FAIR VALUE MEASUREMENT

6 Months Ended

Jun. 30, 2011

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

NOTE G - FAIR VALUE MEASUREMENT

Fair value is a market-based measurement and is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the assets or owes the liability. In general, the transaction price will equal the exit price and, therefore, represent the fair value of the asset or liability at initial recognition. In determining whether a transaction price represents the fair value of the asset or liability at initial recognition, each reporting entity is required to consider factors specific to the transaction and the asset or liability, the principal or most advantageous market for the asset or liability, and market participants with whom the entity would transact in the market. In order to determine the fair value or the exit price, entities must determine the unit of account, highest and best use, principal market, and market participants.

These determinations allow the reporting entity to define the inputs for fair value and level of hierarchy.

Outlined below is the application of the fair value hierarchy.

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. As of June 30, 2011 and December 31, 2010, the Company carried certain marketable equity securities at fair value hierarchy Level 1.

Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. As of June 30, 2011 and December 31, 2010, the types of financial assets and liabilities the Company carried at fair value hierarchy Level 2 included securities available for sale and derivative liabilities.

Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are supported by little or no market activity or by the entity’s own assumptions. As of June 30, 2011 and December 31, 2010, while the Company did not carry any financial assets or liabilities, measured on a recurring basis, at fair value hierarchy Level 3, the Company did value impaired loans and other real estate owned, measured on a non-recurring basis, at fair value hierarchy Level 3.

Fair Value on a Recurring Basis

The Company measures certain assets and liabilities at fair value on a recurring basis, as described below.

Investment Securities Available-for-Sale

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, and money market funds.  Level 2 securities include US Government obligations and agencies, mortgage-backed securities and collateralized mortgage obligations issued by government sponsored entities, municipal bonds and corporate debt securities. There are currently no securities classified as Level 3, but would include asset-backed securities in less liquid markets.

Derivative Liabilities

Derivative instruments at June 30, 2011 and 2010 include interest rate swaps and are valued using models developed by third-party providers.  This type of derivative is classified as Level 2 within the hierarchy.

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

Mortgage Banking Activity

The Company enters into interest rate lock commitments and commitments to sell mortgages. These commitments are valued as a percentage of the dollar volume of the period end loan pipeline based on an average year-to-date earnings factor and pull-through rate.  At June 30, 2011, the fair value associated with these interest rate lock commitments was $92,000, which is included in other assets. The fair value associated with interest rate lock commitments at December 31, 2010 was $53,000. Forward loan sale commitments have been deemed insignificant.

Fair Value on a Nonrecurring Basis

The Company measures certain assets at fair value on a nonrecurring basis, as described below.

Loans Held for Investment

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2011, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When current appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3. There were $61.6 million in impaired loans at June 30, 2011, of which $51.4 million in loans showed impairment and had a specific reserve of $12.7 million.  Impaired loans totaled $54.4 million at December 31, 2010.  Of such loans, $43.6 million had specific loss allowances aggregating $11.0 million at that date.

Foreclosed Assets

Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at lower of cost or net realizable value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.

There were no significant transfers between the valuation of financial assets or liabilities between levels 1 and 2 in the valuation hierarchy.  Below is a table that presents information about assets measured at fair value at June 30, 2011, and December 31, 2010:

				Fair Value Measurements at
				June 30, 2011, Using
				Quoted Prices		Significant
	Assets/(Liabilities)			in Active		Other			Significant
	Measured at			Markets for		Observable			Unobservable
	Fair Value			Identical Assets		Inputs			Inputs
Description	6/30/2011			(Level 1)		(Level 2)			(Level 3)
Securities available for sale:
U.S. Government obligations and agency	$	12,672,310		$	-	$	12,672,310		$	-
Mortgage-backed		36,071,163			-		36,071,163			-
Collateralized mortgage obligations		108,189,670			-		108,189,670			-
Municipals		40,646,071			-		40,646,071			-
Corporate bonds		2,813,630			-		2,813,630			-
Marketable equity		529,534			529,534		-			-
Foreclosed assets		13,491,059			-		-			13,491,059
Impaired loans		38,735,068			-		-			38,735,068
Interest rate lock commitments		91,716			-		-			91,716
Derivative liabilities		(504,867	)		-		(504,867	)		-

				Fair Value Measurements at
				December 31, 2010, Using
				Quoted Prices		Significant
	Assets/(Liabilities)			in Active		Other			Significant
	Measured at			Markets for		Observable			Unobservable
	Fair Value			Identical Assets		Inputs			Inputs
Description	12/31/2010			(Level 1)		(Level 2)			(Level 3)
Securities available for sale:
U.S. Government obligations and agency	$	9,838,400		$	-	$	9,838,400		$	-
Mortgage-backed		39,724,845			-		39,724,845			-
Collateralized mortgage obligations		78,449,684			-		78,449,684			-
Municipals		50,618,363			-		50,618,363			-
Corporate bonds		2,768,800			-		2,768,800			-
Marketable equity		516,137			516,137		-			-
Foreclosed assets		15,523,592			-		-			15,523,592
Impaired loans		43,404,439			-		-			43,404,439
Interest rate lock commitments		53,185			-		-			53,185
Derivative liabilities		(579,038	)		-		(579,038	)		-

The following table provides information regarding the activity in assets and liabilities measured at a fair value Level 3 on a recurring basis per ASU No 2010-06, Fair Value Measurements and Disclosures:

	Level 3
	Interest Rate
	Lock Commitments
Beginning balance December 31, 2010	$	53,185
Realized gain on commitments		(257,713	)
Expired commitments		(27,352	)
New commitments entered into		323,596
Ending balance June 30, 2011	$	91,716

ASC Topic 825 Financial Instruments requires disclosure of fair value information about financial instruments on an interim basis, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.

Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. ASC Topic 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. In addition to the valuation methods previously described for investments available for sale and derivative assets and liabilities, the following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

Cash and Cash Equivalents

The carrying amounts for cash and cash equivalents approximate fair value because of the short maturities of those instruments.

Investment Securities

Fair value for investment securities equals quoted market price if such information is available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans Held For Sale

The fair value of loans held for sale is based on commitments on hand from investors within the secondary market for loans with similar characteristics.

Loans Held for Investment

For certain homogenous categories of loans, such as residential mortgages, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.  Additional adjustments are estimated by applying a reasonable discount to reflect the current market for and illiquid nature of bank loan portfolios.

Federal Home Loan Bank Stock

The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.

Investment in Life Insurance

The carrying value of life insurance approximates fair value because this investment is carried at cash surrender value, as determined by the insurers.

Deposits

The fair value of demand deposits, savings, money market and NOW accounts is the amount payable on demand at the reporting date. The fair value of time deposits is estimated using the rates currently offered for instruments of similar remaining maturities.

Short-term Borrowings and Long-term Debt

The fair value of short-term borrowings and long-term debt are based upon the discounted value when using current rates at which borrowings of similar maturity could be obtained.

Accrued Interest Receivable and Accrued Interest Payable

The carrying amounts of accrued interest receivable and payable approximate fair value, because of the short maturities of these instruments.

Derivative financial instruments

Fair values for interest rate swaps are based upon the estimated amounts required to settle the contracts.

The carrying amounts and estimated fair values of the Company’s financial instruments, none of which are held for trading purposes, are as follows at June 30, 2011 and December 31, 2010:

	June 30, 2011				December 31, 2010
	Carrying		Estimated		Carrying		Estimated
	amount		fair value		amount		fair value
Financial assets:
Cash and cash equivalents	$	51,151,616	$	51,151,616	$	49,106,179	$	49,106,179
Investment securities		200,922,378		200,922,378		184,455,418		184,455,418
Federal Home Loan Bank stock		9,606,100		9,606,100		10,521,700		10,521,700
Loans held for sale		1,949,066		1,949,066		5,689,853		5,689,853
Loans held for investment, net		614,088,773		579,313,443		656,101,069		621,983,795
Investment in life insurance		18,873,349		18,873,349		18,482,993		18,482,993
Accrued interest receivable		3,655,350		3,655,350		3,995,242		3,995,242
Financial liabilities:
Deposits		714,574,010		732,888,705		724,383,323		742,610,196
Short-term borrowings		5,000,000		5,348,119		7,000,000		7,232,221
Long-term borrowings		152,748,000		152,991,881		157,748,000		158,661,779
Interest rate swaps		504,867		504,867		579,038		579,038
Accrued interest payable		1,317,760		1,317,760		1,350,326		1,350,326