Fair Value

6 Months Ended

Jun. 30, 2011

Fair Value [Abstract]

FAIR VALUE

NOTE 5 — FAIR VALUE

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 values:

Level 1 — Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of 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 a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value of each type of asset and liability:

Securities available for sale: The fair value of securities available for sale is determined using pricing models that vary based on asset class and include available trade, bid, and other market information or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2).

Derivatives: The fair value of derivatives is based on valuation models using observable market data as of the measurement date (Level 2).

Impaired loans: The fair value of impaired loans with specific allocations of the ALLL is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Loan servicing rights: Fair value is based on a valuation model that calculates the present value of estimated future net servicing income (Level 2).

Loans held for sale: Loans held for sale are carried at fair value as determined by outstanding commitments from third party investors (Level 2).

Foreclosed assets: Nonrecurring adjustments to certain commercial real estate properties classified as foreclosed assets are measured at fair value, less costs to sell. Fair values are based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below:

	Fair Value
	Measurements at
	June 30, 2011
	Using Significant Other
	Observable Inputs
	(Level 2)
Financial Assets:
Securities available for sale:
Issued by U.S. government-sponsored entities and agencies:
Mortgage-backed securities — residential	$	1,905
Collateralized mortgage obligations		25,428
Total securities available for sale	$	27,333
Loans held for sale	$	1,810
Yield maintenance provisions (embedded derivatives)	$	854
Interest rate lock commitments	$	25
Financial Liabilities:
Interest-rate swaps	$	854

	Fair Value
	Measurements at
	December 31, 2010
	Using Significant Other
	Observable Inputs
	(Level 2)
Financial Assets:
Securities available for sale:
Issued by U.S. government-sponsored entities and agencies:
Mortgage-backed securities — residential	$	2,107
Collateralized mortgage obligations		26,691
Total securities available for sale	$	28,798
Loans held for sale	$	1,953
Yield maintenance provisions (embedded derivatives)	$	686
Interest rate lock commitments	$	41
Financial Liabilities:
Interest-rate swaps	$	686

No assets or liabilities measured at fair value on a recurring basis were measured using Level 1 or Level 3 inputs at June 30, 2011 or December 31, 2010.

Assets Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

	Fair Value Measurements at June 30, 2011 Using
	Significant Other		Significant
	Observable Inputs		Unobservable Inputs
	(Level 2)		(Level 3)
Loan servicing rights	$	10
Impaired loans:
Commercial			$	382
Real Estate:
Multi-family residential				2,288
Commercial:
Non-owner occupied				969
Owner occupied				762
Land				246
Total impaired loans			$	4,647
Foreclosed assets:
Commercial real estate: land			$	1,209

	Fair Value Measurements at December 31, 2010 Using
	Significant Other		Significant
	Observable Inputs		Unobservable Inputs
	(Level 2)		(Level 3)
Loan servicing rights	$	17
Impaired loans:
Commercial			$	1,591
Real estate:
Single-family residential				142
Multi-family residential				2,690
Commercial:
Non-owner occupied				1,176
Owner occupied				1,020
Total impaired loans			$	6,619

At June 30, 2011 and December 31, 2010, the Company had no assets or liabilities measured at fair value on a non-recurring basis that were measured using Level 1 inputs.

Impaired loan servicing rights, which are carried at fair value, were carried at $10, which was made up of the amortized cost of $12, net of a valuation allowance of $2 at June 30, 2011. At December 31, 2010, impaired loan servicing rights were carried at $17, which was made up of the amortized cost of $22, net of a valuation allowance of $5. There was a $1 increase in earnings with respect to servicing rights for the three months ended June 30, 2011, and a $3 increase in earnings for the six months ended June 30, 2011. There was a $1 charge against earnings with respect to servicing rights for the three and six months ended June 30, 2010.

Impaired loans carried at the fair value of the collateral for collateral dependent loans, had a recorded investment of $5,987, with a valuation allowance of $1,340, resulting in a $1,593 reduction in the valuation allowance for the quarter ended June 30, 2011, and a $1,558 reduction for the six months ended June 30, 2011. Impaired loans carried at the fair value of collateral had a recorded investment of $9,517 with a valuation allowance of $2,898 at December 31, 2010. For the quarter ended June 30, 2010 there was a reduction in the valuation allowance of $785, and an additional provision of $765 recorded for impairment charges for the six months ended June 30, 2010.

Foreclosed assets which are carried at fair value less costs to sell, were carried at $1,209, which was made up of the outstanding balance of $2,348, net of a valuation allowance of $1,139 at June 30, 2011, resulting in a charge of $1,139 for the three and six months ended June 30, 2011. There were no foreclosed assets measured at fair value in the prior year period.

During the six months ended June 30, 2011, the Company did not have any significant transfers of assets or liabilities between those measured using Level 1 or 2 inputs. The Company recognizes transfers of assets and liabilities between Level 1 and 2 inputs based on the information relating to those assets and liabilities at the end of the reporting period.

The carrying amounts and estimated fair values of financial instruments at June 30, 2011 and December 31, 2010 were as follows:

	June 30, 2011						December 31, 2010
	Carrying			Fair			Carrying			Fair
	Amount			Value			Amount			Value
Financial assets
Cash and cash equivalents	$	60,436		$	60,436		$	34,275		$	34,275
Securities available for sale		27,333			27,333			28,798			28,798
Loans held for sale		1,810			1,810			1,953			1,953
Loans, net		171,482			175,769			190,767			194,970
FHLB stock		1,942			n/a			1,942			n/a
Accrued interest receivable		117			117			119			119
Yield maintenance provisions (embedded derivatives)		854			854			686			686
Interest rate lock commitments		25			25			41			41
Financial liabilities
Deposits	$	(238,223	)	$	(240,474	)	$	(227,381	)	$	(228,859	)
FHLB advances		(18,742	)		(19,379	)		(23,942	)		(24,656	)
Subordinated debentures		(5,155	)		(2,662	)		(5,155	)		(2,653	)
Accrued interest payable		(307	)		(307	)		(191	)		(191	)
Interest-rate swaps		(854	)		(854	)		(686	)		(686	)

The methods and assumptions used to estimate fair value are described as follows.

Carrying amount is the estimated fair value for cash and cash equivalents, short-term borrowings, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. The methods for determining the fair values for securities were described previously. Fair value of loans held for sale is based on binding quotes from third party investors. For fixed rate loans or deposits and for variable rate loans 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 Federal Home Loan Bank (FHLB) advances and other borrowings are based on current rates for similar financing. Fair value of subordinated debentures is based on discounted cash flows using current market rates for similar debt. It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability. The method for determining the fair values for derivatives (interest-rate swaps, interest rate lock commitments and yield maintenance provisions) was described previously. The fair value of off-balance sheet items is not considered material.