(13) Fair Value of Financial Instruments

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 such value:

Loans

The fair values of loans are estimated by discounting the expected future cash flows using the current rates at which similar loans could be made to borrowers with similar credit ratings and for the same remaining maturities. The net carrying amount of impaired loans is generally based on the fair values of collateral obtained through independent appraisals or internal evaluations, or by discounting the total expected future cash flows. This method of estimating fair value does not incorporate the exit-price concept of fair value prescribed by ASC Topic 820.

Investment in available-for-sale securities

A detailed description of the fair value measurement of the debt instruments in the available-for-sale sections of the investment security portfolio is provided in the Fair Value Measurement section above. A schedule of investment securities by category and maturity is provided in the notes on Investment Securities.

Federal Home Loan Bank (FHLB) Stock

Ownership of equity securities of FHLB is restricted and there is no established market for their resale. The carrying amount is a reasonable estimate of fair value as this stock can only be sold to FHLB or other member banks at their par value per share.

Federal Funds Sold and Other Overnight Interest-Bearing Deposits

The carrying amounts of short-term federal funds sold and securities purchased under agreements to resell, interest earning deposits with banks, and cash and due from banks approximate fair value. Federal funds sold and securities purchased under agreements to resell classified as short-term generally mature in 90 days or less.

Mortgage Servicing Rights

The fair value of mortgage servicing rights is based on the discounted value of estimated future cash flows utilizing contractual cash flows, servicing rate, constant prepayment rate, servicing cost, and discount rate factors. Accordingly, the fair value is estimated based on a valuation model that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost to service, float earnings rates, and other ancillary income, including late fees.

Cash Surrender Value — Life Insurance

The fair value of Bank owned life insurance (BOLI) approximates the carrying amount. Upon liquidation of these investments, the Company would receive the cash surrender value which equals the carrying amount.

Accrued Interest Receivable and Payable

For accrued interest receivable and payable, the carrying amount is a reasonable estimate of fair value because of the short maturity for these financial instruments.

Deposits

The fair value of deposits with no stated maturity, such as noninterest-bearing demand, NOW accounts, savings, and money market, is equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

Securities Sold under Agreements to Repurchase and Interest-bearing Demand Notes to U.S. Treasury

For securities sold under agreements to repurchase and interest-bearing demand notes to U.S. Treasury, the carrying amount is a reasonable estimate of fair value, as such instruments reprice in a short time period.

Subordinated Notes and Other Borrowings

The fair value of subordinated notes and other borrowings is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for other borrowed money of similar remaining maturities.

A summary of the carrying amounts and fair values of the Company’s financial instruments at June 30, 2013 and December 31, 2012 is as follows:

					June 30, 2013
					Fair Value Measurements
					Quoted Prices
					in Active				Net
					Markets for		Other		Significant
	June 30, 2013				Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
(in thousands)	amount		value		(Level 1)		(Level 2)		(Level 3)
Financial Assets:
Cash and due from banks	$	20,838	$	20,838	$	20,838	$	0	$	0
Federal fund sold and overnight interest-bearing deposits	14,867		14,867		14,867		0		0
Investment in available-for-sale securities	220,655		220,655		1,009		219,646		0
Loans, net	823,632		832,932		0		0		832,932
Investment in FHLB stock	2,686		2,686		0		2,686		0
Mortgage servicing rights	2,873		2,873		0		0		2,873
Cash surrender value - life insurance	2,175		2,175		0		2,175		0
Accrued interest receivable	5,100		5,100		5,100		0		0
	$	1,092,826	$	1,102,126	$	41,814	$	224,507	$	835,805
Financial Liabilities:
Deposits:
Non-interest bearing demand	$	180,461	$	180,461	$	180,461	$	0	$	0
Savings, interest checking and money market	427,742		427,742		427,742		0		0
Time deposits	377,789		380,808		0		0		380,808
Federal funds purchased and securities sold under agreements to repurchase	21,499		21,499		21,499		0		0
Subordinated notes	49,486		33,726		0		33,726		0
Federal Home Loan Bank advances	29,033		30,070		0		30,070		0
Accrued interest payable	1,316		1,316		1,316		0		0
	$	1,087,326	$	1,075,622	$	631,018	$	63,796	$	380,808

					December 31, 2012
					Fair Value Measurements
					Quoted Prices
					in Active				Net
					Markets for		Other		Significant
	December 31, 2012				Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
(in thousands)	amount		value		(Level 1)		(Level 2)		(Level 3)
Financial Assets:
Cash and due from banks	$	31,020	$	31,020	$	31,020	$	0	$	0
Federal fund sold and overnight interest-bearing deposits	27,857		27,857		27,857		0		0
Investment in available-for-sale securities	200,246		200,246		2,030		198,216		0
Loans, net	832,142		834,824		0		0		834,824
Investment in FHLB stock	2,278		2,278		0		2,278		0
Mortgage servicing rights	2,549		2,549		0		0		2,549
Cash surrender value - life insurance	2,136		2,136		0		2,136		0
Accrued interest receivable	5,190		5,190		5,190		0		0
	$	1,103,418	$	1,106,100	$	66,097	$	202,630	$	837,373
Financial Liabilities:
Deposits:
Non-interest bearing demand	$	192,271	$	192,271	$	192,271	$	0	$	0
Savings, interest checking, and money market	405,702		405,702		405,702		0		0
Time deposits	393,302		397,986		0		0		397,986
Federal funds purchased and securities sold under agreements to repurchase	21,058		21,058		21,058		0		0
Subordinated notes	49,486		13,154		0		13,154		0
Federal Home Loan Bank advances	20,126		20,651		0		20,651		0
Accrued interest payable	909		909		909		0		0
	$	1,082,854	$	1,051,731	$	619,940	$	33,805	$	397,986

Off-Balance Sheet Financial Instruments

The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the likelihood of the counterparties drawing on such financial instruments, and the present creditworthiness of such counterparties. The Company believes such commitments have been made on terms that are competitive in the markets in which it operates.

Limitations

The fair value estimates provided are made at a point in time based on market information and information about the financial instruments. 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 fair value estimates.