ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

6 Months Ended

Jun. 30, 2011

ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

FASB ASC No. 820-10 defines fair value as 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. FASB ASC 820-10 also 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 standard describes three levels of inputs that may be used to measure fair values:

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.

The fair value of securities available for sale is determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or 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).

Assets and liabilities measured on a recurring basis:

			Fair Value Measurements at
			June 30, 2011 Using:
				Significant
			Quoted Prices In	Other		Significant
			Active Markets for	Observable		Unobservable
	Carrying		Identical Assets	Inputs		Inputs
(In thousands)	Value		(Level 1)	(Level 2)		(Level 3)
Financial Assets:
Available for sale securities:
U.S. GSE securities	$	95,292		$	95,292
State and municipal obligations	41,160			41,160
U.S. GSE residential mortgage-backed securities	81,144			81,144
U.S. GSE residential collateralized mortgage obligations	168,314			168,314
Total available for sale	$	385,910		$	385,910

			Fair Value Measurements at
			December 31, 2010 Using:
				Significant
			Quoted Prices In	Other		Significant
			Active Markets for	Observable		Unobservable
	Carrying		Identical Assets	Inputs		Inputs
(In thousands)	Value		(Level 1)	(Level 2)		(Level 3)
Financial Assets:
Available for sale securities:
U.S. GSE securities	$	41,333		$	41,333
State and municipal obligations	48,065			48,065
U.S. GSE residential mortgage-backed securities	80,171			80,171
U.S. GSE residential collateralized mortgage obligations	153,970			153,970
Total available for sale	$	323,539		$	323,539

Assets measured at fair value on a non-recurring basis are summarized below:

			Fair Value Measurements at
			June 30, 2011 Using:
				Significant
			Quoted Prices In	Other	Significant
			Active Markets for	Observable	Unobservable
	Carrying		Identical Assets	Inputs	Inputs
(In thousands)	Value		(Level 1)	(Level 2)	(Level 3)
Impaired loans	$	590			$	590

			Fair Value Measurements at
			December 31, 2010 Using:
				Significant
			Quoted Prices In	Other	Significant
			Active Markets for	Observable	Unobservable
	Carrying		Identical Assets	Inputs	Inputs
(In thousands)	Value		(Level 1)	(Level 2)	(Level 3)
Impaired loans	$	693			$	693

For impaired and TDR loans, the Company evaluates the fair value of the loan in accordance with current accounting guidance.  For loans that are collateral dependent, the fair value of the collateral is used to determine the fair value of the loan. The fair value of the collateral is determined based upon recent appraised values. The fair value of the loan is compared to the carrying value to determine if any write-down or specific reserve is required. These methods of fair value measurement for impaired and TDR loans are considered level 3 within the fair value hierarchy described in current accounting guidance. Impaired loans with allocated allowance for loan losses at June 30, 2011 and December 31, 2010, had a carrying amount of $590,000 and $693,000, respectively, which is made up of the outstanding balance of $838,000 and $700,000, net of a valuation allowance of $248,000 and $7,000, respectively. This resulted in an additional provision for loan losses of $248,000 and $7,000, respectively that is included in the amount reported on the income statement as of June 30, 2011 and December 31, 2010.

The Company used the following method and assumptions in estimating the fair value of its financial instruments:

Cash and Due from Banks and Federal Funds Sold: Carrying amounts approximate fair value, since these instruments are either payable on demand or have short-term maturities.

Securities Available for Sale and Held to Maturity: The estimated fair values are based on independent dealer quotations on nationally recognized securities exchanges or 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.

Restricted Stock: It is not practicable to determine the fair value of FHLB, ACBB and FRB stock due to restrictions placed on its transferability.

Loans: The estimated fair values of real estate mortgage loans and other loans receivable are based on discounted cash flow calculations that use available market benchmarks when establishing discount factors for the types of loans. All nonaccrual loans are carried at their current fair value. Exceptions may be made for adjustable rate loans (with resets of one year or less), which would be discounted straight to their rate index plus or minus an appropriate spread.

Deposits: The estimated fair value of certificates of deposits are based on discounted cash flow calculations that use a replacement cost of funds approach to establishing discount rates for certificates of deposits maturities. Stated value is fair value for all other deposits.

Borrowed Funds: The estimated fair value of borrowed funds are based on discounted cash flow calculations that use a replacement cost of funds approach to establishing discount rates for funding maturities.

Junior Subordinated Debentures: The estimated fair value is based on estimates using market data for similarly risk weighted items taking into consideration the convertible features of the debentures into common stock of the Company.

Accrued Interest Receivable and Payable: For these short-term instruments, the carrying amount is a reasonable estimate of the fair value.

Off-Balance-Sheet Liabilities: The fair value of off-balance-sheet commitments to extend credit is estimated using fees currently charged to enter into similar agreements. The fair value is immaterial as of June 30, 2011 and December 31, 2010.

Fair value estimates are made at specific points in time and are based on existing on-and off-balance sheet financial instruments. Such estimates are generally subjective in nature and dependent upon a number of significant assumptions associated with each financial instrument or group of financial instruments, including estimates of discount rates, risks associated with specific financial instruments, estimates of future cash flows, and relevant available market information. Changes in assumptions could significantly affect the estimates. In addition, fair value estimates do not reflect the value of anticipated future business, premiums or discounts that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument, or the tax consequences of realizing gains or losses on the sale of financial instruments.

The estimated fair values and recorded carrying values of the Bank’s financial instruments are as follows:

	June 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
(In thousands)	Amount		Value		Amount		Value
Financial assets:
Cash and due from banks	$	17,426	$	17,426	$	21,598	$	21,598
Interest bearing deposits with banks	12,491		12,491		1,320		1,320
Securities available for sale	385,910		385,910		323,539		323,539
Securities restricted	1,485		n/a		1,284		n/a
Securities held to maturity	152,807		154,572		147,965		148,144
Loans, net	580,294		604,513		495,563		513,344
Accrued interest receivable	4,570		4,570		4,153		4,153
Financial liabilities:
Demand and other deposits	1,072,344		1,073,485		916,993		917,786
Federal funds purchased and Federal Home Loan Bank overnight borrowings	—		—		5,000		5,000
Repurchase agreements	16,197		17,331		16,370		17,383
Junior Subordinated Debentures	16,002		14,930		16,002		14,783
Accrued interest payable	422		422		433		433