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Fair Value Measurements
 9 Months Ended
Sep. 30, 2012
Fair Value Measurements [Abstract]  
Fair Value Measurements

Note 11. Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the “Fair Value Measurement 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, fair value estimates may not be realized in an immediate settlement of the instrument.

The 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.

In accordance with this guidance, the Company groups its assets and 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 and 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 in 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 and 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, as well as instruments for which determination of fair value requires a significant management judgment or estimation.

 

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 describes the valuation techniques used by the Company to measure certain assets and liabilities recorded at fair value on a recurring basis in the financial statements:

Securities available for sale

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).

The following tables present the balances of assets measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011.

 

                                 
          Fair Value Measurements at September 30, 2012
(in thousands)		  

Description

   Balance as of
September 30,
2012		     Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)		     Significant
Other
Observable
Inputs
(Level 2) 		    Significant
Unobservable
Inputs
(Level 3)		  

Assets

                                

Securities available for sale

                                

U.S. agency and mortgage-backed securities

   $ 79,580     $ —       $ 79,580     $ —    

Obligations of states and political subdivisions

     16,255       —         16,255       —    

Corporate equity securities

     4       4       —         —    
   

 

 

    

 

 

    

 

 

    

 

 

  
    $ 95,839     $ 4     $ 95,835     $ —    
   

 

 

    

 

 

    

 

 

    

 

 

  
     
          Fair Value Measurements at December 31, 2011
(in thousands)		  

Description

   Balance as of
December 31,
2011		     Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)		     Significant
Other
Observable
Inputs
(Level 2) 		    Significant
Unobservable
Inputs
(Level 3)		  

Assets

                                

Securities available for sale

                                

U.S. agency and mortgage-backed securities

   $ 78,876     $ —       $ 78,876     $ —    

Obligations of states and political subdivisions

     12,676       —         12,676       —    

Corporate equity securities

     113       113       —         —    
   

 

 

    

 

 

    

 

 

    

 

 

  
    $ 91,665     $ 113     $ 91,552     $ —    
   

 

 

    

 

 

    

 

 

    

 

 

  

 

Certain 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 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 being held at September 30, 2012 or 2011.

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. Fair value is measured based on the value of the collateral securing the loans or the present value of expected future cash flows. 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 receivables collateral 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

Loans are transferred to other real estate owned (OREO) when the collateral securing them is foreclosed on or acquired through a deed in lieu of foreclosure. The measurement of loss associated with other real estate owned is based on the fair value of the collateral compared to the unpaid loan balance and anticipated costs to sell the property. If there is a contract for the sale of a property, and management reasonably believes the contract will be executed, fair value is based on the sale price in that contract (Level 1). Lacking such a contract, 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. Any fair value adjustments to other real estate owned are recorded in the period incurred and expensed against current earnings.

 

The following tables summarize the Company’s assets that were measured at fair value on a nonrecurring basis during the periods:

 

                                 
          Carrying Value at September 30, 2012
(in thousands)		  

Description

   Balance as of
September 30,
2012		     Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)		     Significant
Other
Observable
Inputs
(Level 2) 		    Significant
Unobservable
Inputs
(Level 3)		  

Assets

                                

Impaired loans, net

   $ 8,513     $ —       $ —       $ 8,513  

Other real estate owned, net

     5,323       —         —         5,323  

 

                                 
          Carrying Value at December 31, 2011
(in thousands)		  

Description

   Balance as of
December 31,
2011		     Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)		     Significant
Other
Observable
Inputs
(Level 2) 		    Significant
Unobservable
Inputs
(Level 3)		  

Assets

                                

Impaired loans, net

   $ 8,320     $ —       $ 7,213     $ 1,107  

Other real estate owned, net

     6,374       —         6,374       —    

The following table displays quantitative information about Level 3 Fair Value Measurements for September 30, 2012:

 

                         
    Quantitative information about Level 3 Fair Value Measurements for September 30, 2012  
    (dollars in thousands)  
    Fair
Value		    

Valuation Technique

  

Unobservable Input

   Range  

Assets

                        

Impaired loans

   $ 8,513     Discounted appraised value   Selling cost     10 % 
                Discount for lack of marketability     0%-30 % 
                and age of appraisal        

Other real estate owned

     5,323     Discounted appraised value   Selling cost     7 % 
                Discount for lack of marketability     0%-30 % 
                and age of appraisal        

 

The changes in Level 3 assets measured at estimated fair value on a nonrecurring basis during the nine months ended September 30, 2012, were as follows:

 

                 
    Carrying Value at September 30,
2012
(in thousands)		  
    Impaired
Loans		     Other Real
Estate Owned		  

Balance, December 31, 2011

   $ 1,107     $ —    

Increase in carrying value

     139       —    

Decrease in carrying value

     (126 )      —    

Additions

     6,250       —    

Transfers to OREO

     (209 )      2,428  

Transfers out of Level 3

     (171 )      —    

Transfers into Level 3

     1,523       2,895  
   

 

 

    

 

 

  

Balance, September 30, 2012

   $ 8,513     $ 5,323  
   

 

 

    

 

 

  

Accounting guidance requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The methodologies for other financial assets and financial liabilities are discussed below:

Cash and Cash Equivalents

The carrying amounts of cash and short-term instruments approximate fair values.

Loans

For variable-rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for all other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

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 certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.

Accrued Interest

The carrying amounts of accrued interest approximate fair value.

Borrowings

The carrying amounts of federal funds purchased and other short-term borrowings maturing within ninety days approximate their fair values. Fair values of all other borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Commitments and Unfunded Credits

The fair value of commitments to extend credit 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 stand-by letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At September 30, 2012 and December 31, 2011, the fair value of loan commitments and standby letters of credit was immaterial.

The carrying values and estimated fair values of the Company’s financial instruments at September 30, 2012 and December 31, 2011 are as follows:

 

                                         
    (in thousands)  
    Fair Value Measurements at September 30, 2012 using  
    Carrying
Amount		     Quoted
Prices in
Active
Markets for
Identical
Assets
Level 1		     Significant
Other
Observable
Inputs
Level 2		     Significant
Unobservable
Inputs
Level 3		     Balance  

Financial Assets

                                        

Cash and short-term investments

   $ 26,219     $ 26,219     $ —       $ —       $ 26,219  

Securities

     95,839       4       95,835       —         95,839  

Loans, net

     366,703       —         361,931       8,513       370,444  

Accrued interest receivable

     1,581       —         1,581       —         1,581  
           

Financial Liabilities

                                        

Deposits

   $ 456,958     $ —       $ 459,260     $ —       $ 459,246k0  

Other borrowings

     6,082       —         6,263       —         6,263  

Trust preferred capital notes

     9,279       —         8,893       —         8,893  

Accrued interest payable

     315       —         315       —         315  

 

                 
    (in thousands)  
    December 31, 2011  
    Carrying
Amount		     Fair
Value		  

Financial Assets

                

Cash and short-term investments

   $ 29,524     $ 29,524  

Securities

     91,665       91,665  

Loans, net

     379,503       383,557  

Loans held for sale

     274       274  

Accrued interest receivable

     1,620       1,620  
     

Financial Liabilities

                

Deposits

   $ 469,172     $ 471,771  

Other borrowings

     19,100       19,137  

Trust preferred capital notes

     9,279       8,576  

Accrued interest payable

     366       366  

 

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values 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 to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates 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 terms of new loans and deposits and by investing in securities and borrowing wholesale funding with terms that mitigate the Company’s overall interest rate risk.