Fair Value Measurements

9 Months Ended

Sep. 30, 2011

9.	Fair Value Measurements

	Determination of Fair Value

	The company uses fair value measurements to record fair value adjustments for certain assets and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic of FASB ASC, the fair value of a financial instrument is 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. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

	The recent fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

	Fair Value Hierarchy

	In accordance with this guidance, the company groups its financial assets and financial liabilities generally measured 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.

	Level 1—Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

	Level 2—Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on 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 asset or liability.

	Level 3—Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques.

	A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

	The following methods and assumptions were used by the company in estimating fair value disclosures for financial instruments:

	Cash and Short-Term Investments

	The carrying amounts of cash and short-term instruments approximate fair values based on the short-term nature of the assets.

	Securities

	Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). Certain of the equity securities with inactive markets utilize Level 3 which may include judgement or estimation.



	Loans

	For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans were estimated using discounted cash flow analyses, using interest rates currently being offered.

	FHLB Stock

	The carrying amounts of FHLB stock approximate fair value based on redemption provisions of the FHLB.

	Bank Owned Life Insurance (BOLI)

	The carrying amounts of BOLI approximate fair value.

	Deposit Liabilities

	The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity fixed rate certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.

	Short-Term Borrowings

	The carrying amounts of borrowings under repurchase agreements and federal funds purchased approximate fair value.

	FHLB Advances

	The fair values of the company’s FHLB advances are estimated using discounted cash flow analysis based on the company’s incremental borrowing rates for similar types of borrowing arrangements.

	Accrued Interest

	The carrying amounts of accrued interest approximate fair value.

	Off-Balance Sheet Financial Instruments

	At September 30, 2011 and December 31, 2010, the fair value of loan commitments and standby-letters of credit was immaterial. Therefore, they have not been included in the following table.



	The carrying amounts and estimated fair values of the company’s financial instruments are as follows:

		September 30, 2011				December 31, 2010
		Carrying		Fair		Carrying		Fair
		Amount		Value		Amount		Value
		(in thousands)				(in thousands)
Financial assets:
	Cash	$	17 268	$	17 268	$	10 180	$	10 180
	Federal funds sold		725		725		2 725		2 725
	Securities available for sale		45 543		45 543		42 690		42 690
	Loans, net		202 108		201 864		214 238		212 200
	Loans held for sale		- -		- -		76		76
	FHLB stock		822		822		765		765
	BOLI		6 872		6 872		6 397		6 397
	Accrued interest receivable		888		888		960		960

Financial liabilities:
	Deposits	$	257 697	$	258 612	$	257 422	$	258 240
	Securities sold under
	agreements to repurchase		5 239		5 239		7 382		7 382
	FHLB advances		1 823		1 839		2 717		2 734
	Accrued interest payable		245		245		361		361

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the balances (in thousands) of financial assets measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010:

			Fair Value Measurements at September 30, 2011 Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
	Balance as of		Identical		Observable		Unobservable
	September 30		Assets		Inputs		Inputs
Description	2011		(Level 1)		(Level 2)		(Level 3)
Available for sale debt securities
U.S. Government sponsored
agency securities	$	38 041	$	- -	$	38 041	$	- -
State and municipal securities		6 709		- -		6 709		- -

Total available for sale debt securities		44 750		- -		44 750		- -

Available for sale equity securities
Financial services industry		793		- -		135		658

Total available for sale securities	$	45 543	$	- -	$	44 885	$	658

			Fair Value Measurements at December 31, 2010 Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
	Balance as of		Identical		Observable		Unobservable
	December 31		Assets		Inputs		Inputs
Description	2010		(Level 1)		(Level 2)		(Level 3)
Available for sale debt securities
U.S. Government sponsored
agency securities	$	36 288	$	- -	$	36 288	$	- -
State and municipal securities		5 524		- -		5 524		- -

Total available for sale debt securities		41 812		- -		41 812		- -

Available for sale equity securities
Financial services industry		878		- -		878		- -

Total available for sale securities	$	42 690	$	- -	$	42 690	$	- -

Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	(in thousands)

	Available for Sale Equity Securities
Beginning Balance January 1, 2011	$	- -

Transfers into Level 3		834
Transfers out of Level 3		- -
Total losses (unrealized)
included in other
comprehensive income		(176	)

Ending Balance September 30, 2011	$	658

	Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

	Certain assets are measured at fair value on a nonrecurring basis in accordance with generally accepted accounting principles. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

	The following describes the valuation techniques used by the company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:

	Loans held for sale: Loans held for sale are carried at the lower of cost or market value. These loans currently consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). As such, the company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the periods ended September 30, 2011 and December 31, 2010. Gains and losses on the sale of loans are recorded within other operating income on the consolidated statements of operations.

	Impaired Loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is likely that some amounts due according to the contractual terms of the loan agreement may not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered (Level 3). The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of operations.



	Other Real Estate Owned: Certain assets such as other real estate owned (OREO) are measured at fair value less cost to sell. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal outside of the company or comparative market analysis using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, or property is in the process of being appraised then the fair value is considered Level 3.

	The following table summarizes the company’s financial assets that were measured at fair value (in thousands) on a nonrecurring basis as of September 30, 2011 and December 31, 2010.

Carrying Value at September 30, 2011

Quoted Prices

In Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

Balance as of

Assets

Input

Description

September 30, 2011

(Level 1)

(Level 2)

(Level 3)

Assets

Impaired loans with a

valuation allowance

11 094

- -

5 034

6 060

OREO

6 151

- -

5 355

796

Carrying Value at December 31, 2010

Quoted Prices

In Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

Balance as of

Assets

Input

Description

December 31, 2010

(Level 1)

(Level 2)

(Level 3)

Assets

Loans held for sale

Impaired loans with a

valuation allowance

11 933

- -

10 593

1 340

OREO

6 563

- -

6 563

- -

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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