Fair Value Of Financial Instruments

9 Months Ended

Sep. 30, 2011

Fair Value Of Financial Instruments [Abstract]

Fair Value Of Financial Instruments

(9) Fair Value Of Financial Instruments

Fair value estimates are made by management at a specific point in time, based on relevant information about the financial instrument and the market. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument nor are potential taxes and other expenses that would be incurred in an actual sale considered. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions and/or the methodology used could significantly affect the estimates disclosed. Similarly, the fair values disclosed could vary significantly from amounts realized in actual transactions.

The following table presents the carrying values and estimated fair values of the Company's financial instruments at September 30, 2011 and December 31, 2010:

	September 30, 2011				December 31, 2010
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	17,239	$	17,239	$	20,166	$	20,166
Investment securities		327,066		327,066		273,229		273,229
FHLB stock		3,768		3,768		4,571		4,571
Accrued interest receivable		4,972		4,972		5,243		5,243
Net loans		509,412		501,923		554,384		550,614
Loans held for sale		2,338		2,338		4,136		4,136
Financial liabilities:
Deposits	$	796,609	$	804,049	$	785,941	$	790,105
Short-term borrowings		13,528		13,528		11,509		11,509
Accrued interest payable		630		630		631		631
Long-term obligations		25,500		26,340		34,500		34,954

The fair value of net loans is based on estimated cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. This does not include consideration of liquidity that market participants would use to value such loans. The estimated fair values of deposits and long-term obligations at September 30, 2011 and December 31, 2010 are based on estimated cash flows discounted at market interest rates. The carrying values of other financial instruments, including various receivables and payables, approximate fair value. The fair value of off-balance sheet financial instruments is considered immaterial. These off-balance sheet financial instruments are commitments to extend credit and are either short-term in nature or subject to immediate repricing.

Fair Value Hierarchy

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1 Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2 Valuation is based upon 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 Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

There were no changes to the techniques used to measure fair value during the period.

Following is a description of valuation methodologies used for assets recorded at fair value.

Investment Securities Available-for-Sale

Investment securities available-for-sale are recorded at fair value on a recurring 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 securities include those traded on an active exchange, such as the New York Stock Exchange, securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Mortgage Banking Activity

The Company enters into interest rate lock commitments and commitments to sell mortgages. At September 30, 2011, the amount of fair value associated with these interest rate lock commitments was $96 thousand, which is included in other assets. At December 31, 2010, the amount of fair value associated with these interest rate lock commitments was $101 thousand, which was included in other assets. Forward loan sale commitments have been deemed insignificant for both periods.

Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. 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 impaired. Once a loan is identified as individually impaired, management measures impairment using one of several methods, including collateral value, market price and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 30, 2011, the majority of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

Real Estate and Repossessions Acquired in Settlement of Loans

Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charged to earnings if the estimated fair value of the property less estimated selling costs declines below the initial recorded 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 or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.

Assets recorded at fair value on a recurring basis

September 30, 2011	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Investment Securities Available-for-Sale
Government-sponsored enterprises and FFCB bonds	$	14,529	$	—	$	14,529	$	—
Obligations of states and political subdivisions		11,453		—		11,453		—
Mortgage-backed securities		156,701		25,109		131,592		—
SBA-backed securities		113,201		113,201		—		—
Corporate bonds		31,182		4,994		23,100		3,088
Total Securities	$	327,066	$	143,304	$	180,674	$	3,088
Interest rate lock commitments	$	96	$	—	$	—	$	96
Total assets at fair value	$	327,162	$	143,304	$	180,674	$	3,184

Assets recorded at fair value on a recurring basis

December 31, 2010	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Investment Securities Available-for-Sale
Government-sponsored enterprises and FFCB bonds	$	24,781	$	—	$	24,781	$	—
Obligations of states and political subdivisions		12,978		—		12,978		—
Mortgage-backed securities		150,090		4,200		145,890		—
SBA-backed securities		56,853		55,422		1,431		—
Corporate bonds		28,527		—		26,811		1,716
Total Securities	$	273,229	$	59,622	$	211,891	$	1,716
Interest rate lock commitments	$	101	$	—	$	—	$	101
Total assets at fair value	$	273,330	$	59,622	$	211,891	$	1,817

Assets recorded at fair value on a nonrecurring basis

September 30, 2011	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Impaired Loans
Real estate—construction and land development	$	10,962	$	—	$	4,320	$	6,642
Real estate—secured by residential properties		4,510		—		3,251		1,259
Real estate—secured by nonfarm nonresidential properties		5,500		—		3,488		2,012
Commercial and industrial		630		—		36		594
Total impaired loans	$	21,602	$	—	$	11,095	$	10,507
Real estate and repossessions acquired in settlement of loans
Total real estate and repossessions acquired in settlement of loans	$	6,223	$	—	$	4,517	$	1,706
Total assets at fair value	$	27,825	$	—	$	15,612	$	12,213

December 31, 2010	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Impaired Loans
Real estate—construction and land development	$	11,077	$	—	$	3,027	$	8,050
Real estate—secured by residential properties		3,834		—		3,666		168
Real estate—secured by nonfarm nonresidential properties		2,550		—		2,467		83
Commercial and industrial		77		—		—		77
Total impaired loans	$	17,538	$	—	$	9,160	$	8,378
Real estate and repossessions acquired in settlement of loans
Real estate and repossessions acquired in settlement of loans	$	4,536	$	—	$	2,277	$	2,259
Total assets at fair value	$	22,074	$	—	$	11,437	$	10,637

As of September 30, 2011 there were $3.9 million of Level 2 investment securities available for sale that were reported as Level 1 as of December 31, 2010. The bond was transferred from Level 1 to Level 2 during the year of 2011 because the December 31, 2010 pricing was based on the Company's actual trade for the security at initial purchase while the September 30, 2011 pricing was through a pricing system.

During the first nine months of 2011 there were no investment securities transferred in or out of Level 3. During the first nine months of 2010, there was one Level 3 investment security that was transferred to Level 2 given that the September 30, 2010 valuation was based on a third party market valuation that was based on quoted prices for similar instruments in active markets versus the December 31, 2009 valuation which was based on assumptions not observable in the market. The tables below present a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three and nine month periods of 2011 and the first nine months of 2010.

	Corporate Bonds			Interest Rate Lock Commitments			Total
	(Dollars in thousands)
Balance, December 31, 2010	$	1,716		$	101		$	1,817
Total gains or losses (realized/unrealized):
Included in earnings		—			(31	)		(31	)
Included in other comprehensive income		(225	)		—			(225	)
Purchases, issuances, and settlements		—			—			—
Transfers in to/out of Level 3		—			—			—
Balance, June 30, 2011	$	1,491		$	70		$	1,561
Total gains or losses (realized/unrealized):
Included in earnings		—			26			26
Included in other comprehensive income		97			—			97
Purchases, issuances, and settlements		1,500			—			1,500
Transfers in to/out of Level 3		—			—			—
Balance, September 30, 2011	$	3,088		$	96		$	3,184

	Government- sponsored enterprises and FFCB bonds			Corporate Bonds			Total
	(Dollars in thousands)
Balance, December 31, 2009	$	2,480		$	1,871		$	4,351
Total gains or losses (realized/unrealized):
Included in earnings		—			—			—
Included in other comprehensive income		—			(70	)		(70	)
Purchases, issuances, and settlements								—
Transfers in to/out of Level 3		(2,480	)		—			(2,480	)
Balance, September 30, 2010	$	—		$	1,801		$	1,801