Disclosures About Fair Value Of Assets And Liabilities

9 Months Ended

Sep. 30, 2011

Disclosures About Fair Value Of Assets And Liabilities [Abstract]

Disclosures About Fair Value Of Assets And Liabilities

NOTE H—DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES

This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy has been established that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 Quoted prices in active markets for identical assets or liabilities

Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Available-for-sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. The security valued in Level 1 is a mutual fund.

Level 2 securities include U.S. Government agency and U.S. Government-sponsored enterprise mortgage-backed securities. Level 2 securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of securities with similar characteristics and, because many fixed-income securities do not trade on a daily basis, apply available information through processes such as benchmark curves, benchmarking of like securities, sector grouping and matrix pricing. In addition, model processes, such as an option adjusted spread model is used to develop prepayment and interest rate scenarios for securities with prepayment features. The Company has reviewed the methodologies used by the third party and has determined that the securities are properly classified as Level 2.

Level 3 securities consist of municipal securities and are valued by a third party who uses a discounted cash flow model to determine the price. The key inputs to the discounted cash flow model are the coupon, yield, and expected maturity date. Appropriate market yields are determined based on credit, structure, and related Wall Street trades, quotes, and issuances.

The following table presents the fair value measurements of assets recognized in the accompanying balance sheet measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2011 and December 31, 2010 (dollars in thousands):

			Fair Value Measurements Using
Available-for-sale securities:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
At September 30, 2011:
Ginnie Mae and GSE mortgage-backed pass-through securities	$	36,368	$	—	$	36,368	$	—
Municipal securities		2,399		—		—		2,399
Mutual fund		1,768		1,768		—		—
	$	40,535	$	1,768	$	36,368	$	2,399
At December 31, 2010:
Ginnie Mae and GSE mortgage-backed pass-through securities	$	29,436	$	—	$	29,436	$	—
Ginnie Mae collateralized mortgage obligations		5,341		—		5,341
Municipal securities		2,164		—		2,164		—
Mutual fund		1,667		1,667		—		—
	$	38,608	$	1,667	$	36,941	$	—

The following is a reconciliation of the beginning and ending balance for the three months and nine months ended September 30, 2011 of fair value measurements recognized in the accompanying balance sheet using significant unobservable (Level 3) inputs (dollars in thousands):

	Three Months Ended		Nine Months Ended
	September 30, 2011		September 30, 2011
Beginning balance	$	—	$	—
Total realized and unrealized gains and losses
Included in net income		—		—
Included in other comprehensive income		78		78
Purchases, issuances and settlements		2,321		2,321
Transfers in or out of Level 3		—		—
Ending balance	$	2,399	$	2,399

Following is a description of valuation methodologies used for instruments measured at fair value on a non-recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Impaired Loans (Collateral Dependent)

Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.

Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

Other Real Estate Owned

The fair value of the Company's other real estate owned is determined using Level 3 inputs, which include current and prior appraisals and estimated costs to sell.

The following table presents the fair value measurements of assets recognized in the accompanying balance sheet measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2011 and December 31, 2010. The totals represent only those impaired loans and other real estate owned as of that date that experienced a change in fair value since the beginning of the year (dollars in thousands):

			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
At September 30, 2011:
Impaired loans	$	11,255	$	—	$	—	$	11,255
Other real estate owned		2,486		—		—		2,486
At December 31, 2010:
Impaired loans	$	17,388	$	—	$	—	$	17,388
Other real estate owned		4,028		—		—		4,028

Fair Value of Financial Instruments

Fair values are based on estimates using present value and other valuation techniques in instances where quoted market prices are not available. These techniques are significantly affected by the assumptions used, including discount rates and estimates of future cash flows. As such, the derived fair value estimates may not be realized upon an immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent, and should not be construed to represent, the underlying value of the Company.

The following table presents the estimates of fair value of financial instruments (dollars in thousands):

	September 30, 2011				December 31, 2010
	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets
Cash and cash equivalents	$	26,440	$	26,440	$	11,747	$	11,747
Investment securities available for sale		40,535		40,535		38,608		38,608
Loans held for sale		542		542		91		91
Loans		299,347		311,227		312,715		318,753
Stock in FHLB		4,472		4,472		5,101		5,101
Mortgage servicing rights		635		635		689		689
Interest and dividends receivable		984		984		1,065		1,065
Liabilities
Deposits		342,886		345,776		337,978		340,430
Borrowings		45,810		43,799		51,810		50,061
Drafts payable		1,973		1,973		1,594		1,594
Interest and dividends payable		620		620		143		143

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

Cash and Cash Equivalents and Stock in FHLB: The carrying amounts reported in the consolidated balance sheets approximate those assets' fair values.

Loans Held for Sale: The fair value approximates carrying value.

Loans: The fair values for loans are estimated using a discounted cash flow calculation that applies interest rates used to price new similar loans to a schedule of aggregated expected monthly maturities on loans.

Mortgage Servicing Rights: The initial amount recorded is an estimate of the fair value of the streams of net servicing revenues that will occur over the estimated life of the servicing arrangement, and the initial amount recorded is then amortized over the estimated life. The Bank engages a third party consulting firm to perform a valuation analysis of the fair value of the mortgage servicing rights at least annually.

Interest and Dividends Receivable/Payable: The fair value of accrued interest and dividends receivable/payable approximates carrying values.

Deposits: The fair values of non-maturity demand, savings, and money market accounts are equal to the amount payable on demand at the balance sheet date. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on deposits to a schedule of aggregated expected monthly maturities on deposits.

Borrowings: The fair value of borrowings is estimated using a discounted cash flow calculation, based on borrowing rates for periods comparable to the remaining terms to maturity of the borrowings.

Drafts Payable: The fair value approximates carrying value.