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Fair Value and Interest Rate Risk
 12 Months Ended
Dec. 31, 2011
Fair Value and Interest Rate Risk [Abstract]  
Fair Value and Interest Rate Risk

Note 19. Fair Value and Interest Rate Risk

As described in Note 1, the Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. A description of the valuation methodologies used for assets and liabilities recorded at fair value, and for estimating fair value for financial and non-financial instruments not recorded at fair value, is set forth below.

Cash and due from banks, federal funds sold, short-term investments and accrued interest receivable and payable: The carrying amount is a reasonable estimate of fair value. These financial instruments are not recorded at fair value on a recurring basis.

Available-for-Sale Securities: These financial instruments are recorded at fair value in the financial statements. Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted prices are not available, then fair values are estimated by using pricing models (i.e., matrix pricing) or quoted prices of securities with similar characteristics and are classified within Level 2 of the valuation hierarchy. Examples of such instruments include U.S. government agency bonds and mortgage-backed securities, corporate bonds and money market preferred equity securities. The prices for these instruments are obtained through an independent pricing service or dealer market participants with whom the Company has historically transacted both purchases and sales of investment securities. Prices obtained from these sources include prices derived from market quotations and matrix pricings. The fair value measurements considered observable data may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Management reviews the data and assumptions used in pricing the securities by its third party provider to ensure the highest level of significant inputs are derived from market observable data. Level 3 securities are instruments for which significant unobservable input are utilized. Available-for-sale securities are recorded at fair value on a recurring basis.

Loans: For variable rate loans, which reprice frequently and have no significant change in credit risk, carrying values are a reasonable estimate of fair values, adjusted for credit losses inherent in the portfolios. The fair value of fixed rate loans is estimated by discounting the future cash flows using the period end rates, estimated by using local market data, at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, adjusted for credit losses inherent in the portfolios. The Company does not record loans at fair value on a recurring basis. However, from time to time, nonrecurring fair value adjustments to collateral-dependent impaired loans are recorded to reflect partial write-downs based on the observable market price or current appraised value of collateral. Fair values estimated in this manner do not fully incorporate an exit-price approach to fair value, but instead are based on a comparison to current market rates for comparable loans.

 

Other Real Estate Owned: The fair value of the Company’s OREO properties is based on the estimated current property valuations less estimated selling costs. When the fair value is based on current observable appraised values, OREO is classified within Level 2. The Company classifies the OREO within Level 3 when unobservable adjustments are made to appraised values. The Company does not record other real estate owned at fair value on a recurring basis.

Deposits: The fair value of demand deposits, regular savings and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit and other time deposits is estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities, estimated using local market data, to a schedule of aggregated expected maturities on such deposits. The Company does not record deposits at fair value on a recurring basis.

Short-term borrowings: The carrying amounts of borrowings under short-term repurchase agreements and other short-term borrowings maturing within 90 days approximate their fair values. The Company does not record short-term borrowings at fair value on a recurring basis.

Junior Subordinated Debt: Junior subordinated debt reprices quarterly and as a result the carrying amount is considered a reasonable estimate of fair value. The Company does not record junior subordinated debt at fair value on a recurring basis.

Federal Home Loan Bank Borrowings: The fair value of the advances is estimated using a discounted cash flow calculation that applies current Federal Home Loan Bank interest rates for advances of similar maturity to a schedule of maturities of such advances. The Company does not record these borrowings at fair value on a recurring basis.

Other Borrowings: The fair values of longer term borrowings and fixed rate repurchase agreements are estimated using a discounted cash flow calculation that applies current interest rates for transactions of similar maturity to a schedule of maturities of such transactions. The Company does not record these borrowings at fair value on a recurring basis.

Off-balance sheet instruments: Fair values for the Company’s off-balance-sheet instruments (lending commitments) are based on interest rate changes and fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The Company does not record its off-balance-sheet instruments at fair value on a recurring basis.

 

The following table details the financial assets measured at fair value on a recurring basis as of December 31, 2011 and 2010, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine fair value:

 

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

Corporate bonds

   $ —       $ 11,383,458     $ —       $ 11,383,458  

U.S. Government agency mortgage-backed securities

     —         50,049,429       —         50,049,429  

U.S. Government bonds

     —         5,037,085       —         5,037,085  
   

 

 

    

 

 

    

 

 

    

 

 

  

Securities available for sale

   $ —       $ 66,469,972     $ —       $ 66,469,972  
   

 

 

    

 

 

    

 

 

    

 

 

  

 

                                 
December 31, 2010   Quoted Prices in
Active Markets
for Identical Assets
(Level 1)		     Significant
Observable
Inputs
(Level 2)		     Significant
Unobservable
Inputs
(Level 3)		     Balance
as of
December 31, 2010		  

Securities available for sale

   $ —       $ 40,564,700     $ —       $ 40,564,700  
   

 

 

    

 

 

    

 

 

    

 

 

  

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

 

The following table reflects assets measured at fair value on a non-recurring basis as of December 31, 2011 and 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

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

Impaired Loans (1)

   $ —       $ —       $ 13,498,177     $ 13,498,177  
   

 

 

    

 

 

    

 

 

    

 

 

  

Other real estate owned (2)

   $ —       $ —       $ 2,762,640     $ 2,762,640  
   

 

 

    

 

 

    

 

 

    

 

 

  
         
December 31, 2010                        

Impaired Loans (1)

   $ —       $ —       $ 30,999,865     $ 30,999,865  
   

 

 

    

 

 

    

 

 

    

 

 

  

Other real estate owned (2)

   $ —       $ —       $ 10,103,199     $ 10,103,199  
   

 

 

    

 

 

    

 

 

    

 

 

  

 

(1)

Represents carrying value for which adjustments are based on the appraised value of the collateral.

(2)

Represents carrying value for which adjustments are based on the appraised value of the property.

The Company discloses fair value information about financial instruments, whether or not recognized in the consolidated balance sheet, for which it is practicable to estimate that value. Certain financial instruments are excluded from disclosure requirements and, accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The estimated fair value amounts have been measured as of December 31, 2011 and have not been reevaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than amounts reported on those dates.

The information presented should not be interpreted as an estimate of the fair value of the Company since a fair value calculation is only required for a limited portion of the Company’s assets and liabilities. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other bank holding companies may not be meaningful.

 

The following is a summary of the carrying amounts and estimated fair values of the Company’s financial instruments at December 31, 2011 and 2010 (in thousands):

 

                                 
    2011     2010  
    Carrying
Amount		     Estimated
Fair Value		     Carrying
Amount		     Estimated
Fair Value		  

Financial Assets:

                                

Cash and noninterest bearing deposits due from banks

   $ 4,242     $ 4,242     $ 4,613     $ 4,613  

Interest-bearing deposits due from banks

     50,474       50,474       131,711       131,711  

Federal funds sold

     —         —         10,000       10,000  

Short-term investments

     710       710       453       453  

Other Investments

     3,500       3,500       3,500       3,500  

Available-for-sale securities

     66,470       66,470       40,565       40,565  

Federal Reserve Bank stock

     1,707       1,707       1,192       1,192  

Federal Home Loan Bank stock

     4,508       4,508       4,508       4,508  

Loans receivable, net

     501,477       511,648       534,531       542,360  

Accrued interest receivable

     2,453       2,453       2,512       2,512  
         

Financial Liabilities:

                                

Demand deposits

   $ 65,613     $ 65,613     $ 51,058     $ 51,058  

Savings deposits

     59,396       59,396       57,042       57,042  

Money market deposits

     52,890       52,890       92,683       92,683  

NOW accounts

     24,396       24,396       19,297       19,297  

Time deposits

     342,614       347,246       426,728       432,466  

FHLB borrowings

     50,000       52,645       50,000       51,195  

Securities sold under repurchase agreements

     7,000       8,173       7,000       7,796  

Subordinated debt

     8,248       8,248       8,248       8,248  

Accrued interest payable

     949       949       729       729  

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 with terms that mitigate the Company’s overall interest rate risk.

 

Off-balance-sheet instruments

Loan commitments on which the committed interest rate is less than the current market rate were insignificant at December 31, 2011 and 2010. The estimated fair value of fee income on letters of credit at December 31, 2011 and 2010 was insignificant.