Quarterly report pursuant to Section 13 or 15(d)

Fair Value

 v2.3.0.11
Fair Value
 6 Months Ended
Jun. 30, 2011
Fair Value [Abstract]  
Fair Value
NOTE 5 – FAIR VALUE

ASC Topic 820, Fair Value Measurements and Disclosures, 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.  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.
 
Investment 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 but rather by relying on the securities' relationship to other benchmark quoted securities (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 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:  Adjustments to 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 through a valuation allowance.

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)
  
June 30, 2011
                        
U.S. Treasury and federal agency securities
   $ 15,826     $ ---     $ 15,826     $ ---  
State and municipal bonds
     5,887       ---       5,887       ---  
Other equity securities
     1,022       ---       1,022       ---  
Loans held for sale
     467       ---       467       ---  
                                 
December 31, 2010
                                
U.S. federal agency securities
   $ 8,109     $ ---     $ 8,109     $ ---  
State and municipal 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)
  
June 30, 2011
                        
Impaired loans
   $ 13,401     $ ---     $ ---     $ 13,401  
Other real estate owned
     57,444       ---       ---       57,444  
                                 
December 31, 2010
                                
Impaired loans
   $ 37,173     $ ---     $ ---     $ 37,173  
Other real estate owned
     32,262       ---       ---       32,262  
 
The carrying amounts and estimated fair values of financial instruments, not previously presented, were as follows at June 30, 2011 and December 31, 2010 (dollars in thousands).

   
June 30, 2011
    
December 31, 2010
  
   
Carrying
    
Fair
    
Carrying
    
Fair
  
   
Amount
    
Value
    
Amount
    
Value
  
Financial assets
                        
Cash and cash equivalents
   $ 266,705     $ 266,705     $ 236,127     $ 236,127  
Securities held to maturity
     ---       ---       83       83  
FHLB stock
     11,236       N/A       11,932       N/A  
Loans, net
     1,061,699       1,071,233       1,169,770       1,169,497  
Accrued interest receivable
     3,588       3,588       3,845       3,845  
                                 
Financial liabilities
                                
Deposits
     (1,202,556 )     (1,203,433 )     (1,276,620 )     (1,280,238 )
Other borrowed funds
     (174,270 )     (176,727 )     (185,336 )     (187,104 )
Long-term debt
     (41,238 )     (34,564 )     (41,238 )     (34,506 )
Subordinated debt
     (1,650 )     (1,650 )     (1,650 )     (1,650 )
Accrued interest payable
     (2,918 )     (2,918 )     (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.