FAIR VALUE OF ASSETS AND LIABILITIES

3 Months Ended

Mar. 31, 2012

FAIR VALUE OF ASSETS AND LIABILITIES [Abstract]

FAIR VALUE OF ASSETS AND LIABILITIES

NOTE F - FAIR VALUE OF ASSETS AND LIABILITIES

The Company follows the guidance of FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (ASC Topic 820).  ASC Topic 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.

ASC Topic 820 defines the fair value 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. ASC Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

In accordance with ASC Topic 820, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1	Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2	Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities.
Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheets.

Available-for-Sale Securities

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 Company 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 states 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 Company has no securities classified within Level 3.

The following table presents the Company's assets that are measured at fair value on a recurring basis and the level within the ASC Topic 820 hierarchy in which the fair value measurements fell as of March 31, 2012 and December 31, 2011, (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
March 31, 2012:
Available-for-sale securities
U. S. Government agencies	$	-	$	12,599	$	-	$	12,599
State and local political subdivisions		-		76,966		-		76,966
Mortgage-backed securities		-		52,951		-		52,951
	$	-	$	142,516	$	-	$	142,516
	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
U. S. Government agencies	$	-	$	9,578	$	-	$	9,578
State and local political subdivisions		-		76,498		-		76,498
Mortgage-backed securities		-		37,896		-		37,896
	$	-	$	123,972	$	-	$	123,972

There were no transfers of financial assets among Level 1, Level 2 and Level 3 during 2012.

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 Company 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, Receivables.  Allowable methods for estimating 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 is 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.

The following table presents the fair value measurement of impaired loans and other real estate measured at fair value on a nonrecurring basis and the level within the ASC Topic 820 fair value hierarchy in which the fair value measurements fell at March 31, 2012 and December 31, 2011, (in thousands):

March 31, 2012
	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	$	9,780	$	-	$	-	$	9,780
Other real estate owned		12,268		-		-		12,268
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	$	10,355	$	-	$	-	$	10,355
Other real estate owned		14,352		-		-		14,352

Total loans analyzed for impairment had a carrying amount of $38,287,000 at March 31, 2012.  Of this amount, $12,400,000 had a reserve allocated of $2,620,000.  Total loans analyzed for impairment at December 31, 2011 totaled $36,615,000 of which $12,614,000 had a reserve allocated of $2,259,000.

Other Real Estate Owned

Other real estate owned acquired through loan foreclosure is initially recorded at fair value less estimated costs to sell when acquired, establishing a new cost basis. The 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. 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 March 31, 2012 and December 31, 2011 amounted to $12.3 million and $14.4 million, respectively, with the remainder carried at cost.  Write-downs and sales resulted in a decrease of $300 thousand and $843 thousand in the three months ending March 31, 2012 and March 31, 2011, respectively.  Increases to other real estate owned occurred due to additional loan foreclosures and capital expenditures made to improve individual properties.  These increases totaled $1.2 million for the period ending March 31, 2012 and $380 thousand for the period ending March 31, 2011.

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:

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 Bankers Bankshares, Inc., 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, savings 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 fair 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:

	March 31, 2012				December 31, 2011
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
	(In thousands)				(In thousands)
Financial assets:
Cash and cash equivalents	$	22,029	$	22,029	$	20,890	$	20,890
Federal funds sold		31,995		31,995		23,995		24,821
Certificates of deposit with
other banks		6,074		6,074		826		826
Securities available-for-sale		142,516		142,516		123,972		123,972
Securities held-to-maturity		42,829		42,853		47,219		47,337
Securities, other		1,678		1,678		1,938		1,938
Loans		230,493		232,798		233,023		235,481
Financial liabilities:
Noninterest-bearing deposits		85,665		75,757		81,013		71,652
Interest-bearing deposits		352,710		343,508		327,613		319,066
FHLB and other borrowings		20,098		20,938		24,309		25,325