Junior Subordinated Debt/Trust Preferred Securities

6 Months Ended

Jun. 30, 2011

Junior Subordinated Debt/Trust Preferred Securities [Abstract]

Junior Subordinated Debt/Trust Preferred Securities

10.	Junior Subordinated Debt/Trust Preferred Securities

Effective September 30, 2009 and beginning with the quarterly interest payment due October 1, 2009, the Company elected to defer interest payments on the Company's $15.0 million of junior subordinated debentures relating to its trust preferred securities. The terms of the debentures and trust indentures allow for the Company to defer interest payments for up to 20 consecutive quarters without default or penalty. During the period that the interest deferrals are elected, the Company will continue to record interest expense associated with the debentures. Upon the expiration of the deferral period, all accrued and unpaid interest will be due and payable. During the deferral period, the Company is precluded from paying cash dividends to shareholders or repurchasing its stock.

The fair value guidance generally permits the measurement of selected eligible financial instruments at fair value at specified election dates. Effective January 1, 2008, the Company elected the fair value option for its junior subordinated debt issued under USB Capital Trust II. The rate paid on the junior subordinated debt issued under USB Capital Trust II is 3-month LIBOR plus 129 basis points, and is adjusted quarterly.

At June 30, 2011 the Company performed a fair value measurement analysis on its junior subordinated debt using a cash flow model approach to determine the present value of those cash flows. The cash flow model utilizes the forward 3-month LIBOR curve to estimate future quarterly interest payments due over the thirty-year life of the debt instrument, adjusted for deferrals of interest payments per the Company's election at September 30, 2009. These cash flows were discounted at a rate which incorporates a current market rate for similar-term debt instruments, adjusted for additional credit and liquidity risks associated with the junior subordinated debt. Although there is little market data in the current relatively illiquid credit markets, we believe the 8.03% discount rate used represents what a market participant would consider under the circumstances based on current market assumptions.

The fair value calculation performed at June 30, 2011 resulted in a pretax gain adjustment of 222,000 ($131,000, net of tax) for the quarter ended June 30, 2011 and a cumulative pre-tax loss adjustment of $145,000 (85,000 net of tax) for the six months ended June 30, 2011. The previous year's fair value calculation performed at June 30, 2010 resulted in a pretax gain adjustment of $467,000 ($275,000, net of tax) for the quarter ended June 30, 2010, and a cumulative pretax gain adjustment of $624,000 ($368,000, net of tax) for the six months ended June 30, 2010.