Fair Value Of Financial Instruments

9 Months Ended

Sep. 30, 2011

Fair Value Of Financial Instruments [Abstract]

Fair Value Of Financial Instruments

Note 4: Fair Value of Financial Instruments

We apply the provisions of Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic 820 ("ASC 820"), "Fair Value Measurements," for fair value measurement of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis.  ASC 820 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. Under ASC 820, fair value measurements are not adjusted for transaction costs. ASC 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 measurement) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below:

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

ØLevel 2 -  Quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.

ØLevel 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).

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 table below presents the balance of financial assets and liabilities at September 30, 2011 and December 31, 2010 measured at fair value on a recurring basis:

		Fair Value Measurements at Reporting Date Using
(In thousands)	Total	Quoted Prices in Active Markets for Identical Assets  (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
As of September 30, 2011
U.S. Treasury Obligations	$250	$0	$250	$0
U.S. Agency Obligations	80,805	0	80,805	0
FHLB Obligations	17,113	0	17,113	0
Agency MBSs	154,062	0	154,062	0
Agency CMOs	159,332	0	159,332	0
Non-Agency CMOs	5,069	0	5,069	0
ABSs	1,308	0	1,308	0
Interest rate swaps	(1,530)	0	(1,530)	0
Total	$416,409	$0	$416,409	$0
As of December 31, 2010
U.S. Treasury Obligations	$250	$0	$250	$0
U.S. Agency Obligations	47,788	0	47,788	0
FHLB Obligations	11,457	0	11,457	0
Agency MBSs	174,907	0	174,907	0
Agency CMOs	224,268	0	224,268	0
Non-Agency CMOs	5,852	0	5,852	0
ABSs	1,440	0	1,440	0
Interest rate swaps	(1,218)	0	(1,218)	0
Total	$464,744	$0	$464,744	$0

Investment securities are reported at fair value utilizing Level 2 inputs. The prices for these instruments are obtained through an independent pricing service or dealer market participant with which we have historically transacted both purchases and sales of investment securities. Prices obtained from these sources include market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things.

Certain assets are also measured at fair value on a non-recurring basis. These other financial assets include impaired loans and OREO. The table below presents the balance of financial assets at September 30, 2011 measured at fair value on a nonrecurring basis:

		Fair Value Measurements at Reporting Date Using
(In thousands)	Total	Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs  (Level 3)
OREO	$340	$0	$0	$340
Impaired loans	3,192	0	0	3,192
Total	$3,532	$0	$0	$3,532

Presented below is a roll forward of assets measured at fair value using significant unobservable inputs (Level 3) as of September 30, 2011:

	Impaired loans
(In thousands)	Commercial, financial and agricultural	Real estate- residential	Real estate- commercial	Real estate-  construction	Installment	OREO	Total
Beginning     Balance	$595	$2,665	$844	$0	$0	$191	$4,295
Transfers into     Level 3	302	956	529	169	13	50	2,019
Transfers out     of Level 3	0	(558)	(307)	0	0	0	(865)
Transfer from    impaired loans    to OREO	(28)	(189)	0	(73)	0	290	0
Payments	(567)	(431)	(418)	0	(2)	0	(1,418)
Charge-offs	(79)	(63)	(60)	(96)	(10)	0	(308)
Sales/expense     recoveries	0	0	0	0	0	(191)	(191)
Ending Balance	$223	$2,380	$588	$0	$1	$340	$3,532

Transfers into Level 3 represent loans that have been placed on non-accruing status. Transfers out of Level 3 represent loans that have been returned to accruing status. The OREO balance of $340 thousand consists of $28 thousand in Commercial, financial and agricultural; $239 thousand in Real estate-residential; and $73 thousand in Real estate-construction.

In accordance with the provisions of FASB ASC Subtopic 310-10-35, "Accounting by Creditors for Impairment of a Loan – an amendment of FASB Statements No. 5 and 15," we had collateral dependent impaired loans with a carrying value of approximately $1.09 million, which had specific reserves included in the allowance for loan losses of $254 thousand at September 30, 2011.

We use the fair value of underlying collateral to estimate the specific reserves for collateral dependent impaired loans. Collateral may be real estate and/or business assets including equipment, inventory and accounts receivable. Real estate values are determined based on appraisals by qualified licensed appraisers we have hired. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Management's ongoing review of appraisal information may result in additional discounts or adjustments to valuation based upon more recent market sales activity or more current appraisal information derived from properties of similar type and/or locale. Other business assets are valued using a variety of approaches including appraisals, depreciated book value, purchase price and independent confirmation of accounts receivable. OREO in the table above consists of property acquired through foreclosures and settlements of loans. Property acquired is carried at the lower of cost or the estimated fair value of the property, determined by an independent appraisal, and is adjusted for estimated disposal costs. Certain inputs used in appraisals, and possible subsequent adjustments, are not always observable, and therefore, collateral dependent impaired loans and OREO are categorized as Level 3 within the fair value hierarchy.

FASB ASC Subtopic 820-10-50, "Disclosures about Fair Value of Financial Instruments," as amended, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring or nonrecurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents and the FHLBB stock approximate fair value. The methodologies for other financial assets and financial liabilities are discussed below.

Loans - The fair value for loans is estimated using discounted cash flow analyses, using interest rates and spreads currently being offered for loans with similar terms to borrowers of similar credit quality. The fair value estimates, methods and assumptions set forth below for our financial instruments, including those financial instruments carried at cost, are made solely to comply with disclosures required by generally accepted accounting principles in the United States and do not always incorporate the exit-price concept of fair value proscribed by ASC 820-10 and should be read in conjunction with the financial statements and associated footnotes.

Deposits - The fair value of demand deposits approximates the amount reported in the consolidated balance sheets. The fair value of variable rate, fixed term certificates of deposit also approximates the carrying amount reported in the consolidated balance sheets. The fair value of fixed rate and fixed term certificates of deposit is estimated using a discounted cash flow method which applies interest rates currently being offered for deposits of similar remaining maturities.

Debt - The fair value of debt is estimated using current market rates for borrowings of similar remaining maturity.

Interest rate swap - The interest rate swaps are reported at their fair value of $(1.53) million and $(1.22) million as of September 30, 2011 and December 31, 2010, respectively, utilizing Level 2 inputs from third parties. The fair value of our interest rate swaps are determined using prices obtained from a third party advisor. The fair value measurement of the interest rate swap is determined by netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on the expectation of future interest rates derived from observed market interest rate curves.

Commitments to extend credit and standby letters of credit - The fair value of commitments to extend credit 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 financial standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties. The fair value of commitments to extend credit and standby letters of credit was approximately $44 thousand and $40 thousand as of September 30, 2011 and December 31, 2010, respectively.

The fair value of our financial instruments as of September 30, 2011 and December 31, 2010 are summarized in the table below:

	September 30, 2011		December 31, 2010
(In thousands)	Carrying Amount	Fair Value	Carrying Amount	Fair Value
Securities available for sale	$417,940	$417,940	$465,962	$465,962
Securities held to maturity	603	671	794	882
FHLBB stock	8,630	8,630	8,630	8,630
Loans, net of the allowance for loan losses	997,596	1,023,871	900,659	913,882
Accrued interest receivable	4,718	4,718	4,992	4,992
Total assets	$1,429,487	$1,455,830	$1,381,037	$1,394,348
Deposits	$1,165,559	$1,168,948	$1,092,196	$1,094,455
Securities sold under agreement to repurchase and other      short-term borrowings	225,351	226,287	227,657	228,109
Securities sold under agreement to repurchase and other      long-term borrowings	22,581	23,826	38,639	39,574
Junior subordinated debentures issued to unconsolidated      subsidiary trust	20,619	14,979	20,619	14,413
Accrued interest payable	286	286	377	377
Total liabilities	$1,434,396	$1,434,326	$1,379,488	$1,376,928