FAIR VALUE OF ASSETS AND LIABILITIES

9 Months Ended

Sep. 30, 2011

FAIR VALUE OF ASSETS AND LIABILITIES [Abstract]

NOTE F – FAIR VALUE OF ASSETS AND LIABILITIES

FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (ASC 820). ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.

ASC 820 defines the 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. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

In accordance with ASC 820, 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. These levels are:


	Level 1	Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. 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 which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in 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 and 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.

Available-for-Sale Securities

The fair value of available-for-sale securities is determined by various valuation methodologies. Where quoted market prices are available in an active market, securities are classified within Level 1. The Company has no securities classified within Level 1. If quoted market prices are not available, then fair values are estimated by using pricing models or quoted prices of securities with similar characteristics. Level 2 securities include U.S. Treasury securities, obligations of U.S. government corporations and agencies, obligations of states and political subdivisions, mortgage-backed securities and collateralized mortgage obligations. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The Company has no securities classified within Level 3.

The following table presents the Company's assets that are measured at fair value on a recurring basis and the level within the ASC 820 hierarchy in which the fair value measurements fell as of September 30, 2011 and December 31, 2010, (in thousands):

	Quoted		Models with			Models with		Carrying
	market		significant			significant		value
	prices in		observable			unobservable		in the
	active		market			market		Balance
	markets		parameters			parameters		Sheet

	Level 1		Level 2			Level 3		Total

September 30, 2011:
Available-for-sale securities
U. S. Government agencies	$	-	$	13,753		$	-	$	13,753
State and local political subdivisions		-		76,815	-		-		76,815
Mortgage-backed securities		-		36,775	-		-		36,775
	$	-	$	127,343		$	-	$	127,343

	Quoted		Models with			Models with		Carrying
	market		significant			significant		value
	prices in		observable			unobservable		in the
	active		market			market		Balance
	markets		parameters			parameters		Sheet

	Level 1		Level 2			Level 3		Total

December 31, 2010:
Available-for-sale securities
U. S. Government agencies	$	-	$	21,164		$	-	$	21,164
State and local political subdivisions		-		59,975	-		-		59,975
Mortgage-backed securities		-		43,308	-		-		43,308
	$	-	$	124,447		$	-	$	124,447

There were no transfers of financial assets among Level 1, Level 2 and Level 3 during 2011.

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

Impaired Loans

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 in accordance with the provisions of ASC 310, Receivables. Allowable methods for estimating fair value include using the fair value of the collateral for collateral dependent loans or, where a loan is determined not to be collateral dependent, using the discounted cash flow method.

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. If the impaired loan is determined not to be collateral dependent, then the discounted cash flow method is used. This method requires the impaired loan to be recorded at the present value of expected future cash flows discounted at the loan's effective interest rate. The effective interest rate of a loan is the contractual interest rate adjusted for any net deferred loan fees or costs, premiums or discount existing at origination or acquisition of the loan. Impaired loans are classified within Level 3 of the fair value hierarchy.

The following table presents the fair value measurement of impaired loans measured at fair value on a nonrecurring basis and the level within the ASC Topic 820 fair value hierarchy in which the fair value measurements fell at September 30, 2011 and December 31, 2010, (in thousands):

September 30, 2011

	Carrying		Quoted		Models with		Models with
	value		market		significant		significant
	in the		prices in		observable		unobservable
	Balance		active		market		market
	Sheet		markets		parameters		parameters

	Fair Value		Level 1		Level 2		Level 3
Impaired Loans
Real estate - construction
and development	$	6,976	$	-	$	-	$	6,976
Real estate - farmland		-		-		-		-
Real estate - 1-4 family
residential		-		-		-		-
Nonfarm/Nonresidential		1,679		-		-		1,679
Commerical and industrial		-		-		-		-
Consumer		-		-		-		-
Total impaired loans	$	8,655	$	-	$	-	$	8,655

December 31, 2010
	Carrying		Quoted		Models with		Models with
	value		market		significant		significant
	in the		prices in		observable		unobservable
	Balance		active		market		market
	Sheet		markets		parameters		parameters

	Fair Value		Level 1		Level 2		Level 3
Impaired Loans	$	17,091	$	-	$	-	$	17,091

Total loans analyzed for impairment had a carrying amount of $31,186,000 at September 30, 2011. Of this amount, $8,655,000 had a reserve allocated of $2,177,000. Total loans analyzed for impairment at December 31, 2010 totaled $45,262,000 of which $17,091,000 had a reserve allocated of $2,879,000.

Other Real Estate Owned

Other real estate owned acquired through loan foreclosure is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined the fair value declines subsequent to foreclosure, a valuation allowance is recorded through non-interest expense. Operating costs associated with the assets after acquisition are also recorded as non-interest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other non-interest expense. Other real estate owned measured at fair value on a non-recurring basis at September 30, 2011 and December 31, 2010, amounted to $15.2 million and $8.2 million, respectively, with the remainder carried at cost.

The following table presents the fair value measurement of assets and liabilities measured at fair value on a nonrecurring basis and the level within the ASC 820 fair value hierarchy in which the fair value measurements fell at September 30, 2011 and December 31, 2010, (in thousands):

September 30, 2011

Carrying

Quoted

Models with

value

market

significant

in the

prices in

observable

unobservable

Balance

active

market

Sheet

markets

parameters

Fair Value

Level 1

Level 2

Level 3

Other real estate owned

15,189

December 31, 2010

Carrying

Quoted

Models with

value

market

significant

in the

prices in

observable

unobservable

Balance

active

market

Sheet

markets

parameters

Fair Value

Level 1

Level 2

Level 3

Other real estate owned

8,233

The following disclosure of the estimated fair value of financial instruments is made in accordance with ASC 825 Financial Instruments. The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Cash Equivalents – For such short-term instruments, the carrying amount is a reasonable estimate of fair value.

Securities – For securities held as investments, fair value equals market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Fair value of other securities, which consist of FHLB and First National Banker's Bankshares, is estimated to be the carrying value, which is par.

Loans – The fair value of loans is estimated by discounting the future cash flows 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 values of demand deposits are, as required by ASC 825, equal to the carrying value of such deposits. Demand deposits include noninterest-bearing demand deposits, savings accounts, NOW accounts, and money market demand accounts. The fair value of variable rate term deposits, those repricing within six months or less, approximates the carrying value of these deposits. Discounted cash flows have been used to value fixed rate term deposits and variable rate term deposits repricing after six months. The discount rate used is based on interest rates currently being offered on comparable deposits as to amount and term.

FHLB and Other Borrowings – The fair value of the fixed rate borrowings are estimated using discounted cash flows, based on current incremental borrowing rates for similar types of borrowing arrangements. The carrying amount of any variable rate borrowings approximates their fair values.

Off-Balance Sheet Instruments – Fair values of off-balance sheet financial instruments are based on fees charged to enter into similar agreements. However, commitments to extend credit do not represent a significant value until such commitments are funded or closed. Management has determined that these instruments do not have a distinguishable fair value and no fair value has been assigned.

The estimated fair values of the financial instruments, none of which are held for trading purposes, were as follows:

	September 30, 2011				December 31, 2010
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
	(In thousands)				(In thousands)
Financial assets:
Cash and cash equivalents	$	28,378	$	28,378	$	15,264	$	15,264
Federal funds sold		19,290		19,289		31,270		31,269
Certificates of deposit with
other banks		1,538		1,538		1,778		1,778
Securities available-for-sale		127,343		127,343		124,447		124,447
Securities held-to-maturity		48,341		48,436		33,095		32,541
Securities, other		1,937		1,937		1,933		1,933
Loans		239,553		241,617		247,764		249,898
Financial liabilities:
Noninterest-bearing deposits		82,880		64,956		74,022		58,013
Interest-bearing deposits		338,136		322,013		334,721		318,760
FHLB and other borrowings		25,252		27,037		26,970		28,671

- 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

Reference 1: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

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Reference 2: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 159

-Paragraph 17-22, 27, 28

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 3: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 825

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-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 5: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

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Reference 8: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

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-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

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Reference 10: http://www.xbrl.org/2003/role/presentationRef

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-Name Accounting Standards Codification

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-Name Statement of Financial Accounting Standard (FAS)

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-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 13: http://www.xbrl.org/2003/role/presentationRef

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SECURITY CAPITAL CORP/MS 10-Q/A