FAIR VALUE MEASUREMENTS

12 Months Ended

Dec. 31, 2011

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

NOTE 20. FAIR VALUE MEASUREMENTS

ASC 820, “Fair Value Measurements and Disclosures” provides a framework for measuring and disclosing fair value under GAAP. This accounting guidance requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis or on a nonrecurring basis.

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available for sale and derivative assets and liabilities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans and other real estate and other assets owned (foreclosed assets). These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

Under ASC 820, assets and liabilities are grouped 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 their fair values. These hierarchy levels are:

Level 1 inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

Level 2 inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

The following is a description of valuation methodologies used for the Company’s assets and liabilities recorded at fair value.

Investment Securities Available for Sale

Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based on quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Loans

The Company does not record loans at fair value on a recurring basis; however, from time to time, a loan is considered impaired and a valuation allowance may be established if there are losses associated with the loan. Loans are considered impaired if it is probable that payment of interest and principle will not be made in accordance with contractual terms. The fair value of impaired loans is estimated using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. At December 31, 2011 and 2010, substantially all impaired loans were evaluated based on the fair value of the collateral and were classified as Level 3 in the fair value hierarchy.

Other Real Estate and Other Assets Owned (Foreclosed Assets)

Foreclosed assets are adjusted for fair value upon transfer of loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value and fair value. Fair value is based on independent market prices, appraised value of the collateral or management’s estimation of the value of the collateral. At December 31, 2011 and 2010, foreclosed assets were classified as Level 3 in the fair value hierarchy.

Derivative Assets and Liabilities

Derivative instruments held or issued by the Company for risk management purposes are traded in over-the-counter markets where quoted market prices are not readily available. For those derivatives, the Company measures fair value using models that use primarily market observable inputs, such as yield curves and option volatilities, and include the value associated with counterparty credit risk. The Company classifies derivative instruments held or issued for risk management purposes as recurring Level 2. As of December 31, 2011 and 2010, the Company’s derivative instruments consisted solely of interest rate caps. Derivative assets and liabilities are included in other assets and liabilities, respectively, in the accompanying consolidated balance sheets.

Assets Recorded at Fair Value on a Recurring Basis

The tables below present the recorded amount of assets measured at fair value on a recurring basis at December 31, 2011 and 2010. No assets were transferred from one hierarchy level to another during 2011 and 2010.

(Dollars in thousands)	Fair Value		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2011
Securities available for sale:
U.S. Government agencies	$	42,148	$	-	$	42,148	$	-
Mortgage-backed securities		87,033		-		87,033		-
Other equity securities		599		-		599		-
Total	$	129,780	$	-	$	129,780	$	-
Interest rate caps	$	250	$	-	$	250	$	-

(Dollars in thousands)	Fair Value		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2010
Securities available for sale:
U.S. Government agencies	$	58,904	$	-	$	58,904	$	-
Mortgage-backed securities		39,577		-		39,577		-
Other equity securities		574		-		574		-
Total	$	99,055	$	-	$	99,055	$	-
Interest rate caps	$	2,022	$	-	$	2,022	$	-

Assets Recorded at Fair Value on a Nonrecurring Basis

The tables below summarize the changes in the recorded amount of assets measured at fair value on a nonrecurring basis for 2011 and 2010. All assets measured at fair value on a nonrecurring basis were classified as Level 3 in the fair value hierarchy for the periods presented.

(Dollars in thousands)	Construction			Residential real estate			Commercial real estate			Commercial			Consumer			Total
2011
Impaired loans:
Beginning balance	$	28,175		$	15,327		$	13,280		$	4,374		$	30		$	61,186
Charge-offs		(4,313	)		(7,082	)		(4,643	)		(2,600	)		-			(18,638	)
Payments		(1,555	)		(7,557	)		(2,364	)		(550	)		(13	)		(12,039	)
Transfers to other real estate owned		(2,317	)		(1,642	)		(4,920	)		(388	)		-			(9,267	)
Return to performing status		-			(1,907	)		-			-			-			(1,907	)
Changed to nonaccrual status		(419	)		(3,120	)		(1,825	)		-			-			(5,364	)
Additions		7,765			29,879			24,050			902			11			62,607
Changes in allowance		(170	)		(1,296	)		-			-			-			(1,466	)
Ending balance	$	27,166		$	22,602		$	23,578		$	1,738		$	28		$	75,112

(Dollars in thousands)	Construction			Residential real estate			Commercial real estate			Commercial			Consumer			Total
2010
Impaired loans:
Beginning balance	$	7,163		$	5,968		$	2,828		$	1,560		$	37		$	17,556
Charge-offs		(7,765	)		(5,809	)		(76	)		(2,258	)		(94	)		(16,002	)
Payments		(2,209	)		(4,146	)		(1,099	)		(220	)		(2	)		(7,676	)
Transfers to other real estate owned		(157	)		(1,233	)		(208	)		-			-			(1,598	)
Return to performing status		(462	)		(655	)		-			(582	)		-			(1,699	)
Changed to nonaccrual status		-			-			-			-			-			-
Additions		31,605			21,405			11,835			5,874			89			70,808
Changes in allowance		-			(203	)		-			-			-			(203	)
Ending balance	$	28,175		$	15,327		$	13,280		$	4,374		$	30		$	61,186

(Dollars in thousands)	2011			2010
Other real estate owned:
Beginning balance	$	3,702		$	2,572
Sales		(3,978	)		(1,353	)
Write-downs		(1,051	)		(657	)
Additions		10,712			3,140
Ending balance	$	9,385		$	3,702

The following disclosures relate to the fair value of the Company’s financial instruments and include the methods and assumptions used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value:

Cash and Cash Equivalents

Cash equivalents include interest-bearing deposits with other banks and federal funds sold. For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Investment Securities

For all investments in debt securities, fair values are based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans

The fair values of categories of fixed rate loans, such as commercial loans, residential mortgage, and other consumer loans are 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. Other loans, including variable rate loans, are adjusted for differences in loan characteristics.

Financial Liabilities

The fair values of demand deposits, savings accounts, and certain money market deposits are the amounts payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. These estimates do not take into consideration the value of core deposit intangibles. Generally, the carrying amount of short-term borrowings is a reasonable estimate of fair value. The fair values of securities sold under agreements to repurchase (included in short-term borrowings) and long-term debt are estimated using the rates offered for similar borrowings.

Commitments to Extend Credit and Standby Letters of Credit

The majority of the Company’s commitments to grant loans and standby letters of credit are written to carry current market interest rates if converted to loans. In general, commitments to extend credit and letters of credit are not assignable by the Company or the borrower, so they generally have value only to the Company and the borrower. Therefore, it is impractical to assign any value to these commitments.

The following table provides information on the estimated fair values of the Company’s financial instruments as of December 31, 2011 and 2010.

	2011					2010
				Estimated					Estimated
	Carrying			Fair		Carrying			Fair
(Dollars in thousands)	Amount			Value		Amount			Value
Financial assets
Cash and cash equivalents	$	127,742		$	127,742	$	77,964		$	77,964
Investment securities		136,260			136,512		105,782			105,906
Loans		841,050			856,917		895,404			908,745
Less:  allowance for credit losses		(14,288	)		-		(14,227	)		-
Total	$	1,090,764		$	1,121,171	$	1,064,923		$	1,092,615
Financial liabilities
Deposits	$	1,009,919		$	1,013,964	$	979,516		$	983,257
Short-term borrowings		17,817			17,817		16,041			16,041
Long-term debt		455			470		932			982
Total	$	1,028,191		$	1,032,251	$	996,489		$	1,000,280