Fair Value Measurements

6 Months Ended

Jun. 30, 2011

Fair Value Measurements [Abstract]

Fair Value Measurements

Note 4 — Fair Value Measurements

Fair value is the exchange price that would be received to sell 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 at the measurement date. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes 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 market 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 company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

In determining the appropriate levels, 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 for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). 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). Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. 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.

Interest Rate Swap Derivatives: The fair value of interest rate swap derivatives is determined based on discounted cash flow valuation models using observable market data as of the measurement date (Level 2 inputs). The fair value adjustment is included in other liabilities.

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.

Loans Held for Sale: Loans held for sale are carried at fair value, as determined by outstanding commitments, from third party investors (Level 2).

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

Investments in Tax Credits: The fair values for tax credits are measured on a recurring basis and are based upon total credits and deductions remaining to be allocated and total estimated credits and deductions to be allocated (Level 3 inputs).

Other Real Estate Owned: The fair value of other real estate owned 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.

Assets and Liabilities Measured on a Recurring Basis

The following tables present the balances of assets and liabilities measured at fair value on a recurring basis by level within the hierarchy as of June 30, 2011 and December 31, 2010.

			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
	June 30,		Identical Assets		Observable Inputs		Inputs
	2011		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Available-for-sale securities
Obligations of U.S. Government agencies	$	187,735		47,705		140,030		—
Obligations of states and political subdivisions		83,241		—		83,241		—
Mortgage-backed securities
U.S. GSE’s MBS — residential		148,545		—		148,080		465
U.S. GSE’s CMO		111,820		—		111,820		—
Other CMO		2,378		—		428		1,950
Corporate bonds		35,781		—		33,446		2,335
Total available-for-sale securities	$	569,500		47,705		517,045		4,750
Tax credits		316		—		—		316
Loans held for sale		15,913		—		15,913		—
Mortgage banking derivatives		82		—		82		—
	$	585,811		47,705		533,040		5,066
Liabilities:
Interest rate swap derivatives		106		—		106		—
	$	106		—		106		—

			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
	December 31,		Identical Assets		Observable Inputs		Inputs
	2010		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Available-for-sale securities
Obligations of U.S. Government agencies	$	200,917		31,405		169,512		—
Obligations of states and political subdivisions		64,118		—		64,118		—
Mortgage-backed securities
U.S. GSE’s MBS — residential		141,725		—		141,216		509
U.S. GSE’s CMO		140,334		985		139,349		—
Other CMO		3,073		—		663		2,410
Corporate bonds		36,133		—		25,395		10,738
Equity securities		2		2		—		—
Total available-for-sale securities	$	586,302		32,392		540,253		13,657
Tax credits		356		—		—		356
Loans held for sale		12,775		—		12,775		—
Mortgage banking derivatives		2		—		2		—
Total	$	599,435		32,392		553,030		14,013

During the six months ended June 30, 2011, six U.S. agency securities with a market value of $15,564 were transferred out of Level 2 and into Level 1. During the first quarter of 2011, eight corporate securities with a market value of $7,278 were transferred out of Level 3 and into Level 2 based on observable market data for these securities due to increased market activity for these securities. The tables below present 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) as of June 30, 2011 and 2010.

	Fair Value Measurements Using Significant Unobservable Inputs
				(Level 3)
				Available-for-sale
	Tax credits			Securities			Total
	(Dollars in thousands)
Beginning balance, January 1, 2011	$	356			13,657			14,013
Total gains or losses (realized/unrealized)
Included in earnings
Gain (loss) on sales		—			—			—
Other-than-temporary impairment		—			(62	)		(62	)
Amortization of tax credit investment		(40	)		—			(40	)
Included in other comprehensive income		—			(1,567	)		(1,567	)
Purchases, sales, issuances and settlements
Purchases		—			—			—
Sales		—			—			—
Issuances		—			—			—
Settlements		—			—			—
Transfers into Level 3		—			—			—
Transfers out of Level 3		—			(7,278	)		(7,278	)
Ending balance, June 30, 2011	$	316			4,750			5,066

	Fair Value Measurements Using Significant Unobservable Inputs
				(Level 3)
				Available-for-sale
	Tax credits			Securities			Total
	(Dollars in thousands)
Beginning balance, January 1, 2010	$	435			14,365			14,800
Total gains or losses (realized/unrealized)
Included in earnings
Gain (loss) on sales		—			(122	)		(122	)
Other-than-temporary impairment		—			—			—
Amortization of tax credit investment		(40	)		—			(40	)
Included in other comprehensive income		—			1,856			1,856
Purchases, sales, issuances and settlements
Purchases		—			—			—
Sales		—			(1,790	)		(1,790	)
Issuances		—			—			—
Settlements		—			—			—
Transfers into Level 3		—			—			—
Transfers out of Level 3		—			—			—
Ending balance, June 30, 2010	$	395			14,309			14,704

Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis as of June 30, 2011 and December 31, 2010 are summarized below.

			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
	June 30,		Identical Assets		Observable Inputs		Inputs
	2011		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Impaired loans
Commercial, financial, and agricultural	$	736		—		—		736
Real estate:
Commercial		7,559		—		—		7,559
Residential		3,754		—		—		3,754
Acquisition, development and construction		7,446		—		—		7,446
Consumer installment		86		—		—		86
Total impaired loans	$	19,581		—		—		19,581
Other real estate owned		8,558		—		—		8,558
Total	$	28,139		—		—		28,139

			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
	December 31,		Identical Assets		Observable Inputs		Inputs
	2010		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Impaired loans
Commercial, financial, and agricultural	$	—		—		—		—
Real estate:
Commercial		3,143		—		—		3,143
Residential		3,187		—		—		3,187
Acquisition, development and construction		6,565		—		—		6,565
Consumer installment		—		—		—		—
Total impaired loans	$	12,895		—		—		12,895
Other real estate owned		7,751		—		—		7,751
Total	$	20,646		—		—		20,646

The following represents impairment charges recognized during the period:

Impaired loans, which are measured for impairment using the fair value of collateral for collateral dependent loans, had a carrying amount of $20,273, with a valuation allowance of $692, resulting in an additional provision for loan losses of $1,267 and $2,877 for the three and six months ended June 30, 2011, respectively. Impaired loans that are not carried at fair value had a carrying amount of $5,084 at June 30, 2011.

As of December 31, 2010, impaired loans had a carrying amount of $14,369, with a valuation allowance of $1,474, resulting in an additional provision for loan losses of $6,831 for the year ending 2010. Impaired loans that are not carried at fair value had a carrying amount of $10,679 at December 31, 2010.

Other real estate owned, which is carried at lower of cost or fair value, was $8,558 which consisted of the outstanding balance of $10,680, less a valuation allowance of $2,122, resulting in a write down of $135 and $248 for the three and six months ended June 30, 2011, respectively.

As of December 31, 2010, other real estate owned was $7,751 which consisted of the outstanding balance of $9,866, less a valuation allowance of $2,115, resulting in a write down of $1,909 for the year ending 2010.

Disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value is required. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.

Because no market exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.

The assumptions used in the estimation of the fair value of the Company’s financial instruments are explained below. Where quoted market prices are not available, fair values are based on estimates using discounted cash flow and other valuation techniques. Discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following fair value estimates cannot be substantiated by comparison to independent markets and should not be considered representative of the liquidation value of the Company’s financial instruments, but rather a good-faith estimate of the fair value of financial instruments held by the Company. Certain financial instruments and all nonfinancial instruments are excluded from disclosure requirements.

The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:

(a)	Cash and Cash Equivalents
	Fair value equals the carrying value of such assets due to their nature.
(b)	Loans, net
	The fair value of loans is calculated using discounted cash flows by loan type. The discount rate used to determine the present value of the loan portfolio is an estimated market rate that reflects the credit and interest rate risk inherent in the loan portfolio without considering widening credit spreads due to market illiquidity. The estimated maturity is based on the Company’s historical experience with repayments adjusted to estimate the effect of current market conditions. The carrying amount of related accrued interest receivable approximates its fair value and is not disclosed. The carrying amount of real estate loans originated for sale approximates their fair value. The allowance for loan losses is considered a reasonable discount for credit risk.
(c)	Deposits
	Fair values for certificates of deposit have been determined using discounted cash flows. The discount rate used is based on estimated market rates for deposits of similar remaining maturities. The carrying amounts of all other deposits, due to their short-term nature, approximate their fair values. The carrying amount of related accrued interest payable approximates its fair value and is not disclosed.
(d)	Securities Sold Under Repurchase Agreements
	Fair value approximates the carrying value of such liabilities due to their short-term nature.
(e)	Advances from Federal Home Loan Bank
	The fair value of the Federal Home Loan Bank (“FHLB”) advances is obtained from the FHLB and is calculated by discounting contractual cash flows using an estimated interest rate based on the current rates available to the Company for debt of similar remaining maturities and collateral terms.
(f)	Subordinated debentures
	The fair value for subordinated debentures is calculated based upon current market spreads to LIBOR for debt of similar remaining maturities and collateral terms.

(g)	Commitments
	The difference between the carrying values and fair values of commitments to extend credit are not significant and are not disclosed.

The carrying amounts and estimated fair values of the Company’s financial instruments at June 30, 2011 and December 31, 2010 are as follows:

	June 30, 2011
	Carrying		Estimated
	amount		fair value
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	69,684		69,684
Loans, net		861,304		861,182
Financial liabilities:
Deposits with stated maturities		421,742		425,939
Deposits without stated maturities		980,258		980,258
Securities sold under repurchase agreements		611		611
Advances from FHLB		52,000		56,736
Subordinated debentures		22,947		15,072

	December 31, 2010
	Carrying		Estimated
	amount		fair value
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	65,115		65,115
Loans, net		860,213		858,505
Financial liabilities:
Deposits with stated maturities		487,810		491,867
Deposits without stated maturities		922,927		922,927
Securities sold under repurchase agreements		818		818
Advances from FHLB		60,000		64,615
Subordinated debentures		22,947		14,978