DISCLOSURE ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2011

DISCLOSURE ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS [Abstract]

DISCLOSURE ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS

NOTE N – DISCLOSURE ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS

The following disclosure of the estimated fair value of financial instruments is made in accordance with ASC Topic 825 – Financial Instruments.  The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies.  However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value.  Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Federal Funds Sold and Certificates of Deposits with Other Banks - The fair value is estimated by discounting the expected cash flows to their present value by an appropriate discount rate.  Given a possible short-term investment period and gernerally negligible credit losses, the fair value of these investments is considererd to approximate therir respective carrying values.

Cash and Cash Equivalents – For such short-term instruments, the carrying amount is a reasonable estimate of fair value.

Securities – For securities held as investments, fair value equals market price, if available.  If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.  Fair value of other securities, which consist of FHLB and First National Banker's Bankshares is estimated to be the carrying value which is par.

Loans – The fair value 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.

Deposits – The fair values of demand deposits are, as required by ASC Topic 825, equal to the carrying value of such deposits.  Demand deposits include noninterest-bearing demand deposits, saving accounts, NOW accounts, and money market demand accounts.  The fair value of variable rate term deposits, those repricing within six months or less, approximates the carrying value of these deposits.  Discounted cash flows have been used to value fixed rate term deposits and variable rate term deposits repricing after six months.  The discount rate used is based on interest rates currently being offered on comparable deposits as to amount and term.

FHLB and Other Borrowings – The fair value of the fixed rate borrowings are estimated using discounted cash flows, based on current incremental borrowing rates for similar types of borrowing arrangements.  The carrying amount of any variable rate borrowings approximates their fair values.

Off-Balance Sheet Instruments – Fair values of off-balance sheet financial instruments are based on fees charged to enter into similar agreements.  However, commitments to extend credit do not represent a significant value until such commitments are funded or closed.  Management has determined that these instruments do not have a distinguishable far value and no fair value has been assigned.

The estimated fair values of the financial instruments, none of which are held for trading purposes, were as follows:

	December 31, 2011				December 31, 2010
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
	(In thousands)				(In thousands)
Financial assets:
Cash and cash equivalents	$	20,890	$	20,890	$	15,264	$	15,264
Federal funds sold		23,995		24,821		31,270		31,269
Certificates of deposit with
other banks		826		826		1,778		1,778
Securities available-for-sale		123,972		123,972		124,447		124,447
Securities held-to-maturity		47,219		47,337		33,095		32,541
Securities, other		1,938		1,938		1,933		1,933
Loans		233,023		235,481		247,764		249,898
Financial liabilities:
Noninterest-bearing deposits		81,013		71,652		74,022		58,013
Interest-bearing deposits		327,613		319,066		334,721		318,760
FHLB and other borrowings		24,309		25,325		26,970		28,671

ASC Topic 820 – “Fair Value Measurements and Disclosures” establishes a three-level valuation hierarchy for disclosure of fair value measurements.  The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.  A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.  The three levels are defined as follows:

·   Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

·   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.

·   Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following table summarizes the valuation of the assets and liabilities that the Corporation measures at fair value on a recurring basis, by the ASC Topic 820 pricing observability levels as of December 31, 2011 and December 31, 2010, (in thousands):

	Quoted		Models with		Models with		Carrying
	market		significant		significant		value
	prices in		observable		unobservable		in the
	active		market		market		Balance
	markets		parameters		parameters		Sheet
	Level 1		Level 2		Level 3		Total
December 31, 2011:
Available-for-sale securities	$	-	$	123,972	$	-	$	123,972
	Quoted		Models with		Models with		Carrying
	market		significant		significant		value
	prices in		observable		unobservable		in the
	active		market		market		Balance
	markets		parameters		parameters		Sheet
	Level 1		Level 2		Level 3		Total
December 31, 2010:
Available-for-sale securities	$	-	$	124,447	$	-	$	124,447

The fair value of available-for-sale securities is determined by various valuation methodologies.  Where quoted market prices are available in an active market, securities are classified within Level 1.  The Corporation has no securities classified within Level 1.  If quoted market prices are not available, then fair values are estimated by using pricing models or quoted prices of securities with similar characteristics.  Level 2 securities include U.S. Treasury securities, Obligations of U.S. government corporations and agencies, Obligations of state and political subdivisions, mortgage-backed securities, and collateralized mortgage obligations.  In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.  The Corporation has no securities classified within Level 3.

Following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a non-recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.

Impaired Loans

Loans for which it is probable that the Corporation will not collect all principal and interest due according to contractual terms are measured for impairment in accordance with the provisions of ASC Topic 310-Receibables.  Allowable methods for estimation fair value include using the fair value of the collateral for collateral dependent loans, or, where a loan is determined not to be collateral dependent, using the discounted cash flow method.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized.  This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.  If the impaired loan is determined not to be collateral dependent, then the discounted cash flow method is used.  This method requires the impaired loan to be recorded at the present value of expected future cash flows discounted at the loan's effective interest rate.  The effective interest rate of a loan in the contractual interest rate adjusted for any net deferred loan fees or costs, premiums or discount existing at origination or acquisition of the loan.  Impaired loans are classified within Level 3 of the fair value hierarchy.

Other Real Estate Owned

Other real estate owned acquired through loan foreclosure is initially recorded at the lower of cost  or fair value less costs to sell.  If recorded at fair value,  a new cost basis is established and an adjustment at the time of foreclosure is recorded through the allowance for loan losses.  Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate.  If it is determined the fair value declines subsequent to foreclosure, a valuation allowance is recorded through non-interest expense.  Other real estate values werre written down by $258 thousand in 2011 and $1.4 million in 2010.  Operating costs associated with the assets after acquisition are also recorded as non-interest expense.  Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other non-interest expense.  Other real estate owned measured at fair value on a non-recurring basis at December 31, 2011 and 2010 amounted to $14.4 million and $8.2 million, respectively.  The remainder of other real estate was carried at cost at December 31, 2011 and 2010, at $9.3 million and $4.1 million, respectively.  Net gains on other real estate disposed of during the year ended December 31, 2011 totaled $18.3 thousand.

The following table presents the fair value measurement of assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2011 and December 31, 2010.

December 31, 2011
	Carrying		Quoted		Models with		Models with
	value		market		significant		significant
	in the		prices in		observable		unobservable
	Balance		active		market		market
	Sheet		markets		parameters		parameters
	Fair Value		Level 1		Level 2		Level 3
Impaired Loans	$	12,614	$	-	$	-	$	12,614
Other real estate owned		14,352		-		-		14,352
December 31, 2010
	Carrying		Quoted		Models with		Models with
	value		market		significant		significant
	in the		prices in		observable		unobservable
	Balance		active		market		market
	Sheet		markets		parameters		parameters
	Fair Value		Level 1		Level 2		Level 3
Impaired Loans	$	17,091	$	-	$	-	$	17,091
Other real estate owned		8,233		-		-		8,233