Fair Value

9 Months Ended

Sep. 30, 2011

Fair Value [Abstract]

FAIR VALUE

NOTE 5 – FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (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 values.

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 reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). The remaining fair values of securities (Level 3 inputs) are based on the reporting entity’s own assumptions and basic knowledge of market conditions and individual investment performance. The Corporation reviews the performance of the securities that comprise level 3 on a quarterly 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 usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Other Real Estate Owned: Non-recurring adjustments to certain commercial and residential real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available, which results in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

Assets Measured on a Recurring Basis

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

	Fair Value Measurements Using
(000s omitted)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2011
Available for sale securities
U.S. Government and federal agency	$	8,178	$	0	$	8,178	$	0
Mortgage-backed residential		17,229		0		17,229		0
Collateralized mortgage obligations-agency		33,104		0		33,104		0
Collateralized mortgage obligations-private label		3,233		0		3,233		0
Equity securities		2,160		0		1,049		1,111
	$	63,904	$	0	$	62,793	$	1,111

	Fair Value Measurements Using
(000s omitted)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2010
Available for sale securities
U.S. Government and federal agency	$	4,000	$	0	$	4,000	$	0
Mortgage-backed residential		7,432		0		7,432		0
Collateralized mortgage obligations-agency		24,902		0		24,902		0
Collateralized mortgage obligations-private label		3,871		0		3,871		0
Equity securities		1,670		0		523		1,147
	$	41,875	$	0	$	40,728	$	1,147

The table below presents a reconciliation including the respective income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3). The Corporation did not hold any level 3 assets during the first nine months of 2010.

(000s omitted)	Equity Securities 2011
Beginning balance, January 1,	$	1,147
Total gains or losses (realized / unrealized)
Included in other comprehensive income		(36	)
Ending balance, September 30,	$	1,111

Assets Measured on a Non-Recurring Basis

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

(000s omitted)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
At September 30, 2011
Impaired loans
Commercial	$	63	$	0	$	0	$	63
Commercial real estate		8,690		0		0		8,690
Residential real estate		695		0		0		695
Consumer		357		0		0		357
Total impaired loans	$	9,805	$	0	$	0	$	9,805
Other real estate owned
Commercial real estate		627	$	0	$	0	$	627
Total other real estate owned	$	627	$	0	$	0	$	627

	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
At December 31, 2010
Impaired loans
Commercial	$	599	$	0	$	0	$	599
Commercial real estate		9,268		0		0		9,268
Residential real estate		716		0		0		716
Consumer		355		0		0		355
Total impaired loans	$	10,938	$	0	$	0	$	10,938
Other real estate owned
Commercial real estate	$	235	$	0	$	0	$	235
Residential real estate		60		0		0		60
Total other real estate owned	$	295	$	0	$	0	$	295

At September 30, 2011, impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal amount of $13,150,000 with a valuation allowance of $3,345,000. This resulted in additional specific provision for loan losses of $1,096,000 for the three month period and $1,473,000 for the nine month period ended September 30, 2011. This is compared to December 31, 2010 when the principal amount of impaired loans was $15,836,000 with a valuation allowance of $4,698,000.

Other real estate owned which is measured at the lower of carrying value or fair value less costs to sell, had a net carrying amount of $1,966,000, of which $627,000 was at fair value at September 30, 2011, resulting from write-downs totaling $229,000 for the three month period and $520,000 for the nine month period. At December 31, 2010, other real estate owned had a net carrying amount of $3,407,000, of which $295,000 was at fair value.

Carrying amount and estimated fair value of financial instruments, not previously presented were as follows:

	September 30, 2011				December 31, 2010
(000s omitted)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets:
Cash and cash equivalents	$	22,168	$	22,168	$	33,492	$	33,492
Securities—held to maturity		3,423		3,506		4,350		4,383
Loans held for sale		489		489		850		850
Loans (including impaired loans), net		196,371		196,410		206,907		204,378
FHLB stock		661		661		740		740
Accrued interest receivable		1,014		1,014		1,050		1,050
Liabilities:
Deposits	$	272,265	$	268,917	$	275,977	$	272,223
Short-term borrowings		647		647		879		879
FHLB advances		923		1,183		954		1,369
Subordinated debentures		14,000		12,591		14,000		12,613
Accrued interest payable		1,464		1,464		1,166		1,166

The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments:

Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and short-term instruments approximate their fair values.

Securities: Fair values for securities held to maturity are based on similar information previously presented for securities available for sale.

Loans held for sale: The fair values of these loans are determined in the aggregate on the basis of existing forward commitments or fair values attributable to similar loans.

Loans: For variable rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying values. The fair value for other loans is estimated using discounted cash flow analysis.

FHLB Stock: It was not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

Accrued interest: The carrying amount of accrued interest approximates its fair value.

Off-balance-sheet instruments: The fair value of off-balance sheet items is not considered material.

Deposit liabilities: The fair values disclosed for demand deposits are, by definition equal to the amount payable on demand at the reporting date. The carrying amounts for variable rate, fixed term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed certificates of deposit are estimated using discounted cash flow calculation that applies interest rates currently being offered on similar certificates.

Short-term borrowings: The carrying amounts of federal funds purchased and other short-term borrowings approximate their fair values.

FHLB advances: Rates currently available for FHLB debt with similar terms and remaining maturities are used to estimate the fair value of the existing debt.

Subordinated Debentures: The estimated fair value of the existing subordinated debentures is calculated by comparing a current market rate for the instrument compared to the book rate. The difference between these rates computes the fair value.

Limitations: Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Corporation’s financial instruments, fair value estimates are based on management’s judgments regarding future expected loss experience, current economic conditions, risk characteristics 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 the estimates.