Fair Value

12 Months Ended

Dec. 31, 2011

Fair Value

Fair Value

(13) Fair Value

        Accounting guidance 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 standard describes three levels of inputs that may be used to measure fair value:

        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 prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data (for example, interest rates and yield curves observable at commonly quoted intervals, prepayment speeds, credit risks, and default rates).

        Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

• Financial Assets and Liabilities Measured on a Recurring Basis

        The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used 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 (Level 2 inputs).

        The fair value of interest-only ("I/O") strip receivable assets is based on a valuation model used by a third party. The Company is able to compare the valuation model inputs and results to widely available published industry data for reasonableness (Level 2 inputs).

			Fair Value Measurements Using
	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Assets at December 31, 2011:
Available-for-sale securities:
Agency mortgage-backed securities	$	350,348	$	—	$	350,348		—
Trust preferred securities		30,107		—		30,107		—
I/O strip receivables		2,094		—		2,094		—
Assets at December 31, 2010:
Available-for-sale securities:
Agency mortgage-backed securities	$	232,165		—	$	232,165		—
I/O strip receivables		2,140		—		2,140		—

        There were no transfers between Level 1 and Level 2 during the year for assets measured at fair value on a recurring basis.

Assets and Liabilities Measured on a Non-Recurring Basis

        The fair value of loans held-for-sale is generally based on obtaining bids and broker indications on the estimated value of these loans held-for-sale, resulting in a Level 2 classification.

        The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. The 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 usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

        Nonrecurring adjustments to certain foreclosed assets are measured at fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

Assets and Liabilities Measured on a Non-Recurring Basis

			Fair Value Measurements Using
	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Assets at December 31, 2011:
Impaired loans held-for-sale — other:
Real estate:
Land and construction	$	186		—	$	186		—
Impaired loans — held-for-investment:
Commercial	$	6,526		—		—	$	6,526
Real estate:
Commercial and residential		1,794		—		—		1,794
Land and construction		1,590		—		—		1,590
Home equity		32						32
Consumer		10		—		—		10
	$	9,952		—		—	$	9,952
Foreclosed assets:
Commercial and residential	$	156		—		—	$	156
Land and construction		2,156		—		—		2,156
	$	2,312					$	2,312
Assets at December 31, 2010:
Impaired loans held-for-sale — other:
Real estate:
Commercial and residential	$	929		—	$	929		—
Land and construction		1,097		—		1,097		—
	$	2,026		—	$	2,026		—
Impaired loans — held-for-investment:
Commercial	$	6,725		—		—	$	6,725
Real estate:
Commercial and residential		5,982		—		—		5,982
Land and construction		8,005		—		—		8,005
Consumer		120		—		—		120
	$	20,832		—		—	$	20,832
Foreclosed assets:
Commercial and residential	$	1,296		—		—	$	1,296

        The following table shows the detail of the impaired loans held for investment and the impaired loans held-for-investment carried at fair value for the periods indicated:

	December 31, 2011			December 31, 2010
	(Dollars in thousands)
Impaired loans held-for-investment:
Book value of impaired loans held-for-investment carried at fair value	$	12,279		$	26,892
Book value of impaired loans held-for-investment carried at cost		5,635			4,421
Total impaired loans held-for-investment	$	17,914		$	31,313
Impaired loans held-for-investment carried at fair value:
Book value of impaired loans held-for-investment carried at fair value	$	12,279		$	26,892
Specific valuation allowance		(2,327	)		(6,060	)
Impaired loans held-for-investment carried at fair value, net	$	9,952		$	20,832

        Impaired loans held-for-investment of $17,914,000 at December 31, 2011, after partial charge-offs of $3,604,000 in 2011, were analyzed for additional impairment primarily using the fair value of collateral. In addition, these loans had a specific valuation allowance of $2,327,000 at December 31, 2011. Impaired loans held-for-investment totaling $12,279,000 at December 31, 2011 were carried at fair value as a result of the aforementioned partial charge-offs and specific valuation allowances at year-end. The remaining $5,635,000 of impaired loans were carried at cost at December 31, 2011, as the fair value of the collateral exceeded the cost basis of each respective loan. Partial charge-offs and changes in specific valuation allowances during 2011 on impaired loans held-for-investment carried at fair value at December 31, 2011 resulted in an additional provision for loan losses of $2,916,000.

        Impaired loans held-for-investment of $31,313,000 at December 31, 2010, after partial charge-offs of $6,982,000 in 2010, were analyzed for additional impairment primarily using the fair value of collateral. In addition, these loans had a specific valuation allowance of $6,060,000 at December 31, 2010. Impaired loans held-for-investment totaling $26,892,000 at December 31, 2010 were carried at fair value as a result of the aforementioned partial charge-offs and specific valuation allowances at year-end. The remaining $4,421,000 of impaired loans were carried at cost at December 31, 2010, as the fair value of the collateral exceeded the cost basis of each respective loan. Partial charge-offs and changes in specific valuation allowances during 2010 on impaired loans held-for-investment carried at fair value at December 31, 2010 resulted in an additional provision for loan losses of $9,791,000.

        The carrying amounts and estimated fair values of the Company's financial instruments, at year-end were as follows:

	2011				2010
	Carrying Amounts		Estimated Fair Value		Carrying Amounts		Estimated Fair Value
	(Dollars in thousands)
Assets
Cash and cash equivalents	$	72,872	$	72,872	$	72,177	$	72,177
Securities available-for-sale		380,455		380,455		232,165		232,165
Loans (including loans held-for-sale), net		745,057		745,421		831,855		855,327
FHLB and FRB stock		9,925		N/A		9,174		N/A
Accrued interest receivable		3,719		3,719		3,215		3,215
Loan servicing rights and I/O strips receivables		2,886		5,261		3,055		5,340
Liabilities
Time deposits	$	288,528	$	289,512	$	287,344	$	288,798
Other deposits		760,900		760,900		706,574		706,574
Securities sold under agreement to repurchase		—		N/A		5,000		5,018
Short-term borrowings		—		N/A		2,445		2,445
Subordinated debt		23,702		15,950		23,702		14,445
Accrued interest payable		784		784		2,810		2,810

        The methods and assumptions, not previously discussed, used to estimate the fair value are described as follows:

• Cash and Cash Equivalents and Accrued Interest Receivable and Payable

        The carrying amount approximates fair value because of the short maturities of these instruments.

• Loans

        Loans with similar financial characteristics are grouped together for purposes of estimating their fair value. Loans are segregated by type such as commercial, term real estate, construction and land development, and consumer. Each loan category is further segmented into fixed and adjustable rate interest terms.

        The fair value of performing, fixed rate loans is calculated by discounting scheduled future cash flows using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The fair value of variable rate loans approximates the carrying amount as these loans generally reprice within 90 days.

        The fair value of loans held-for-sale is based on estimated market values from third party investors.

• FHLB and FRB Stock

        It was not practical to determine the fair value of FHLB and FRB stock due to the restrictions placed on transferability.

• Deposits

        The fair value of deposits with no stated maturity, such as demand deposits, savings, and money market accounts, approximates the amount payable on demand. The carrying amount approximates the fair value of time deposits with a remaining maturity of less than 90 days. The fair value of all other time deposits is calculated based on discounting the future cash flows using rates currently offered for time deposits with similar remaining maturities.

• Subordinated debt and Securities Sold Under Agreement to Purchase

        The fair values of subordinated debt and securities sold under agreement to repurchase were determined based on the current market value for like kind instruments of a similar maturity and structure.

• Short-term Borrowings and Note Payable

        The carrying amount approximates the fair value of short-term borrowings and the note payable that reprice frequently and fully.

• Off-Balance Sheet Items

        The fair value of off-balance sheet items, such as commitments to extend credit, is not considered material and therefore is not included in the table above.

• Limitations

        Fair value estimates are made at a specific point in time, based on relevant market information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. 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.