Fair Value Instruments

6 Months Ended

Jun. 30, 2011

Fair Value Instruments [Abstract]

FAIR VALUE OF INSTRUMENTS

NOTE 2 FAIR VALUE OF INSTRUMENTS

FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair values of financial instruments are management’s estimate of the values at which the instruments could be exchanged in a transaction between willing parties. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, other significant assets are not considered financial assets including deferred tax assets, premises, equipment and intangibles. Further, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered in any of the elements.

The following assumptions and methods were used in estimating the fair value for financial instruments.

Cash and Cash Equivalents

The carrying amounts reported in the balance sheet for cash, cash equivalents and federal funds sold approximate their fair values. Also included in this line item are the carrying amounts of interest-bearing deposits maturing within ninety days which approximate their fair values. Fair values of other interest-bearing deposits are estimated using discounted cash flow analyses based on current rates for similar types of deposits.

Securities and Other Securities

Fair values for securities, excluding Federal Home Loan Bank stock, are based on quoted market price, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.

Loans

Most commercial, agricultural and real estate mortgage loans are made on a variable rate basis. For those variable rate loans that re-price frequently, and with no significant change in credit risk, fair values are based on carrying values. The fair values of the fixed rate and all other loans are estimated using discounted cash flow analysis. This is accomplished by using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality.

Deposits

The fair values disclosed for deposits with no defined maturities are equal to their carrying amounts, which represent the amount payable on demand. The carrying amounts for variable-rate, fixed term money market accounts and certificates of deposit approximate their fair value at the reporting date. Fair value for fixed- rate certificates of deposit are estimated using a discounted cash flow analysis that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Borrowings

Short-term borrowings are carried at cost that approximates fair value. Other long-term debt was generally valued using a discounted cash flow analysis with a discounted rate based on current incremental borrowing rates for similar types of arrangements, or if not available, based on an approach similar to that used for loans and deposits.

Accrued Interest Receivable and Payable

The carrying amounts of accrued interest approximate their fair values.

Dividends Payable

The carrying amounts of dividends payable approximate their fair values and are generally paid within forty days of declaration.

Off Balance Sheet Financial Instruments

Fair values for off-balance sheet, credit related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counter- parties’ credit standing.

The estimated fair values, and related carrying or notional amounts, for on and off-balance sheet financial instruments as of June 30, 2011 and December 31, 2010 are reflected below.

	(In Thousands)
	June 2011				December 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial Assets:
Cash and Cash Equivalents	$	22,625	$	22,625	$	43,379	$	43,379
Securities – available for sale		327,666		327,666		287,317		287,317
Other Securities		4,365		4,365		4,406		4,406
Loans, net		500,671		498,003		521,883		520,766
Accrued interest receivable		3,847		3,847		4,036		4,036
Financial Liabilities:
Deposits	$	722,607	$	725,021	$	724,513	$	725,270
Short-term debt Repurchase agreement sold		48,946		48,946		51,241		51,241
Federal Home Loan Bank advances		26,765		27,666		29,874		30,764
Accrued interest payable		416		416		471		471
Dividends payable		890		890		894		894
Off-Balance Sheet Financial Instruments
Commitments to extend credit	$	—	$	—	$	—	$	—
Standby letters of credit		—		—		—		—

Fair Value Measurements

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis at June 30, 2011, and the valuation techniques used by the Company to determine those fair values.

In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

Disclosures concerning assets and liabilities measured at fair value are as follows:

	Assets and Liabilities Measured at Fair Value on a Recurring Basis
	Quoted Prices in Active		Significant		Significant
(In Thousands)	Markets for Identical		Observable Inputs		Unobservable Inputs
June 30, 2011	Assets (Level 1)		(Level 2)		(Level 3)
Assets-Securities Available for Sale
U.S. Treasury	$	36,819
U.S. Government agency		188,604
Mortgage-backed securities		38,773
State and local governments		—	$	52,249	$	11,221
Total Securities Available for Sale	$	264,196	$	52,249	$	11,221
Liabilities	$	—	$	—	$	—
	Quoted Prices in Active		Significant		Significant
	Markets for Identical		Observable Inputs		Unobservable Inputs
December 31, 2010	Assets (Level 1)		(Level 2)		(Level 3)
Assets-Securities Available for Sale
U.S. Treasury	$	32,279
U.S. Government agency		165,703
Mortgage-backed securities		24,531
State and local governments		—	$	53,502	$	11,302
Total Securities Available for Sale	$	222,513	$	53,502	$	11,302
Liabilities	$	—	$	—	$	—

The Company did have assets measured at fair value that were categorized as Level 3 during the period. The Company’s available for sale securities includes bonds issued by local municipalities. Those municipal bonds that did not have CUSIP or credit rating numbers were treated as Level 3. Those bonds, including municipalities, that did have CUSIP numbers or have similar characteristics of those in like markets, were considered comparable and marketable and reported as Level 2.

The Company also has assets that, under certain conditions, are subject to measurement at fair value on a non-recurring basis. At June 30, 2011, such assets consist primarily of impaired loans and other real estate. The Company has established the fair values of these assets using Level 3 inputs, each individually described below.

Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. The Company estimates the fair value of the loans based on the present value of expected future cash flows using management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals.)

Other real estate is reported at either the fair value of the real estate minus the estimated costs to sell the asset or the cost of the asset. The determination of fair value of the real estate relies primarily on appraisals from third parties. If the fair value of the real estate, minus the estimated costs to sell the asset, is less than the asset’s cost, the deficiency is recognized as a valuation allowance against the asset through a charge to expense.

	Assets Measured at Fair Value on a Nonrecurring Basis at June 30, 2011 (In Thousands)
			Quoted Prices in Active
			Markets for		Significant		Significant
	Balance at		Identical		Observable Inputs		Unobservable Inputs
	June 30, 2011		Assets (Level 1)		(Level 2)		(Level 3)
Impaired loans	$	7,966	$	—	$	—	$	7,966
Other real estate owned – residential mortgages	$	975	$	—	$	—	$	975
Other real estate owned – commercial	$	2,564	$	—	$	—	$	2,564
Total change in fair value

	Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2010 (In Thousands)
			Quoted Prices in Active
			Markets for		Significant		Significant
	Balance at		Identical		Observable Inputs		Unobservable Inputs
	December 31, 2010		Assets (Level 1)		(Level 2)		(Level 3)
Impaired loans	$	4,369	$	—	$	—	$	4,369
Other real estate owned – residential mortgages	$	2,110	$	—	$	—	$	2,110
Other real estate owned commercial	$	2,328	$	—	$	—	$	2,328
Total change in fair value