XML 17 R25.htm IDEA: XBRL DOCUMENT v2.4.0.6
Fair Value Disclosures
 12 Months Ended
Dec. 31, 2011
Notes to Financial Statements [Abstract]  
Fair Value Disclosures
Note 19. Fair Value Disclosures

Certain assets and liabilities are recorded at fair value to provide additional insight into the Company's quality of earnings. Some of these assets and liabilities are measured on a recurring basis while others are measured on a nonrecurring basis, with the determination based upon applicable existing accounting pronouncements. For example, securities available for sale are recorded at fair value on a recurring basis. Other assets, such as, mortgage servicing rights, loans held for sale, and impaired loans, are recorded at fair value on a nonrecurring basis using the lower of cost or market methodology to determine impairment of individual assets. The Company groups assets and liabilities which are recorded 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. A financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with level 1 considered highest and level 3 considered lowest). A brief description of each level follows.
Level 1 - Valuation is based upon quoted prices for identical instruments 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 that market participants would use in pricing the asset or liability. Valuation includes use of discounted cash flow models and similar techniques.
The most significant instruments that the Company fair values include securities which fall into Level 2 in the fair value hierarchy. The securities in the available for sale portfolio are priced by independent providers. In obtaining such
valuation information from third parties, the Company has evaluated their valuation methodologies used to develop the fair values in order to determine whether the valuations are representative of an exit price in the Company's principal markets. The Company's principal markets for its securities portfolios are the secondary institutional markets, with an exit price that is predominantly reflective of bid level pricing in those markets.




Assets and Liabilities Recorded at Fair Value on a Recurring Basis

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 for similar assets, if available. If quoted prices are not available, fair values are measured using matrix pricing models, or other model-based valuation techniques requiring observable inputs other than quoted prices such as yield curves, prepayment speeds, and default rates. Recurring Level 1 securities would include U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets. Recurring Level 2 securities include federal agency securities, mortgage-backed securities, collateralized mortgage obligations, municipal bonds and corporate debt securities. The following table presents the balances of assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2011 and 2010.

   
At December 31, 2011
 
   
Level 1
  
Level 2
  
Level 3
  
Total
 
Securities available for sale
            
   U.S. Government sponsored agencies
 $-  $-  $-  $- 
   Mortgage-backed securities
  -   198,232,000   -   198,232,000 
   State and political subdivisions
  -   85,726,000   -   85,726,000 
   Corporate securities
  -   811,000   -   811,000 
   Other equity securities
  -   1,433,000   -   1,433,000 
Total assets
 $-  $286,202,000  $-  $286,202,000 

   
At December 31, 2010
 
   
Level 1
  
Level 2
  
Level 3
  
Total
 
Securities available for sale
            
   U.S. Government sponsored agencies
 $-  $16,045,000  $-  $16,045,000 
   Mortgage-backed securities
  -   234,414,000   -   234,414,000 
   State and political subdivisions
  -   41,524,000   -   41,524,000 
   Corporate securities
  -   866,000   -   866,000 
   Other equity securities
  -   380,000   -   380,000 
Total assets
 $-  $293,229,000  $-  $293,229,000 

Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis

Mortgage Servicing Rights. Mortgage servicing rights represent the value associated with servicing residential mortgage loans. Servicing assets and servicing liabilities are reported using the amortization method or the fair value measurement method. In evaluating the carrying values of mortgage servicing rights, the Company obtains third party valuations based on loan level data including note rate, type and term of the underlying loans. As such, the Company classifies mortgage servicing rights as nonrecurring Level 2.
Loans Held for Sale. Mortgage loans held for sale are recorded at the lower of carrying value or market value. The fair value of mortgage loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies mortgage loans held for sale as nonrecurring Level 2.
Other Real Estate Owned. Real estate acquired through foreclosure is recorded at fair value. The fair value of other real estate owned is based on property appraisals and an analysis of similar properties currently available. As such, the Company records other real estate owned as nonrecurring Level 2.
Impaired Loans. A loan is considered to be impaired when it is probable that all of the principal and interest due under the original underwriting terms of the loan may not be collected. Impairment is measured based on the fair value of the underlying collateral or the present value of future cashflows. The Company measures impairment on all nonaccrual loans for which it has established specific reserves as part of the specific allocated allowance component of the allowance for loan losses. As such, the Company records impaired loans as nonrecurring Level 2.
The following table presents assets measured at fair value on a nonrecurring basis as of December 31, 2011. Other real estate owned is presented net of an allowance for losses of $436,000. Impaired loans are presented net of their related specific allowance for loan losses of $2,058,000.



   
At December 31, 2011
 
   
Level 1
  
Level 2
  
Level 3
  
Total
 
Mortgage servicing rights
 $-  $1,581,000  $-  $1,581,000 
Loans held for sale
  -   -   -   - 
Other real estate owned
  -   4,094,000   -   4,094,000 
Impaired loans
  -   12,165,000   -   12,165,000 
Total Assets
 $-  $17,840,000  $-  $17,840,000 

The following table presents assets measured at fair value on a nonrecurring basis as of December 31, 2010. Other real estate owned is presented net of an allowance for losses of $132,000. Impaired loans are presented net of their related specific allowance for loan losses of $1,256,000.

   
At December 31, 2010
 
   
Level 1
  
Level 2
  
Level 3
  
Total
 
Mortgage servicing rights
 $-  $1,684,000  $-  $1,684,000 
Loans held for sale
  -   2,806,000   -   2,806,000 
Other real estate owned
  -   4,929,000   -   4,929,000 
Impaired loans
  -   8,254,000   -   8,254,000 
Total Assets
 $-  $17,673,000  $-  $17,673,000 

FASB ASC Topic 825, "Financial Instruments," requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, if the fair values can be reasonably determined. 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 using observable inputs when available. 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. FASB ASC Topic 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
The carrying amounts and estimated fair values for financial instruments as of December 31, 2011 and 2010 were as follows:

   
December 31, 2011
  
December 31, 2010
 
   
Carrying
  
Estimated
  
Carrying
  
Estimated
 
   
amount
  
fair value
  
amount
  
fair value
 
Financial assets
            
Cash and cash equivalents
 $14,115,000  $14,115,000  $13,838,000  $13,838,000 
Interest-bearing deposits in other banks
  -   -   100,000   100,000 
Securities available for sale
  286,202,000   286,202,000   293,229,000   293,229,000 
Securities to be held to maturity
  122,661,000   130,677,000   107,380,000   110,366,000 
Federal Home Loan Bank and Federal Reserve Bank stock
  15,443,000   15,443,000   15,443,000   15,443,000 
Loans held for sale
  -   -   2,806,000   2,806,000 
Loans (net of allowance for loan losses)
  851,988,000   866,442,000   874,280,000   878,856,000 
Cash surrender value of life insurance
  10,181,000   10,181,000   9,842,000   9,842,000 
Accrued interest receivable
  4,835,000   4,835,000   5,263,000   5,263,000 
Financial liabilities
                
Deposits
 $941,333,000   921,388,000  $974,518,000  $924,903,000 
Borrowed funds
  265,663,000   273,568,000   257,330,000   262,984,000 
Accrued interest payable
  734,000   734,000   926,000   926,000 




The fair value methods and assumptions for the Company's financial instruments are set forth below.

Cash and Cash Equivalents
The carrying values of cash equivalents, due from banks and federal funds sold approximate their relative fair values.

Investment Securities
The fair values of investment securities are estimated by independent providers. In obtaining such valuation information from third parties, the Company has evaluated their valuation methodologies used to develop the fair values in order to determine whether the valuations are representative of an exit price in the Company's principal markets. The Company's principal markets for its securities portfolios are the secondary institutional markets, with an exit price that is predominantly reflective of bid level pricing in those markets. Fair values are calculated based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, or estimated transaction costs. If these considerations had been incorporated into the fair value estimates, the aggregate fair value could have been changed. The carrying values of restricted equity securities approximate fair values.

Loans Held for Sale
The carrying value approximates fair value because the sale price of the loans has been contracted.

Loans
Fair values are estimated for portfolios of loans with similar financial characteristics. The fair values of performing loans are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest risk inherent in the loan. The estimates of maturity are based on the Company's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions, and the effects of estimated prepayments. Fair values for significant non-performing loans are based on estimated cash flows and are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. Management has made estimates of fair value using discount rates that it believes to be reasonable. However, because there is no market for many of these financial instruments, Management has no basis to determine whether the fair value presented above would be indicative of the value negotiated in an actual sale.

Cash Surrender Value of Life Insurance
The fair value is based on the actual cash surrender value of life insurance policies.

Accrued Interest Receivable
The fair value estimate of this financial instrument approximates the carrying value as this financial instrument has a short maturity. It is the Company's policy to stop accruing interest on loans for which it is probable that the interest is not collectible. Therefore, this financial instrument has been adjusted for estimated credit loss.

Deposits
The fair value of deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit that results from the low-cost funding provided by the deposits compared to the cost of borrowing funds in the market. If that value were considered, the fair value of the Company's net assets could increase.

Borrowed Funds
The fair value of borrowed funds is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently available for borrowings of similar remaining maturities.

Accrued Interest Payable
The fair value estimate approximates the carrying amount as this financial instrument has a short maturity.

Off-Balance-Sheet Instruments
Off-balance-sheet instruments include loan commitments. Fair values for loan commitments have not been presented as the future revenue derived from such financial instruments is not significant.




Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These values 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. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on Management's 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 could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial instruments include the deferred tax asset, premises and equipment, and other real estate owned. In addition, tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.