Fair Values of Financial Instruments

3 Months Ended

Mar. 31, 2012

Fair Value of Measurements and Financial Instruments [Abstract]

FAIR VALUES OF FINANCIAL INSTRUMENTS

NOTE 5—FAIR VALUES OF FINANCIAL INSTRUMENTS

The estimated fair values of recognized financial instruments as of March 31, 2012 and December 31, 2011 are as follows:

	March 31, 2012
(Dollars in thousands)	Carrying Value		Level 1		Level II		Level III		Total Fair Value
			(dollars in thousands)
Financial assets:
Cash and cash equivalents	$	79,881	$	79,881	$	—	$	—	$	79,881
Securities		122,639		167		122,472		—		122,639
Loans held for sale		461		461		—		—		461
Net loans		327,107		—		—		333,708		333,708
Bank-owned life insurance		8,113		8,113		—		—		8,113
Regulatory stock		5,463		—		5,463		—		5,463
Accrued interest receivable		1,427		1,427		—		—		1,427
Financial liabilities:
Deposits	$	450,207	$	283,343	$	—	$	168,676	$	452,019
Short-term borrowings		41,717		41,717		—		—		41,717
Federal Home Loan Bank advances		17,009		—		—		17,906		17,906
Accrued interest payable		163		163		—		—		163

	December 31, 2011
(Dollars in thousands)	Carrying value		Fair value
Financial assets:
Cash and cash equivalents	$	82,258	$	82,258
Securities available for sale		123,026		123,026
Net loans		320,100		327,138
Bank-owned life insurance		3,068		3,068
Regulatory stock		5,463		5,463
Accrued interest receivable		1,349		1,349
Financial liabilities:
Deposits	$	443,553	$	445,587
Short-term borrowings		37,073		37,073
Federal Home Loan Bank advances		19,161		20,087
Accrued interest payable		182		182

For purposes of the above disclosures of estimated fair value, the following assumptions are used:

Cash and cash equivalents; Loans held for sale; Accrued interest receivable; Short term borrowings, Accrued interest payable

The fair value of the above instruments is considered to be carrying value. Classified as Level I in the fair value hierarchy.

Securities

The fair value of securities available-for-sale which are measured on a recurring basis are determined primarily by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on securities’ relationship to other similar securities. Classified as Level I or Level II in the fair value hierarchy

Net Loans

The fair value for loans is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality. Where quoted market prices were available, primarily for certain residential mortgage loans, such market rates were utilized as estimates for fair value. Fair value of non-accrual loans is based on carrying value, classified as Level III.

Bank-owned Life Insurance

The carrying amount of bank-owned life insurance is based on the cash surrender value of the policies and is a reasonable estimate of fair value, classified as Level I.

Regulatory stock

Regulatory stock includes Federal Home Loan Bank Stock and Federal Reserve Bank Stock. It is not practicable to determine the fair value of regulatory equity securities due to restrictions placed on their transferability. Fair value is based on carrying value, classified as Level II.

Deposits

The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rates are estimated using market rates currently offered for similar instruments with similar remaining maturities, resulting in a Level III classification. Demand, savings, and money market deposit accounts are valued at the amount payable on demand as of quarter end, resulting in a Level I classification.

Federal Home Loan Bank advances

The fair value of Federal Home Loan Bank advances are estimated using a discounted cash flow analysis based on the current borrowing rates for similar types of borrowings, resulting in a Level III classification.

The Company also has unrecognized financial instruments at March 31, 2012 and December 31, 2011. These financial instruments relate to commitments to extend credit and letters of credit. The aggregated contract amount of such financial instruments was approximately $101 million at March 31, 2012 and $92 million at December 31, 2011. Such amounts are also considered to be the estimated fair values.

The fair value estimates of financial instruments are made at a specific point in time based on relevant market information. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument over the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Since no ready market exists for a significant portion of the financial instruments, fair value estimates are largely based on judgments after considering such factors as future expected credit losses, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates.