Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUE MEASUREMENT

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FAIR VALUE MEASUREMENT
 6 Months Ended
Jun. 30, 2011
FAIR VALUE MEASUREMENT
NOTE 9 - FAIR VALUE MEASUREMENT

Measurement of fair value under U.S. GAAP establishes a hierarchy that prioritizes observable and unobservable inputs used to measure fair value, as of the measurement date, into three broad levels, which are described below:

Level 1:
Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2:
Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3:
Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, and also considers counterparty credit risk in its assessment of fair value.
 
Securities – Where quoted prices are available in an active market, securities are classified within Level 1 of the hierarchy.  Level 1 securities include highly liquid government securities such as U.S. Treasuries and exchange-traded equity securities.  For securities traded in secondary markets for which quoted market prices are not available, the Company generally relies on prices obtained from independent vendors.  Securities measured with these techniques are classified within Level 2 of the hierarchy and often involve using quoted market prices for similar securities, pricing models or discounted cash flow calculations using inputs observable in the market where available.  Examples include U.S. government agency securities, mortgage-backed securities, obligations of states and political subdivisions, and certain corporate, asset-backed and other securities.  In cases where Level 1 or Level 2 inputs are not available, securities are classified in Level 3 of the hierarchy.

Interest Rate Swap and Cap Agreements – The fair value is estimated by a third party using inputs that are observable or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the hierarchy.  These fair value estimations include primarily market observable inputs such as yield curves and option volatilities, and include the value associated with counterparty credit risk.

Impaired Loans- Impaired loans are measured and reported at fair value when full payment under the loan terms is not expected.  Impaired loans are carried at the present value of estimated future cash flows using the loan’s existing rate or the fair value of the collateral if the loan is collateral-dependent.  Impaired loans are subject to nonrecurring fair value adjustment upon initial recognition or subsequent impairment.  A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance.  The amount recognized as an impairment charge related to impaired loans that are measured at fair value on a nonrecurring basis was $1,508,000 and $3,135,000 during the three and six months ended June 30, 2011, respectively, and $1,244,000 and $3,852,000 during the three and six months ended June 30, 2010, respectively.  Impaired loans are classified within Level 3 of the hierarchy.

Other real estate owned – Other real estate assets (“OREO”) acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at the lower of cost or fair value, less selling costs.  Any write-downs to fair value at the time of transfer to OREO are charged to the allowance for loan losses subsequent to foreclosure.  Values are derived from appraisals of underlying collateral and discounted cash flow analysis.  The amount charged to earnings was $144,000 and $91,000 during the three and six months ended June 30, 2011 and $558,000 and $659,000 during the three and six months ended June 30, 2010, respectively.  These charges were for write-downs in the value of OREO subsequent to foreclosure and losses on the disposal of OREO.  OREO is classified within Level 3 of the hierarchy.
 
The following table presents the Company’s financial assets and financial liabilities carried at fair value on a recurring basis as of June 30, 2011 and December 31, 2010:

   
Fair Value Measurements at June 30, 2011 Using
  
   
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
    
Significant Other
Observable Inputs
(Level 2)
    
Significant
Unobservable
Inputs (Level 3)
    
Total
  
Assets Measured on a Recurring Basis:
  
(In Thousands)
  
Available-for-sale securities
   $ -     $ 230,671     $ -     $ 230,671  
Interest rate swap agreements
     -       724       -       724  
Interest rate cap
     -       16               16  
Total assets at fair value
   $ -     $ 231,411     $ -     $ 231,411  
                                 
Liabilities Measured on a Recurring Basis:
                                
Interest rate swap agreements
   $ -     $ 724     $ -     $ 724  

   
Fair Value Measurements at December 31, 2010 Using
  
   
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
   
Significant Other
Observable Inputs
(Level 2)
    
Significant
Unobservable
Inputs (Level 3)
   
Total
  
Assets Measured on a Recurring Basis:
  
(In Thousands)
  
Available-for-sale securities
   $ -     $ 276,959     $ -     $ 276,959  
Interest rate swap agreements
     -       803               803  
Interest rate cap
     -       115       -       115  
Total assets at fair value
   $ -     $ 277,877     $ -     $ 277,877  
                                 
Liabilities Measured on a Recurring Basis:
                                
Interest rate swap agreements
   $ -     $ 803     $ -     $ 803  
 
The following table presents the Company’s financial assets and financial liabilities carried at fair value on a nonrecurring basis as of June 30, 2011:

   
Fair Value Measurements at June 30, 2011 Using
  
   
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant Other
Observable Inputs
(Level 2)
  
Significant
Unobservable
Inputs (Level 3)
  
Total
  
Assets Measured on a Nonrecurring Basis:
  
(In Thousands)
  
Impaired loans
   $ -     $ -     $ 6,417     $ 6,417  
Other real estate owned
     -       -       6,931       6,931  
Total assets at fair value
   $ -     $ -     $ 13,348     $ 13,348  

   
Fair Value Measurements at December 31, 2010 Using
  
   
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant Other
Observable Inputs
(Level 2)
  
Significant
Unobservable
Inputs (Level 3)
 
Total
  
Assets Measured on a Nonrecurring Basis:
  
(In Thousands)
  
Impaired loans
   $ -     $ -     $ 35,183     $ 35,183  
Other real estate owned
     -       -       6,966       6,966  
Total assets at fair value
   $ -     $ -     $ 42,149     $ 42,149  

The fair value of a financial instrument is the current amount that would be exchanged in a sale between willing parties, other than in a forced liquidation.  Fair value is best determined based upon quoted market prices.  However, in many instances, there are no quoted market prices for the Company’s various financial instruments.  In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.  Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.  Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Current U.S. GAAP excludes certain financial instruments and all nonfinancial instruments from its fair value disclosure requirements.  Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The carrying amount and estimated fair value of the Company’s financial instruments, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis, at June 30, 2011 and December 31, 2010 were as follows:

   
June 30, 2011
    
December 31, 2010
  
   
Carrying
Amount
    
Fair Value
    
Carrying
Amount
    
Fair Value
  
   
(In Thousands)
  
Financial Assets:
                        
Cash and cash equivalents
   $ 197,455     $ 197,455     $ 231,978     $ 231,978  
Investment securities available for sale
     230,671       230,671       276,959       276,959  
Investment securities held to maturity
     13,895       14,232       5,234       4,963  
Restricted equity securities
     3,899       3,899       3,510       3,510  
Mortgage loans held for sale
     4,092       4,092       7,875       7,875  
Loans, net
     1,541,458       1,545,710       1,376,741       1,388,154  
Accrued interest and dividends receivable
     6,847       6,847       6,990       6,990  
Derivatives
     740       740       918       918  
                                 
Financial Liabilities:
                                
Deposits
   $ 1,803,874     $ 1,807,300     $ 1,758,716     $ 1,761,906  
Borrowings
     4,945       5,243       24,937       25,717  
Trust preferred securities
     30,490       27,384       30,420       27,989  
Accrued interest payable
     983       983       898       898  
Derivatives
     724       724       803       803  

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

Cash and cash equivalents:  The carrying amounts reported in the statements of financial condition for cash and cash equivalents approximate those assets’ fair values.

Investment securities:  Fair values for investment securities are based on quoted market prices, where available.  If a quoted market price is not available, fair value is based on quoted market prices of comparable instruments.

Restricted equity securities:  Fair values for other investments are considered to be their cost.

Loans:  For variable-rate loans that re-price frequently and with no significant change in credit risk, fair value is based on carrying amounts.  The fair value of other loans (for example, fixed-rate commercial real estate loans, mortgage loans, and industrial loans) is estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of  similar credit quality.  Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics.  The method of estimating fair value does not incorporate the exit-price concept of fair value as prescribed by FASB Accounting Standards Compilation (ASC) 820 and generally produces a higher value than an exit-price approach.  Fair value for impaired loans is estimated using discounted cash flow analysis, or underlying collateral values, where applicable.

Mortgage loans held for sale:  Loans are committed to be delivered to investors on a “best efforts delivery” basis within 30 days of origination.  Due to this short turn-around time, the carrying amounts of the Company’s agreements approximate their fair values.

Derivatives:  The fair values of the derivative agreements are based on quoted prices from an outside third party.
 
Accrued interest and dividends receivable:  The carrying amount of accrued interest and dividends receivable approximates its fair value.

Deposits:  The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts).  The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values.  Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation.

Federal funds purchased:  The carrying amounts of federal funds purchased approximate their market value.

Other borrowings:  The fair values of other borrowings are estimated using discounted cash flow analysis, based on interest rates currently being offered by the Federal Home Loan Bank for borrowings of similar terms as those being valued.

Trust preferred securities:  The fair values of trust preferred securities are estimated using a discounted cash flow analysis, based on interest rates currently being offered on the best alternative debt available at the measurement date.

Accrued interest payable:  The carrying amount of accrued interest payable approximates its fair value.

Loan commitments:  The fair values of the Company’s off-balance sheet financial instruments are based on fees currently charged to enter into similar agreements.  Since the majority of the Company’s other off-balance-sheet instruments consist of non-fee-producing, variable-rate commitments, the Company has determined they do not have a distinguishable fair value.