Fair Value Of Financial Instruments

3 Months Ended

Mar. 31, 2012

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 presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company's financial instruments as of March 31, 2012 and December 31, 2011. For short-term financial assets such as cash and cash equivalents, accrued interest receivable and loans held for sale the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For financial liabilities such as noninterest-bearing demand, interest-bearing demand, savings deposits, short-term borrowing and accrued interest payable the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.

The fair value of investment securities available-for-sale are recorded at fair value utilizing Level 1, Level 2 and Level 3 inputs and is described in more detail below.

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 time deposits and long-term obligations are based on estimated cash flows discounted at market interest rates.

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.

The following table presents the carrying values and estimated fair values of the Company's financial instruments at March 31, 2012 and December 31, 2011:

	March 31, 2012
	Carrying Amount		Fair Value		Fair Value Measurements Using
(Dollarss in thousands)					Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	12,070	$	12,070	$	12,070	$	—	$	—
Investment securities		348,810		348,810		158,134		188,887		1,789
FHLB stock		4,279		4,279		—		3,532		—
Accrued interest receivable		4,984		4,984		—		4,984		—
Net loans		479,998		478,078		—		—		478,078
Loans held for sale		3,310		3,310		—		3,310		—
Liabilities
Demand, noninterest bearing deposits	$	134,828	$	134,828	$	—	$	134,828	$	—
Demand, interest-bearing deposits		277,520		277,520		—		277,520		—
Savings deposits		57,656		57,656		—		57,656		—
Time deposits		302,593		309,067		—		309,067		—
Accrued interest payable		457		457		—		457		—
Short-term borrowing		39,218		39,218		—		39,218		—
Long-term borrowing		18,000		18,722		—		18,722		—

	December 31, 2011
	Carrying Amount		Fair Value		Fair Value Measurements Using
(Dollarss in thousands)					Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	24,731	$	24,731	$	24,731	$	—	$	—
Investment securities		339,450		339,450		151,714		186,094		1,642
FHLB stock		3,456		3,456		—		3,456		—
Accrued interest receivable		5,308		5,308		—		5,308		—
Net loans		484,450		482,851		—		—		482,851
Loans held for sale		2,866		2,866		—		2,866		—
Liabilities
Demand, noninterest bearing deposits	$	135,732	$	135,732	$	—	$	135,732	$	—
Demand, interest-bearing deposits		270,119		270,119		—		270,119		—
Savings deposits		55,517		55,517		—		55,517		—
Time deposits		336,277		343,374		—		343,374		—
Accrued interest payable		519		519		—		519		—
Short-term borrowing		11,679		11,679		—		11,679		—
Long-term borrowing		25,500		26,296		—		26,296		—

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 March 31, 2012 and December 31, 2011, the amount of fair value associated with these interest rate lock commitments was $111 thousand and $76 thousand, respectively, which is included in other assets. Fair value associated with the interest rate lock commitments are classified as Level 3 measurements due to the use of significant management judgment and estimation. 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 March 31, 2012, 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. The fair values of impaired loans are generally based on judgment and therefore are considered to be level 3 assets.

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. The fair values of foreclosed assets are generally based on judgment and therefore are considered to be level 3 assets.

Assets recorded at fair value on a recurring basis

March 31, 2012	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Investment Securities Available-for-Sale
Government-sponsored enterprises and FFCB bonds	$	26	$	—	$	26	$	—
Obligations of states and political subdivisions		33,786		—		33,786		—
Mortgage-backed securities		125,912		10,885		115,027		—
SBA-backed securities		152,335		147,249		5,086		—
Corporate bonds		36,751		—		34,962		1,789
Total Securities	$	348,810	$	158,134	$	188,887	$	1,789
Interest rate lock commitments	$	111	$	—	$	—	$	111
Total assets at fair value	$	348,921	$	158,134	$	188,887	$	1,900

December 31, 2011	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Investment Securities Available-for-Sale
Government-sponsored enterprises and FFCB bonds	$	1,032	$	—	$	1,032	$	—
Obligations of states and political subdivisions		28,718		6,752		21,966		—
Mortgage-backed securities		132,292		—		132,292		—
SBA-backed securities		146,637		144,962		1,675		—
Corporate bonds		30,771		—		29,129		1,642
Total Securities	$	339,450	$	151,714	$	186,094	$	1,642
Interest rate lock commitments	$	76	$	—	$	—	$	76
Total assets at fair value	$	339,526	$	151,714	$	186,094	$	1,718

Assets recorded at fair value on a nonrecurring basis

March 31, 2012	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Impaired Loans
Real estate—construction and land development	$	7,302	$	—	$	—	$	7,302
Real estate—secured by residential properties		5,478		—		—		5,478
Real estate—secured by nonfarm nonresidential properties		8,776		—		—		8,776
Commercial and industrial		135		—		—		135
Total impaired loans	$	21,691	$	—	$	—	$	21,691
Real estate and repossessions acquired in settlement of loans
Total real estate and repossessions acquired in settlement of loans	$	7,906	$	—	$	—	$	7,906
Total assets at fair value	$	29,597	$	—	$	—	$	29,597
December 31, 2011	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Impaired Loans
Real estate—construction and land development	$	9,169	$	—	$	—	$	9,169
Real estate—secured by residential properties		3,893		—		—		3,893
Real estate—secured by nonfarm nonresidential properties		8,805		—		—		8,805
Commercial and industrial		196		—		—		196
Total impaired loans	$	22,063	$	—	$	—	$	22,063
Real estate and repossessions acquired in settlement of loans
Real estate and repossessions acquired in settlement of loans	$	6,573	$	—	$	—	$	6,573
Total assets at fair value	$	28,636	$	—	$	—	$	28,636

As of March 31, 2012 there were $6.6 million of Level 2 investment securities available for sale that were reported as Level 1 as of December 31, 2011. These obligations of states and political subdivisions were transferred from Level 1 to Level 2 during the first quarter of 2012 because the December 31, 2011 pricing was based on the Company's actual trades for the securities at initial purchase while the March 31, 2012 pricing was through a pricing system.

During the first quarter of 2012 and 2011 there were no investment securities transferred in or out of Level 3. 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 first quarter of 2012 and the first quarter of 2011.

	Corporate Bonds			Interest Rate Lock Commitments			Total
	(Dollars in thousands)
Balance, December 31, 2011	$	1,642		$	76		$	1,718
Total gains or losses (realized/unrealized):
Included in earnings		—			35			35
Included in other comprehensive income		147			—			147
Purchases, issuances, and settlements		—			—			—
Transfers in to/out of Level 3		—			—			—
Balance, March 31, 2012	$	1,789		$	111		$	1,900
	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		—			(6	)		(6	)
Included in other comprehensive income		(392	)		—			(392	)
Purchases, issuances, and settlements		—			—			—
Transfers in to/out of Level 3		—			—			—
Balance, March 31, 2011	$	1,324		$	95		$	1,419

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of March 31, 2012, the significant unobservable inputs used in the fair value measurements were as follows:

Level 3 Assets with Significant Unobservable Inputs	Fair Value At 3/31/2012		Valuation Technique	Significant Unobservable Inputs	Significant Unobservable Input Value
Corporate Bonds	$	916	Fundamental Analysis Pricing Model	Spread		+500/7 yr BB Finance Paper
				Yield		10.92	%
Corporate Bonds		873	Fundamental Analysis Pricing Model	Spread		+100/7 yr BB Finance Paper
				Yield		6.92	%
				Discount Margin		635
Interest Rate Lock Commitments		111	Pricing Model	Weighted average Closing Ratio		90	%
Impaired Loans		21,691	Discounted appraisals(1)	Appraisal  adjustments(2)		8% to 86%
OREO		7,906	Discounted appraisals(1)	Appraisal adjustments(2)		4% to 70%

(1) Fair value is generally based on appraisals of the underlying collateral but is also based on discounted cash flows for some loans.

(2) Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.

The significant unobservable inputs used in the fair value measurement of the Company's Corporate Bonds are the yield expected to be earned on the bonds and the spread. The yield is applied to a discounted cash flow in order to arrive at a price and corresponding market value. A discount margin represents a spread over the floating rate index. Spread represents an additional yield that is applied over a comparable security or curve (such as the treasury curve). Yield of the comparable or curve plus the "spread" in basis points is equal to the yield or discount rate applied in a discounted cash flow in order to arrive at a price and corresponding market value. The spread is based on various factors such as liquidity, earning history and capital ratios.

The significant unobservable input used in the fair value measurement of the Company's interest rate lock commitments (IRLC) is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. Generally the fair value of an IRLC is positive if the prevailing interest rate is lower than the IRLC rate. The fair value would be negative if the prevailing rate was higher. When a higher percentage of loans are estimated to close, the increase in the closing ratio will result in a positive effect to fair value. The closing ratio is dependent upon the loan processing stage that a loan is currently in and the change in prevailing interest rates from the time of the rate lock.

Impaired loans and real estate and repossessions acquired in settlement of loans classified as Level 3 are based are management judgment and estimation.