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Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2011

8. Fair Value of Financial Instruments

In accordance with accounting guidance, the Company groups its financial assets and financial liabilities measured at fair value in 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. These levels are:

Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes U.S. Treasury, other U.S. government and agency mortgage-backed securities that are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 — Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities.

Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

The balances of assets and liabilities measured at fair value on a recurring basis are as follows:

	As of June 30, 2011
(dollars in thousands)	Total			Level 1		Level 2			Level 3

Securities available for sale	$	207,275		$	—	$	207,275		$	—
Cash flow hedge	(1,922		)	—		(1,922		)	—
Warrant portfolio	577			—		—			577

Total	$	205,930		$	—	$	205,353		$	577

	As of December 31, 2010
	Total			Level 1		Level 2			Level 3

Securities available for sale	$	217,303		$	—	$	217,303		$	—
Cash flow hedge	(1,750		)	—		(1,750		)	—
Warrant portfolio	724			—		—			724

Total	$	216,277		$	—	$	215,553		$	724

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis were not material for the quarter and six months ended June 30, 2011.

The Company may be required, from time to time, to measure certain other financial assets at fair value on a non-recurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The assets measured at fair value on a non-recurring basis at June 30, 2011 and December 31, 2010 included OREO of $9.7 million and $6.6 million, respectively. The fair value of OREO was determined using Level 2 assumptions. The Company charged-off $5,000 during the quarter and six months ended June 30, 2011 as a result of declines in the OREO property values. The assets measured at fair value on a non-recurring basis as of June 30, 2011 and December 31, 2010 also included impaired loans of $12.6 million and $16.7 million, respectively. The fair value of impaired loans was determined using Level 3 assumptions. The Company charged-off $380,000 and $2.1 million during the quarter and six months ended June 30, 2011, respectively, as a result of impaired loans.

The following estimated fair value amounts have been determined by using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation techniques may have a material effect on the estimated fair value amounts.

The following table presents the carrying amount and estimated fair value of certain assets and liabilities of the Company at June 30, 2011 and December 31, 2010. The carrying amounts reported in the balance sheets approximate fair value for the following financial instruments: cash and due from banks, federal funds sold, interest-bearing deposits in other banks, demand and savings deposits, bank owned life insurance, and cash flow hedge (see Note 3 for information regarding securities).

	June 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
(dollars in thousands)	Value		Value		Value		Value

Financial assets:
Cash and due from banks	$	28,299	$	28,299	$	8,676	$	8,676
Federal funds sold	110,330		110,330		114,240		114,240
Interest bearing deposits in other banks	335		335		2,539		2,539
Investments securities	207,275		207,275		217,303		217,303
Loans and leases, gross	651,663		634,181		650,103		663,030
Bank owned life insurance	10,587		10,587		10,393		10,393

Financial liabilities:
Deposits	879,673		893,958		847,946		846,701
Trust preferred securities	17,527		17,617		17,527		17,607
Other borrowings	—		—		7,672		7,650
Cash flow hedge	1,922		1,922		1,750		1,750

Loans

The fair value of loans with fixed rates is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings. For loans with variable rates that adjust with changes in market rates of interest, the carrying amount is a reasonable estimate of fair value.

Time deposits

The fair value of fixed maturity certificates of deposit is estimated using rates currently offered for deposits of similar remaining maturities.

Trust preferred securities

The fair value of the trust preferred securities approximates the pricing of a preferred security at current market prices.