Disclosures About Fair Value Of Assets And Liabilities

9 Months Ended

Sep. 30, 2011

Disclosures About Fair Value Of Assets And Liabilities

Disclosures About Fair Value Of Assets And Liabilities

Note 11:    Disclosures About Fair Value of Assets and Liabilities

ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

Level 1   Quoted prices in active markets for identical assets or liabilities.

Level 2   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 for substantially the full term of the assets or liabilities.

Level 3   Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the Company's condensed consolidated balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Available-for-Sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Government sponsored agencies. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include other less liquid securities.

Mortgage Loans Held for Sale

Mortgage loans held for sale are valued using market prices for loans with similar characteristics. This measurement is classified as Level 2 within the hierarchy.

Commitments to Originate Loans and Forward Sales Commitments

Commitments to originate loans and forward sales commitments are valued using a valuation model which considers differences between quoted prices for loans with similar characteristics in the secondary market and the committed rates. The valuation model includes assumptions which adjust the price for the likelihood that the commitment will ultimately result in a closed loan. These measurements are significant unobservable inputs and are classified as Level 3 within the hierarchy.

The following table presents the fair value measurements of assets and liabilities recognized in the Company's condensed consolidated balance sheet and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2011 and December 31, 2010:

	Fair Value Measurements Using
	Fair Value	Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Unobservable Inputs (Level 3)
(In thousands)
September 30, 2011:
Assets:
Available-for-sale securities:
U.S. Government sponsored agencies	$    64,363	$               –	$     64,363	$               –
Equity and other securities	622	622	–	–
Mortgage loans held for sale	4,303	–	4,303	–
Commitments to originate loans	22	–	–	22
Forward sales commitments	78	–	–	78
Total assets	$    69,388	$           622	$     68,666	$           100
Liabilities:
Commitments to originate loans	$               –	$               –	$               –	$               –
Forward sales commitments	1	–	–	1
Total liabilities	$               1	$               –	$               –	$               1
December 31, 2010:
Assets:
Available-for-sale securities:
U.S. Government sponsored agencies	$    63,039	$               –	$     63,039	$               –
Equity and other securities	601	601	–	–
Mortgage loans held for sale	8,162	–	8,162	–
Commitments to originate loans	1	–	–	1
Forward sales commitments	372	–	–	372
Total assets	$    72,175	$           601	$     71,201	$           373
Liabilities:
Commitments to originate loans	$               9	$               –	$               –	$               9
Forward sales commitments	–	–	–	–
Total liabilities	$               9	$               –	$               –	$               9

The following table is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the Company's condensed consolidated balance sheet using significant unobservable (Level 3) inputs:

	Commitments to Originate Loans	Forward Sales Commitments
(In thousands)
Balance as of December 31, 2010	$              (8)	$           372
Total realized and unrealized gains (losses):
Included in net income	30	(295)
Included in other comprehensive income	–	–
Transfers in and/or out due to changes in significant inputs	–	–
Balance as of September 30, 2011	$             22	$             77
Balance as of December 31, 2009	$            (47)	$           283
Total realized and unrealized gains (losses):
Included in net income	49	(95)
Included in other comprehensive income	–	–
Transfers in and/or out due to changes in significant inputs	–	–
Balance as of September 30, 2010	$               2	$           188

Realized and unrealized gains and losses noted in the table above and included in net income for the periods ended September 30, 2011 and 2010 are reported in the condensed consolidated statements of operations in other income.

Following is a description of the valuation methodologies used for financial and nonfinancial instruments measured at fair value on a non-recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Impaired Loans (Collateral Dependent)

Loans for which it is probable that the Company will not collect all principal and interest due according to the contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include using the fair value of the collateral for collateral dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

Foreclosed Assets Held for Sale

Foreclosed assets held for sale are carried at the fair value less costs to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell.

The following table presents the fair value measurement of assets and liabilities measured at fair value on a non-recurring basis at September 30, 2011 and December 31, 2010:

	Fair Value Measurements Using
	Fair Value	Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Unobservable Inputs (Level 3)
(In thousands)
September 30, 2011:
Impaired loans, net of reserves	$      23,561	$                –	$                –	$      23,561
Foreclosed assets held for sale, net	11,062	–	–	11,062
Total	$      34,623	$                –	$                –	$      34,623
December 31, 2010:
Impaired loans, net of reserves	$      26,106	$                –	$                –	$      26,106
Foreclosed assets held for sale, net	3,360	–	–	3,360
Total	$      29,466	$                –	$                –	$      29,466

The following methods and assumptions were used to estimate the fair value of all other financial instruments recognized in the accompanying condensed consolidated balance sheets at amounts other than fair value.

Cash and Cash Equivalents

For these short-term instruments, the carrying amount approximates fair value.

Loans

The fair value of loans is estimated by discounting the future cash flows using the market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations. The carrying amount of accrued interest approximates its fair value.

Federal Home Loan Bank Stock, Federal Reserve Bank Stock, and other securities

The carrying amounts for these securities approximate their fair value.

Deposits

The fair value of demand deposits, savings accounts, NOW accounts and certain money market deposits is the amount payable on demand at the reporting date (i.e., their carrying amount). The fair value of fixed maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value.

Securities Sold Under Agreement to Repurchase and Other Interest-Bearing Liabilities

For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Long-Term Debt

Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.

Commitments to Extend Credit, Letters of Credit and Lines of Credit

The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit and lines of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.

The following table presents estimated fair values of the Company's financial instruments not previously disclosed at September 30, 2011 and December 31, 2010.

	September 30, 2011		December 31, 2010
	Carrying     Amount	Fair         Value	Carrying       Amount	Fair         Value
(In thousands)
Financial assets:
Cash and cash equivalents	$       94,172	$       94,172	$     114,781	$     114,781
Loans, net of allowance for loan losses	442,496	446,615	477,723	478,926
Federal Home Loan Bank stock, Federal Reserve Bank stock, and other securities	7,241	7,241	7,163	7,163
Interest receivable	1,950	1,950	1,783	1,783

Financial liabilities:
Deposits	503,019	505,283	541,218	543,832
Securities Sold Under Agreement to Repurchase and Other Interest-Bearing Liabilities	14,506	14,506	18,748	18,748
Long-term debt	100,265	94,223	99,757	90,880
Interest payable	2,912	2,912	2,689	2,689
Unrecognized financial instruments     (net of amortization):
Commitments to extend credit	–	–	–	–
Letters of credit	–	–	–	–
Lines of credit	–	–	–	–