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NOTE L - FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2011

NOTE L – FAIR VALUE MEASUREMENTS

The Company groups its assets and 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. These levels are:

	·	Quoted prices in active markets for identical assets (Level 1): Inputs that are quoted unadjusted prices in active markets for identical assets that the Company has the ability to access at the measurement date. An active market for the asset is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

	·	Significant other observable inputs (Level 2): Inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity including quoted prices for similar assets or liabilities, quoted prices for securities in inactive markets and inputs derived principally from, or corroborated by, observable market data by correlation or other means.

	·	Significant unobservable inputs (Level 3): Inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

Assets Recorded at Fair Value on a Recurring Basis

The table below presents assets measured at fair value on a recurring basis (in thousands).

	At September 30, 2011
	Fair Value		Level 1		Level 2		Level 3
Available-for-sale securities:
Obligations of U.S. government agencies	$	15,273	$	—	$	15,273	$	—
Obligations of state and political subdivisions		14,642		—		14,642		—
Government agency mortgage-backed securities		235,573		—		235,573		—
Corporate debt securities		4,270		—		4,270		—
Equity securities		3,122		—		3,122		—
	$	272,880	$	—	$	272,880	$	—

	At December 31, 2010
	Fair Value		Level 1		Level 2		Level 3
Available-for-sale securities:
Obligations of U.S. government agencies	$	21,221	$	—	$	21,221	$	—
Obligations of state and political subdivisions		14,551		—		14,551		—
Government agency mortgage-backed securities		222,569		—		222,569		—
Corporate debt securities		4,303		—		4,303		—
Equity securities		3,000		—		3,000		—
	$	265,644	$	—	$	265,644	$	—

Assets Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or writedowns of individual assets. For assets measured at fair value on a nonrecurring basis that were still held in the balance sheet at quarter end, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets at quarter end (in thousands).

	At September 30, 2011
	Fair Value		Level 1		Level 2		Level 3
Impaired loans
Commercial	$	1,280	$	—	$	—	$	1,280
Real estate - commercial		2,281		—		—		2,281
Real estate - construction		2,175		—		—		2,175
Real estate - mortgage		700		—		—		700
Installment		14		—		—		14
Other		—		—		—		—
Other real estate owned		14,432		1,748		—		12,684
Total assets measured at fair value on a nonrecurring basis	$	20,882	$	1,748	$	—	$	19,134

	At December 31, 2010
	Fair Value		Level 1		Level 2		Level 3

Impaired loans
Commercial	$	1,097	$	—	$	1,097	$	—
Real estate - commercial		3,527		—		3,527		—
Real estate - construction		4,114		—		3,829		285
Real estate - mortgage		1,507		—		1,507		—
Installment		16		—		16		—
Other		—		—		—		—
Other real estate owned		25,784		—		25,784		—
Total assets measured at fair value on a nonrecurring basis	$	36,045	$	—	$	35,760	$	285

Impaired Loans - The value of the impaired loan is periodically assessed by performing a property valuation, which could include a full or limited appraisal, or another alternative valuation method. In accordance with Subtopic 310, impaired loan with recorded balances totaling $6.5 million were written down to their estimated fair value, resulting in specific reserves and charge offs totaling $2.3 million, which was included in earnings for the period.

Other Real Estate Owned – Other real estate owned includes the fair value of foreclosed real estate and other collateral that were measured at fair value subsequent to their initial classification as foreclosed assets. At the time of foreclosure, other real estate owned is recorded at the fair value of the real estate less costs to sell, which becomes the property’s new basis. Subsequent declines in fair value are written off as incurred through a valuation allowance. The value of the OREO properties is periodically assessed by performing a property valuation, which could include a full or limited appraisal, or another alternative valuation method. In accordance with Subtopic 360, other real estate owned with recorded balances totaling $14.4 million were written down to their estimated fair value, resulting in write downs totaling $1.9 million, which was included in earnings for the period.

Disclosures about Fair Value of Financial Instruments

The fair values presented represent the Company’s best estimate of fair value using the methodologies discussed below. The fair values of financial instruments which have a relatively short period of time between their origination and their expected realization were valued using historical cost. The values assigned do not necessarily represent amounts which ultimately may be realized. In addition, these values do not give effect to discounts to fair value which may occur when financial instruments are sold in larger quantities.

The following assumptions were used as of September 30, 2011 and December 31, 2010 to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.

	a)	Cash and Due From Banks - The carrying amount represents a reasonable estimate of fair value.

	b)	Federal Funds Sold - The carrying amount represents a reasonable estimate of fair value.

	c)	Time Deposits at Other Financial Institutions - The carrying amount represents a reasonable estimate of fair value due to the short-term nature of such deposits.

	d)	FHLB, FRB Stock and Other Securities - The carrying amount represents a reasonable estimate of fair value.

	e)	Investment Securities – The fair value of investment securities are based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Available for sale securities are carried at fair value.

	f)	Loans - Commercial loans, residential mortgages, construction loans and direct financing leases are segmented by fixed and adjustable rate interest terms, by maturity, and by performing and nonperforming categories.

		The fair value of performing loans is estimated by discounting contractual cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Assumptions regarding credit risk, cash flow, and discount rates are determined using available market information.

		The fair value of nonperforming loans is estimated by discounting estimated future cash flows using current interest rates with an additional risk adjustment reflecting the individual characteristics of the loans, or using the fair value of underlying collateral for collateral dependent loans as a practical expedient.

	g)	Bank-owned Life Insurance - The carrying amount and estimated fair values are based on current cash surrender values at each reporting date provided by the insurers.

	h)	Mortgage Servicing Assets – The fair value of mortgage servicing assets is estimated using projected cash flows adjusted for the effects of anticipated prepayments, using a market discount rate.

	i)	Deposits – Noninterest-bearing and interest-bearing demand deposits and savings accounts are payable on demand and their carrying values are assumed to be at fair value. The fair value of the core deposit intangible has not been included as a component of the fair value estimate. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is based on rates currently offered for deposits of similar size and remaining maturities.

	j)	Subordinated Debentures - The fair value of the subordinated debentures is estimated by discounting the contractual cash flows using the current interest rate at which similar securities with the same remaining expected life could be made.

	k)	Commitments to Fund Loans/Standby Letters of Credit - The fair values of commitments are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The differences between the carrying value of commitments to fund loans or standby letters of credit and their fair value are not significant and therefore not included in the following table.

	l)	Accrued Interest Receivable/Payable – The carrying amount of accrued interest receivable and accrued interest payable represents a reasonable estimate of fair value.

The carrying amounts and estimated fair values of the Company’s financial instruments are as follows (in thousands):

	September 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
FINANCIAL ASSETS
Cash and due from banks	$	21,662	$	21,662	$	14,629	$	14,629
Federal funds sold		68,535		68,535		9,005		9,005
Time deposits at other financial institutions		459		459		459		459
FHLB, FRB and other securities		8,044		8,044		7,141		7,141
Securities:
Available-for-sale		272,880		272,880		265,644		265,644
Held-to-maturity		6		6		6		6
Loans		458,087		477,018		498,473		514,284
Bank owned life insurance		34,750		34,750		33,871		33,871
Mortgage and SBA servicing assets		829		829		708		694
Accrued interest receivable		2,449		2,449		2,713		2,713

FINANCIAL LIABILITIES
Deposits	$	769,408	$	770,912	$	753,790	$	755,514
Subordinated debentures		31,961		21,690		31,961		18,178
Accrued interest payable		4,475		4,475		3,052		3,052

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

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