Annual report pursuant to Section 13 and 15(d)

FAIR VALUE

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FAIR VALUE
 12 Months Ended
Dec. 31, 2011
Fair Value [Abstract]  
FAIR VALUE
NOTE 5 – FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  The three levels of inputs that may be used to measure fair value include:

Level 1:  Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2:  Significant other 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.
Level 3:  Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Securities:  The fair values of investment securities are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities.  The pricing service utilizes evaluated pricing models that vary based on asset class and include available trade, bid, and other market information.  The methodology used includes broker quotes, proprietary modes, vast descriptive terms and conditions databases as well as extensive quality control programs (Level 2 inputs).

Loans Held for Sale:  The fair value of loans held for sale is based upon binding quotes from 3rd party investors (Level 2 inputs).

Impaired Loans:  The fair value of impaired loans with specific fair value based allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Other Real Estate Owned:  Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification.   In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

Assets measured at fair value on a recurring basis are summarized below (in thousands):

   
 
 
Fair Value
    
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
    
Significant Other
Observable Inputs
(Level 2)
    
Significant
Unobservable
Inputs
(Level 3)
  
                         
December 31, 2011
                        
US Treasury and federal agency securities
   $ 31,499     $ ---     $ 31,499     $ ---  
Tax-exempt state and municipal bonds
     4,408       ---       4,408       ---  
Taxable state and municipal bonds
     16,716       ---       16,716       ---  
Corporate bonds
     1,081       ---       1,081       ---  
Other equity securities
     1,042       ---       1,042       ---  
Loans held for sale
     1,026       ---       1,026       ---  
                                 
December 31, 2010
                                
US Treasury and federal agency securities
   $ 8,109     $ ---     $ 8,109     $ ---  
State and municipal bonds
     ---       ---       ---       ---  
Corporate bonds
     ---       ---       ---       ---  
Other equity securities
     1,011       ---       1,011       ---  
Loans held for sale
     2,537       ---       2,537       ---  
 
Assets measured at fair value on a non-recurring basis are summarized below (in thousands):

   
 
 
Fair Value
    
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
    
Significant Other
Observable Inputs
(Level 2)
    
Significant
Unobservable
Inputs
(Level 3)
  
                         
December 31, 2011
                        
Impaired loans
   $ 22,525     $ ---     $ ---     $ 22,525  
Other real estate owned
     39,730       ---       ---       39,730  
                                 
December 31, 2010
                                
Impaired loans
   $ 37,173     $ ---     $ ---     $ 37,173  
Other real estate owned
     32,262       ---       ---       32,262  

The following represent impairment charges recognized during the period:

Impaired loans which are measured for impairment using the fair value of the collateral had a carrying amount of $22.5 million net of a valuation allowance of $6.8 million at December 31, 2011, resulting in an additional provision for loan losses of approximately $3.3 million for the year.  Impaired loans which are measured for impairment using the fair value of the collateral had a carrying amount of $37.2 million net of a valuation allowance of $5.6 million at December 31, 2010, resulting in an additional provision for loan losses of approximately $409,000 for the year.

Other real estate owned measured using the fair value of collateral, had a carrying amount of $39.7 million net of a valuation allowance of $17.2 million at December 31, 2011 resulting in write-downs of approximately $9.9 million for the year ending December 31, 2011.  Other real estate owned measured using the fair value of collateral, had a carrying amount of $32.3 million net of a valuation allowance of $10.4 million at December 31, 2010 resulting in write-downs of approximately $8.3 million for the year ending December 31, 2010.

Carrying amount and estimated fair value of financial instruments, not previously presented, were as follows at year-end (dollars in thousands).

   
2011
    
2010
  
   
Carrying
Amount
    
Fair
Value
    
Carrying
Amount
    
Fair
Value
  
Financial assets
                        
Cash and cash equivalents
   $ 243,042     $ 243,042     $ 236,127     $ 236,127  
Securities held to maturity
     300       300       83       83  
FHLB stock
     11,236    
NA
       11,932    
NA
  
Loans, net
     1,039,334       1,047,291       1,169,770       1,169,497  
Accrued interest receivable
     3,595       3,595       3,845       3,845  
                                 
Financial liabilities
                                
Deposits
     (1,215,289 )     (1,216,452 )     (1,276,620 )     (1,280,238 )
Other borrowed funds
     (148,603 )     (151,566 )     (185,336 )     (187,104 )
Long-term debt
     (41,238 )     (34,820 )     (41,238 )     (34,506 )
Subordinated debt
     (1,650 )     (1,650 )     (1,650 )     (1,650 )
Accrued interest payable
     (3,517 )     (3,517 )     (2,401 )     (2,401 )
                                 
Off-balance sheet credit-related items
                                
Loan commitments
     ---       ---       ---       ---  
 
The methods and assumptions used to estimate fair value are described as follows.

Carrying amount is the estimated fair value for cash and cash equivalents, short-term borrowings, accrued interest receivable and payable, demand deposits, and variable rate loans or deposits that reprice frequently and fully.  Security fair values are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities as discussed above.  For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk (including consideration of widening credit spreads).  Fair value of debt is based on current rates for similar financing.  It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.  The fair value of off-balance-sheet credit-related items is not significant.