Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value Measurements

NOTE 17 — Fair Value Measurements

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such a liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 820, “Fair Value Measurements and Disclosure”, establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

The standard describes three levels of inputs that may be used to measure fair values:

• Level 1 — Valuation is based upon quoted prices for identical instruments traded in active markets.

• Level 2 — Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

• Level 3 — Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Bank’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Assets and liabilities measured at estimated fair value on a recurring basis for the periods indicated were,

As of September 30, 2012 (Unaudited, dollars in thousands)	Level 1		Level 2		Level 3
On a recurring basis:
Mortgage-backed securities	$	—	$	21,757	$	—
US Government Agency securities		—		23,859		—
Municipal securities		—		11,820		—
Asset-back debt securities		—		—		68
On a non-recurring basis:
Impaired Loans (1)		—		—		7,834
Other Real Estate Owned (2)		—		—		1,610
Total	$	—	$	57,436	$	9,512
As of December 31, 2011 (dollars in thousands)	Level 1		Level 2		Level 3
On a recurring basis:
Mortgage-backed securities	$	—	$	21,071	$	—
US Government Agency securities		—		24,606		—
Municipal securities		—		11,591		—
Asset-back debt securities		—		—		68
On a non-recurring basis:
Impaired Loans (1)		—		—		6,304
Other Real Estate Owned (2)		—		—		615
Total	$	—	$	57,268	$	6,987

(1) Includes loans that have been measured for impairment at the fair value of the loans’ collateral.

(2) Other real estate owned is transferred from loans to OREO at the lower of cost or market.

During the periods ended September 30, 2012 and December 31, 2011, certain impaired loans were re-measured and reported at fair value through a specific valuation allowance allocation of the allowance for possible loan losses based upon the fair value of the underlying collateral.

Level 3 Valuations

Financial instruments are considered Level 3 when their fair values are determine using pricing models, discount flow methodologies or similar techniques and at least one significant model assumptions in input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.

The following table presents a reconciliation of the beginning and ending balance for September 30, 2012 and December 31, 2011 of assets measured on a recurring basis,

	September 30, 2012		December 31, 2011
(Dollars in thousands)	(Unaudited)
Beginning Balance, January 1	$	68	$	17
Transfer into Level 3:		—		—
Purchases, settlements, paydowns, and maturities		—		—
Realized gains (losses) in earnings		—		—
Unrealized gains (losses) in other comprehensive income		—		51
Ending Balance	$	68	$	68

The fair value information for financial instruments, which is provided below, is based on the requirements of Financial Accounting Standard Board ASC 825 (formerly known as SFAS No. 107 “Disclosures about Fair Value of Financial Instruments,”) and does not represent the aggregate net fair value of the Company. Much of the information used to determine fair value is subjective and judgmental in nature; therefore, fair value estimates, especially for less marketable securities, may vary. The amounts actually realized or paid upon settlement or maturity could be significantly different. The Company uses the following methods and assumptions in estimating fair values of financial instruments:

Cash and Cash Equivalents. The carrying amount of cash and cash equivalents approximates fair value.

Investment securities. The fair value of investment securities held-to-maturity and available-for-sale is estimated based on bid quotations received from independent pricing services.

Loans. For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. For all other loans, fair values are calculated by discounting the contractual cash flows using estimated market discount rates which reflect the credit and interest rate risk inherent in the loans, or by using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Deposits. The fair value of deposits with no stated maturity, such as demand, interest checking and money market, and savings accounts, is equal to the amount payable on demand. The fair value of certificates of deposit is based on the discounted value of contractual cash flows using the rates currently offered for deposits of similar remaining maturities.

FHLB Advances. The fair value of FHLB Advances is based on the discounted value of future cash flows using interest rates currently being offered for FHLB advances with similar terms and characteristics.

Off-balance-sheet instruments. The fair value of off-balance-sheet lending commitments is equal to the amount of commitments outstanding. This is based on the fact that the Company generally does not offer lending commitments or standby letters of credit to its customers for long periods, and therefore, the underlying rates of the commitments approximate market rates.

	September 30, 2012				December 31, 2011
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
(Dollars in thousands)	(Unaudited)
Cash & Cash Equivalents	$	65,398	$	65,398	$	72,321	$	72,321
Investment Securities		57,504		57,504		57,336		57,336
Loans, net		455,844		462,429		415,005		420,122
Time Deposits		217,252		219,477		201,513		203,172
FHLB Advances		17,100		17,355		24,350		25,486
Off Balance Sheet Items		86,781		86,781		79,686		79,686

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 estimate of future cash flows. This disclosure does not and is not intended to represent the fair value of the Company.