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Disclosures About Fair Value Measurements
9 Months Ended
Sep. 30, 2011
Disclosures About Fair Value Measurements [Abstract] 
Disclosures About Fair Value Measurements
17. Disclosures About Fair Value Measurements

The following disclosures establish a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined within this hierarchy are as follows:

Level I: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II: Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.

Level III: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management's best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quoted market spreads, cash flows, the US Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things.

The fair value of the swap asset and liability is based on an external derivative valuation model using data inputs as of the valuation date and classified Level 2.

The following tables present the assets reported on the balance sheet at their fair value as of September 30, 2011 and December 31, 2010, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Assets and Liability Measured on a Recurring Basis

Assets and liability measured at fair value on a recurring basis are summarized below (in thousands):

 

$000,000 $000,000 $000,000 $000,000
     Fair Value Measurements at September 30, 2011 Using  
     Total      (Level 1)      (Level 2)      (Level 3)  

U.S. Agency securities

    $ 8,594       $ —         $ 8,594       $ —     

U.S. Agency mortgage-backed securities

      176,683         —           176,683         —     

Fair value of swap asset

      408         —           408         —     

Fair value of swap liability

      408         —           408         —     

 

$000,000 $000,000 $000,000 $000,000
     Fair Value Measurements at December 31, 2010 Using  
     Total      (Level 1)      (Level 2)      (Level 3)  

U.S. Agency securities

    $ 15,944       $ —         $ 15,944       $ —     

U.S. Agency mortgage-backed securities

      148,867         —           148,867         —     

Fair value of swap asset

      420         —           420         —     

Fair value of swap liability

      420         —           420         —     

Loans considered impaired are loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. As detailed in the allowance for loan loss footnote, impaired loans are reported at fair value of the underlying collateral if the repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on observable market data which at times are discounted. At September 30, 2011, impaired loans with a carrying value of $4.3 million were reduced by a specific valuation allowance totaling $1.2 million resulting in a net fair value of $3.1 million.

 

Other real estate owned (OREO) is measured at fair value based on appraisals, less cost to sell at the date of foreclosure. Valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less cost to sell. Income and expenses from operations and changes in valuation allowance are included in the net expenses from OREO.

Assets Measured on a Non-recurring Basis

Assets measured at fair value on a non-recurring basis are summarized below (in thousands):

 

     Fair Value Measurements at September 30, 2011 Using  
     Total      (Level 1)      (Level 2)      (Level 3)  

Impaired loans

    $ 3,089       $ —         $ —         $ 3,089   

Other real estate owned

      4         —           —           4   

 

     Fair Value Measurements at December 31, 2010 Using  
     Total      (Level 1)      (Level 2)      (Level 3)  

Impaired loans

    $ 8,341       $ —         $ —         $ 8,341   

Other real estate owned

      738         —           —           738   

DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

For the Company, as for most financial institutions, approximately 90% of its assets and liabilities are considered financial instruments. Many of the Company's financial instruments, however, lack an available trading market characterized by a willing buyer and willing seller engaging in an exchange transaction. Therefore, significant estimates and present value calculations were used by the Company for the purpose of this disclosure.

Fair values have been determined by the Company using independent third party valuations that use the best available data (Level 2) and an estimation methodology (Level 3) the Company believes is suitable for each category of financial instruments. Management believes that cash, cash equivalents, and loans and deposits with floating interest rates have estimated fair values which approximate the recorded book balances. The estimation methodologies used, the estimated fair values based on US GAAP measurements, and recorded book balances at September 30, 2011 and December 31, 2010, were as follows (in thousands):

 

     September 30, 2011      December 31, 2010  
     Fair Value      Recorded
Book
Balance		      Fair Value      Recorded
Book
Balance		  

FINANCIAL ASSETS:

            

Cash and cash equivalents

    $ 36,186       $ 36,186       $ 19,337       $ 19,337   

Investment securities

      196,427         195,784         173,078         172,635   

Regulatory stock

      8,327         8,327         9,358         9,358   

Loans held for sale

      4,240         4,163         7,542         7,405   

Net loans, net of allowance for loan loss and unearned income

      652,890         647,177         651,866         651,011   

Accrued income receivable

      3,176         3,176         3,210         3,210   

Bank owned life insurance

      35,127         35,127         34,466         34,466   

Fair value swap asset

      408         408         420         420   

FINANCIAL LIABILITIES:

            

Deposits with no stated maturities

    $ 487,475       $ 487,475       $ 437,072       $ 437,072   

Deposits with stated maturities

      345,009         339,883         369,972         364,144   

Short-term borrowings

      —           —           4,550         4,550   

All other borrowings

      27,895         22,792         25,419         22,835   

Accrued interest payable

      2,613         2,613         3,541         3,541   

Fair value swap liability

      408         408         420         420   

 

The fair value of cash and cash equivalents, regulatory stock, accrued income receivable, short-term borrowings, and accrued interest payable are equal to the current carrying value.

The fair value of investment securities is equal to the available quoted market price. The fair value measurements consider observable data that may include dealer quoted market spreads, cash flows, the US Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things.

Loans held for sale are priced individually at market rates on the day that the loan is locked for commitment with an investor. All loans in the held for sale account conform to Fannie Mae underwriting guidelines, with the specific intent of the loan being purchased by an investor at the predetermined rate structure. Loans in the held for sale account have specific delivery dates that must be executed to protect the pricing commitment (typically a 30, 45, or 60 day lock period).

The net loan portfolio has been valued using a present value discounted cash flow. The discount rate used in these calculations is based upon the treasury yield curve adjusted for non-interest operating costs, credit loss, current market prices and assumed prepayment risk.

The fair value of bank owned life insurance is based upon the cash surrender value of the underlying policies and matches the book value.

Deposits with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating current market for similar assets and liabilities. Deposits with no stated maturities have an estimated fair value equal to both the amount payable on demand and the recorded book balance.

The fair value of all other borrowings is based on the discounted value of contractual cash flows. The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities.

The fair values of the swaps used for interest rate risk management represents the amount the Company would have expected to receive or pay to terminate such agreements.

Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values. The Company's remaining assets and liabilities which are not considered financial instruments have not been valued differently than has been customary under historical cost accounting.