Fair Value

9 Months Ended

Sep. 30, 2012

Fair Value [Abstract]

Fair Value

(3) Fair Value

The Company records investments available for sale, loans held-for-sale, other real estate owned (“OREO”), mortgage servicing rights and impaired loans at fair value. Fair value measurement is determined based on the assumptions that market participants would use in pricing the asset or liability in an exchange. The definition of fair value includes the exchange price which is the price in an orderly transaction between market participants to sell an asset or transfer a liability in the principal market for the asset or liability. Market participant assumptions include assumptions about risk, the risk inherent in a particular valuation technique used to measure fair value and/or the risk inherent in the inputs to the valuation technique, as well as the effect of credit risk on the fair value of liabilities. The Company uses three levels of the fair value inputs to measure assets, as described below.

Basis of Fair Value Measurement:

Level 1 – Valuations based on quoted prices in active markets for identical investments.

Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Level 2 inputs include: (i) quoted prices for similar investments in active markets; (ii) quoted prices for identical investments traded in non-active markets (i.e., dealer or broker markets); and (iii) inputs other than quoted prices that are observable or inputs derived from or corroborated by market data for substantially the full term of the investment.

Level 3 – Valuations based on inputs that are unobservable, supported by little or no market activity, and significant to the overall fair value measurement.

The following table presents the carrying amounts and fair values of the Company’s financial instruments. FASB ASC 825, “Financial Instruments,” defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation: (in thousands)

	Level in Fair  Value Heirarchy	September 30, 2012				December 31, 2011
		Carrying Amount		Fair Value		Carrying Amount		Fair Value
Cash and due from banks	Level 1	$	402,704	$	402,704	$	172,559	$	172,559
Cash equivalents	Level 2		1,642		1,642		—		—
Federal Reserve Bank, Federal Home Loan Bank and Other Stock Bank and Other Stock	N/A		2,368		N/A		2,536		N/A
Investment securities held to maturity	Level 2		8,164		9,049		9,315		10,161
Investment securities available for sale	Level 2/3 (1)		328,668		328,668		299,204		299,204
Loans Held-for-Sale	Level 2		7,000		7,000		—		—
Loans, net of allowance	Level 2		745,548		772,759		929,696		960,070
Accrued interest and loan fees receivable	Level 2		5,572		5,572		6,885		6,885
Non-maturity Deposits	Level 2		1,125,117		1,125,117		1,056,923		1,056,923
Time Deposits	Level 2		247,997		250,130		254,949		257,267
Accrued interest payable	Level 2		287		287		348		348

(1) See table that follows for Level 2 and 3 components.

Fair value estimates are made at a specific point in time and may be based on judgments regarding losses expected in the future, risk, and other factors that are subjective in nature. The methods and assumptions used to produce the fair value estimates follow.

Short-term financial instruments are valued at the carrying amounts included in the condensed consolidated statements of condition, which are reasonable estimates of fair value due to the relatively short term nature of the instruments. This approach applies to cash and cash equivalents; accrued interest and loan fees receivable; non-interest-bearing demand deposits; N.O.W., money market, and saving accounts; and accrued interest payable. Certificates of deposit are valued using a replacement cost of funds approach.

Fair values are estimated for portfolios of loans with similar characteristics. Loans are segregated by class. The fair value of performing loans was calculated by discounting scheduled cash flows through their estimated maturity using estimated market discount rates that reflect the credit and interest rate risk of the loan. Estimated maturity is based on the Bank’s history of repayments for each type of loan and an estimate of the effect of the current economy. Fair value for significant non-performing loans is based on recent external appraisals of collateral, if any. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the associated risk. Assumptions regarding credit risk, cash flows, and discount rates are made using available market information and specific borrower information.

The fair value of loans held-for-sale is based upon binding contracts from third party investors.

Assets measured at fair value on a non-recurring basis were as follows: (in thousands)

Fair Value Measurements Using
Description	September 30, 2012		Significant Unobservable Inputs (Level 3)
Impaired loans	$	28,928	$	28,928
Loans held-for-sale		7,000		7,000
Other real estate owned		1,572		1,572
Mortgage servicing rights		1,723		1,723
Total	$	39,223	$	39,223

Fair Value Measurements Using
Description	December 31, 2011		Significant Unobservable Inputs (Level 3)
Impaired loans	$	118,613	$	118,613
Other real estate owned		1,800		1,800
Mortgage servicing rights		1,623		1,623
Total	$	122,036	$	122,036

Impaired loans are evaluated and valued at the time the loan is identified as impaired. The loans are measured based on the value of the collateral securing these loans, or techniques that are not based on market activity for loans that are not collateral dependent and require management’s judgment. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable. The value of real estate collateral is determined based on appraisals by qualified licensed appraisers hired by the Company. The value of business equipment may be based on an appraisal by qualified licensed appraisers hired by the Company if significant, or may be valued based on the equipment’s net book value on the business’ financial statements. Inventory and accounts receivable collateral may be valued based on independent field examiner review or aging reports, if significant. Reviews by field examiners may be conducted based on the loan exposure and reliance on this type of collateral. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

The following tables summarize the valuation of financial instruments measured at fair value on a recurring basis in the condensed consolidated statements of condition at September 30, 2012 and December 31, 2011, including the additional requirement to segregate classifications to correspond to the major security type classifications utilized for disclosure purposes: (in thousands)

Fair Value Measurements Using
Description	September 30, 2012		Significant Other Observable Inputs (Level 2)
U.S. Government Agency securities	$	12,136	$	12,136
Obligations of states and political subdivisions		170,411		170,411
Collateralized mortgage obligations		95,964		95,964
Mortgage-backed securities		37,056		37,056
Corporate Bonds		13,101		13,101
Total	$	328,668	$	328,668

Fair Value Measurements Using
Description	December 31, 2011		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Obligations of states and political subdivisions	$	171,992	$	171,992	$	—
Collateralized mortgage obligations		126,770		118,776		7,994
Mortgage-backed securities		442		442		—
Total	$	299,204	$	291,210	$	7,994

There were no transfers between, into and/or out of Levels 1 or 2 during the quarter ended September 30, 2012. For the quarter ended September 30, 2012, there were no longer any assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) due to the sale of two private label collateralized mortgage obligation (“CMO”) securities during the third quarter of 2012 as part of management’s efforts to reduce overall balance sheet risk. These securities had previously been written down $1.1 million in the fourth quarter of 2011 due to other than temporary impairment evident at that time. The Company owns no other private label CMOs.

The table below presents a reconciliation for the CMOs measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarter ended September 30, 2012:

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
(in thousands)
Balance at June 30, 2012	$	7,425
Other-than-temporary impairment		—
Included in other comprehensive income		—
Sales		(7,425	)
Balance at September 30, 2012	$	—

The types of instruments valued based on quoted market prices in active markets include most U.S. Treasury securities. Such instruments are generally classified within level 1 and level 2 of the fair value hierarchy. The Company does not adjust the quoted price for such instruments.

The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include U.S. Government agency securities, state and municipal obligations, mortgage-backed securities, collateralized mortgage obligations and corporate bonds. Such instruments are generally classified within level 2 of the fair value hierarchy.

The types of instruments valued based on significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability are generally classified within level 3 of the fair value hierarchy. The significant unobservable inputs used in the fair value measurements of the Company’s level 3 CMOs at December 31, 2011 were voluntary prepayment rates, conditional default rates and loss severity in the event of default. Significant increases or decreases in any of those inputs in isolation would result in a significantly higher or lower fair value measurement. Generally, a change in the assumption used for the conditional default rates is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for voluntary prepayment rates.

FASB ASC 820, “Fair Value Measurements and Disclosures,” provides additional guidance in determining fair values when the volume and level of activity for the asset or liability have significantly decreased, particularly when there is no active market or where the price inputs being used represent distressed sales. It also provides guidelines for making fair value measurements more consistent with principles, reaffirming the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets become inactive.

The fair value of commitments to extend credit was estimated by either discounting cash flows or using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the current creditworthiness of the counterparties. The fees charged for commitments to extend credit were not material in amount.

The estimated fair value of written financial guarantees and letters of credit is based on fees currently charged for similar agreements. The contractual amounts of these commitments were $18,705,000 and $19,841,000 at September 30, 2012 and December 31, 2011, respectively. The fees charged for the commitments were not material in amount.