Fair Values of Financial Instruments

12 Months Ended

Dec. 31, 2011

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

17. Fair Values of Financial Instruments

Management uses its best judgment in estimating the fair value of the Corporation’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Corporation could have realized in a sale transaction on the date indicated. The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at year-end.

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) 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 Corporation has the ability to access at 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 the Corporation’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

An asset or liability’s level is based on the lowest level of input that is significant to the fair value measurement.

The Corporation used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Available for sales securities — The fair value of available for sale securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying on quoted prices for the specific securities but rather by relying on securities’ relationships to other benchmark quoted securities (Level 2 inputs).

Impaired loans — Fair value on impaired loans is measured using the estimate fair market value of the collateral less the estimate costs to sell. Fair value of the loan’s collateral is typically determined by appraisals or independent valuation. Management’s ongoing review of appraisal information may result in additional discounts or adjustments to the valuation based upon more recent market sales activity or more current appraisal information derived from properties of similar type and/or locale. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. As of December 31, 2011, the fair value of impaired loans consists of loan balances totaling $652,000, net of a valuation allowance of $164,000, compared to loan balances of $3.2 million, net of a valuation allowance of $1.2 million at December 31, 2010. Additional provision for loan losses of $143,000 and $1.1 million was recorded during the years ended December 31, 2011 and 2010, respectively.

Real estate owned — Fair value on other real estate owned (OREO) is measured using the estimate fair market value of the collateral less the estimate costs to sell. Fair value of the collateral is typically determined by appraisals or independent valuation. Management’s ongoing review of appraisal information may result in additional discounts or adjustments to the valuation based upon more recent market sales activity or more current appraisal information derived from properties of similar type and/or locale. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. As of December 31, 2011, OREO measured at fair value less costs to sell had a net carrying amount of $45,000, which is made up of the outstanding balance of $50,000 and a write-down of $5,000.

For assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy are as follows:

(Dollar amounts in thousands) Description	Total		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs
December 31, 2011:
U.S. Treasury and federal agency	$	4,460	$	4,460	$	—	$	—
U.S. government sponsored entities and agencies		41,520		—		41,520		—
Mortgage-backed securities: residential		37,478		—		37,478		—
State and political subdivision		37,000		—		37,000		—
Equity securities		2,696		1,052		1,644		—
	$	123,154	$	5,512	$	117,642	$	—
December 31, 2010:
U.S. Treasury and federal agency	$	6,729	$	6,729	$	—	$	—
U.S. government sponsored entities and agencies		62,362		—		62,362		—
Mortgage-backed securities: residential		19,380		—		19,380		—
Collateralized mortgage obligations		922		—		922		—
State and political subdivision		33,902		—		33,902		—
Equity securities		2,525		154		2,371		—
	$	125,820	$	6,883	$	118,937	$	—

During 2011, the Corporation transferred one equity security from a Level 2 classification to a Level 1 classification within the fair value hierarchy. This equity security had a fair market value of $853,000 at December 31, 2011, compared to $1.0 million at December 31, 2010.

For assets measured at fair value on a non-recurring basis, the fair value measurements by level within the fair value hierarchy are as follows:

(Dollar amounts in thousands) Description	Total		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs
December 31, 2011:
Impaired commercial real estate loans	$	382	$	—	$	—	$	382
Impaired commercial business loans		106						106
Other residential real estate owned		45		—		—		45
	$	533	$	—	$	—	$	533
December 31, 2010:
Impaired commercial real estate loans	$	1,382	$	—	$	—	$	1,382
Impaired commercial business loans		587		—		—		587
	$	1,969	$	—	$	—	$	1,969

The following table sets forth the carrying amount and fair value of the Corporation’s financial instruments included in the consolidated balance sheet as of December 31:

	2011				2010
(Dollar amounts in thousands)	Carrying amount		Fair value		Carrying amount		Fair value
Financial assets:
Cash and cash equivalents	$	28,193	$	28,193	$	19,027	$	19,027
Securities		123,154		123,154		125,820		125,820
Loans receivable		312,545		319,967		306,152		308,776
Federal bank stocks		3,664		N/A		4,129		N/A
Accrued interest receivable		1,630		1,630		1,763		1,763
Financial liabilities:
Deposits		416,468		422,704		409,658		415,040
Borrowed funds		20,000		23,362		30,000		33,163
Accrued interest payable		541		541		649		649
Off-balance sheet commitments		—		—		—		—

This information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate fair values of the Corporation’s financial instruments at December 31, 2011 and 2010:

Carrying amount is the estimated fair value for cash and cash equivalents, securities, accrued interest receivable and payable, demand deposits, short-term borrowed funds, and variable rate loans or deposits that reprice frequently and fully. 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 federal bank stocks due to restrictions placed on its transferability.

Estimates of the fair value of off-balance sheet items were not made because of the short-term nature of these arrangements and the credit standing of the counterparties. Also, unfunded loan commitments relate principally to variable rate commercial loans.

Off-Balance Sheet Financial Instruments

The Corporation is party to credit related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and commercial letters of credit. Commitments to extend credit involve, to a varying degree, elements of credit and interest rate risk in excess of amounts recognized in the consolidated balance sheets. The Corporation’s exposure to credit loss in the event of non-performance by the other party for commitments to extend credit is represented by the contractual amount of these commitments, less any collateral value obtained. The Corporation uses the same credit policies in making commitments as for on-balance sheet instruments. The Corporation’s distribution of commitments to extend credit approximates the distribution of loans receivable outstanding.

The following table presents the notional amount of the Corporation’s off-balance sheet commitment financial instruments as of December 31:

	2011				2010
(Dollar amounts in thousands)	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	2,967	$	953	$	4,073	$	5,023
Unused lines of credit		3,703		36,166		888		35,903
	$	6,670	$	37,119	$	4,961	$	40,926

Commitments to make loans are generally made for periods of 30 days or less. The fixed rate loan commitments at December 31, 2011 have interest rates ranging from 3.125% to 4.75%. Commitments to extend credit include agreements to lend to a customer as long as there is no violation of any condition established in the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Commitments to extend credit also include unfunded commitments under commercial and consumer lines of credit, revolving credit lines and overdraft protection agreements. These lines of credit may be collateralized and usually do not contain a specified maturity date and may be drawn upon to the total extent to which the Corporation is committed.

Standby letters of credit are conditional commitments issued by the Corporation usually for commercial customers to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation generally holds collateral supporting those commitments if deemed necessary. Standby letters of credit were $245,000 and $648,000 at December 31, 2011 and 2010, respectively. The current amount of the liability as of December 31, 2011 and 2010 for guarantees under standby letters of credit issued is not material.