FAIR VALUE

12 Months Ended

Dec. 31, 2011

FAIR VALUE

FAIR VALUE

NOTE 7 — 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) for 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 values:

        The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or using market data utilizing pricing models, primarily Interactive Data Corporation (IDC), that vary based upon asset class and include available trade, bid, and other market information. Matrix pricing is used for most municipals, 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. The grouping of securities is done according to insurer, credit support, state of issuance, and rating to incorporate additional spreads and municipal curves. For the general market municipals, the Thomson Municipal Market Data curve is used to determine the initial curve for determining the price, movement, and yield relationships with the municipal market (Level 2 inputs). Level 3 securities are largely comprised of small, local municipality issuances, single issuer trust preferred securities and certain equity securities for which there are no active trades. Fair values are derived through consideration of funding type, maturity and other features of the issuance, and include reviewing financial statements, earnings forecasts, industry trends and the valuation of comparative issuers.

        The fair value of servicing rights is based on a valuation model that incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. The Company compares the valuation model inputs and results to published industry data in order to validate the model results and assumptions. (Level 2 inputs).

        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 typically significant and result in a Level 3 classification of the inputs for determining fair value.

        The fair value of other real estate owned is measured based on the value of the collateral securing those assets and is determined using several methods. The fair value of real estate is generally determined based on appraisals by qualified licensed appraisers. The appraisers typically determine the value of the real estate by utilizing an income or market valuation approach. If an appraisal is not available, the fair value may be determined by using a cash flow analysis (Level 3 inputs).

Assets and Liabilities Measured on a Recurring Basis

        Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Company has elected the fair value option, are summarized below:

			Fair Value Measurements at December 31, 2011 Using:
(Dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets
Investment securities available-for-sale States and municipal	$	344,877			$	321,321	$	23,556
Mortgage-backed securities — residential — Government Sponsored Entity		271,504				271,504
Collateralized mortgage obligations — Government Sponsored Entity		250,767				250,767
Equity securities		5,410		4,660				750
Other securities		3,532				945		2,587
Total investment securities available-for-sale	$	876,090	$	4,660	$	844,537	$	26,893

			Fair Value Measurements at December 31, 2010 Using
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets
Investment securities available-for-sale
States and municipal	$	300,144			$	300,144
Mortgage-backed securities — Residential — Government Sponsored Entity		312,831				312,831
Collateralized mortgage obligations — Government Sponsored Entity		185,997				185,997
Equity securities		4,405		3,655				750
Other securities		2,694				824		1,870
Total investment securities available-for-sale	$	806,071	$	3,655	$	799,796	$	2,620

        There have been no transfers between Level 1 and 2 during the two years ending December 31, 2011 and 2010.

        The tables 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 years ended December 31, 2011 and 2010:

States and municipal	2011		2010
Beginning balance, January 1	$	—	$	930
Total gains or losses (realized / unrealized)
Included in earnings
Other changes in fair value		—		—
Gains (losses) on sales of securities		—		—
Included in other comprehensive income		—		—
Purchases		1,975		—
Issuances		—		—
Settlements		—		—
Transfers in and / or out of Level 3		21,581		(930	)
Ending balance, December 31	$	23,556	$	—

Equity securities	2011		2010
Beginning balance, January 1	$	750	$	750
Total gains or losses (realized / unrealized)
Included in earnings
Other changes in fair value		—		—
Gains (losses) on securities		—		—
Included in other comprehensive income		—		—
Purchases		—		—
Issuances		—		—
Settlements		—		—
Transfers in and / or out of Level 3		—		—
Ending balance, December 31	$	750	$	750

Other securities	2011			2010
Beginning balance, January 1	$	1,870		$	1,540
Total gains or losses (realized / unrealized)
Included in earnings
Other changes in fair value		—			—
Gains (losses) on securities		—			—
Included in other comprehensive income		—			330
Purchases		2,587			—
Issuances		—			—
Settlements		—			—
Transfers in and / or out of Level 3		(1,870	)		—
Ending balance, December 31	$	2,587		$	1,870

        Transfers out of Level 3 are primarily due to the availability of Level 2 data. During the middle of 2011, the Company's pricing service no longer priced some municipal securities due to the illiquidity of those securities. These investments are carried at fair value, which approximate book value and classified as Level 3. These securities are monitored by the Company to insure no impairment exists and the issuers are current as to repayment of interest and principal. The Company has no intent or need of selling these investments before maturity. Accordingly, the Company believes the fair value of these securities equals book value at December 31, 2011.

Assets and Liabilities Measured on a Non-Recurring Basis

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

			Fair Value Measurements at December 31, 2011 Using:
	December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans
Commercial and industrial	$	519				$	519
Agricultural		43					43
Farm		292					292
Construction and development		763					763
Other		6,125					6,125
Total impaired loans	$	7,742				$	7,742
Servicing rights	$	4,000		$	4,000
Other real estate owned/assets held for sale	$	5,516				$	5,516

			Fair Value Measurements at December 31, 2010 Using
	December 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans
Commercial and industrial	$	1,735				$	1,735
Hotel		5,827					5,827
Construction and development		14,504					14,504
Other		11,090					11,090
Total impaired loans	$	33,156				$	33,156
Servicing rights	$	1,548		$	1,548
Other real estate owned/assets held for sale	$	3,085				$	3,085

        The following represent impairment charges recognized during the period:

        Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a gross carrying amount of $11,399, with a valuation allowance of $3,657, resulting in an additional provision for loan losses of $2,928 in 2011. A breakdown on these loans by portfolio class is as follows:

	Gross Balance		Valuation Allowance		Net
Commercial and industrial	$	918	$	399	$	519
Agricultural		43		—		43
Farm		486		194		292
Construction and development		1,401		638		763
Other		8,551		2,426		6,125
Ending Balance	$	11,399	$	3,657	$	7,742

        At December 31, 2010, impaired loans had a gross carrying amount of $41,597, with a valuation allowance of $8,441, resulting in an additional provision for loan losses of $16,317 for the year ending December 31, 2010.

        Impaired tranches of servicing rights were carried at a fair value of $4,000, which is made up of the gross outstanding balance of $4,449, net of a valuation allowance of $449. A credit of $45 was included in 2011 earnings. In 2010, impaired servicing rights were written down to a fair value of $1,548, resulting in a valuation allowance of $494. The gross outstanding balance was $2,042, net of a valuation allowance of $494. A credit of $132 was included in 2010 earnings.

        Other real estate owned/assets held for sale is evaluated at the time a property is acquired through foreclosure or moved to held for sale or shortly thereafter. Fair value is based on appraisals by qualified licensed appraisers. At December 31, 2011, the fair value is made up of the gross outstanding balance of $9,519, net a valuation allowance of $4,003. At December 31, 2010, the fair value is made up of the gross outstanding balance of $5,067, net a valuation allowance of $1,982. During 2011, these properties were written down by $2,671 which was included in 2011 earnings. During 2010, these properties were written down by $1,479 which was included in 2010 earnings. A breakdown of these properties by portfolio class at December 31, 2011 is as follows:

	Gross Balance		Valuation Allowance		Net
Construction and development	$	3,862	$	1,982	$	1,880
Other commercial real estate		5,657		2,021		3,836
Ending Balance	$	9,519	$	4,003	$	5,516

        Carrying amount and estimated fair values of financial instruments, not previously presented, at year end were as follows:

	2011						2010
December 31	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Assets
Cash and cash equivalents	$	109,148		$	109,148		$	60,123		$	60,123
Loans including loans held for sale, net		1,503,368			1,507,310			1,611,055			1,595,748
Restricted stock		15,856			N/A			19,502			N/A
Interest receivable		10,814			10,814			11,552			11,552
Liabilities
Deposits		(2,159,900	)		(2,161,888	)		(2,211,564	)		(2,214,778	)
Other borrowings		(25,789	)		(25,789	)		(33,181	)		(33,181	)
FHLB advances		(151,427	)		(164,209	)		(152,065	)		(163,498	)
Interest payable		(1,891	)		(1,891	)		(3,391	)		(3,391	)
Subordinated debentures		(50,267	)		(26,645	)		(50,117	)		(26,565	)

        The methods and assumptions, not previously presented, used to estimate fair value are described as follows.

        Carrying amount is the estimated fair value of cash and cash equivalents, interest-bearing time deposits, accrued interest receivable and payable, demand and all other transactional deposits, short-term borrowings, variable rate notes payable, and variable rate loans or deposits that reprice frequently and fully. 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 value of loans held for sale is based on market quotes. Fair value of FHLB advances and subordinated debentures is based on current rates for similar financing. It is not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability. The fair value of off-balance-sheet items is based on the current fees or cost that would be charged to enter into or terminate such arrangements, and are not considered significant.