Fair value

6 Months Ended

Jun. 30, 2011

Note 2. Fair value

ASC Section 820 — Fair Value Measurements and Disclosure defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Topic 820 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The hierarchy of valuation techniques is based on whether the inputs to those valuation techniques are observable or unobservable. These inputs are summarized in three broad levels as follows:

	*Level 1:*		Quoted prices in active exchange markets for identical assets or liabilities; also includes certain U.S. Treasury and other U.S. government and agency securities actively traded in over-the-counter markets.

	*Level 2:*		Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. government and agency securities, corporate debt securities, derivative instruments, and residential mortgage loans held for sale.

	*Level 3:*		Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for single dealer nonbinding quotes not corroborated by observable market data. This category generally includes certain private equity investments, retained interests from securitizations, and certain collateralized debt obligations.

The Company’s bond holdings in the investment securities portfolio, if any, are the only asset or liability subject to fair value measurement on a recurring basis. No financial assets or liabilities are valued on a recurring basis under Level 1or Level 2 inputs at June 30, 2011 or December 31, 2010. The Company has financial and non-financial assets measured by fair value measurements on a non-recurring basis during 2011. At June 30, 2011, these assets include $6.7 million of non-accrual loans ($5.0 million after specific reserves) and other real estate owned of $3.3 million all of which are valued under Level 3 inputs.

The changes in the assets subject to fair value measurements are summarized below by Level:


	Level 1
	and
In thousands	Level 2		Level 3
December 31, 2010:
Loans	$	—	$	7,283
Other real estate owned		—		3,324

Total December 31, 2010		—		10,607

Activity:
Loans:
New loans measured at fair value		—		1,978
Payments and other loan reductions		—		(652	)
Foreclosed — to other real estate owned		—		(720	)
Loans charged-off		—		(1,182	)

Net change in loans		—		(576	)


Other real estate owned:
Additions to other real estate owned		—		806
Sales of other real estate owned		—		(673	)
Provision for valuation reduction		—		(125	)

Net change in other real estate owned		—		8

June 30, 2011:
Loans		—		6,707
Other real estate owned		—		3,332

Total June 30, 2011	$	—	$	10,039

The estimated fair values of the Company’s financial instruments at June 30, 2011 and December 31, 2010 are summarized below. The fair values of a significant portion of these financial instruments are estimates derived using present value techniques and may not be indicative of the net realizable or liquidation values. Also, the calculation of estimated fair values is based on market conditions at a specific point in time and may not reflect current or future fair values.


	June 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
In thousands	Amount		Value		Amount		Value
Financial assets:
Cash and due from banks	$	2,072	$	2,072	$	1,437	$	1,437
Interest bearing deposits		23,683		23,683		12,289		12,289
Investments in restricted stock		527		527		527		527
Loans, net		177,249		186,943		181,709		191,353
Accrued interest receivable		721		721		750		750

Financial liabilities:
Non-interest bearing deposits	$	26,474	$	26,474	$	23,760	$	23,760
Interest bearing deposits		160,164		161,747		156,350		157,228
Accrued interest payable		98		98		106		106

Off-balance sheet commitments		—		—		—		—

Fair values are based on quoted market prices for similar instruments or estimated using discounted cash flows. The discounts used are estimated using comparable market rates for similar types of instruments adjusted to be commensurate with the credit risk, overhead costs and optionality of such instruments.

The fair value of cash and due from banks, interest bearing deposits, federal funds sold, investments in restricted stocks and accrued interest receivable are equal to the carrying amounts. The fair values of investment securities are determined using market quotations. The fair value of loans receivable is estimated using discounted cash flow analysis.

The fair value of non-interest bearing deposits, interest-bearing checking, savings, and money market deposit accounts, securities sold under agreements to repurchase, and accrued interest payable are equal to the carrying amounts. The fair value of fixed maturity time deposits is estimated using discounted cash flow analysis.

- Definition

This item represents the complete disclosure regarding the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments, assets, and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the Company is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risk is are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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