NOTE 5 – FAIR VALUES OF FINANCIAL INSTRUMENTS

The estimated fair values of recognized financial instruments as of September 30, 2013 and December 31, 2012 are as follows:


	Carrying								Total Fair
(Dollars in thousands)	Value		Level 1		Level II		Level III		Value
September 30, 2013
Financial assets:
Cash and cash equivalents	$	48,619	$	48,619	$	—	$	—	$	48,619
Securities, available for sale		102,453		1,117		101,336		—		102,453
Securities, held to maturity		36,808		—		35,690		—		35,690
Loans held for sale		70		70		—		—		70
Net loans		372,357		—		—		376,006		376,006
Bank-owned life insurance		9,486		9,486		—		—		9,486
Restricted stock		5,463		—		5,463		—		5,463
Accrued interest receivable		1,509		1,509		—		—		1,509
Financial liabilities:
Deposits	$	480,861	$	334,445	$	—	$	147,352	$	481,797
Short-term borrowings		46,044		46,044		—		—		46,044
Other borrowings		12,511		—		—		13,163		13,163
Accrued interest payable		122		122		—		—		122


	Carrying								Total Fair
(Dollars in thousands)	Value		Level 1		Level II		Level III		Value
December 31, 2012
Financial assets:
Cash and cash equivalents	$	66,878	$	66,878	$	—	$	—	$	66,878
Securities, available for sale		129,291		169		129,122		—		129,291
Net loans		360,000		—		—		367,028		367,028
Bank-owned life insurance		8,298		8,298		—		—		8,298
Restricted stock		5,463		—		5,463		—		5,463
Accrued interest receivable		1,317		1,317		—		—		1,317
Financial liabilities:
Deposits	$	475,443	$	317,369	$	—	$	159,573	$	476,942
Short-term borrowings		43,992		43,992		—		—		43,992
Other borrowings		12,672		—		—		13,772		13,772
Accrued interest payable		135		135		—		—		135

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, and 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 and securities held-to-maturity 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.

Other borrowings

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 September 30, 2013 and December 31, 2012. These financial instruments relate to commitments to extend credit and letters of credit. The aggregated contract amount of such financial instruments was approximately $113.6 million at September 30, 2013 and $107.4 million at December 31, 2012. 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.