Note 13 - Fair Value Measurements

6 Months Ended

Jun. 30, 2012

Fair Value, Measurement Inputs, Disclosure [Text Block]

Note 13 – Fair Value Measurements

The Company records certain assets at fair value. The Company has not elected the fair value option for liabilities.  Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.  Fair value measurements are also utilized to determine the initial value of certain assets, to perform impairment assessments, and for disclosure purposes.  The Company uses quoted market prices and observable inputs to the maximum extent possible when measuring fair value.  In the absence of quoted market prices, various valuation techniques are utilized to measure fair value.  When possible, observable market data for identical or similar financial instruments are used in the valuation.  When market data is not available, fair value is determined using valuation models that incorporate management’s estimates of the assumptions a market participant would use in pricing the asset or liability.

Fair value measurements are classified within one of three levels based on the observability of the inputs used to determine fair value, as follows:

Level 1 — The valuation is based on quoted prices in active markets for identical instruments.

Level 2 — The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 — The valuation is based on unobservable inputs that are supported by minimal or no market activity and that are significant to the fair value of the instrument.  Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar techniques that incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument, or valuations that require significant management judgment or estimation.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Investment securities available for sale and rabbi trusts are recorded at fair value on a recurring basis.  Additionally, the Company records at fair value other assets on a nonrecurring basis, including presold loans in process of settlement, impaired loans, and other real estate owned.  These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting for these other assets.

Fair value measurements for assets where there exists limited or no observable market data and, therefore, are based primarily upon estimates, are often calculated based on the economic and competitive environment, the characteristics of the asset and other factors.  Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability.  Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.  The following is a description of valuation methodologies used for assets recorded at fair value. The determination of where an instrument falls in the hierarchy requires significant judgment.

Financial Instruments on a Recurring Basis:

The following is a description of the valuation methodologies used for financial instruments measured at fair value on a recurring basis:

Investment Securities – Investment securities available for sale are recorded at fair value on at least a monthly basis.  Fair value measurement is based upon quoted prices, if available.  If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.  Level 1 fair value is used for those securities traded on an active exchange, U.S. Treasury securities that are traded by brokers or dealers in an active over-the-counter market, and money market funds.  Level 2 securities include mortgage-backed securities issued by government-sponsored enterprises, municipal bonds, and corporate debt securities.  These Level 2 securities are valued using an independent third party.  This independent third party uses multiple pricing vendors and matrix pricing methods developed in accordance with the Securities Industry and Financial Markets Association’s industry-standard methods.  Level 3 investment securities include equity securities that are not traded on an active exchange, investments in closely held subsidiaries, and asset-backed securities traded in less liquid markets.

The table below presents by level, the amount of assets at June 30, 2012 and December 31, 2011 measured at fair value on a recurring basis:

	Fair Value Measurement Classification
	Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
June 30, 2012
Investment Securities Available for Sale
Municipal bonds	$	-	$	1,478	$	200	$	1,678
Mortgage-backed bonds		-		15,055		-		15,055
Equity securities		-		-		1,625		1,625
Total	$	-	$	16,533	$	1,825	$	18,358
December 31, 2011
Investment Securities Available for Sale
U.S. Government Agency obligations	$	-	$	7,241	$	-	$	7,241
Municipal bonds		-		6,511		200		6,711
Mortgage-backed bonds		-		35,492		-		35,492
SBA securities		-		1,326		-		1,326
Equity securities		-		-		1,366		1,366
Total	$	-	$	50,570	$	1,566	$	52,136

The following table provides a reconciliation of the beginning and ending balances for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended June 30, 2012 and June 30, 2011.

	Six Months Ended June 30,
	2012		2011
	(Dollars in thousands)
Beginning balance, January 1	$	1,566	$	3,023
Total gains included in:
Other comprehensive income		47		45
Purchases		212		-
Sales		-		(1,065	)
Transfers in		-		258
Ending balance, June 30	$	1,825	$	2,261

The purchases in 2012 represent capital calls for two Small Business Investment Company investments. The sales in 2011 represent the sale of corporate bonds that were not traded on an active exchange and the incoming transfers in 2011 include equity securities that were obtained as partial payment on a loan that had defaulted.

Financial Instruments on a Non-recurring Basis:

The following is a description of the valuation methodologies used for financial instruments measured at fair value on a non-recurring basis:

Investment Securities – Investment securities held to maturity are recorded at amortized cost.  Fair value measurement is based upon quoted prices, if available.  If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.  Level 1 fair value is used for those securities traded on an active exchange, U.S. Treasury securities that are traded by brokers or dealers in an active over-the-counter market, and money market funds.  Level 2 securities include mortgage-backed securities issued by government-sponsored enterprises, municipal bonds, and corporate debt securities.  These Level 2 securities are valued using an independent third party.  This independent third party uses multiple pricing vendors and matrix pricing methods developed in accordance with the Securities Industry and Financial Markets Association’s industry-standard methods.  Level 3 investment securities include equity securities that are not traded on an active exchange, investments in closely held subsidiaries, and asset-backed securities traded in less liquid markets.

Presold Loans in Process of Settlement - The Company does not record all loans at fair value on a recurring basis.  However, loans that have been presold and are in the process of settlement are recorded at their fair value.  These presold loans are recorded as nonrecurring Level 2 since there is a firm commitment by a qualified third party to purchase the loans within a 90 day period.

Impaired Loans - Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered to be impaired. Once a loan is identified as being impaired, management measures the impairment in accordance with ASC 310-10-35. The fair value of impaired loans is estimated using one of several methods, including collateral value, market price and discounted cash flows. When the fair value of the collateral was based on an observable market price, the Company recorded the impaired loan as nonrecurring Level 2. When an observable market price was not available or when management made assumptions that impact the fair value of the collateral, such as estimated disposition or holding costs, the Company recorded the impaired loan as nonrecurring Level 3. Management has determined that the fair value of the Company’s impaired loans used Level 3 methodology.  For substantially all of the Company’s impaired loans as of June 30, 2012 and December 31, 2011, the valuation methodology utilized by the Company was collateral based measurements such as a real estate appraisal and the discount to reflect current market conditions and ultimately collectability ranged from 0% to 30% for each of the respective periods.

Other Real Estate Owned - Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price, the Company records the foreclosed asset as nonrecurring Level 2. When an observable market price is not available, or when management makes assumptions that impact the fair value of the collateral, such as estimated disposition or holding costs, the Company records the other real estate owned as nonrecurring Level 3. For substantially all of the Company’s foreclosed assets as of June 30, 2012 and December 31, 2011, the valuation methodology utilized by the Company was collateral based measurements such as a real estate appraisal and the discount to reflect current market conditions ranged from 0% to 30% for each of the respective periods.

The table below presents the information about certain assets at June 30, 2012 and December 31, 2011 measured at fair value on a non-recurring basis:

	Fair Value Measurement Classification
	Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
June 30, 2012
Investment Securities Held to Maturity:
U.S. Treasury obligations	$	10,019	$	-	$	-	$	10,019
U.S. Government Agency obligations		-		14,055		-		14,055
Municipal bonds		-		3,363		-		3,363
Mortgage-backed bonds		-		48,491		-		48,491
SBA securities		-		5,105		-		5,105
Corporate bonds		-		3,814		-		3,814
Presold loans in process of settlement		-		2,146		-		2,146
Impaired loans		-		-		27,565		27,565
Other real estate owned		-		-		21,405		21,405
Total	$	10,019	$	76,974	$	48,970	$	135,963
December 31, 2011
Investment Securities Held to Maturity:
U.S. Treasury obligations	$	10,033	$	-	$	-	$	10,033
U.S. Government Agency obligations		-		26,059		-		26,059
Municipal bonds		-		3,399		-		3,399
Mortgage-backed bonds		-		54,779		-		54,779
Corporate bonds		-		3,845		-		3,845
Presold loans in process of settlement		-		2,146		-		2,146
Impaired loans		-		-		29,372		29,372
Other real estate owned		-		-		17,571		17,571
Total	$	10,033	$	90,228	$	46,943	$	147,204