FAIR VALUE

12 Months Ended

Dec. 31, 2011

FAIR VALUE

FAIR VALUE

12. FAIR VALUE

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

Assets and liabilities measured at fair value on a recurring basis are summarized below:

				Fair Value Measurements at
				December 31, 2011 Using:
				Quoted
				Prices In
				Active	Significant
				Markets for	Other		Significant
				Identical	Observable		Unobservable
	Carrying			Assets	Inputs		Inputs
	Value			(Level 1)	(Level 2)		(Level 3)
(In thousands)
Financial Assets:
Available for sale securities
U.S. GSE securities	$		131,674		$	131,674
State and municipal obligations	54,219				54,219
U.S. GSE Residential mortgage-backed securities	70,984				70,984
U.S. GSE Residential collateralized mortgage obligations	179,325				179,325
U.S. GSE Commercial collateralized mortgage obligations	5,237				5,237
Total available for sale	$		441,439		$	441,439
				Fair Value Measurements at
				December 31, 2010 Using:
				Quoted
				Prices In
				Active	Significant
				Markets for	Other		Significant
				Identical	Observable		Unobservable
	Carrying			Assets	Inputs		Inputs
	Value			(Level 1)	(Level 2)		(Level 3)
(In thousands)
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

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 Bank’s entire holdings of a particular financial instrument, or the tax consequences of realizing gains or losses on the sale of financial instruments.

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

			Fair Value Measurements at
			December 31, 2011 Using:
				Significant
			Quoted Prices In	Other	Significant
			Active Markets for	Observable	Unobservable
	Carrying		Identical Assets	Inputs	Inputs
	Value		(Level 1)	(Level 2)	(Level 3)
(In thousands)
Impaired loans	$	1,868			$	1,868
Loans held for sale		2,300				2,300
			Fair Value Measurements at
			December 31, 2010 Using:
				Significant
			Quoted Prices In	Other	Significant
			Active Markets for	Observable	Unobservable
	Carrying		Identical Assets	Inputs	Inputs
	Value		(Level 1)	(Level 2)	(Level 3)
(In thousands)
Impaired loans	$	693			$	693

For impaired 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 loans are considered level 3 within the fair value hierarchy described in current accounting guidance. Impaired loans with allocated allowance for loan losses at December 31, 2011, had a carrying amount of $1.9 million, which is made up of the outstanding balance of $2.1 million, net of a valuation allowance of $0.2 million. This resulted in an additional provision for loan losses of $0.2 million that is included in the amount reported on the income statement. Impaired loans with allocated allowance for loan losses at December 31, 2010, had a carrying amount of $693,000, which is made up of the outstanding balance of $700,000, net of a valuation allowance of $7,000. This resulted in an additional provision for loan losses of $7,000 that is included in the amount reported on the income statement.  Charge-offs of $0.9 million were incurred on loans transferred to loans held for sale at December 31, 2011.  No loans were transferred to loans held for sale in 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 Securities: 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 December 31, 2011 and 2010.

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

December 31,	2011				2010
(In thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial Assets:
Cash and due from banks	$	25,921	$	25,921	$	21,598	$	21,598
Interest bearing deposits with banks	53,625		53,625		1,320		1,320
Securities available for sale	441,439		441,439		323,539		323,539
Securities restricted	1,660		n/a		1,284		n/a
Securities held to maturity	169,153		170,952		147,965		148,144
Loans, net (including loans held for sale)	603,606		632,616		495,563		513,344
Accrued interest receivable	4,940		4,940		4,153		4,153
Financial liabilities:
Demand and other deposits	1,188,185		1,190,080		916,993		917,786
Federal funds purchased and Federal Home Loan Bank overnight borrowings	—		—		5,000		5,000
Repurchase agreements	16,897		17,990		16,370		17,383
Junior subordinated debentures	16,002		16,915		16,002		14,783
Accrued interest payable	319		319		433		433