Fair Value Of Assets And Liabilities

6 Months Ended

Jun. 30, 2011

Fair Value Of Assets And Liabilities

Fair Value Of Assets And Liabilities

10. Fair Value of Assets and Liabilities

     The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

     Level 1: Valuation is based upon quoted prices for identical instruments traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes U.S. Treasury and federal agency securities, which are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

     Level 2: Valuation is based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

     Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company's estimation of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

     The following methods and assumptions were used to estimate fair value disclosures. All financial instruments are held for other than trading purposes.

Cash, due from banks and overnight investments: Due to the short term nature of these instruments, the carrying amounts reported in the balance sheet represent their fair values.

Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Investments in Federal Home Loan Bank stock are recorded at cost, which also represents fair value.

Loans held for sale: Due to the short term nature of these instruments, the carrying amounts reported in the balance sheet represent their fair values.

Loans: Fair value adjustments for loans are mainly related to credit risk, interest rate risk, required equity return, and liquidity risk. Credit risk is primarily addressed in the financial statements through the Allowance (see Note 5). Loans are valued using a discounted cash flow methodology and are pooled based on type of interest rate (fixed or adjustable) and maturity. A discount rate was developed based on the relative risk of the cash flows, taking into account the maturity of the loans and liquidity risk. Impaired loans are carried at fair value. Specific valuation allowances are included in the Allowance.

Purchased receivables: Fair values for purchased receivables are based on their carrying amounts due to their short duration and repricing frequency.

Accrued interest receivable: Due to the short term nature of these instruments, the carrying amounts reported in the balance sheet represent their fair values.

Deposit liabilities: The fair values of demand and savings deposits are equal to the carrying amount at the reporting date. The carrying amount for variable-rate time deposits approximate their fair value. Fair values for fixed-rate time deposits are estimated using a discounted cash flow calculation that applies currently offered interest rates to a schedule of aggregate expected monthly maturities of time deposits.

Accrued interest payable: Due to the short term nature of these instruments, the carrying amounts reported in the balance sheet represent their fair values.

Securities sold under repurchase agreements: Fair values for securities sold under repurchase agreements are based on their carrying amounts due to their short duration and repricing frequency.

Borrowings: Due to the short term nature of these instruments, the carrying amount of short-term borrowings reported in the balance sheet approximate the fair value. Fair values for fixed-rate long-term borrowings are estimated using a discounted cash flow calculation that applies currently offered interest rates to a schedule of aggregate expected monthly payments.

Junior subordinated debentures: Fair value adjustments for junior subordinated debentures are based on discounted cash flows to maturity using current interest rates for similar financial instruments. Management utilized a market approach to determine the appropriate discount rate for junior subordinated debentures.

Assets subject to nonrecurring adjustment to fair value: The Company is also required to measure certain assets such as equity method investments, goodwill, intangible assets or OREO at fair value on a nonrecurring basis in accordance with GAAP. Any nonrecurring adjustments to fair value usually result from the write down of individual assets.

     The Company uses either in-house evaluations or external appraisals to estimate the fair value of OREO and impaired loans as of each reporting date. In-house appraisals are considered Level 3 inputs and external appraisals are considered Level 2 inputs. The Company's determination of which method to use is based upon several factors. The Company takes into account compliance with legal and regulatory guidelines, the amount of the loan, the size of the assets, the location and type of property to be valued and how critical the timing of completion of the analysis is to the assessment of value. Those factors are balanced with the level of internal expertise, internal experience and market information available, versus external expertise available such as qualified appraisers, brokers, auctioneers and equipment specialists.

     The Company uses external sources to estimate fair value for projects that are not fully constructed as of the date of valuation. These projects are generally valued as if complete, with an appropriate allowance for cost of completion, including contingencies developed from external sources such as vendors, engineers and contractors. The Company believes that recording other real estate owned that is not fully constructed based on as if complete values is more appropriate than recording other real estate owned that is not fully constructed using as is values. We concluded that as if complete values are appropriate for these types of projects based on the accounting guidance for capitalization of project costs and subsequent measurement of the value of real estate. GAAP specifically states that estimates and cost allocations must be reviewed at the end of each reporting period and reallocated based on revised estimates. The Company adjusts the carry value of other real estate owned in accordance with this guidance for increases in estimated cost to complete that exceed the fair value of the real estate at the end of each reporting period.

Commitments to extend credit and standby letters of credit: The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counterparties at the reporting date.

Limitations: Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

     Estimated fair values as of June 30, 2011 and December 31, 2010 are as follows:

	June 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
			(In Thousands)
Financial assets:
Cash, due from banks and overnight investments	$	143,831	$	143,831	$	66,033	$	66,033
Investment securities		188,020		188,216		220,135		222,299
Investment in Federal Home Loan Bank stock		2,003		2,003		2,003		2,003
Loans		618,556		615,464		662,964		659,650
Loans held for sale		—		—		5,558		5,558
Purchased receivables		14,743		14,743		16,531		16,531
Accrued interest receivable		2,745		2,745		3,401		3,401
Financial liabilities:
Deposits	$	884,170	$	883,317	$	892,136	$	890,729
Accrued interest payable		239		239		300		300
Securities sold under repurchase agreements		11,616		11,616		12,874		12,874
Borrowings		4,696		3,993		5,386		4,759
Junior subordinated debentures		18,558		15,106		18,558		15,106
Unrecognized financial instruments:
Commitments to extend credit(1)	$	204,899	$	2,049	$	181,305	$	1,813
Standby letters of credit(1)		18,240		182		19,085		191

⁽¹⁾ Carrying amounts reflect the notional amount of credit exposure under these financial instruments.

     The following table sets forth the balances as of June 30, 2011 and 2010, respectively, of assets and liabilities measured at fair value on a recurring basis:

			Quoted Prices in		Signifcant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable Inputs
	Total		Assets (Level 1)		Inputs (Level 2)		(Level 3)
2011:			(In Thousands)
Available for sale securities
U.S. Treasury and government sponsored	$	138,126		—	$	138,126		—
Municipal securities		14,402		—		14,402		—
U.S. Agency mortgage-backed securities		60				60
Corporate bonds		30,290		—		30,290		—
Total	$	182,878		—	$	182,878		—
2010:
Available for sale securities
U.S. Treasury and government sponsored	$	126,804		—	$	126,804		—
Municipal securities		6,369		—		6,369		—
U.S. Agency mortgage-backed securities		81				81
Corporate bonds		34,775		—		34,775		—
Total	$	168,029		—	$	168,029		—

     As of and for the six months ending June 30, 2011 and 2010, no impairment or valuation adjustment was recognized for assets recognized at fair value on a nonrecurring basis, except for certain assets as shown in the following table:

			Quoted Prices in
			Active Markets		Significant Other		Significant
			for Identical		Observable		Unobservable Inputs		Total (gains)
	Total		Assets (Level 1)		Inputs (Level 2)		(Level 3)		losses
2011:					(In Thousands)
Loans measured for impairment1	$	2,532		—	$	1,636	$	896	$	313
Total	$	2,532		—	$	1,636	$	896	$	313
2010:
Loans measured for impairment1	$	5,081		—	$	4,237	$	844		($864	)
Other real estate owned2		498		—		—		498		176
Total	$	5,579		—	$	4,237	$	1,342		($688	)

1	Relates to certain impaired collateral dependant loans. The impairment was measured based on the fair value of collateral, in accordance with U.S. GAAP.
2	Relates to certain impaired other real estate owned. This impairment arose from an adjustment to the Company's estimate of the fair market value of these properties based on changes in estimated costs to complete the projects and changes in market conditions.

     For loans measured for impairment, the Company classifies fair value measurements using observable inputs, such as external appraisals, as level 2 valuations in the fair value hierarchy, and unobservable inputs, such as in-house evaluations, as level 3 valuations in the fair value hierarchy.