Fair Value

9 Months Ended

Sep. 30, 2011

Fair Value [Abstract]

Fair Value

3.           Fair Value

Fair value is the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  There are three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other 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.

Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair values of securities available for sale are usually determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs), or matrix pricing, which is a mathematical technique widely used to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs).

The Corporation's investment in collateralized debt obligations consisting of pooled trust preferred securities which are issued by financial institutions were historically priced using Level 2 inputs.  The lack of observable inputs and market activity in this class of investments has been significant and resulted in unreliable external pricing.  Broker pricing and bid/ask spreads, when available, have varied widely.  The once active market has become comparatively inactive. As a result, these investments are now priced using Level 3 inputs.

The Corporation has developed an internal model for pricing these securities. This is the same model used in determining other-than-temporary impairment (“OTTI”) as further described in Note 8.  Information such as historical and current performance of the underlying collateral, deferral/default rates, collateral coverage ratios, break in yield calculations, cash flow projections, liquidity and credit premiums required by a market participant, and financial trend analysis with respect to the individual issuing financial institutions, are utilized in determining individual security valuations. Discount rates were utilized along with the cash flow projections in order to calculate an appropriate fair value.  These discount rates were calculated based on industry index rates and adjusted for various credit and liquidity factors.  Due to current market conditions as well as the limited trading activity of these securities, the market value of the securities is highly sensitive to assumption changes and market volatility.

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals and collateral evaluations. The appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.  Adjustments are routinely made in the appraisal process by third party appraisers to adjust for differences between the comparable sales and income data available.  Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Non-recurring adjustments to certain commercial and residential real estate properties classified as other real estate owned ("OREO") are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification.  In cases where the carrying amount exceeds the fair value less costs to sell, an impairment loss is recognized.

Assets and liabilities measured at fair value on a recurring basis are summarized below:

			Fair Value Measurement at September 30, 2011 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Obligations of U.S. Government and U.S.   Government sponsored enterprises	$	142,948,508	$	36,088,000	$	106,860,508	$	-
Mortgage-backed securities, residential		57,220,655		-		57,220,655		-
Obligations of states and political subdivisions		46,636,291		-		46,636,291		-
Trust Preferred securities		2,280,848		-		1,985,938		294,910
Corporate bonds and notes		13,792,147		-		13,792,147		-
CMO's		8,468,507		-		8,468,507		-
SBA Pool's		2,305,718		-		2,305,718		-
Corporate stocks		5,425,922		4,741,501		684,421		-
Total available for sale securities	$	279,078,596	$	40,829,501	$	237,954,185	$	294,910

			Fair Value Measurement at December 31, 2010 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Obligations of U.S. Government and U.S.   Government sponsored enterprises	$	102,131,517	$	40,581,250	$	61,550,267	$	-
Mortgage-backed securities, residential		62,761,633		-		62,761,633		-
Obligations of states and political subdivisions		38,765,092		-		38,765,092		-
Trust Preferred securities		2,344,094		-		2,009,509		334,585
Corporate bonds and notes		11,694,190		-		11,694,190		-
Corporate stocks		5,848,435		5,209,069		639,366		-
Total available for sale securities	$	223,544,961	$	45,790,319	$	177,420,057	$	334,585

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine-month periods ending September 30, 2011 and 2010:

	Fair Value Measurement nine-months ended September 30, 2011 Using Significant Unobservable Inputs (Level 3)			Fair Value Measurement nine-months ended September 30, 2010 Using Significant Unobservable Inputs (Level 3)
Investment Securities Available for Sale
Beginning balance	$	334,585		$	511,480
Total gains/losses (realized/unrealized):
Included in earnings:
Income on securities		-			-
Impairment charge on investment securities		(67,400	)		(393,005	)
Included in other comprehensive income		27,725			172,340
Transfers in and/or out of Level 3		-			-
Ending balance September 30	$	294,910		$	290,815

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

			Fair Value Measurement at September 30, 2011 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans
Commercial, financial and agricultural:
Commercial and industrial	$	701,710	$	-	$	-	$	701,710
Commercial mortgages:		407,551		-		-		407,551
Other		392,257		-		-		392,257
Total Impaired Loans	$	1,501,578	$	-	$	-	$	1,501,578
Other real estate owned, net	$	661,475	$	-	$	-	$	661,475

			Fair Value Measurement at December 31, 2010 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans:
Commercial mortgages:
Construction	$	72,211	$	-	$	-	$	72,211
Other		580,329		-		-		580,329
Total Impaired Loans	$	652,540	$	-	$	-	$	652,540
Other real estate owned, net	$	740,620	$	-	$	-	$	740,620

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $3,088,321 with a valuation allowance of $1,586,743 as of September 30, 2011, resulting in a $833,333 provision for loan losses for the nine-month period ending September 30, 2011.  Impaired loans had a carrying amount of $892,298, with a valuation allowance of $239,758 as of December 31, 2010, resulting in no additional provision for loan losses for the year ending December 31, 2010.

OREO, which is measured by the lower of carrying or fair value less costs to sell, had a net carrying amount of $661,475 at September 30, 2011.  The net carrying amount reflects the outstanding balance of $784,162 net of a valuation allowance of $122,687 at September 30, 2011 which resulted in write downs of $12,120 for the nine-month period ending September 30, 2011.  OREO had a net carrying amount of $740,620 at December 31, 2010.  The net carrying amount reflected an outstanding balance of $909,947, net of a valuation allowance of $169,327 at December 31, 2010 which resulted in write downs of $169,327 for the year ending December 31, 2010.

The carrying amounts and estimated fair values of other financial instruments, at September 30, 2011 and December 31, 2010, are as follows:

(dollars in thousands)	September 30, 2011				December 31, 2010
Financial assets:	Carrying Amount		Estimated Fair Value (1)		Carrying Amount		Estimated Fair Value (1)
Cash and due from financial institutions	$	30,749	$	30,749	$	16,540	$	16,540
Interest-bearing deposits in other financial institutions		87,724		87,724		44,080		44,080
Securities available for sale		279,079		279,079		223,545		223,545
Securities held to maturity		7,586		8,484		7,715		8,297
Federal Home Loan and Federal Reserve Bank stock		5,672		N/A		3,329		N/A
Net loans		778,782		798,889		604,186		618,859
Loans held for sale		74,412		74,412		487		487
Accrued interest receivable		4,001		4,001		2,713		2,713
Financial liabilities:
Deposits:
Demand, savings, and insured money market accounts		736,711		736,711		532,555		532,555
Time deposits		305,495		307,978		253,804		256,281
Securities sold under agreements to repurchase		41,454		43,975		44,775		46,667
Federal Home Loan Bank advances		43,936		47,452		20,000		21,609
Accrued interest payable		823		823		784		784
Dividends payable		1,142		1,142		881		881
(1) Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. 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 estimates.

The methods and assumptions used to estimate fair value are described as follows:

Carrying amount is the estimated fair value for cash and due from financial institutions, interest bearing deposits, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully.  The methods for determining the fair values for securities were described previously.  For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk.  Fair value of debt is based on current rates for similar financing.  It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.  The fair value of off-balance-sheet items is not considered material.