XML 31 R16.htm IDEA: XBRL DOCUMENT  v2.3.0.11
Fair Value Measurements
 6 Months Ended
Jun. 30, 2011
Fair Value Measurements  
Fair Value Measurements

NOTE 9. Fair Value Measurements

 

GAAP requires the Company to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.  The fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

 

"Fair Value Measurements" defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements.  The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.  The three levels are defined as follows:

 

 

 

 

 

 

•

 

Level 1

 

Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

 

 

•

 

Level 2

 

Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

 

 

•

 

Level 3

 

Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

The following sections provide a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

 

Securities Available for Sale:  Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy.  Level 1 securities would include highly liquid government bonds, mortgage products and 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 flow.  Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. 

 

Interest Rate Swap:  The fair value is estimated by a third party using inputs that are observable or that can be corroborated by observable market data, and therefore, are classified within Level 2 of the valuation hierarchy.

 

The following table presents balances of financial assets and liabilities measured at fair value on a recurring basis at June 30, 2011 and December 31, 2010:

 

Fair Value Measurements at June 30, 2011 Using

Quoted Prices

in Active

Significant

Markets for

Other

Significant

Balance as of

Identical

Observable

Unobservable

June 30,

Assets

Inputs

Inputs

2011

(Level 1)

(Level 2)

(Level 3)

(in thousands)

Assets:

Securities available for sale

     Obligations of U.S. government

         corporations and agencies

 $            26,367

 $                      -

 $            26,367

 $                      -

     Mortgage-backed securities

               25,490

                         -

               25,490

                         -

     Obligations of states and

         political subdivisions

               44,302

                         -

               44,302

                         -

Corporate securities

               14,451

                         -

               14,451

                         -

Equity securities:

       Bank preferred stock

                 2,243

                 2,243

                         -

                         -

Total assets at fair value

 $          112,853

 $              2,243

 $          110,610

 $                      -

Liabilities:

     Interest rate swap

                    282

                         -

                    282

                         -

Total liabilities at fair value

 $                 282

 $                      -

 $                 282

 $                      -

 

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

2010

(Level 1)

(Level 2)

(Level 3)

(in thousands)

Assets:

Securities available for sale

     Obligations of U.S. government

         corporations and agencies

 $            33,150

 $                      -

 $            33,150

 $                      -

     Mortgage-backed securities

               16,157

                         -

               16,157

                         -

     Obligations of states and

         political subdivisions

               42,908

                         -

               42,908

                         -

Corporate securities

               15,401

               15,401

Equity securities:

       Bank preferred stock

                 2,178

                 2,178

                         -

                         -

Total assets at fair value

 $          109,794

 $              2,178

 $          107,616

 $                      -

Liabilities:

     Interest rate swap

                    169

                         -

                    169

                         -

Total liabilities at fair value

 $                 169

 $                      -

 $                 169

 $                      -

 

 

Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP.  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 financial and nonfinancial assets recorded at fair value on a nonrecurring basis in the financial statements:

 

Impaired Loans:  Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will 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 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.  Level 2 impaired loan value is determined by 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.  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.  Level 3 impaired loan values are determined using inventory and accounts receivables collateral and are based on financial statement balances or aging reports.  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 has been discounted based on management's historical knowledge, changes in market conditions from the time of valuation, and/or management's expertise and knowledge of the client and client's business, then the fair value is considered 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 Income.  

 

Other Real Estate Owned:  Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lesser of the fair value of the property, less estimated selling costs or the loan balance outstanding at the date of foreclosure.  Any write-downs based on the asset's fair value at the date of acquisition are charged to the allowance for loan losses.  After foreclosure, valuations are periodically performed by management and property held for sale is carried at the lower of the new cost basis or fair value less cost to sell. Any subsequent valuation adjustments are applied to earnings in the consolidated statements of income. Impairment losses on property to be held and used are measured as the amount by which the carrying amount of a property exceeds its fair value.  Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed.  The portion of interest costs relating to development of real estate is capitalized.  Valuations are periodically performed by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less cost to sell.  We believe that the fair value component in its valuation follows the provisions of GAAP.

 

The following table summarizes the Company's financial and nonfinancial assets that were measured at fair value on a nonrecurring basis at June 30, 2011 and December 31, 2010:

 

Carrying value at June 30, 2011

Balance as of

Identical

Observable

Unobservable

June 30,

Assets

Inputs

Inputs

2011

(Level 1)

(Level 2)

(Level 3)

(in thousands)

Financial Assets:

     Impaired loans

 $            11,407

 $                      -

 $                      -

 $            11,407

Nonfinancial Assets:

     Other real estate owned

                 3,653

                         -

                         -

                 3,653

Carrying value at December 31, 2010

Quoted Prices

in Active

Significant

Markets for

Other

Significant

Balance as of

Identical

Observable

Unobservable

December 31,

Assets

Inputs

Inputs

2010

(Level 1)

(Level 2)

(Level 3)

(in thousands)

Financial Assets:

     Impaired loans

 $            17,524

 $                      -

 $                      -

 $            17,524

Nonfinancial Assets:

     Other real estate owned

                 1,783

                         -

                         -

                 1,783

 

 

GAAP defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than through a forced or liquidation sale for purposes of this disclosure. 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 following methods and assumptions were used to estimate the fair value of the Company's financial instruments:

 

Cash and short-term investments/accrued interest:  The fair value was equal to the carrying amount.

 

Securities:  The fair value, excluding restricted securities, was based on quoted market prices.  The fair value of restricted securities approximated the carrying amount based on the redemption provisions of the issuers.

 

Loans:  The fair value of variable rate loans, which reprice frequently and with no significant change in credit risk, was equal to the carrying amount.  The fair value of all other loans was determined using discounted cash flow analysis.  The discount rate was equal to the current interest rate on similar products.

 

Deposits and borrowings:  The fair value of demand deposits, savings accounts, and certain money market deposits was equal to the carrying amount.  The fair value of all other deposits and borrowings was determined using discounted cash flow analysis.  The discount rate was equal to the current interest rate on similar products.

 

Off-balance-sheet financial instruments:  The fair value of commitments to extend credit was estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the credit worthiness of the counterparties.  The fair value of fixed rate loan commitments also considered the difference between current interest rates and the committed interest rates.  The fair value of standby letters of credit was estimated using the fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties. 

 

The carrying amount and fair value of the Company's 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

(in thousands)

(in thousands)

Financial assets:

     Cash and short-term investments

 $      39,769

 $      39,769

 $      13,970

 $      13,970

     Securities

       116,783

       116,783

       109,794

       109,794

     Loans, net

       394,640

       410,820

       401,338

       416,669

     Accrued interest receivable

           2,139

           2,139

           2,179

           2,179

Financial liabilities:

     Deposits

 $    449,974

 $    451,864

 $    429,296

 $    430,627

     Federal funds purchased and securities

         sold under agreements to repurchase

         13,240

         13,721

         14,395

         14,950

     Federal Home Loan Bank advances

         52,250

         54,733

         52,250

         54,853

     Trust preferred capital notes

           7,217

           7,217

           7,217

           7,217

     Accrued interest payable

              368

              368

              417

              417

     Interest rate swap contract

              282

              282

              169

              169

 

 

 

The Company assumes interest rate risk (the risk that general interest rate levels will change) during its normal operations.  As a result, the fair value of the Company's financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company.  Management attempts to match maturities of assets and liabilities in order to minimize interest rate risk.  However, borrowers with fixed rate obligations are less likely to prepay their principal balance in a rising rate environment and more likely to do so in a falling rate environment.  Conversely, depositors who are receiving fixed rate interest payments are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment.  Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting the terms of new loans and deposits and by investing in securities with terms that mitigate the Company's overall interest rate risk.