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Fair Value
 6 Months Ended
Jun. 30, 2012
Fair Value [Abstract]  
Fair Value
 
(6)
Fair Value
 
The Company is required to disclose fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate that value. The assumptions used in the estimation of the fair value of the Company's financial instruments are detailed below. Where quoted prices are not available, fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather a good faith estimate of the increase or decrease in value of financial instruments held by the Company since purchase, origination, or issuance.

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.  These levels are:

·  
Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.
·  
Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
·  
Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market.  These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.  Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Cash and Cash Equivalents
For cash, due from banks and interest bearing deposits, the carrying amount is a reasonable estimate of fair value.

Investment Securities Available for Sale
Fair values of investment securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges when available.  If quoted prices are not available, fair value is determined using matrix pricing, which is a mathematical technique used widely 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.  Fair values for investment securities with quoted market prices are reported in the Level 1 fair value category.  Fair value measurements obtained from independent pricing services are reported in the Level 2 fair value category.  All other fair value measurements are reported in the Level 3 fair value category.

Other Investments
For other investments, the carrying value is a reasonable estimate of fair value.

Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at lower of aggregate cost or market value.  The cost of mortgage loans held for sale approximates the market value.  Mortgage loans held for sale are reported  in the Level 3 fair value category.

Loans
The fair value of fixed rate 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. For variable rate loans, the carrying amount is a reasonable estimate of fair value.  Impaired loans with current certified appraisals are included in the Level 2 fair value category.  All other loans are included in the Level 3 fair value category, as the pricing of loans is more subjective than the pricing of other financial instruments.
 
Cash Surrender Value of Life Insurance
For cash surrender value of life insurance, the carrying value is a reasonable estimate of fair value.
 
Other Real Estate
The fair value of other real estate is based upon independent market prices, appraised values of the collateral or management's estimation of the value of the collateral. Other real estate is reported in the Level 3 fair value category.

Derivative Instruments
For derivative instruments, fair value is estimated as the amount that the Company would receive or pay to terminate the contracts at the reporting date, taking into account the current unrealized gains or losses on open contracts.

Deposits
The fair value of demand deposits, interest-bearing demand deposits and savings is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.

Securities Sold Under Agreements to Repurchase
For securities sold under agreements to repurchase, the carrying value is a reasonable estimate of fair value.

Federal Home Loan Bank ("FHLB") Borrowings
The fair value of FHLB borrowings is estimated based upon discounted future cash flows using a discount rate comparable to the current market rate for such borrowings.

Junior Subordinated Debentures
Because the Company's junior subordinated debentures were issued at a floating rate, the carrying amount is a reasonable estimate of fair value.

Commitments to Extend Credit and Standby Letters of Credit
Commitments to extend credit and standby letters of credit are generally short-term and at variable interest rates. Therefore, both the carrying value and estimated fair value associated with these instruments are immaterial.

Limitations
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 significant portion of the Company's financial instruments, fair value estimates are based on many judgments. 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. Significant assets and liabilities that are not considered financial instruments include deferred income taxes and premises and equipment. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

GAAP establishes a framework for measuring fair value and expands disclosures about fair value measurements. There is a three-level fair value hierarchy for fair value measurements.  Level 1 inputs are quoted prices in active markets for identical assets or liabilities that a company has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability.   The following tables present the balance of securities available for sale, mortgage loans held for sale and derivatives, which are measured at fair value on a recurring basis by level within the fair value hierarchy as of June 30, 2012 and December 31, 2011.
 
(Dollars in thousands)
       
 
June 30, 2012
 
Fair Value Measurements
 
Level 1
Valuation
 
Level 2
Valuation
 
Level 3
Valuation
Mortgage-backed securities
$166,021 - 166,021 -
U.S. Government
        
sponsored enterprises
$2,930 - 2,930 -
State and political subdivisions
$107,675 - 107,675 -
Corporate bonds
$1,545 - 1,545 -
Trust preferred securities
$1,250 - - 1,250
Equity securities
$1,314 1,314 - -
Mortgage loans held for sale
$3,753 - - 3,753
 
(Dollars in thousands)
       
 
December 31, 2011
 
Fair Value Measurements
 
Level 1
Valuation
 
Level 2
Valuation
 
Level 3
Valuation
Mortgage-backed securities
$213,693 - 208,349 5,344
U.S. Government
        
sponsored enterprises
$7,694 - 7,694 -
State and political subdivisions
$97,097 - 97,097 -
Corporate bonds
$543 - 543 -
Trust preferred securities
$1,250 - - 1,250
Equity securities
$1,111 1,111 - -
Mortgage loans held for sale
$5,146 - - 5,146
 
The following is an analysis of fair value measurements of investment securities available for sale using Level 3, significant unobservable inputs, for the six months ended June 30, 2012.  Transfers out of Level 3 during the six months ended June 30, 2012 are attributable to one available for sale security reported in Level 3 at December 31, 2011 because market pricing was unavailable from the Bank's third party bond accounting provider at that time.  This security was reported in Level 2 at June 30, 2012, as the market valuation was provided by the Bank's third party bond accounting provider.
 
(Dollars in thousands)
  
 
Investment Securities Available for Sale
 
 
Level 3 Valuation
 
Balance, beginning of period
$6,594 
Change in book value
 - 
Change in gain/(loss) realized and unrealized
 - 
Purchases/(sales)
 - 
Transfers in and/or (out) of Level 3
 (5,344)
Balance, end of period
$1,250 
     
Change in unrealized gain/(loss) for assets still held in Level 3
$- 
 
The Company's June 30, 2012 and December 31, 2011 fair value measurement for impaired loans and other real estate on a non-recurring basis is presented below:
 
(Dollars in thousands)
         
 
Fair Value Measurements June
30, 2012
 
Level 1 Valuation
 
Level 2 Valuation
 
Level 3 Valuation
 
Total Gains/(Losses) for
the Six Months Ended
June 30, 2012
 
Impaired loans
$51,729 - 345 51,384 (4,217)
Other real estate
$6,505 - - 6,505 (384)
 
(Dollars in thousands)
         
 
Fair Value Measurements December 31, 2011
 
Level 1 Valuation
 
Level 2 Valuation
 
Level 3 Valuation
 
Total Gains/(Losses) for
the Year Ended
December 31, 2011
 
Impaired loans
$49,901 - 431 49,470 (11,864)
Other real estate
$7,576 - - 7,576 (1,322)
 
The carrying amount and estimated fair value of the Company's financial instruments at June 30, 2012 and December 31, 2011 are as follows:
 
(Dollars in thousands)
         
    
Fair Value Measurements at June 30, 2012
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
         
Cash and cash equivalents
$69,477 69,477 - - 69,477
Investment securities available for sale
 280,735 1,314 278,171 1,250 280,735
Other investments
 5,734 - - 5,734 5,734
Mortgage loans held for sale
 3,753 - - 3,753 3,753
Loans, net
 626,175 - 345 619,259 619,604
Cash surrender value of life insurance
 13,040 - 13,040 - 13,040
            
Liabilities:
          
Deposits
$780,546 - 779,500 - 779,500
Securities sold under agreements
          
to repurchase
 50,510 - 50,510 - 50,510
FHLB borrowings
 70,000 - 75,508 - 75,508
Junior subordinated debentures
 20,619 - 20,619 - 20,619
 
(Dollars in thousands)
   
 
December 31, 2011
 
Carrying
Amount
 
Estimated
Fair Value
Assets:
   
Cash and cash equivalents
$29,236 29,236
Investment securities available for sale
 321,388 321,388
Other investments
 5,712 5,712
Mortgage loans held for sale
 5,146 5,146
Loans, net
 653,893 648,640
Cash surrender value of life insurance
 12,835 12,835
      
Liabilities:
    
Deposits and demand notes payable
$827,111 826,810
Securities sold under agreements
    
to repurchase
 39,600 39,600
FHLB borrowings
 70,000 75,046
Junior subordinated debentures
 20,619 20,619