12. FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2011

Fair Value Disclosures [Text Block]

12. FAIR VALUE MEASUREMENTS

The carrying amounts and estimated fair values of the Company’s financial instruments are as follows (dollars in thousands):

	September 30, 2011				December 31, 2010
			Estimated				Estimated
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents	$	50,562	$	50,562	$	31,871	$	31,871
Interest-bearing deposits in banks		1,749		1,749		2,248		2,248
Investment securities		177,814		178,068		160,664		160,987
Loans and leases, net		306,614		304,055		338,533		332,964
FHLB stock		3,093		3,093		3,486		3,486
Accrued interest receivable		1,834		1,834		1,876		1,876
Cash surrender values of life insurance policies		11,225		11,225		11,019		11,019
Financial liabilities:
Deposits	$	463,589	$	464,551	$	465,122	$	465,985
Short-term borrowings		5,000		5,000		7,000		7,000
Long-term borrowings		14,000		14,268		10,000		10,523
Accrued interest payable		160		160		268		268

Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding 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 the fair values presented.

The following methods and assumptions were used by the Company to estimate the fair values of its financial instruments at September 30, 2011 and December 31, 2010:

Cash and cash equivalents: For cash and cash equivalents, the carrying amount is estimated to be fair value.

Interest-bearing deposits in banks: The fair values of interest-bearing deposits in banks are estimated by discounting their future cash flows using rates at each reporting date for instruments with similar remaining maturities offered by comparable financial institutions.

Investment securities: For investment securities, fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are estimated using quoted market prices for similar securities and indications of value provided by brokers.

Loans and leases: For variable-rate loans and leases that reprice frequently with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans and leases are estimated using discounted cash flow analyses, using interest rates being offered at each reporting date for loans and leases with similar terms to borrowers of comparable creditworthiness. The carrying amount of accrued interest receivable approximates its fair value.

FHLB stock: The carrying amount of FHLB stock approximates its fair value. This investment is carried at cost and is redeemable at par with certain restrictions.

Cash surrender values of life insurance policies: The fair values of life insurance policies are based on cash surrender values at each reporting date as provided by insurers.

Deposits: The fair values for non-maturing deposits are, by definition, equal to the amount payable on demand at the reporting date represented by their carrying amount. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow analysis with interest rates offered at each reporting date for certificates with similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value.

Short-term and long-term borrowings: The fair values of short-term borrowings are estimated to be the carrying amount. The fair values of long-term borrowings are estimated using a discounted cash flow analysis with interest rates currently available for similar debt instruments.

Commitments to extend credit: The fair value of commitments is based on fees currently charged to enter into similar agreements, net of origination fees. These fees were not material at September 30, 2011 and December 31, 2010.

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of September 30, 2011 and December 31, 2010, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize information other than the quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement, in its entirety, falls has been determined based on the lowest level input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Description	Fair Value		Fair Value Measurements Using						Total Gains (Losses)
(dollars in thousands)			Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2011
Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
Mortgage-backed securities	$	146,811			$	146,811
Obligations of states and political subdivisions		26,426				26,426
Corporate stock		72	$	13		59
Total recurring	$	173,309	$	13	$	173,296	$	—	$	—
Assets and liabilities measured on a nonrecurring basis:
Impaired loans:
Commercial	$	2,642	$	—	$	1,432	$	1,210	$	(512	)
Real estate:
Commercial		13,123		—		6,431		6,692		(1,402	)
Multi-family		1,190		—		—		1,190		16
Construction		3,831		—		3,480		351		(863	)
Residential		512		—		357		155		67
Other:
Leases		—		—		—		—		—
Agriculture		597		—		597		—		(329	)
Consumer		174		—		121		53		(40	)
Other real estate owned		3,827		—		3,397		430		(718	)
Repossessed assets		55		—		55		—		(2	)
Total nonrecurring	$	25,951	$	—	$	15,870	$	10,081	$	(3,783	)
December 31, 2010
Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
Mortgage-backed securities	$	138,644		—	$	138,644		—		—
Obligations of states and political subdivisions		15,792		—		15,792		—		—
Corporate stock		79	$	75		4
Total recurring	$	154,515	$	75	$	154,440	$	—	$	—
Assets and liabilities measured on a nonrecurring basis:
Impaired loans:
Commercial	$	3,231	$	—	$	2,904	$	327	$	(11	)
Real estate:
Commercial		12,120		—		194		11,926		(397	)
Multi-family		1,214		—		—		1,214		(93	)
Construction		—		—		—		—		—
Residential		1,013		—		—		1,013		—
Other:
Agriculture		—		—		—		—		—
Consumer		491		—		—		491		107
Other real estate owned		2,696		—		2,696		—		(908	)
Total nonrecurring	$	20,765	$	—	$	5,794	$	14,971	$	(1,302	)

There were no significant transfers between level 1and level 2 during the three-month and nine-month periods ended September 30, 2011 or the twelve months ended December 31, 2010.

The following methods were used to estimate the fair value of each class of financial instrument above:

Available-for-sale securities - Fair values for investment securities are based on quoted market prices, if available, or evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information. Pricing applications apply available information, as applicable, through processes such as benchmark curves, benchmarking to similar securities, sector groupings, and matrix pricing.

Impaired loans and leases -The fair value calculation for impaired loans and leases is based upon the fair values of the assets obtained through either collateral valuations or present value of future cash flows. For Level 2 impaired loans and leases, the analysis consists of a collateral analysis inclusive of an appraisal and detailed review of any mitigating factors pertaining to a complete valuation of the asset. For Level 3 impaired loans or leases, the analysis is one of determining the credit’s value based upon a review of the present value of the loan or lease’s future cash flows.

Other real estate owned -Other real estate owned (“OREO”) represents real estate which the Company has title to in partial or full satisfaction of loans. At or near the time of foreclosure, the Company obtains an independent third-party appraisal and the OREO is recorded at the fair value of the real estate less costs to sell, which becomes the property’s new basis. The value of the OREO properties is periodically assessed by performing a property valuation, which could include a full or partial appraisal performed by internally or by an independent third-party. Recent appraisals or sales that are in contract are considered a Level 2 valuation. In instances where a recent appraisal or contractual sales price is not available, an internal analysis employing third party information to value the property will be performed. This valuation will be considered Level 3.