Note 5 - Fair Value

9 Months Ended

Sep. 30, 2011

Fair Value Disclosures [Text Block]

NOTE 5 – FAIR VALUE

Carrying amount and estimated fair values of financial instruments were as follows:

	(In Thousands of Dollars)
	September 30, 2011						December 31, 2010
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Financial Assets:
Cash and cash equivalents	$	96,718		$	96,718		$	73,538		$	73,538
FDIC insured bank certificates of deposit		5,700			5,700			10,405			10,405
Trading account securities		20			20			13			13
Securities available for sale		290,283			290,283			255,703			255,703
Federal Home Loan Bank stock		7,266			7,266			8,203			8,203
Loans held for sale		434			434			1,355			1,355
Loans, net		984,635			965,253			1,010,189			987,800
Accrued interest receivable		4,845			4,845			4,689			4,689
Financial Liabilities:
Deposits		(1,218,320	)		(1,210,213	)		(1,183,783	)		(1,173,030	)
Securities sold under agreements to repurchase and overnight borrowings		(46,304	)		(46,304	)		(41,328	)		(41,328	)
Federal Home Loan Bank advances		(21,543	)		(23,444	)		(40,658	)		(42,684	)
Accrued interest payable		(1,220	)		(1,220	)		(1,467	)		(1,467	)
Subordinated debentures		(36,084	)		(36,781	)		(36,084	)		(37,051	)

The methods and assumptions used to estimate fair value are described as follows: The carrying amount is the estimated fair value for cash and cash equivalents, short term borrowings, Federal Home Loan Bank stock, accrued interest receivable and payable, demand deposits, short term debt, and variable rate loans or deposits that re-price frequently and fully. Security fair values are based on market prices or dealer quotes, and if no such information is available, on the rate and term of the security and information about the issuer. For fixed rate loans and variable rate loans, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk based on historical losses on similar loan pools. For deposits with infrequent re-pricing or re-pricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life of the product.

Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values for the specific loans in the portfolio and assumes the bank will resolve them through orderly liquidation. Fair value of loans held for sale is based on market quotes. Fair value of debt is based on current rates for similar financing. The fair value of off-balance sheet items is based on the current fees or cost that would be charged to enter into or terminate such arrangements. The fair value of off-balance sheet items was not material to the consolidated financial statements at September 30, 2011 and December 31, 2010.

The following tables present information about our assets measured at fair value on a recurring basis at September 30, 2011, and valuation techniques used by us to determine those fair values.

In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets that we have the ability to access. Securities for Level 1 include, Treasury Notes, Government Sponsored Agency Bonds, and Corporate Notes.

Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals. Level 2 securities consist of Government Sponsored Agency Backed Collateralized Mortgage Obligation and Municipal Securities.

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability. Level 3 Securities include local Municipal Securities where market pricing is not available, trust preferred securities issued by banks, and other miscellaneous investments.

Assets Measured at Fair Value on a Recurring Basis

(Dollars in Thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
September 30, 2011
Securities available for sale
Treasury Notes	$	0	$	0	$	0	$	0
U.S. Government Agency Bonds		115,710		0		0		115,710
U.S. Government Agency CMOs		0		133,197		0		133,197
Municipal Securities		0		56,130		13,338		69,468
Other Securities		92		0		1,562		1,654
Total Securities available for sale	$	115,802	$	189,327	$	14,900	$	320,029
Trading equity securities	$	20	$	0	$	0	$	20
December 31, 2010
Securities available for sale
Treasury Notes	$	12,530	$	0	$	0	$	12,530
U.S. Government Agency Bonds		82,897		0		0		82,897
U.S. Government Agency CMOs		0		110,542		0		110,542
Municipal Securities		0		38,371		9,716		48,087
Other Securities		530		0		1,117		1,647
Total Securities available for sale	$	95,957	$	148,913	$	10,833	$	255,703
Trading equity securities	$	13	$	0	$	0	$	13

Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis

(Dollars in Thousands)	2011			2010
Balance at beginning of year	$	10,833		$	7,559
Total realized and unrealized gains/(losses) included in income		0			(150	)
Total unrealized gains/(losses) included in other comprehensive income		(48	)		56
Purchases of securities		9,177			5,097
Sales of securities		0			(397	)
Calls and maturities		(5,062	)		(540	)
Net transfers in/(out) of Level 3		0			0
Balance at September 30 of each year	$	14,900		$	11,625

Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 assets. As a result, the unrealized gains and losses for these assets presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs.

Available for sale investments securities categorized as Level 3 assets primarily consist of bonds issued by local municipalities and other like assets. We carry local municipal securities at historical cost, which approximates fair value, unless economic conditions for the municipality changes to a degree requiring a valuation adjustment.

We also have assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets consist of impaired loans and other real estate owned. We have estimated the fair value of impaired loans using Level 3 inputs, specifically valuation of loans based on either a discounted cash flow projection, or a discount to the appraised value of the collateral underlying the loan. We use discounted appraised values or broker’s price opinions to determine the fair value other real estate owned.

Assets Measured at Fair Value on a Nonrecurring Basis

(Dollars in Thousands)	Balance at September 30,		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Losses for the nine month period ended September 30,
2011
Impaired loans	$	38,178		0		0	$	38,178	$	(6,462	)
Other Real Estate Owned	$	7,367		0		0	$	7,367	$	(1,128	)
2010
Impaired loans	$	29,587		0		0	$	29,587	$	(5,563	)
Other Real Estate Owned	$	9,020		0		0	$	9,020	$	(1,431	)

Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. We estimate the fair value of the loans based on the present value of expected future cash flows using management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals). Other Real Estate Owned is valued based on either a recent appraisal for the property or a brokers' price opinion of the value of the property, which are discounted for expected costs to dispose of the property. The $6,462,000 loss on impaired loans indicated in the table above, for the nine month period ended September 30, 2011, and the $5,563,000 for the nine months ended September 30, 2010, were charged to the allowance for loan losses, while the $1,128,000 and the $1,431,000 losses, for the nine months ended September 30 of 2011 and 2010, in other real estate owned were charged to earnings through other non-interest expense on the income statement.