Fair Value Measurements

6 Months Ended

Jun. 30, 2012

Fair Value Measurements [Abstract]

FAIR VALUE MEASUREMENTS

NOTE 6 – FAIR VALUE MEASUREMENTS

Fair Value Hierarchy

ASC 820-10, “Fair Value Measurements and Disclosures,” provides a framework for measuring fair value under generally accepted accounting principles. The guidance allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis.

In accordance with ASC 820-10, the Company groups its financial assets and financial liabilities 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 - Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes U.S. Treasury, other U.S. Government and agency mortgage-backed securities that are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 - Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities.

Level 3 - Valuations for assets and liabilities that are derived from other methodologies, including option pricing models, discounted cash flow models and similar techniques, are not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets and liabilities.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value for June 30, 2012 (unaudited) and December 31, 2011.

The Company’s cash instruments are generally classified within level 1 or level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. There were no significant transfers between level 1 and 2 of the fair value hierarchy for the six months ended June 30, 2012 (unaudited) and the year ended December 31, 2011.

The Company’s investment in mortgage-backed securities and other debt securities available-for-sale is generally classified within level 2 of the fair value hierarchy. For these securities, the Company obtains fair value measurements from independent pricing services. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. treasury yield curve, trading levels, market consensus prepayment speeds, credit information and the instrument’s terms and conditions.

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Subsequent to inception, management only changes level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalization and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows.

The Company’s impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using level 2 inputs based upon appraisals of similar properties obtained from a third party. For level 3 inputs, fair value is based upon management estimates of the value of the underlying collateral or the present value of the expected cash flows.

The following summarizes assets measured at fair value as of June 30, 2012 (unaudited) and December 31, 2011.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

There were no assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 (unaudited) and December 31, 2011. There were no transfers between Level 1 and Level 2 assets and liabilities for the six months ended June 30, 2012 (unaudited) and the year ended December 31, 2011.

Assets Measured at Fair Value on a Non-recurring Basis

The Company may also be required, from time to time, to measure certain other financial assets on a non-recurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. There were no liabilities measured at fair value on a non-recurring basis at June 30, 2012 (unaudited) and December 31, 2011.

The following tables summarize the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets as of June 30, 2012 (unaudited) and December 31, 2011:

	June 30, 2012
	Level 1		Level 2		Level 3
Impaired loans	$	—	$	—	$	727
Totals	$	—	$	—	$	727
	December 31, 2011
	Level 1		Level 2		Level 3
Impaired loans	$	—	$	—	$	1,315
Totals	$	—	$	—	$	1,315

Certain impaired loans were adjusted to the fair value, less the costs to sell, of the underlying collateral securing these loans resulting in losses. The loss is either recorded directly as an adjustment to current earnings through a partial charge off or is recorded as a component in determining the allowance for loan losses. Fair value was measured using appraised values of collateral and adjusted as necessary by management based on unobservable inputs for specific properties. However, the choice of observable data is subject to significant judgment, and there are often adjustments based on judgment in order to make observable data comparable and to consider the impact of time, the condition of properties, interest rates, and other market factors on current values. Additionally, commercial real estate appraisals frequently involve discounting of projected cash flows, which relies inherently on unobservable data. Therefore, real estate collateral related nonrecurring fair value measurement adjustments have generally been classified as Level 3. Estimates of fair value used for other collateral supporting commercial loans generally are based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3. Charge offs and specific allocations on impaired loans for the six months ended June 30, 2012 and the year ended December 31, 2011 were $668,000 and $704,000, respectively.

The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments are as follows. Certain financial instruments and all nonfinancial instruments are exempt from its disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.

	June 30, 2012 (unaudited)
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	54,677	$	54,677	$	54,677	$	—	$	—
Interest-bearing time deposits with other banks		119		119		—		119		—
Held-to-maturity securities		75,061		77,077		—		77,077		—
Federal Home Loan Bank stock		7,627		7,627		—		7,627		—
Loans held-for-sale		616		616		—		—		616
Loans, net		592,828		600,906		—		—		600,906
Accrued interest receivable		2,122		2,122		2,122		—		—
Financial liabilities:
Deposits		537,657		546,531		—		546,531		—
Federal Home Loan Bank advances		71,100		71,558		—		71,558		—
Securities sold under agreements to repurchase		3,234		3,234		—		3,234		—
Other borrowed funds		1,476		1,476		—		1,476		—
Accrued interest payable		288		288		288		—		—
Mortgagor’s escrow accounts		625		625		625		—		—

	December 31, 2011
	Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	22,795	$	22,795
Interest-bearing time deposits with other banks		119		123
Held-to-maturity securities		89,391		91,096
Federal Home Loan Bank stock		8,038		8,038
Loans held-for-sale		15,877		15,918
Loans, net		509,964		515,948
Accrued interest receivable		2,185		2,185
Financial liabilities:
Deposits		430,654		433,267
Federal Home Loan Bank advances		95,600		96,001
Securities sold under agreements to repurchase		2,985		2,985
Other borrowed funds		1,502		1,469
Accrued interest payable		177		177
Mortgagors’ escrow accounts		442		442