Fair Value Measurement

12 Months Ended

Dec. 31, 2011

Note 6: Fair Value Measurement

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Available-for-sale investment securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets and liabilities on a nonrecurring basis.

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments.

Cash and cash equivalents: The carrying amounts of cash and short-term instruments, including Federal Funds sold approximate fair values.

Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are unavailable, fair values are based on quoted market prices of comparable instruments or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions, and other factors such as credit loss and liquidity assumptions. As such, we classify investments as Level 2.

FHLB stock: The redeemable carrying amount of these securities with limited marketability approximates their fair value.

Mortgage loans held for sale: Mortgage loans held for sale are carried at the lower of cost or fair value. Fair value is based on independent quoted market prices of the purchasers. Quoted market prices are based on what secondary markets are currently offering for portfolios with similar characteristics. As such, we classify those loans subjected to nonrecurring fair value adjustments as Level 2.

Loans: For variable-rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans (e.g., real estate mortgage, commercial, and installment) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The resulting amounts are adjusted to estimate the effect of declines, if any, in the credit quality of borrowers since the loans were originated. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposits: Demand, savings, and money market deposits are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for variable rate certificates of deposit approximate their recorded carrying value. Fair values for fixed-rate certificates of deposit are estimated using discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Accrued interest: The carrying amounts of accrued interest approximate fair value.

Off-balance-sheet credit-related instruments: Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into consideration the remaining terms of the agreements and the counterparties’ credit standings. The Bank does not charge fees for lending commitments; thus it is not practicable to estimate the fair value of these instruments.

The preceding methods described may produce a fair value calculation that may not be indicative of the net realized value or reflective of the future fair values. Furthermore, although the Company believes its valuations methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions could result in a different fair value measurement.

Assets Recorded at Fair Value on a Recurring Basis

All of the Bank’s securities available-for-sale are classified within Level 2 of the valuation hierarchy as quoted prices for similar assets are available in an active market.

The following table presents the financial instruments carried at fair value on a recurring basis as of December 31, 2011 and 2010 (000s omitted), by valuation hierarchy level (as described above). The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values (dollars in thousands).

As of December 31, 2011	Level 1		Level 2		Level 3		Total
Securities available for sale
U.S. government agencies	$	—	$	1,998	$	—	$	1,998
Mortgage-backed securities		—		2,666		—		2,666
Total	$	—	$	4,664	$	—	$	4,664

As of December 31, 2010		Level 1		Level 2		Level 3		Total
Securities available for sale
U.S. government agencies	$	—	$	1,485	$	—	$	1,485
Mortgage-backed securities		—		2,309		—		2,309
Total	$	—	$	3,794	$	—	$	3,794

Estimated Fair Values of Financial Instruments Not Recorded at Fair Value in their Entirety on a Recurring Basis:

The Bank also has assets that under certain conditions are subject to fair value on a non-recurring basis. These assets are not normally measured at fair value, but can be subject to fair value adjustments in certain circumstances, such as impairment. Assets measured at fair value on a non-recurring basis are as follows:

As of December 31, 2011	Level 1		Level 2		Level 3		Total
Impaired Loans
Commercial Real Estate	$	—	$	—	$	690	$	690

As of December 31, 2010, there were no assets or liabilities subject to fair value on a nonrecurring basis.

The following table provides a reconciliation of all assets measured at fair value on a nonrecurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2011 (dollars in thousands).

	Impaired Loans
Balance at December 31, 2010	$	—
Net transfers in		690
Change in valuation allowance		—
Balance at December 31, 2011	$	690

Disclosure of the estimated fair values of financial instruments, which differ from carrying values, often requires the use of estimates. In cases where quoted market values in an active market are not available, the Company uses present value techniques and other valuation methods to estimate the fair values of its financial instruments. These valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used.

The carrying amount and estimated fair value of financial instruments not recorded at fair value in their entirety on a recurring basis on the Company’s consolidated balance sheets are as follows as of December 31 (dollars in thousands):

	2011				2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets

Cash and cash equivalents	$	6,928	$	6,928	$	4,443	$	4,443
Net loans		67,437		67,445		43,032		43,295
Federal Home Loan Bank Stock		81		81		33		33
Accrued interest receivable		198		198		143		143

Financial liabilities
Noninterest bearing deposits		9,520		9,520		4,534		4,534
Interest bearing deposits		59,489		59,626		36,108		36,151
Accrued interest payable		32		32		23		23

- 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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+ Details

GRAND RIVER COMMERCE INC 10-K