Fair Value of Assets and Liabilities

9 Months Ended

Sep. 30, 2011

Fair Value of Assets and Liabilities [Abstract]

Fair Value of Assets and Liabilities

9.) Fair Value of Assets and Liabilities:

Measurements

Accounting guidance under ASC Topic 820, Fair Value Measurements and Disclosures, affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction, and clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. ASC Topic 820 requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence.

The Company groups assets and liabilities recorded at fair value into 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. 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 (with level 1 considered highest and level 3 considered lowest). A brief description of each level follows:

Level 1:	Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level 2:	Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but which trade less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.
Level 3:	Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where inputs into the determination of fair value require significant management judgment or estimation.

The following table presents the assets reported on the consolidated balance sheets at their fair value as of September 30, 2011 and December 31, 2010 by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

			Fair Value Measurements at 9/30/11 Using
			Quoted Prices in
			Active Markets for		Significant Other		Significant
	September 30,		Identical Assets		Observable Inputs		Unobservable Inputs
Description	2011		(Level 1)		(Level 2)		(Level 3)
U.S. Treasury securities	$	135	$	—	$	135	$	—
U.S. Government agencies and corporations		22,210		—		22,210		—
Obligations of states and political subdivisions		35,877		—		35,877		—
U.S. Government-sponsored mortgage-backed and related securities		117,715		—		117,715		—
Private-label mortgage-backed and related securities		442		—		442		—
Trust preferred securities		8,928		—		—		8,928
General Motors equity investments		356		356		—		—
Total	$	185,663	$	356	$	176,379	$	8,928

			Fair Value Measurements at 12/31/10 Using
			Quoted Prices in
			Active Markets for		Significant Other		Significant
	December 31,		Identical Assets		Observable Inputs		Unobservable Inputs
Description	2010		(Level 1)		(Level 2)		(Level 3)
U.S. Government agencies and corporations	$	29,454	$	—	$	29,454	$	—
Obligations of states and political subdivisions		25,889		—		25,889		—
U.S. Government-sponsored mortgage-backed and related securities		96,486		—		96,486		—
Private-label mortgage-backed and related securities		214		—		214		—
Trust preferred securities		12,779		—		—		12,779
Corporate securities		287		—		287		—
Total	$	165,109	$	—	$	152,330	$	12,779

The following tables present the changes in the Level 3 fair value category for the nine months ended September 30, 2011 (Table 1) and the three months ended September 30, 2011 (Table 2). The Company classifies financial instruments in Level 3 of the fair value hierarchy when there is reliance on at least one significant unobservable input to the valuation model. In addition to these unobservable inputs, the valuation models for Level 3 financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly.

Table 1

																Losses included in
			Net realized/unrealized gains/(losses)													net income for the
			included in						Transfers in		Purchases,					period relating to
			Noninterest			Other comprehensive			and/or out of		issuances and			September 30,		assets held at
Net Unrealized	January 1, 2011		income			income			Level 3		settlements			2011		September 30, 2011
Trust preferred securities	$	12,779	$	(202	)	$	(3,639	)	$	—	$	(10	)	$	8,928	$	(202	)

Table 2

															Losses included in
			Net realized/unrealized gains/(losses)												net income for the
			included in					Transfers in		Purchases,					period relating to
			Noninterest		Other comprehensive			and/or out of		issuances and			September 30,		assets held at
Net Unrealized	July 1, 2011		income		income			Level 3		settlements			2011		September 30, 2011
Trust preferred securities	$	11,722	$	—	$	(2,790	)	$	—	$	(4	)	$	8,928	$	—

The Company conducts OTTI analyses on a quarterly basis. The initial indication of other-than-temporary impairment for both debt and equity securities is a decline in the fair value below the amount recorded for an investment. A decline in value that is considered to be other-than-temporary is recorded as a loss within non-interest income in the consolidated statements of income. In determining whether an impairment is other than temporary, the Company considers a number of factors, including, but not limited to, the length of time and extent to which the market value has been less than cost, recent events specific to the issuer, including investment downgrades by rating agencies and economic conditions of its industry, and a determination that the Company does not intend to sell those investments and it is not more-likely-than-not that the Company will be required to sell the investments before recovery of its amortized cost basis less any current period credit loss. Among the factors that are considered in determining the Company’s intent and ability is a review of its capital adequacy, interest rate risk position and liquidity.

The Company also considers the issuer’s financial condition, capital strength and near-term prospects. In addition, for debt securities the Company considers the cause of the price decline (general level of interest rates and industry- and issuer-specific factors), current ability to make future payments in a timely manner and the issuer’s ability to service debt, the assessment of a security’s ability to recover any decline in market value, the ability of the issuer to meet contractual obligations and the Company’s intent and ability to retain the security. All of the foregoing require considerable judgment.

Trust Preferred Securities

Trust preferred securities are accounted for under FASB ASC Topic 325 Investments Other. The Company evaluates current available information in estimating the future cash flows of securities and determines whether there have been favorable or adverse changes in estimated cash flows from the cash flows previously projected. The Company considers the structure and term of the pool and the financial condition of the underlying issuers. Specifically, the evaluation incorporates factors such as interest rates and appropriate risk premiums, the timing and amount of interest and principal payments and the allocation of payments to the various note classes. Current estimates of cash flows are based on the most recent trustee reports, announcements of deferrals or defaults, expected future default rates and other relevant market information.

The Company owns 32 trust preferred securities totaling $34,917 (par value) and are issued by banks, thrifts, insurance companies and real estate investment trusts. These securities were all rated investment grade at inception. Beginning during the second half of 2008 and through 2011, factors outside the Company’s control impacted the fair value of these securities and will likely continue to do so for the foreseeable future. These factors include, but are not limited to, the following: guidance on fair value accounting, issuer credit deterioration, issuer deferral and default rates, potential failure or government seizure of underlying financial institutions or insurance companies, ratings agency actions, or regulatory actions. As a result of changes in these and various other factors during 2009 and 2010, Moody’s Investors Service, Fitch Ratings and Standards and Poor’s downgraded multiple trust preferred securities, including securities held by the Company. All 32 of the trust preferred securities held by the Company are now considered to be below investment grade. The deteriorating economic, credit and financial conditions experienced in 2008 and through 2010 have resulted in illiquid and inactive financial markets and severely depressed prices for these securities. The Company analyzed the cash flow characteristics of these securities and determined that for 12 of these securities, it does not consider the investment in these assets to be other-than-temporarily impaired at September 30, 2011. The Company does not intend to sell the securities and it is more-likely-than-not that the Company will be required to sell the securities before recovery of its amortized cost basis. There was no adverse change in the cash flows for the 12 securities. Although the Company does not consider the investment in these assets to be other-than-temporarily impaired at September 30, 2011, there is a risk that subsequent evaluations could result in recognition of OTTI charges in the future. Upon completion of the September 30, 2011 analysis, the model indicated OTTI on the remaining 20 securities. These 20 securities had life-to-date impairment losses of $20.0 million, of which $16.6 million was recorded as expense and $3.4 was recorded in other comprehensive loss. These 20 securities remained classified as available-for-sale at September 30, 2011, and together, the 32 securities subjected to FASB ASC Topic 320 accounted for the entire $9.0 of unrealized losses in the trust preferred securities category at September 30, 2011.

The following table details the 20 debt securities with other-than-temporary impairment, their credit ratings at September 30, 2011 and the related losses recognized in earnings:

										Amount of OTTI
								Additions in		related to credit
		Amount of OTTI		Additions in		Additions in		QTD		loss at
	Moody’s/Fitch	related to credit loss		QTD March 31,		QTD June 30,		September 30,		September 30,
	Rating	at January 1, 2011		2011		2011		2011		2011
Alesco Preferred Funding VIII Class E Notes 1	C/C	$	1,500	$	—	$	—	$	—	$	1,500
MM Community Funding II Class B	Ba1/CC		11		—		—		—		11
PreTSL I Mezzanine	Ca/C		430		—		—		—		430
PreTSL II Mezzanine	Ca/C		1,274		141		—		—		1,415
PreTSL V Mezzanine	Ba3/D		97		—		—		—		97
PreTSL VIII B-3	C/C		1,635		—		—		—		1,635
PreTSL IX Class B-2	Ca/C		274		—		—		—		274
PreTSL XV Class B-2	C/C		267		10		—		—		277
PreTSL XV Class B-3	C/C		269		10		—		—		279
PreTSL XVI D	NR/C		518		—		—		—		518
PreTSL XVI D	NR/C		991		—		—		—		991
PreTSL XVII Class C	Ca/C		978		—		—		—		978
PreTSL XVII Class D	NR/C		930		—		—		—		930
PreTSL XVIII Class D	NR/C		513		—		—		—		513
PreTSL XXIII Class C-FP	C/C		211		—		—		—		211
PreTSL XXV Class D	NR/C		1,001		—		—		—		1,001
PreTSL XXVI Class D	NR/C		465		—		—		—		465
Trapeza CDO II Class C-1	Ca/C		598		—		—		—		598
Tropic CDO V Class B-1L	C/C		4,427		1		—		—		4,428
Trapeza IX B-1	Ca/CC		10		40		—		—		50
Total		$	16,399	$	202	$	—	$	—	$	16,601

The following table provides additional information related to the Company’s trust preferred securities as of September 30, 2011 used to evaluate other-than-temporary impairments.

															Excess
										Number of		Deferrals and			Subordination as a
										Issuers		Defaults as a %			% of Current
						Unrealized			Moody’s/	Currently		of Current			Performing
Deal	Class	Book Value		Fair Value		Gain/(Loss)			Fitch Rating	Performing		Collateral			Collateral
PreTSL I	Mezzanine	$	513	$	539	$	26		Ca/C		17		38.07	%		—	%
PreTSL II	Mezzanine		689		461		(228	)	Ca/C		16		48.26			—
PreTSL IV	Mezzanine		183		125		(58	)	Ca/CCC		4		27.07			19.49
PreTSL V	Mezzanine		22		11		(11	)	Ba3/D		—		100.00			—
PreTSL VIII	B-3		364		114		(250	)	C/C		21		45.91			—
PreTSL IX	B-2		719		199		(520	)	Ca/C		33		31.02			—
PreTSL XV	B-2		224		26		(198	)	C/C		49		36.39			—
PreTSL XV	B-3		224		26		(198	)	C/C		49		36.39			—
PreTSL XVI	D		—		—		—		NR/C		32		48.68			—
PreTSL XVI	D		—		—		—		NR/C		32		48.68			—
PreTSL XVII	C		—		—		—		Ca/C		35		36.46			—
PreTSL XVII	D		—		—		—		NR/C		35		36.46			—
PreTSL XVIII	D		—		—		—		NR/C		52		26.46			—
PreTSL XXIII	C-2		1,011		84		(927	)	C/C		92		27.81			—
PreTSL XXIII	C-FP		1,548		476		(1,072	)	C/C		92		27.81			—
PreTSL XXV	D		—		—		—		NR/C		48		34.09			—
PreTSL XXVI	D		—		—		—		NR/C		48		28.26			—
I-PreTSL I	B-1		985		577		(408	)	NR/CCC		15		16.79			2.16
I-PreTSL I	B-2		1,000		577		(423	)	NR/CCC		15		16.79			2.16
I-PreTSL I	B-3		1,000		577		(423	)	NR/CCC		15		16.79			2.16
I-PreTSL II	B-3		2,991		2,174		(817	)	NR/B		27		4.88			11.97
I-PreTSL III	B-2		1,000		564		(436	)	B2/CCC		22		12.35			7.05
I-PreTSL III	C		1,000		351		(649	)	NR/CCC		22		12.35			—
I-PreTSL IV	B-1		1,000		458		(542	)	Ba2/CCC		26		12.76			4.96
I-PreTSL IV	B-2		1,000		458		(542	)	Ba2/CCC		26		12.76			4.96
I-PreTSL IV	C		500		143		(357	)	Caa1/CC		26		12.76			—
Alesco VIII	E		—		—		—		C/C		53		22.47			—
MM Community Funding III	B		424		362		(62	)	Ba1/CC		6		32.17			1.39
MM Community Funding II	B		164		164		—		Baa2/BB		5		29.31			17.77
Tropic V	B-1L		—		—		—		C/C		42		45.00			—
Trapeza II	C-1		414		284		(130	)	Ca/C		23		37.04			—
Trapeza IX	B-1		950		178		(772	)	Ca/CC		40		11.26			—
Total		$	17,925	$	8,928	$	(8,997	)

The market for these securities at September 30, 2011 is not active and markets for similar securities are also not active. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which trust preferred securities trade and then by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive as no new trust preferred securities have been issued since 2007. There are currently very few market participants who are willing and or able to transact for these securities. The pooled market value for these securities remains very depressed relative to historical levels. Although there has been marked improvement in the credit spread premium in the corporate bond space, no such improvement has been noted in the market for trust preferred securities.

Given conditions in the debt markets today and the absence of observable transactions in the secondary and the new issue markets, the Company determined the following:

• The few observable transactions and market quotations that are available are not reliable for purposes of determining fair value at September 30, 2011;

• An income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than the market approach valuation technique used at measurement dates prior to 2008; and

• The trust preferred securities will be classified within Level 3 of the fair value hierarchy because the Company determined that significant judgments are required to determine fair value at the measurement date.

The Company enlisted the aid of an independent third party to perform the trust preferred security valuations. The approach to determining fair value involved the following process:

1. Estimate the credit quality of the collateral using average probability of default values for each issuer (adjusted for rating levels).

2. Consider the potential for correlation among issuers within the same industry for default probabilities (e.g. banks with other banks).

3. Forecast the cash flows for the underlying collateral and apply to each trust preferred security tranche to determine the resulting distribution among the securities, including prepayment and cures.

4. Discount the expected cash flows to calculate the present value of the security.

The effective discount rates on an overall basis generally range from 18.31% to 49.35% and are highly dependent upon the credit quality of the collateral, the relative position of the tranche in the capital structure of the trust preferred security and the prepayment assumptions.

The Company also monitored default and deferral activity since September 30, 2011 for valuation consideration. There were no material unexpected results to consider.

The following table presents the assets measured on a nonrecurring basis on the consolidated balance sheets at their fair value as of September 30, 2011 and December 31, 2010, by level within the fair value hierarchy. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves. Techniques used to value the collateral that secure the impaired loans include: quoted market prices for identical assets classified as Level 1 inputs; observable inputs, employed by certified appraisers, for similar assets classified as Level 2 inputs. In cases where valuation techniques include inputs that are unobservable and are based on estimates and assumptions developed by management based on the best information available under each circumstance, the asset valuation is classified as Level 3 inputs.

	September 30, 2011
	Level 1		Level 2		Level 3		Total
Assets measured on a nonrecurring basis:
Impaired loans	$	—	$	—	$	2,338	$	2,338
Other real estate owned		—		—		479		479

	December 31, 2010
	Level 1		Level 2		Level 3		Total
Assets measured on a nonrecurring basis:
Impaired loans	$	—	$	—	$	1,696	$	1,696
Other real estate owned		—		—		848		848

Impaired loans: A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both interest and principal) according to the contractual terms of the loan agreement. Impaired loans are measured, as a practical expedient, at the loan’s observable market price or the fair market value of the collateral if the loan is collateral dependent. At September 30, 2011, the recorded investment in impaired loans was $2,447 with a related reserve of $109 resulting in a net balance of $2,338. At December 31, 2010, the recorded investment in impaired loans was $1,893 with a related reserve of $197 resulting in a net balance of $1,696.

Other real estate owned (OREO): Real estate acquired through foreclosure or deed-in-lieu of foreclosure is included in other assets. Such real estate is carried at fair value less estimated costs to sell. Any reduction from the carrying value of the related loan to fair value at the time of acquisition is accounted for as a loan loss. Any subsequent reduction in fair market value is reflected as a valuation allowance through a charge to income. Costs of significant property improvements are capitalized, whereas costs, relating to holding and maintaining the property, are charged to expense. At September 30, 2011, the recorded investment in OREO was $561 with a valuation allowance of $82 resulting in a net balance of $479. At December 31 2010, the recorded investment in OREO was $883 with a valuation allowance of $35 resulting in a net balance of $848.

Financial Instruments

The FASB ASC Topic 825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the Consolidated Balance Sheets, for which it is practicable to estimate the value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other estimation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.

Such techniques and assumptions, as they apply to individual categories of the financial instruments, are as follows:

Cash and cash equivalents — The carrying amounts for cash and cash equivalents are a reasonable estimate of those assets’ fair value.

Investment securities — Fair values of 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 securities. Prices on trust preferred securities were calculated using a discounted cash-flow technique. Cash flows were estimated based on credit and prepayment assumptions. The present value of the projected cash flows was calculated using a discount rate equal to the current yield used to accrete the beneficial interest.

Loans, net of allowance for loan losses — Market quotations are generally not available for loan portfolios. The fair value is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality. Loans held for sale are carried, in aggregate, at the lower of cost or fair value.

Accrued interest receivable — The carrying amount is a reasonable estimate of these assets’ fair value.

Demand, savings and money market deposits — Demand, savings, and money market deposit accounts are valued at the amount payable on demand.

Time deposits — The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rates are estimated using market rates currently offered for similar instruments with similar remaining maturities.

FHLB advances — The fair value for fixed rate advances is estimated by discounting the future cash flows using rates at which advances would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value for the fixed rate advances that are convertible to quarterly LIBOR floating rate advances on or after certain specified dates at the option of the FHLB and the FHLB fixed rate advances that are putable on or after certain specified dates at the option of the FHLB are priced using the FHLB of Cincinnati’s model.

Other short-term borrowings — Other short-term borrowings generally have an original term to maturity of one year or less. Consequently, their carrying value is a reasonable estimate of fair value.

Subordinated debt — The floating issuances curves to maturity are averaged to obtain an index. The spread between BBB-rated bank debt and 25-year swap rates is determined to calculate the spread on outstanding trust preferred securities. The discount margin is then added to the index to arrive at a discount rate, which determines the present value of projected cash flows.

Accrued interest payable — The carrying amount is a reasonable estimate of these liabilities’ fair value.

The fair value of unrecorded commitments at September 30, 2011 and December 31, 2010 is not material.

In addition, other assets and liabilities of the Company that are not defined as financial instruments are not included in the disclosures, such as property and equipment. Also, non-financial instruments typically not recognized in financial statements nevertheless may have value but are not included in the above disclosures. These include, among other items, the estimated earning power of core deposit accounts, the trained work force, customer goodwill and similar items. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

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

	September 30, 2011				December 31, 2010
	Carrying		Estimated Fair		Carrying		Estimated Fair
	Amount		Value		Amount		Value
ASSETS:
Cash and cash equivalents	$	16,832	$	16,832	$	15,804	$	15,804
Investment securities available-for-sale		188,712		188,712		168,158		168,158
Investment securities held-to-maturity		—		—		20,300		20,941
Loans, net of allowance for loan losses		260,672		265,742		262,940		268,557
Accrued interest receivable		2,028		2,028		2,124		2,124
LIABILITIES
Demand, savings and money market deposits	$	238,585	$	238,585	$	234,876	$	234,876
Time deposits		163,536		167,309		156,633		160,750
FHLB advances		36,500		40,305		53,000		56,216
Other short-term borrowings		5,949		5,949		4,901		4,901
Subordinated debt		5,155		3,568		5,155		3,962
Accrued interest payable		446		446		535		535