Fair Value

6 Months Ended

Jun. 30, 2011

Fair Value

Fair Value

(4) Fair Value

Suffolk records investments available for sale 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. Suffolk uses three levels of the fair value inputs to measure assets, as described below.

Basis of Fair Value Measurement:

Level 1 - Unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 - Quoted prices in markets that are not active, or inputs that use pricing models or matrix pricing;

Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

The following table presents the carrying amounts and fair values of Suffolk'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)

	June 30, 2011				December 31, 2010 Restated
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Cash & cash equivalents	$	165,206	$	165,206	$	41,149	$	41,149
Investment securities available for sale		321,890		321,890		396,670		396,670
Investment securities held to maturity		9,683		10,479		10,016		10,703
Total Loans, net		1,059,256		1,090,318		1,112,279		1,144,678
Accrued interest and loan fees receivable		6,696		6,696		7,025		7,025
Deposits		1,415,208		1,417,162		1,402,753		1,404,514
Borrowings		—		—		40,000		41,387
Accrued interest payable		410		410		591		591

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 consolidated statements of condition, which are reasonable estimates of fair value due to the relatively short term 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. Federal Home Loan Bank advances/borrowings are measured using a discounted replacement cost of funds approach.

Fair values are estimated for portfolios of loans with similar characteristics. Loans are segregated by type. The fair value of performing loans was calculated by discounting scheduled cash flows through the 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 carrying amount and fair value of loans were as follows: (in thousands)

	June 30, 2011				December 31, 2010 Restated
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Commercial, financial & agricultural	$	239,432	$	243,369	$	248,750	$	253,153
Commercial real estate		436,511		454,868		431,179		449,418
Real estate construction loans		68,148		68,357		82,720		83,389
Residential mortgages (1st & 2nd liens)		175,389		182,947		195,993		203,909
Home equity loans		81,824		81,845		84,696		84,719
Consumer loans, net of unearned discounts		57,509		58,489		67,814		68,963
Other loans		443		443		1,127		1,127
Totals	$	1,059,256	$	1,090,318	$	1,112,279	$	1,144,678

Other assets measured at fair value were as follows: (in thousands)

			Fair Value Measurements Using
Description	June 30, 2011		Active Markets for Identical Assets Quoted Prices (Level 1)		Significant Other Observable  Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	109,238	$	—	$	—	$	109,238
Other real estate owned		1,800		—		—		1,800
Mortgage servicing rights (1)		1,658		—		—		1,658
Total	$	112,696	$	—	$	—	$	112,696

(1) Mortgage servicing rights are measured at fair value on a recurring basis.

			Fair Value Measurements Using
Description	December 31, 2010 Restated		Active Markets for Identical Assets Quoted Prices (Level 1)		Significant Other Observable  Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans (restated)	$	90,825	$	—	$	—	$	90,825
Other real estate owned (restated)		5,719		—		—		5,719
Mortgage servicing rights (1)		1,596		—		—		1,596
Total	$	98,140	$	—	$	—	$	98,140

(1) Mortgage servicing rights are measured at fair value on a recurring basis.

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 Suffolk. The value of business equipment may be based on an appraisal by qualified licensed appraisers hired by Suffolk 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 fair value of the investment portfolio, including mortgage-backed securities, was based on quoted market prices or market prices of similar instruments.

The following tables summarize the valuation of financial instruments measured at fair value on a recurring basis in the consolidated statements of condition at June 30, 2011 and December 31, 2010, 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	June 30, 2011		Active Markets for Identical Assets Quoted Prices (Level 1)		Significant Other Observable  Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Treasury securities	$	2,003	$	2,003	$	—	$	—
U.S. government agency debt		7,061		7,061		—		—
Collateralized mortgage obligations		144,666		—		144,666		—
Mortgage-backed securities		465		—		465		—
Obligations of states and political subdivisions		167,695		—		167,695		—
Total	$	321,890	$	9,064	$	312,826	$	—

			Fair Value Measurements Using
Description	December 31, 2010		Active Markets for Identical Assets Quoted Prices (Level 1)		Significant Other Observable  Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Treasury securities	$	8,102	$	8,102	$	—	$	—
U.S. government agency debt		22,495		22,495		—		—
Collateralized mortgage obligations		162,323		—		162,323		—
Mortgage-backed securities		510		—		510		—
Obligations of states and political subdivisions		203,240		—		203,240		—
Total	$	396,670	$	30,597	$	366,073	$	—

The types of instruments valued based on quoted market prices in active markets include most U.S. government debt and agency debt securities. Such instruments are generally classified within level 1 and level 2 of the fair value hierarchy. Suffolk 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 state and municipal obligations, mortgage-backed securities and collateralized mortgage obligations. Such instruments are generally classified within level 2 of the fair value hierarchy.

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 certificates of deposit is calculated by discounting cash flows with applicable origination rates. At June 30, 2011, the fair value of certificates of deposit totaling $292,476,000 had a carrying value of $290,520,000.

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.

Credit in the form of revolving open-end lines secured by one-to-four-family residential properties, commercial real estate, construction and land development loans, and lease financing arrangements was $95,520,000 and $123,672,000 as of June 30, 2011 and December 31, 2010, respectively.

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 $49,320,000 and $58,319,000 at June 30, 2011 and December 31, 2010, respectively. The fees charged for the commitments were not material in amount.