Fair Value

6 Months Ended

Jun. 30, 2011

Fair Value [Abstract]

FAIR VALUE

NOTE 4. FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Investment Securities: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3 inputs). Discounted cash flows are calculated using estimates of current market rates for each type of security. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

Loans Held For Sale: Loans held for sale are carried at fair value, as determined by outstanding commitments, from third party investors.

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Other Real Estate Owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned are measured at fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

Mortgage Banking Derivatives: The fair value of mortgage banking derivatives is determined by individual third party sales contract prices for the specific loans held at each reporting period end (level 2 inputs). The fair value adjustment is included in other assets.

Assets and Liabilities Measured on a Recurring Basis

			Fair Value Measurements at
			June 30, 2011 using
			Significant Other		Significant
			Observable Inputs		Unobservable Inputs
	Carrying Value		(Level 2)		(Level 3)
Assets:
Available for sale securities:
U.S. Government sponsored entities	$	5,880	$	5,880	$	—
Mortgage-backed — residential		32,525		32,525		—
State and municipal		19,737		19,737		—
Corporate		4,164		—		4,164
Total available for sale securities		62,306		58,142		4,164
Mortgage banking derivatives		3		3		—
Loans held for sale		5,083		5,083		—

			Fair Value Measurements at
			December 31, 2010 using
			Significant Other		Significant
			Observable Inputs		Unobservable Inputs
	Carrying Value		(Level 2)		(Level 3)
Assets:
Available for sale securities:
U.S. Government sponsored entities	$	5,937	$	5,937	$	—
Mortgage-backed — residential		31,975		31,975		—
State and municipal		18,551		18,551		—
Corporate		7,019		2,936		4,083
Total available for sale securities		63,482		59,399		4,083
Mortgage banking derivatives		28		28		—
Loans held for sale		4,282		4,282		—

The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months and three month periods ended June 30, 2011 and 2010:

	Fair Value Measurements Using Significant Unobservable
	Inputs (Level 3)
	Available for sale securities - Corporate
	Six months ended June 30,					Three months ended June 30,
	2011		2010			2011		2010
Balance at January 1	$	4,083	$	5,639		$	4,053	$	5,652
Securities impairment		—		—			—		—
Change in fair value		81		(612	)		111		(625	)
Balance at June 30	$	4,164	$	5,027		$	4,164	$	5,027

Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

	June 30, 2011
			Fair Value
			Measurements using
			other significant
			unobservable inputs
	Carrying Value		(Level 3)
Assets:
Impaired loans:
Real estate construction	$	17,064	$	17,064
1-4 Family residential		8,673		8,673
Commercial real estate		7,144		7,144
Other real estate secured loans		1,829		1,829
Commercial, financial and agricultural		268		268
Other loans		6,969		6,969
Total impaired loans		41,947		41,947
Other real estate owned:
Construction and development		9,720		9,720
1-4 Family residential		3,139		3,139
Commercial		47		47
Total other real estate owned	$	12,906	$	12,906

	December 31, 2010
			Fair Value
			Measurements using
			other significant
			unobservable inputs
	Carrying Value		(Level 3)
Assets:
Impaired loans:
Real estate construction	$	19,174	$	19,174
1-4 Family residential		6,997		6,997
Commercial real estate		2,691		2,691
Commercial, financial and agricultural		513		513
Total impaired loans		29,375		29,375
Other real estate owned:
Construction and development		8,026		8,026
1-4 Family residential		2,799		2,799
Commercial		399		399
Total other real estate owned	$	11,224	$	11,224

Impaired loans, with specific allocations or partial charge offs based on the fair value of the underlying collateral for collateral dependent loans, had a principal balance of $50,013, with a valuation allowance of $8,066, resulting in an additional provision for loan losses of $5,705 for the six month period ended June 30, 2011, compared to additional provision of $3,274 in the first six months of 2010 and additional provision of $3,916 and $3,274 for the three months ended June 30, 2011 and 2010, respectively. Impaired loans, with specific allocations or partial charge offs based on the fair value of the underlying collateral for collateral dependent loans, had a carrying amount of $35,860, with a valuation allowance of $6,485, resulting in an additional provision for loan losses of $9,129 for the year ended December 31, 2010.

Other real estate owned, measured at fair value less costs to sell, had a net carrying amount of $12,906, which is made up of the outstanding balance of $16,460, net of a valuation allowance of $3,554 at June 30, 2011, resulting in a write-down of $635 charged to expense in the six months ended June 30, 2011, compared to a write-down of $21 charged to expense in the first six months of 2010. Net carrying amount was $11,224 at December 31, 2010, which was made up of the outstanding balance of $14,294, net of a valuation allowance of $3,070, resulting in a write-down of $2,318 charged to expense during 2010.

Carrying amount and estimated fair values of significant financial instruments at June 30, 2011 and December 31, 2010 were as follows:

	June 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets
Cash and cash equivalents	$	58,685	$	58,685	$	60,303	$	60,303
Time deposits in other financial institutions		500		504		1,959		1,960
Securities available for sale		62,306		62,306		63,482		63,482
Loans held for sale		5,083		5,083		4,282		4,282
Loans, net of allowance		466,806		460,903		488,807		480,657
Restricted equity securities		1,727		N/A		1,727		N/A
Accrued interest receivable		2,262		2,262		2,528		2,528
Financial liabilities
Total deposits	$	571,581	$	573,095	$	595,069	$	597,596
Accrued interest payable		2,271		2,271		1,667		1,667
Repurchase agreement		7,000		7,365		7,000		7,447
Federal Home Loan Bank advances		16,000		16,238		16,000		16,317
Subordinated debentures		23,000		13,704		23,000		13,519

Carrying amount is the estimated fair value for cash and cash equivalents, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. The method for determining fair values of securities is discussed above. Restricted equity securities do not have readily determinable fair values due to their restrictions on transferability. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of loans held for sale is based on market quotes. Fair value of debt is based on current rates for similar financing. The fair value of off-balance-sheet items is not considered material.