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11. FAIR VALUE MEASUREMENTS
 9 Months Ended
Sep. 30, 2012
Fair Value Disclosures [Text Block]

11. FAIR VALUE MEASUREMENTS


The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of September 30, 2012 and December 31, 2011. They indicate 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 inputs other than 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 in its entirety. 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.


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.


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


    Carrying     Fair Value Measurements Using:        
September 30, 2012   Amount     Level 1     Level 2     Level 3     Total  
                               
Financial assets:                                        
Cash and due from banks   $ 28,651     $ 28,651                     $ 28,651  
Interest-bearing deposits in banks     1,000             $ 998               998  
Available-for-sale securities     227,906       2       227,904               227,906  
Held-to-maturity securities     2,740               2,916               2,916  
FHLB stock     3,254       N/A       N/A       N/A       N/A  
Net loans and leases:     270,196                       267,134       267,134  
Accrued interest receivable     1,786                       1,786       1,786  
                                         
Financial liabilities:                                        
Deposits:                                        
Noninterest-bearing   $ 137,289     $ 137,289                     $ 137,289  
Savings     51,254       51,254                       51,254  
Money market     126,445       126,445                       126,445  
NOW accounts     52,254       52,254                       52,254  
Time, $100,000 or more     72,760               73,507               73,507  
Other time     26,723               26,970               26,970  
Short-term borrowings     2,000       2,000                       2,000  
Long-term borrowings     16,000               16,177               16,177  
Accrued interest payable     147               147               147  

    Carrying     Fair Value Measurements Using:        
December 31, 2011   Amount     Level 1     Level 2     Level 3     Total  
                               
Financial assets:                                        
Cash and due from banks   $ 23,768     $ 23,768                     $ 23,768  
Interest-bearing deposits in banks     1,250             $ 1,254               1,254  
Available-for-sale securities     208,711       9       208,702               208,711  
Held-to-maturity securities     4,010               4,231               4,231  
FHLB stock     3,093       N/A       N/A       N/A       N/A  
Net loans and leases:     293,731                     $ 290,505       290,505  
Accrued interest receivable     1,952                       1,952       1,952  
                                         
Financial liabilities:                                        
Deposits:                                        
Noninterest-bearing   $ 133,440     $ 133,440                     $ 133,440  
Savings     47,919       47,919                       47,919  
Money market     139,244       139,244                       139,244  
NOW accounts     43,959       43,959                       43,959  
Time, $100,000 or more     69,464               70,143               70,143  
Other time     28,259               28,513               28,513  
Short-term borrowings     5,000       5,000                       5,000  
Long-term borrowings     14,000               14,326               14,326  
Accrued interest payable     226               226               226  

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, 2012 and December 31, 2011:


Cash and due from banks: The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.


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 and are classified as Level 2


Investment securities: For investment securities, fair values are based on quoted market prices, where available, and are classified as Level 1. 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 and are classified as Level 2.


Loans and leases: Fair values of loans, excluding loans held for sale, are estimated as follows:  For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality also resulting in a Level 3 classification. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.


FHLB stock: It is not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.


Deposits: The fair values disclosed for demand deposits (e.g. interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amount) resulting in a Level 1 classification. For time deposits, the fair values for fixed rate certificates of deposit are estimated using a discounted cash flow methodology that applies market interest rates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.


Short-term and long-term borrowings: The fair value of short-term borrowings is estimated to be the carrying amount and is classified as Level 1. The fair value of long-term borrowings is estimated using a discounted cash flow analysis using interest rates currently available for similar debt instruments and are classified as Level 2.


Accrued interest receivable and payable: The carrying amount of accrued interest receivable approximates fair value resulting in a Level 3 classification and the carrying amount of accrued interest payable approximates fair value resulting in a Level 2.


Off-balance sheet instruments: Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments was not material at September 30, 2012 and December 31, 2011.


Assets and liabilities measured at fair value on a recurring and non-recurring basis are presented in the following table:


Description         Fair Value Measurements Using     Total Gains  
(dollars in thousands)   Fair Value     Level 1     Level 2     Level 3     (Losses)  
                               
September 30, 2012                                        
Assets and liabilities measured on a recurring basis:                                        
Available-for-sale securities:                                        
Mortgage-backed securities   $ 196,430     $ —     $ 196,430     $ —     $ —  
Obligations of states and political subdivisions     29,857       —       29,857       —       —  
Corporate bonds     1,558       —       1,558       —       —  
Corporate stock     61       2       59                  
Total recurring   $ 227,906     $ 2     $ 227,906     $ —     $ —  
                                         
Assets and liabilities measured on a nonrecurring basis:                                        
Impaired loans:                                        
Commercial   $ 1,326     $ —     $ —     $ 1,326     $ (64 )
Real estate:                                        
Commercial     786       —       —       786       73  
Multi-family     —       —       —       —       —  
Construction     —       —       —       —       —  
Residential     —       —       —       —       —  
Other:                                        
Agriculture     389       —       —       389       276  
Consumer     —       —       —       —       —  
Other real estate owned     13,681       —       —       13,681       (627 )
Total nonrecurring   $ 16,182     $ —     $ —     $ 16,182     $ (342 )

Description         Fair Value Measurements Using     Total Gains  
(dollars in thousands)   Fair Value     Level 1     Level 2       Level 3     (Losses)  
                         
December 31, 2011                                        
Assets and liabilities measured on a recurring basis:                                        
Available-for-sale securities:                                        
Mortgage-backed securities   $ 179,454     $ —     $ 179,454     $ —     $ —  
Obligations of states and political subdivisions     29,188       —       29,188       —       —  
Corporate stock     69       9       60       —       —  
Total recurring   $ 208,711     $ 9     $ 208,702     $ —     $ —  
                                         
Assets and liabilities measured on a nonrecurring basis:                                        
Impaired loans:                                        
Commercial   $ 1,828     $ —     $ —     $ 1,828     $ (181 )
Real estate:                                        
Commercial     7,982       —       —       7,982       (489 )
Construction     2,083       —       —       2,083       (422 )
Other:                                        
Agriculture     597       —       —       597       (330 )
Consumer     565       —       —       565       (66 )
Other real estate owned     8,190       —       —       8,190       (1,002 )
Total nonrecurring   $ 21,245     $ —     $ —     $ 21,245     $ (2,490 )

There were no transfers between Levels 1 and 2 during the three-month and nine-month periods ended September 30, 2012 or the twelve months ended December 31, 2011.


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, and are considered Level 1, or evaluated using pricing models that vary by asset class and incorporate available trade, bid and other market information and are considered Level 2. Pricing applications apply available information, as applicable, through processes such as benchmark curves, benchmarking to like securities, sector groupings and matrix pricing.


Impaired loans – The fair value of collateral dependent impaired loans adjusted for specific allocations of the allowance for loan losses is generally based on recent real estate appraisals and/or evaluations. These appraisals and/or evaluations may utilize a single valuation approach or a combination of approaches including comparable sales, cost and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income and other available data. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for all Level 3 nonrecurring loans is the sales comparison approach less a reserve for past dues taxes and selling costs ranging from 8% to 10%.


Other real estate owned – Certain commercial and residential real estate properties classified as other real estate owned (“OREO”) are measured at fair value, less costs to sell. Fair values are based on recent real estate appraisals and/or evaluations. These appraisals and/or evaluations may use a single valuation approach or a combination of approaches including comparable sales, cost and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income and other available data. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for all Level 3 nonrecurring OREO is the sales comparison approach less selling costs ranging from 8% to 10%.