equity securities	$	1,805	$	-	$	-	$	1,805
Obligations of U.S. Government agencies		-		14,458		-		14,458
Obligations of state and political subdivisions		-		44,248		-		44,248
Corporate debt securities		-		2,500		-		2,500
Trust Preferred Securities		-		4,671		-		4,671
Mortgage-backed securities
Agency		-		60,585		-		60,585
Private-label		-		3,270		-		3,270
Asset-backed securities		-		51		-		51
Total assets	$	1,805	$	129,783	$	-	$	131,588
Liability Description
Interest rate swaps	$	-	$	1,850	$	-	$	1,850
Total liabilities	$	-	$	1,850	$	-	$	1,850

(Dollars in Thousands)	Fair Value at December 31, 2010
	Level 1		Level 2		Level 3		Total
Asset  Description
Equity securities	$	3,638	$	-	$	-	$	3,638
Obligations of U.S. Government agencies		-		14,785		-		14,785
Obligations of state and political subdivisions		-		39,952		-		39,952
Corporate debt securities		-		2,665		-		2,665
Trust Preferred Securities		-		4,197		-		4,197
Mortgage-backed securities
Agency		-		48,297		-		48,297
Private-label		-		4,029		-		4,029
Asset-backed securities		-		53		-		53
Total assets	$	3,638	$	113,978	$	-	$	117,616
Liability Description
Interest rate swaps	$	-	$	1,752	$	-	$	1,752
Total liabilities	$	-	$	1,752	$	-	$	1,752

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. The Corporation used the following methods and significant assumptions to estimate the fair value for assets and liabilities measured on a recurring basis.

Investment securities:  Level 1 securities represent equity securities that are valued using quoted market prices from nationally recognized markets. Level 2 securities represent debt securities that are valued using a mathematical model based upon the specific characteristics of a security in relationship to quoted prices for similar securities.

Interest rate swaps: The interest rate swaps are valued using a discounted cash flow model that uses verifiable market environment inputs to calculate the fair value. This method is not dependent on the input of any significant judgments or assumptions by Management.

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

(Dollars in Thousands)
	Fair Value at September 30, 2011
Asset  Description	Level 1		Level 2		Level 3		Total
Impaired loans with specific allowance	$	-	$	-	$	15,447	$	15,447
Other real estate owned		-		-		3,337		3,337
Mortgage servicing rights		-		-		389		389
Total assets	$	-	$	-	$	19,173	$	19,173

(Dollars in Thousands)	Fair Value at December 31, 2010
Asset  Description	Level 1		Level 2		Level 3		Total
Impaired loans with specific allowance	$	-	$	-	$	16,973	$	16,973
Other real estate owned		-		-		618		618
Mortgage servicing rights		-		-		603		603
Total assets	$	-	$	-	$	18,194	$	18,194

The Corporation used the following methods and significant assumptions to estimate the fair value of assets and liabilities measured on a nonrecurring basis:

Impaired loans: Impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral.  Collateral values are estimated using Level 3 inputs based on customized discounting criteria.

Other real estate owned: The fair value of other real estate owned, upon initial recognition, is estimated using Level 2 inputs within the fair value hierarchy based on observable market data and Level 3 inputs based on customized discounting criteria.  In connection with the measurement and initial recognition of the foregoing assets, the Corporation recognizes charge-offs through the allowance for loan losses.  Declines in fair value of other real estate subsequent to initial recognition are recorded in other expenses in the Corporation's statement of income.

Mortgage servicing rights: The fair value of mortgage servicing rights, upon initial recognition, is estimated using a valuation model that calculates the present value of estimated future net servicing income.  The model incorporates Level 3 assumptions such as cost to service, discount rate, prepayment speeds, default rates and losses.  Mortgage servicing rights are carried at the lower of cost or fair value after initial recognition.