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Fair Value
 3 Months Ended
Mar. 31, 2012
Fair Value [Abstract]  
FAIR VALUE

NOTE 6 – FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 – Significant other 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.

Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value:

Securities available for sale: The fair value of securities available for sale is determined using pricing models that vary based on asset class and include available trade, bid and other market information or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2).

Loans held for sale, at fair value: Loans held for sale are carried at fair value, as determined by outstanding commitments from third party investors (Level 2).

Derivatives: The fair value of derivatives is based on valuation models using observable market data as of the measurement date (Level 2).

Loan servicing rights: On a quarterly basis, loan servicing rights are evaluated for impairment based on the fair value of the rights as compared to carrying amount. If the carrying amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the servicing asset is carried at fair value. Fair value is determined at a tranche level based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data (Level 2).

Impaired loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the ALLL. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Foreclosed assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

 

Appraisals for both collateral-dependent impaired loans and foreclosed assets are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by a third-party appraisal management company approved by the Board of Directors annually. Once received, the loan officer or a member of the credit department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. Appraisals are updated as needed based on facts and circumstances associated with the individual properties. Real estate appraisals typically incorporate measures such as recent sales prices for comparable properties. Appraisers may make adjustments to the sales prices of the comparable properties as deemed appropriate based on the age, condition or general characteristics of the subject property. Management applies an additional discount to real estate appraised values, typically to reflect changes in market conditions since the date of the appraisal and to cover disposition costs (including selling expenses) based on the intended disposition method of the property.

Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Company has elected the fair value option, are summarized below:

 

         
    Fair Value
Measurements at
March 31, 2012
Using Significant Other
Observable Inputs
(Level 2)		  

Financial Assets:

        

Securities available for sale:

        

Issued by U.S. government-sponsored entities and agencies:

        

Mortgage-backed securities - residential

   $ 2,494  

Collateralized mortgage obligations

     15,614  
   

 

 

  

Total securities available for sale

   $ 18,108  
   

 

 

  

Loans held for sale

   $ 833  
   

 

 

  

Yield maintenance provisions (embedded derivatives)

   $ 970  
   

 

 

  

Interest rate lock commitments

   $ 33  
   

 

 

  

Financial Liabilities:

        

Interest-rate swaps

   $ 970  
   

 

 

  

 

         
    Fair Value
Measurements at
December 31, 2011
Using Significant Other
Observable Inputs
(Level 2)		  

Financial Assets:

        

Securities available for sale:

        

Issued by U.S. government-sponsored entities and agencies:

        

Mortgage-backed securities - residential

   $ 1,673  

Collateralized mortgage obligations

     16,843  
   

 

 

  

Total securities available for sale

   $ 18,516  
   

 

 

  

Loans held for sale

   $ 1,210  
   

 

 

  

Yield maintenance provisions (embedded derivatives)

   $ 999  
   

 

 

  

Interest rate lock commitments

   $ 39  
   

 

 

  

Financial Liabilities:

        

Interest-rate swaps

   $ 999  
   

 

 

  

The Company had no assets or liabilities measured at fair value on a recurring basis that were measured using Level 1 or Level 3 inputs at March 31, 2012 or December 31, 2011.

 

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

 

         
   

Fair Value Measurements

at March 31, 2012

Using Significant
Unobservable Inputs
(Level 3)

  

Impaired loans:

        

Commercial

   $ 145  

Real Estate:

        

Multi-family residential

     3,961  

Commercial:

        

Non-owner occupied

     2,069  

Owner occupied

     422  

Land

     166  
   

 

 

  

Total impaired loans

   $ 6,763  
   

 

 

  

Foreclosed assets

        

Land

   $ 1,209  
   

 

 

  

 

                 
    Fair Value Measurements at December 31, 2011 Using  
    Significant Other
Observable Inputs
(Level 2)		     Significant
Unobservable Inputs
(Level 3)		  

Loan servicing rights

   $ 9          
   

 

 

          

Impaired loans:

                

Commercial

           $ 108  

Real Estate:

                

Multi-family residential

             3,065  

Commercial:

                

Non-owner occupied

             2,887  

Owner occupied

             516  

Land

             233  
           

 

 

  

Total impaired loans

           $ 6,809  
           

 

 

  

Foreclosed assets

                

Land

           $ 1,209  
           

 

 

  

The Company had no assets or liabilities measured at fair value on a non-recurring basis that were measured using Level 1 inputs at March 31, 2012 or December 31, 2011. The Company had no assets or liabilities measured at fair value on a non-recurring basis that were measured using Level 2 inputs at March 31, 2012.

 

There were no impaired loan servicing rights at March 31, 2012. At December 31, 2011, impaired loan servicing rights, which are carried at fair value, were $9, which was made up of the amortized cost of $11, net of a valuation allowance of $2. There was a $1 increase in earnings with respect to servicing rights for the three months ended March 31, 2012. There was a $2 increase in earnings with respect to servicing rights for the three months ended March 31, 2011.

Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans, had an unpaid principal balance of $9,344 and a fair value of $6,763, with no valuation allowance at March 31, 2012. Impaired collateral dependent loans were written down to the fair value of collateral during the quarter ended March 31, 2012, and there were no specific valuation allowances on these loans. The amount of charge-offs on these loans totaled $865 for the three months ended March 31, 2012. Impaired loans carried at the fair value of collateral had an unpaid principal balance of $10,069 and a fair value of $6,809, with no valuation allowance at December 31, 2011. There was a $35 increase in the valuation allowance for the three months ended March 31, 2011.

Foreclosed assets which are carried at fair value less costs to sell, had a net carrying amount of $1,209, which was made up of the outstanding balance of $2,348, net of a valuation allowance of $1,139 at both March 31, 2012 and December 31, 2011. There was no charge against earnings for the three months ended March 31, 2012 or 2011.

During the three months ended March 31, 2012, the Company did not have any significant transfers of assets or liabilities between those measured using Level 1 or 2 inputs. The Company recognizes transfers of assets and liabilities between Level 1 and 2 inputs based on the information relating to those assets and liabilities at the end of the reporting period.

 

Financial Instruments Recorded Using Fair Value Option

The Company has elected the fair value option for loans held for sale. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policy on loans held for investment. None of these loans were 90 days or more past due or on nonaccrual as of March 31, 2012 or December 31, 2011.

As of March 31, 2012 and December 31, 2011, the aggregate fair value, contractual balance (including accrued interest) and gain or loss was as follows:

 

                 
    March 31, 2012     December 31, 2011  

Aggregate fair value

   $ 833     $ 1,210  

Contractual balance

     828       1,196  

Gain

     5       14  

The total amount of gains and losses from changes in fair value included in earnings for the three months ended March 31, 2012 and 2011 for loans held for sale were:

 

                 
    Three months ended March 31,  
    2012     2011  

Interest income

   $ 12     $ 11  

Change in fair value

     (9 )      (12 ) 
   

 

 

    

 

 

  

Total change in fair value

   $ 3     $ (1 ) 
   

 

 

    

 

 

  

 

The carrying amounts and estimated fair values of financial instruments at March 31, 2012 were as follows:

 

                                         
    Fair Value Measurements at March 31, 2012 Using:  
    Carrying
Value		     Level 1     Level 2     Level 3     Total  

Financial assets

                                        

Cash and cash equivalents

   $ 63,284     $ 63,284     $ —       $ —       $ 63,284  

Interest-bearing deposits in other financial institutions

     1,984       1,984       —         —         1,984  

Securities available for sale

     18,108       —         18,108       —         18,108  

Loans held for sale

     833       —         833       —         833  

Loans, net

     140,282       —         —         144,180       144,180  

FHLB stock

     1,942       —         —         —         n/a  

Accrued interest receivable

     84       11       73       —         84  

Yield maintenance provisions (embedded derivatives)

     970       —         970       —         970  

Interest rate lock commitments

     33       —         33       —         33  

Financial liabilities

                                        

Deposits

   $ (207,872 )    $ (81,868 )    $ (128,114 )    $ —       $ (209,982 ) 

FHLB advances

     (15,742 )      —         (16,250 )      —         (16,250 ) 

Subordinated debentures

     (5,155 )      —         (2,807 )      —         (2,807 ) 

Accrued interest payable

     (359 )      —         (359 )      —         (359 ) 

Interest-rate swaps

     (970 )      —         (970 )      —         (970 ) 

 

The carrying amounts and estimated fair values of financial instruments at December 31, 2011 were as follows:

 

                 
    December 31, 2011  
    Carrying
Amount		     Fair
Value		  

Financial assets

                

Cash and cash equivalents

   $ 61,436     $ 61,436  

Interest-bearing deposits in other financial institutions

     1,984       1,984  

Securities available for sale

     18,516       18,516  

Loans held for sale

     1,210       1,210  

Loans, net

     151,160       155,159  

FHLB stock

     1,942       n/a  

Accrued interest receivable

     92       92  

Yield maintenance provisions (embedded derivatives)

     999       999  

Interest rate lock commitments

     39       39  

Financial liabilities

                

Deposits

   $ (217,049 )    $ (219,235 ) 

FHLB advances

     (15,742 )      (16,327 ) 

Subordinated debentures

     (5,155 )      (2,810 ) 

Accrued interest payable

     (300 )      (300 ) 

Interest-rate swaps

     (999 )      (999 ) 

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

Cash and Cash Equivalents

The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

Interest-Bearing Deposits in Other Financial Institutions

The carrying amounts of interest bearing deposits in other financial institutions approximate fair values and are classified as Level 1.

FHLB Stock

It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

Loans

Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for 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 resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

Deposits

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

 

Other Borrowings

The fair values of the Company’s long-term FHLB advances are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

The fair values of the Company’s subordinated debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

Accrued Interest Receivable/Payable

The carrying amounts of accrued interest approximate fair value resulting in a Level 1 or 2 classification, consistent with the asset or liability they are associated with.

Off-Balances-Sheet Instruments

The fair value of off-balance-sheet items is not considered material.