Disclosure About Fair Value Of Financial Instruments

9 Months Ended

Sep. 30, 2012

Disclosure About Fair Value Of Financial Instruments [Abstract]

Disclosure About Fair Value Of Financial Instruments

Note 3 – Disclosure About Fair Value of Financial Instruments

The following summary presents an estimate of the fair value of the Company’s financial instruments. Because no active market readily exists for a portion of the Company’s financial instruments, fair values of some financial instruments are based on estimates using present value and other valuation techniques. Much of the information used to determine fair value is highly subjective in nature and therefore the results may not be precise. The subjective factors include, among other things, estimates of cash flows, risk characteristics, credit quality and interest rates, all of which are subject to change. Accordingly, the amounts that will actually be realized or paid upon settlement or maturity of the various instruments could be significantly different.

The following table presents the carrying amounts, fair value and level of input of those financial instruments whose fair value differs from carrying amount at September 30, 2012 and December 31, 2011.



	At September 30, 2012

	Carrying
	Amount		Fair Value		Level 1		Level 2		Level 3

Financial Assets:	(in thousands)
Loans held for investment	$	213,082	$	216,733	$	-	$	1,494	$	215,239

Financial liabilities:
Deposits	$	272,624	$	272,691	$	-	$	272,691	$	-
Other borrowings		545		573		-		-		573



	At December 31, 2011

	Carrying
	Amount		Fair Value		Level 1		Level 2		Level 3

Financial Assets:	(in thousands)
Loans held for investment	$	213,183	$	219,056	$	-	$	-	$	219,056

Financial liabilities:
Deposits	$	249,978	$	250,167	$	-	$	250,167	$	-
Other borrowings		782		823		-		-		823

Fair Value Hierarchy

“Fair Value Measurements and Disclosures” establishes three levels of inputs that may be used to measure fair value:

Level 1: Valuation is based on quoted prices in active markets for identical assets or liabilities.

Level 2: Valuation is based on 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 or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

Level 3: Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Investment Securities Available for Sale

Investment securities available for sale are recorded at fair value on a recurring basis. Fair value is measured by quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models 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 assumptions. Level 2 securities include Treasury notes and bills, mortgage-backed securities issued by government sponsored entities, municipal bonds and other securities issued by government sponsored agencies.

Loans

The Company does not record loans at fair value on a recurring basis. Fair value is measured using modeling software that incorporates various assumptions based on observable market data such as interest rate fluctuations and cash flow data. From time to time, a loan is considered impaired. Loans that are deemed to be impaired are valued in accordance with guidance related to receivables. The fair value of impaired loans is estimated using one of several methods, including collateral value, liquidation value and discounted cash flows.

When the fair value of collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as Level 2. If the fair value of the loan is based on criteria other than observable market prices or current appraised value, the loan is recorded as Level 3.

Other Real Estate Owned

Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Foreclosed assets are carried at the lower of the carrying value or fair value. Once management’s intentions change regarding the utilization of its own property, that property is transferred to other real estate owned at fair value. Fair value is based upon independent observable market prices or appraised values of the collateral, which the Company considers to be Level 2 inputs. The Company may, from time to time, revise its evaluation of the fair value of a property and provide an allowance based on subjective criteria such as declines in assessed value, which the Company considers to be Level 3 inputs.

Other Financial Assets

Other financial assets are recorded at fair value on a recurring basis. Fair value is based on quoted market prices which are considered to be Level 2 inputs.

General

The Company has no liabilities carried at fair value or measured at fair value on a recurring or nonrecurring basis.



Assets Recorded at Fair Value on a Recurring Basis

	At September 30, 2012
	Total		Level 1		Level 2		Level 3

	(in thousands)
Investment in securities available for sale:
U.S. Treasury notes	$	2,031	$	-	$	2,031	$	-
U.S. government sponsored enterprises		24,157		-		24,157		-
Other financial assets		284		-		284		-
Total assets at fair value	$	26,472	$	-	$	26,472	$	-



Assets Recorded at Fair Value on a Recurring Basis

	At December 31, 2011
	Total		Level 1		Level 2		Level 3

	(in thousands)
Investment in securities available for sale:
U.S. Treasury notes	$	2,043	$	-	$	2,043	$	-
U.S. government sponsored enterprises		34,188		-		34,188		-
Mortgage-backed securities		9,079		-		9,079		-
Other financial assets		245		-		245		-
Total assets at fair value	$	45,555	$	-	$	45,555	$	-



Assets Recorded at Fair Value on a Non-Recurring Basis

	At September 30, 2012
	Total		Level 1		Level 2		Level 3

	(in thousands)

Impaired loans
Real estate-commercial	$	794	$	-	$	794	$	-
Real estate-construction		791		-		791		-
Other real estate owned		591		-		591		-
Total assets at fair value	$	2,176	$	-	$	2,176	$	-



	At December 31, 2011
	Total		Level 1		Level 2		Level 3

		(in thousands)

Other real estate owned	$	1,719	$	-	$	1,719	$	-
Total assets at fair value	$	1,719	$	-	$	1,719	$	-

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

-Publisher FASB

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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 6: http://www.xbrl.org/2003/role/presentationRef

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

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+ Details

HERITAGE BANKSHARES INC /VA 10-Q