FAIR VALUE

6 Months Ended

Jun. 30, 2011

FAIR VALUE

FAIR VALUE

10.  FAIR VALUE

A fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels of inputs may be used to measure fair value.

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.

For the Company’s securities available for sale, the estimated fair value equals quoted market price, if available (Level 1 inputs). If a quoted market price is not available, fair value is estimated using a quoted market price for similar securities (Level 2 inputs). Our derivative instruments consist of interest rate swap transactions with customers on loans.  As such, significant fair value inputs can generally be verified and do not typically involve significant management judgments (Level 2 inputs).  The market value adjustment of the derivatives considers the credit risk of the counterparties to the transaction and the effect of any credit enhancements related to the transaction. 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. Unobservable inputs are typically significant and result in a Level 3 classification for determining fair value of impaired loans.

Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):

	Carrying Amount at June 30, 2011		Fair Value  Measurements at  June 30, 2011  Using Significant  Other Observable  Inputs (Level 2)
Assets:
Securities available for sale:
Obligations of states and political subdivisions	$	1,351	$	1,351
Government Agency securities	43,311		43,311
Mortgage-backed securities and collateralized mortgage obligations - residential:
FHLMC	91,005		91,005
FNMA	118,926		118,926
GNMA	74,088		74,088
Mortgage-backed securities and collateralized mortgage obligations - commercial:
GNMA	4,921		4,921
Total securities available for sale	$	333,602	$	333,602
Derivatives	$	1,997	$	1,997
Liabilities:
Derivatives	$	2,093	$	2,093

	Carrying Amount at December 31, 2010		Fair Value  Measurements at  December 31, 2010  Using Significant  Other Observable  Inputs (Level 2)
Assets:
Securities available for sale:
Obligations of states and political subdivisions	$	1,906	$	1,906
Government Agency securities	40,556		40,556
Mortgage-backed securities and collateralized mortgage obligations - residential:
FHLMC	110,748		110,748
FNMA	113,617		113,617
GNMA	89,472		89,472
Mortgage-backed securities and collateralized mortgage obligations - commercial:
GNMA	4,859		4,859
Total securities available for sale	$	361,158	$	361,158
Derivatives	$	2,111	$	2,111
Liabilities:
Derivatives	$	2,198	$	2,198

For the six months ended June 30, 2011 and the year ended December 31, 2010, there were no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3).

Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis are summarized as follows (in thousands):

	June 30, 2011		Fair Value  Measurements at  June 30, 2011  Using Significant  Unobservable  Inputs (Level 3)
Assets:
Impaired loans:
Commercial and industrial - owner-occupied mortgage	$	219	$	219
Commercial and industrial - general purpose	16,221		16,221
Real estate - commercial mortgage	4,508		4,508
Real estate - commercial construction	6,090		6,090
Total impaired loans	$	27,038	$	27,038

	December 31, 2010		Fair Value  Measurements at  December 31, 2010  Using Significant  Unobservable  Inputs (Level 3)
Assets:
Impaired loans:
Commercial and industrial - general purpose	$	18,321	$	18,321
Real estate - commercial mortgage	1,437		1,437
Real estate - residential mortgage	720		720
Real estate - commercial construction	6,018		6,018
Real estate - residential construction	1,034		1,034
Total impaired loans	$	27,530	$	27,530

Impaired loans with specific allocations had a principal amount of $36 million and $40 million, with a valuation allowance of $9 million and $13 million at June 30, 2011 and December 31, 2010, respectively. The provision for losses on impaired loans was ($682) thousand and $965 thousand for the six months ended June 30, 2011 and 2010, respectively. (See also Note 5 — Loans.)

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

	June 30, 2011				December 31, 2010
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	78,170	$	78,170	$	23,121	$	23,121
Accrued interest receivable	5,537		5,537		5,776		5,776
Securities held to maturity	22,000		21,895		22,000		21,890
Securities available for sale	333,602		333,602		361,158		361,158
Federal Home Loan Bank and
other restricted stock	5,402		N/A		6,381		N/A
Loans - net of the
allowance for loan losses	1,115,487		1,123,717		1,098,292		1,109,500
Derivatives	1,997		1,997		2,111		2,111
Financial liabilities:
Deposits	$	1,400,807	$	1,310,023	$	1,348,735	$	1,257,572
Senior unsecured debt	29,000		29,319		29,000		29,386
Junior subordinated debentures	20,620		15,568		20,620		11,470
Accrued interest payable	638		638		650		650
Temporary borrowings	3,000		3,000		25,000		25,000
Derivatives	2,093		2,093		2,198		2,198

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.

Cash and Cash Equivalents - For cash and cash equivalents (due from banks, federal funds sold and securities purchased under agreements to resell), the carrying amount is a reasonable estimate of fair value.

Accrued Interest Receivable - For accrued interest receivable, the carrying amount is a reasonable estimate of fair value.

Securities Held to Maturity and Securities Available for Sale — For securities held to maturity and securities available for sale, the estimated fair value equals quoted market price if available. If a quoted market price is not available, fair value is estimated using a quoted market price for similar securities.

Federal Home Loan Bank and Other Restricted Stock — Determining the fair value of Federal Home Loan Bank stock is not practicable due to restrictions placed on its transferability. For other restricted stock, the carrying amount is a reasonable estimate of fair value.

Loans - For certain homogeneous categories of loans, such as some residential real estate loans and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics.  The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Deposits - The fair value of demand deposits and savings accounts is estimated by discounting the expected future cash flows against the interest rate swap curve, as it best represents the cost of alternative funding sources. The fair value of fixed-maturity certificates of deposit is estimated using the interest rate swap rates of similar term points.

Senior Unsecured Debt - The fair value of senior unsecured debt is estimated using the interest rate swap rates of similar term and repricing points and spreads of equivalent new issues.

Junior Subordinated Debentures - The fair value of junior subordinated debentures is estimated using observed market prices.

Temporary Borrowings and Accrued Interest Payable — Temporary borrowings (FHLB overnight and term advances, federal funds purchased and securities sold under agreements to repurchase) and accrued interest payable are considered to have fair values equal to their carrying amounts due to their short-term nature.

Derivatives — The fair value is estimated as previously described.

Commitments to Extend Credit, Standby Letters of Credit and Commercial Letters of Credit - The fair value of commitments is 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. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of standby letters of credit and commercial letters of credit is based on fees currently charged for similar agreements, which are not material to the financial statements.