Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value Measurements [Abstract]

Fair Value Measurements

 Note 8. Fair Value Measurements

FASB ASC topic 825, Financial Instruments, requires disclosure of the estimated fair value of an entity's assets and liabilities considered to be financial instruments. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered to be financial instruments. However, many of such instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Also, it is the Company's general practice and intent to hold its financial instruments to maturity whether or not categorized as "available-for-sale" and not to engage in trading or sales activities, except for certain loans. For fair value disclosure purposes, the Company utilized certain value measurement criteria required under the FASB ASC 820, Fair Value Measurements and Disclosures, and discussed below.

Estimated fair values have been determined by the Company using the best available data and an estimation methodology it believes to be suitable for each category of financial instruments. Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Also, there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values.

Cash and cash equivalents, which are comprised of cash and due from banks, our balance at the Federal Reserve Bank and federal funds sold, had recorded values of $544.7 million and $749.2 million as of September 30, 2012 and December 31, 2011, respectively, which approximated fair values.

The estimated fair values of investment securities are based on quoted market prices, if available, or by an estimated methodology based on management's inputs. The fair values of the Company's investment securities held-to-maturity are based on using "unobservable inputs" that are the best information available in the circumstances.

The net loan portfolio at September 30, 2012 and December 31, 2011 has been valued using the present value of discounted cash flow where market prices were not available. The discount rate used in these calculations is the estimated current market rate adjusted for credit risk. The carrying value of accrued interest approximates fair value.

The estimated fair values of demand deposits (i.e. interest-and noninterest-bearing checking accounts, savings, and certain types of demand and money market accounts are equal to the amount payable on demand at the reporting date (i.e. their carrying amounts). The fair values of securities sold under agreements to repurchase and short term borrowings are equal to their carrying amounts as they are overnight borrowings.

The fair values of certificates of deposit and subordinated debentures are estimated using a discounted cash flow calculation that applies current interest rates to discounted expected cash flows. Based upon time deposit maturities at September 30, 2012, the carrying values approximate their fair values. The carrying amount of accrued interest payable approximates its fair value (in thousands).

	September 30, 2012
					Quoted prices in active		Significant other		Significant
					markets for identical		observable		unobservable
	Carrying		Estimated		assets		inputs		inputs
	amount		fair value		(Level 1)		(Level 2)		(Level 3)
Cash and cash equivalents	$	544,658	$	544,658	$	544,658	$	-	$	-
Investment securities available-for-sale		634,894		634,894		3,075		631,211		608
Investment securities held-to-maturity		22,707		18,634		-		-		18,634
Federal Home Loan and Atlantic Central Bankers Bank stock		4,160		4,160		4,160		-		-
Commerical loans held for sale		7,970		7,970		-		-		7,970
Loans receivable, net		1,856,992		1,855,671		-		-		1,855,671
Demand and interest checking		2,300,025		2,300,025		2,300,025		-		-
Savings and money market		459,725		459,725		459,725		-		-
Time deposits		21,425		21,491		-		-		21,491
Subordinated debenture		13,401		9,268		-		-		9,268
Securities sold under agreements to repurchase		18,802		18,802		18,802		-		-
Accrued interest payable		100		100		100		-		-

	December 31, 2011
	Carrying		Estimated
	amount		fair value
Cash and cash equivalents	$	749,174	$	749,174
Investment securities available-for-sale		448,204		448,204
Investment securities held-to-maturity		18,044		13,826
Federal Home Loan and Atlantic Central Bankers Bank stock		5,088		5,088
Loans receivable, net		1,744,828		1,718,698
Demand and interest checking		2,192,938		2,192,938
Savings and money market		454,343		454,343
Time deposits		35,270		35,336
Subordinated debenture		13,401		9,287
Securities sold under agreements to repurchase		33,177		33,177
Accrued interest payable		123		123

The fair value of commitments to extend credit is estimated based on the amount of unamortized deferred loan commitment fees. The fair value of letters of credit is based on the amount of unearned fees plus the estimated cost to terminate the letters of credit. Fair values of unrecognized financial instruments, including commitments to extend credit, and the fair value of letters of credit are considered immaterial.

In addition, FASB ASC topic 820, Fair Value Measurements and Disclosures, establishes a common definition for fair value to be applied to assets and liabilities. It clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes a framework for measuring fair value and expands disclosures concerning fair value measurements. FASB ASC topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Level 1 valuation is based on quoted market prices for identical assets or liabilities to which the Company has access at the measurement date. Level 2 valuation is based on other observable inputs for the asset or liability, either directly or indirectly. This includes quoted prices for similar assets in active or inactive markets, inputs other than quoted prices that are observable for the asset or liability such as yield curves, volatilities, prepayment speeds, credit risks, default rates, or inputs that are derived principally from, or corroborated through, observable market data by market-corroborated reports. Level 3 valuation is based on "unobservable inputs" which the Company believes is the best information available in the circumstances. A financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The assets measured at fair value on a recurring basis, segregated by fair value hierarchy level, are summarized below (in thousands):

			Fair Value Measurements at Reporting Date Using
			Quoted prices in active		Significant other		Significant
			markets for identical		observable		unobservable
	Fair value		assets		inputs		inputs
	September 30, 2012		(Level 1)		(Level 2)		(Level 3)
Investment
U.S. Government agency securities	$	8,828	$	-	$	8,828	$	-
Federally insured student loan securities		111,545		-		111,545
Obligations of states and political subdivisions		163,375		-		163,375		-
Residential mortgage-backed securities		197,158		-		197,158		-
Commercial mortgage-backed securities		102,477		-		102,477		-
Other debt securities		48,436		-		47,828		608
Other equity securities		3,075		3,075		-		-
	$	634,894	$	3,075	$	631,211	$	608
			Fair Value Measurements at Reporting Date Using
			Quoted prices in active		Significant other		Significant
			markets for identical		observable		unobservable
	Fair value		assets		inputs		inputs
	December 31, 2011		(Level 1)		(Level 2)		(Level 3)
Investment
U.S. Government agency securities	$	9,285	$	-	$	9,285	$	-
Obligations of states and political subdivisions		150,666		-		150,666		-
Residential mortgage-backed securities		193,685		-		193,685		-
Commercial mortgage-backed securities		52,061		-		52,061		-
Other debt securities		39,532		-		38,902		630
Other equity securities		2,975		2,975		-		-
	$	448,204	$	2,975	$	444,599	$	630

The changes in the Company's Level 3 assets are set forth below (in thousands).

Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
	Available-for-sale
	securities
	September 30, 2012			December 31, 2011
Beginning balance	$	630		$	748
Transfers into level 3		-			-
Transfers out of level 3		-			-
Total gains or losses (realized/unrealized)
Included in earnings		-			(2	)
Included in other comprehensive income		15			(62	)
Purchases, issuances, and settlements
Purchases		-			-
Issuances		-			-
Sales
Settlements		(37	)		(54	)
Ending balance	$	608		$	630

The other debt securities included in level 3 at September 30, 2012 and December 31, 2011 have been valued on the present value of cash flows, which discounts expected cash flows from principal and interest using yield to maturity at the measurement date. The discount rate used in these calculations is the estimated current market rate adjusted for credit risk.

Assets measured at fair value on a nonrecurring basis, segregated by fair value hierarchy, during the periods shown are summarized below (in thousands):

			Fair Value Measurements at Reporting Date Using
			Quoted prices in active		Significant other		Significant
			markets for identical		observable		unobservable
	Fair value		assets		inputs		inputs
Description	September 30, 2012		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	29,160	$	-	$	-	$	29,160
Other real estate owned		3,065		-		-		3,065
	$	32,225	$	-	$	-	$	32,225
			Fair Value Measurements at Reporting Date Using
			Quoted prices in active		Significant other		Significant
			markets for identical		observable		unobservable
	Fair value		assets		inputs		inputs
Description	December 31, 2011		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	17,587	$	-	$	-	$	17,587
Other real estate owned		7,405		-		-		7,405
	$	24,992	$	-	$	-	$	24,992

At September 30, 2012, impaired loans that are collateral dependent have been presented at their fair value, less costs to sell, of $29.2 million through specific reserves and other write downs of $10.9 million or by recording charge-offs when the carrying value exceeds the fair value. Included in the impaired balance at September 30, 2012 were troubled debt restructured loans with a balance of $8.3 million which have specific reserves of $4.2 million.  Valuation techniques consistent with the market and/or cost approach were used to measure fair value and primarily included observable inputs for the individual impaired loans being evaluated such as recent sales of similar assets or observable market data for operational or carrying costs. In cases where such inputs were unobservable, the loan balance is reflected within the Level 3 hierarchy. The fair value of other real estate owned is based on an appraisal of the property using the market approach for valuation.