FAIR VALUE

3 Months Ended

Mar. 31, 2012

FAIR VALUE [Abstract]

FAIR VALUE

NOTE 9 - FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

When possible, the Company looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to observable market data for similar assets and liabilities. However, certain assets and liabilities are not traded in observable markets and the Company must use other valuation methods to develop a fair value.

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument measured on a recurring basis:

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below:

			Fair Value Measurements at March 31, 2012 Using:
	Carrying 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
Mortgage-backed securities
U. S. agency MBS - residential	$	40,837	$	-	$	40,837	$	-
U. S. agency CMO's - residential		212,211		-		212,211		-
Total mortgage-backed securities of government sponsored agencies		253,048		-		253,048		-
U. S. government sponsored agency securities		32,951		-		32,951		-
Obligations of states and political subdivisions		9,640		-		9,500		140
Other securities		5,473		-		5,473		-
Total available for sale	$	301,112	$	-	$	300,972	$	140

			Fair Value Measurements at December 31, 2011 Using:
	Carrying 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
Mortgage-backed securities
U. S. agency MBS - residential	$	40,255	$	-	$	40,255	$	-
U. S. agency CMO's - residential		205,738		-		205,738		-
Total mortgage-backed securities of government sponsored agencies		245,993		-		245,993		-
U. S. government sponsored agency securities		18,141		-		18,141		-
Obligations of states and political subdivisions		9,650		-		9,510		140
Other securities		4,695		-		4,695		-
Total available for sale	$	278,479	$	-	$	278,339	$	140

The carrying amounts and estimated fair values of financial instruments at March 31, 2012 were as follows:

				Fair Value Measurements at March 31, 2012 Using
	Carrying Amount			Level 1			Level 2			Level 3		Total
Financial assets
Cash and due from banks	$	81,150		$	81,150		$	-		$	-	$	81,150
Federal funds sold		10,295			10,295			-			-		10,295
Securities available for sale		301,112			-			301,972			140		301,112
Loans held for sale		947			-			947			-		947
Loans, net		663,688			-			-			660,360		660,360
Federal Home Loan Bank stock		5,216			n/a			n/a			n/a		n/a
Interest receivable		3,453			-			959			2,494		3,453
Financial liabilities
Deposits	$	(948,215	)	$	(565,401	)	$	(387,637	)	$	-	$	(953,038	)
Securities sold under agreements to repurchase		(21,634	)		-			(21,634	)-		-		(21,634	)
Federal Home Loan Bank advances		(24	)		-			(24	)		-		(24	)
Other borrowed funds		(17,613	)		-			(17,583	)		-		(17,583	)
Interest payable		(657	)		(7	)		(650	)		-		(657	)

The carrying amounts and estimated fair values of financial instruments at December 31, 2011 were as follows:

	Carrying Amount			Fair Value
Financial assets
Cash and due from banks	$	72,056		$	72,056
Federal funds sold		10,832			10,832
Securities available for sale		278,479			278,479
Loans held for sale		70			70
Loans, net		681,128			675,616
Federal Home Loan Bank stock		5,216			n/a
Interest receivable		3,497			3,497
Financial liabilities
Deposits	$	(925,078	)	$	(929,796	)
Securities sold under agreements to repurchase		(23,205	)		(23,205	)
Federal Home Loan Bank advances		(10,083	)		(10,141	)
Other borrowed funds		(18,130	)		(18,101	)
Interest payable		(712	)		(712	)

Carrying amount is the estimated fair value for cash and due from banks, Federal funds sold, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. It was not practicable to determine the fair value of Federal Home Loan Bank stock due to the restrictions placed on its transferability. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of debt is based on current rates for similar financing. The fair value of commitments to extend credit and standby letters of credit is not material.

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument measured on a non-recurring basis:

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and unique to each property and result in a Level 3 classification of the inputs for determining fair value. Management periodically evaluates the appraised values and will discount a property's appraised value to account for a number of factors including but not limited to the cost of liquidating the collateral, the age of the appraisal, observable deterioration since the appraisal, or other factors unique to the property. To the extent an adjusted appraised value is lower than the carrying value of an impaired loan, a specific allocation of the allowance for loan losses is assigned to the loan.

Other real estate owned (OREO): The fair value of OREO is based on appraisals less cost to sell at the date of foreclosure. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Management periodically evaluates the appraised values and will discount a property's appraised value to account for a number of factors including but not limited to the cost of liquidating the collateral, the age of the appraisal, observable deterioration since the appraisal, or other factors unique to the property. To the extent an adjusted appraised value is lower than the carrying value of an OREO property, a direct charge to earnings is recorded as an OREO writedown.

Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

			Fair Value Measurements at March 31, 2012 Using
	March 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans:
Residential Real Estate	$	4,492	$	-	$	-	$	4,492
Commercial Real Estate
Owner Occupied		506		-		-		506
Non-owner Occupied		1,263		-		-		1,263
Commercial and Industrial		6,495		-		-		6,495
All Other		35		-		-		35
Total impaired loans		12,792	$	-	$	-	$	12,792
Other real estate owned:
Residential Real Estate	$	1,604	$	-	$	-	$	1,604
Commercial Real Estate
Owner Occupied		729		-		-		729
Non-owner Occupied		2,931		-		-		2,931
Commercial and Industrial		55		-		-		55
All Other		11,232		-		-		11,232
Total OREO	$	16,551	$	-	$	-	$	16,551

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

			Fair Value Measurements at December 31 2011 Using
	Dec. 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans:
Residential Real Estate	$	4,297	$	-	$	-	$	4,297
Commercial Real Estate
Owner Occupied		1,168		-		-		1,168
Non-owner Occupied		1,269		-		-		1,269
Commercial and Industrial		1,038		-		-		1,038
All Other		4,386		-		-		4,386
Total impaired loans		12,158	$	-	$	-	$	12,158
Other real estate owned:
Residential Real Estate	$	1,608	$	-	$	-	$	1,608
Commercial Real Estate
Owner Occupied		701		-		-		701
Non-owner Occupied		2,931		-		-		2,931
Commercial and Industrial		55		-		-		55
All Other		8,788		-		-		8,788
Total OREO	$	14,083	$	-	$	-	$	14,083

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $16,367,000 at March 31, 2012 with a valuation allowance of $3,575,000 and a carrying amount of $15,205,000 at December 31, 2011 with a valuation allowance of $3,047,000, resulting in a provision for loan losses of $528,000 for the three months ended March 31, 2012, compared to a $15,000 provision for loan losses for the three months ended March 31, 2011. The detail of impaired loans by loan class is contained in Note 3 above.

Other real estate owned measured at fair value less costs to sell, had a net carrying amount of $16,511,000 which is made up of the outstanding balance of $17,737,000 net of a valuation allowance of $1,186,000 at March 31, 2012, resulting in write downs of $44,000 for the three months ended March 31, 2012. At December 31, 2011, other real estate owned had a net carrying amount of $14,083,000, made up of the outstanding balance of $15,288,000, net of a valuation allowance of $1,205,000.