Note 5 - Fair Value

9 Months Ended

Sep. 30, 2012

Fair Value Disclosures [Text Block]

NOTE 5 – FAIR VALUE

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

September 30, 2012	Carrying Amount			Estimated Fair Value			Quoted Prices in Active Markets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
(In thousands of dollars)
Financial Assets:
Cash and cash equivalents	$	71,975		$	71,975		$	71,975		$	0		$	0
FDIC insured bank certificates of deposit		2,927			2,927			2,927			0			0
Trading account securities		2			2			2			0			0
Securities available for sale		350,229			350,229			39			333,489			16,701
Federal Home Loan Bank stock		7,266			7,266			0			0			7,266
Loans held for sale		3,813			3,813			0			3,813			0
Loans, net		956,078			944,191			0			0			944,191
Financial Liabilities:
Non-interest bearing deposits		(229,437	)		(229,437	)		(229,437	)		0			0
Interest bearing deposits		(995,424	)		(998,015	)		0			0			(998,015	)
Securities sold under agreements to repurchase and overnight borrowings		(45,927	)		(45,927	)		0			(45,927	)		0
Federal Home Loan Bank advances		(19,558	)		(21,275	)		0			0			(21,275	)
Subordinated debentures		(36,084	)		(36,102	)		0			0			(36,102	)

December 31, 2011	Carrying Amount			Estimated Fair Value
(In thousands of dollars)
Financial Assets:
Cash and cash equivalents	$	75,816		$	75,816
FDIC insured bank certificates of deposit		4,432			4,432
Trading account securities		2			2
Securities available for sale		342,184			342,184
Federal Home Loan Bank stock		7,266			7,266
Loans held for sale		349			349
Loans, net		962,890			944,756
Financial Liabilities:
Non-interest bearing deposits		(214,904	)		(214,904	)
Interest bearing deposits		(1,005,638	)		(1,000,580	)
Securities sold under agreements to repurchase and overnight borrowings		(46,784	)		(46,784	)
Federal Home Loan Bank advances		(19,457	)		(21,359	)
Subordinated debentures		(36,084	)		(36,488	)

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, 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, 2012 and December 31, 2011.

The following tables present information about our assets measured at fair value on a recurring basis at September 30, 2012, and valuation techniques used by us to determine those fair values.

Level 1 are assets which are actively traded on an open market and pricing is publicly available.

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 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

(In thousands of dollars)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
September 30, 2012
Securities available for sale
U.S. governmental agency bonds	$	0	$	111,781	$	0	$	111,781
Mortgage backed securities		0		73,017		0		73,017
Collateralized mortgage obligations		0		67,385		0		67,385
States and political subdivisions		0		81,306		15,116		96,422
Equity and other Securities		39		0		1,585		1,624
Total Securities available for sale	$	39	$	333,489	$	16,701	$	350,229
Trading equity securities	$	2	$	0	$	0	$	2
December 31, 2011
Securities available for sale
U.S. governmental agency bonds	$	0	$	133,834	$	0	$	133,834
Mortgage backed securities		0		71,052		0		71,052
Collateralized mortgage obligations		0		57,845		0		57,845
States and political subdivisions		0		62,447		15,342		77,789
Equity and other Securities		92		0		1,572		1,664
Total Securities available for sale	$	92	$	325,178	$	16,914	$	342,184
Trading equity securities	$	2	$	0	$	0	$	2

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

(In thousands of dollars)	2012			2011
Balance at beginning of year	$	16,914		$	10,833
Total realized and unrealized gains/(losses) included in income		0			0
Total unrealized gains/(losses) included in other comprehensive income		0			(48	)
Purchases of securities		11,682			9,177
Sales of securities		0			0
Calls and maturities		(12,255	)		(5,062	)
Net transfers in/(out) of Level 3		360			0
Balance at September 30 of each year	$	16,701		$	14,900

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 of other real estate owned.

Assets Measured at Fair Value on a Nonrecurring Basis

(In thousands of dollars)	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)
2012
Impaired loans	$	35,746	$	0	$	0	$	35,746
Other real estate owned	$	3,001	$	0	$	0	$	3,001
Other repossessed assets	$	250	$	0	$	0	$	250
2011
Impaired loans	$	38,178	$	0	$	0	$	38,178
Other real estate owned	$	7,367	$	0	$	0	$	7,367

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. Losses on impaired loans indicated in the table above were charged to the allowance for loan losses. Losses in other real estate owned and other repossessed assets were charged to earnings through other non-interest expense on the income statement.