NOTE 13 - FAIR VALUE MEASUREMENTS

3 Months Ended

Mar. 31, 2012

Fair Value Disclosures [Text Block]

NOTE 13 – FAIR VALUE MEASUREMENTS

The Company groups its assets and 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:

• Quoted prices in active markets for identical assets (Level 1): Inputs that are quoted unadjusted prices in active markets for identical assets that the Company has the ability to access at the measurement date. An active market for the asset is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

• Significant other observable inputs (Level 2): Inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity including quoted prices for similar assets or liabilities, quoted prices for securities in inactive markets and inputs derived principally from, or corroborated by, observable market data by correlation or other means.

• Significant unobservable inputs (Level 3): Inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

Assets Recorded at Fair Value on a Recurring Basis:

The table below presents assets measured at fair value on a recurring basis (in thousands).

	As of March 31, 2012
	Fair Value		Level 1		Level 2		Level 3
Available-for-sale securities:
Obligations of U.S. government sponsored agencies	$	15,188	$	—	$	15,188	$	—
Obligations of state and political subdivisions		13,073		—		13,073		—
Government sponsored agency mortgage-backed securities		318,406		—		318,406		—
Corporate debt securities		4,404		—		4,404		—
Equity securities		3,083		—		3,083		—
	$	354,154	$	—	$	354,154	$	—

	At December 31, 2011
	Fair Value		Level 1		Level 2		Level 3
Available-for-sale securities:
Obligations of U.S. government sponsored agencies	$	15,234	$	—	$	15,234	$	—
Obligations of state and political subdivisions		14,455		—		14,455		—
Government sponsored agency mortgage-backed securities		275,204		—		275,204		—
Corporate debt securities		4,232		—		4,232		—
Equity securities		3,080		—		3,080		—
	$	312,205	$	—	$	312,205	$	—

Fair values for available-for-sale investment securities are based on quoted market prices for similar securities at March 31, 2012 and December 31, 2011. During the quarter ended March 31, 2012, there were no transfers between Levels 1 and 2.

Assets Recorded at Fair Value on a Nonrecurring Basis:

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-fair value accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis that were still held in the balance sheet at quarter end, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets at quarter end (in thousands).

	As of March 31, 2012
	Fair Value		Level 1		Level 2		Level 3
Impaired loans:
Commercial	$	803	$	—	$	—	$	803
Real estate - commercial		382		—		—		382
Real estate - construction		957		—		—		957
Real estate - mortgage		248		—		—		248
Other		17		—		—		17
Other real estate owned:
Real estate - commercial		782		—		—		782
Real estate - construction		966		—		—		966
Real estate - mortgage		248		—		—		248
Total assets measured at fair value on a nonrecurring basis	$	4,403	$	—	$	—	$	4,403

	At December 31, 2011
	Fair Value		Level 1		Level 2		Level 3
Impaired loans:
Commercial	$	1,338	$	—	$	—	$	1,338
Real estate - commercial		4,811		—		—		4,811
Real estate - construction		5,223		—		—		5,223
Real estate - mortgage		268		—		—		268
Installment		37		—		—		37
Other real estate owned:
Real estate - commercial		1,270		—		—		1,270
Real estate - construction		14,575		—		—		14,575
Real estate - mortgage		1,276		—		—		1,276
Total assets measured at fair value on a nonrecurring basis	$	28,798	$	—	$	—	$	28,798

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 independent appraisers to adjust for differences between the comparable sales and income data available, and additional discounts by management for known market factors and time since the last appraisal. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal balance of $2,923,000, with a valuation allowance of $516,000 at March 31, 2012, resulting in an additional provision for loan losses of $633,000 for the quarter ended March 31, 2012. At March 31, 2011, impaired loans had a principal balance of $5,105,000, with a valuation allowance of $735,000, resulting in an additional provision for loan losses of $740,000 for the quarter ended March 31, 2011.

Other Real Estate Owned – Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at fair value, less costs to sell. Fair values are based on recent real estate appraisals. These appraisals may use 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 independent 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 measured at fair value less costs to sell, had a net carrying amount of $1,996,000, resulting in write-downs of $396,000 for the quarter ended March 31, 2012. Other real estate owned had a net carrying amount of $4,997,000, resulting in write-downs of $511,000 for the quarter ended March 31, 2011.

All impaired loans and OREO are measured using the sales comparison approach performed by certified appraisers. On a quarterly basis, the Company compares the actual selling price of collateral that has been liquidated to the most recent appraised value to evaluate if any additional adjustment should be made to arrive at fair value. The most common adjustment to report appraised values are discounts linked to the estimated decline in value over the passage of time since the last appraisal. These adjustments are based on current comparable sales or market data. This discount factor ranges between 8% and 15%. The weighted average adjustment for the unobservable inputs is 10%.

Disclosures about Fair Value of Financial Instruments

The fair values presented represent the Company’s best estimate of fair value using the methodologies discussed below. The fair values of financial instruments which have a relatively short period of time between their origination and their expected realization were valued using historical cost. The values assigned do not necessarily represent amounts which ultimately may be realized. In addition, these values do not give effect to discounts to fair value which may occur when financial instruments are sold in larger quantities.

The following assumptions were used as of March 31, 2012 and December 31, 2011 to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.

a)	Cash and Due From Banks - The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.
b)	Federal Funds Sold - The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.
c)	Time Deposits at Other Financial Institutions - The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.
d)	FHLB, FRB Stock and Other Securities - It was not practicable to determine the fair value of FHLB or FRB stock due to the restrictions placed on its transferability
e)	Investment Securities – The fair value of investment securities are based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Available-for-sale securities are carried at fair value.
f)	Loans - Commercial loans, residential mortgages, construction loans and direct financing leases are segmented by fixed and adjustable rate interest terms, by maturity, and by performing and nonperforming categories.
	The fair value of performing loans are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.
	The fair value of nonperforming loans is estimated by discounting estimated future cash flows using current interest rates with an additional risk adjustment reflecting the individual characteristics of the loans, or using the fair value of underlying collateral for collateral dependent loans as a practical expedient.
g)	Deposits – The fair values disclosed for noninterest-bearing and interest-bearing demand deposits and savings and money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. Fair values for certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.
h)	Subordinated Debentures - The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.
i)	Commitments to Fund Loans/Standby Letters of Credit - The fair values of commitments are 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. The differences between the carrying value of commitments to fund loans or standby letters of credit and their fair value are not significant and therefore not included in the following table.
j)	Accrued Interest Receivable/Payable – The carrying amounts of accrued interest approximate fair value and therefore follow the same classification as the related asset or liability.

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

			Fair Value Measurements at
			March 31, 2012 Using
	Carrying
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS
Cash and due from banks	$	19,314	$	19,314	$	—	$	—	$	19,314
Federal funds sold		16,400		16,400		—		—		16,400
Time deposits at other financial institutions		1,960		1,960		—		—		1,960
FHLB, FRB and other securities		8,044								N/A
Securities:
Available-for-sale		354,154		—		354,154		—		354,154
Held-to-maturity		6		—		6		—		6
Loans		436,375		—		—		452,691		452,691
Accrued interest receivable		2,599		—		1,162		1,437		2,599
FINANCIAL LIABILITIES
Deposits:
Nonmaturity deposits	$	563,913	$	563,913	$	—	$	—	$	563,913
Time deposits		208,651		—		209,682		—		209,682
Subordinated debentures		31,961		—		—		20,544		20,544
Accrued interest payable		5,472		7		113		5,352		5,472

	December 31, 2011
	Carrying		Fair
	Amount		Value
FINANCIAL ASSETS
Cash and due from banks	$	18,758	$	18,758
Federal funds sold		40,210		40,210
Time deposits at other financial institutions		1,959		1,959
FHLB, FRB and other securities		8,044		N/A
Securities:
Available-for-sale		312,205		312,205
Held-to-maturity		6		6
Loans		443,559		461,205
Accrued interest receivable		2,557		2,557
FINANCIAL LIABILITIES
Deposits	$	766,239	$	767,487
Subordinated debentures		31,961		21,420
Accrued interest payable		4,998		4,998