Fair Value

12 Months Ended

Dec. 31, 2011

Fair Value

NOTE 13 – Fair Value

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (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. There are three levels of inputs that may be used to measure fair values:

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; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

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.

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2).

For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

Impaired Loans: Fair values for impaired collateral dependent loans are generally based on appraisals obtained from licensed real estate appraisers and in certain circumstances consideration of offers obtained to purchase properties prior to foreclosure. Appraisals for commercial real estate generally use three methods to derive value: cost, sales or market comparison and income approach. The cost method bases value in the cost to replace the current property. Value of market comparison approach evaluates the sales price of similar properties in the same market area. The income approach considers net operating income generated by the property and an investors required return. Adjustments are routinely made in the appraisal process to adjust for differences between the comparable sale and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Other Real Estate: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate (ORE) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property utilizing similar techniques as discussed above for Impaired Loans, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, impairment loss is recognized.

Loans Held-for-Sale: The fair values of loans held for sale are determined by using quoted prices for a similar asset, adjusted for specific attributes of that loan (Level 2).

Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below:

			Fair Value Measurements at December 31, 2011 Using
			Quoted Prices in
			Active Markets for		Significant Other		Significant
			Identical Assets		Observable Inputs		Unobservable Inputs
	Carrying Value		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. Treasury and Agency Securities	$	6,422	$	—	$	6,422	$	—
Corporate Securities		1,005		—		—		1,005
Obligations of State and Political Subdivisions		64,799		—		60,027		4,772
Mortgage-backed Securities - Residential		443,934		—		443,934		—
Equity Securities		684		331		—		353
Total Securities	$	516,844	$	331	$	510,383	$	6,130
Loans Held-for-Sale	$	21,485	$	—	$	21,485	$	—

			Fair Value Measurements at December 31, 2010 Using
			Quoted Prices in
			Active Markets for		Significant Other		Significant
			Identical Assets		Observable Inputs		Unobservable Inputs
	Carrying Value		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. Treasury and Agency Securities	$	—	$	—	$	—	$	—
Corporate Securities		—		—		—		—
Obligations of State and Political Subdivisions		32,178		—		32,178		—
Mortgage-backed Securities – Residential		311,066		—		311,066		—
Equity Securities		3,503		3,150		—		353
Total Securities	$	346,747	$	3,150	$	343,244	$	353
Loans Held-for-Sale	$	11,850	$	—	$	11,850	$	—

There were no significant transfers between Level 1 and Level 2 during the years ended December 31, 2011 and 2010. At December 31, 2011, the aggregate fair value of the Loans Held-for-Sale was $21,485, aggregate contractual principal balance was $21,225 with a difference of $260. At December 31, 2010, the aggregate fair value of the Loans Held-for-Sale was $11,850, aggregate contractual principal balance was $11,736 with a difference of $114.

The table below presents a reconciliation and income statement classification of gains and losses for equity securities that do not have readily determinable fair values and are evaluated for impairment on a periodic basis. Additionally, in 2011 the Company transferred in non-rated municipal bond investments totaling $4,772 and a corporate bond totaling $1,005 which were purchased in the American Community acquisition that were deemed to be Level 3. Level 3 Equity Securities were unchanged for 2011. These assets were measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2011 and 2010:

	2011		2010
Balance of Recurring Level 3 Assets at January 1	$	353	$	353
Sale of Securities		—		—
Other-than-temporary Impairment Charges Recognized through Net Income		—		—
Transfers In or Out of Level 3		5,777		—
Ending Balance, December 31	$	6,130	$	353

Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

			Fair Value Measurements at December 31, 2011 Using
			Quoted Prices in
			Active Markets for		Significant Other		Significant
			Identical Assets		Observable Inputs		Unobservable Inputs
	Carrying Value		(Level 1)		(Level 2)		(Level 3)
Assets:
Impaired Loans with Specific Allocations
Commercial and Industrial Loans	$	2,035	$	—	$	—	$	2,035
Commercial Real Estate Loans		2,783		—		—		2,783
Other Real Estate
Commercial Real Estate		250		—		—		250
Residential		—		—		—		—

			Fair Value Measurements at December 31, 2010 Using
			Quoted Prices in
			Active Markets for		Significant Other		Significant
			Identical Assets		Observable Inputs		Unobservable Inputs
	Carrying Value		(Level 1)		(Level 2)		(Level 3)
Assets:
Impaired Loans with Specific Allocations
Commercial and Industrial Loans	$	1,451	$	—	$	—	$	1,451
Commercial Real Estate Loans		7,868		—		—		7,868
Other Real Estate
Commercial Real Estate		400		—		—		400
Residential		60		—		—		60

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $9,729 with a valuation allowance of $4,911, resulting in an additional provision for loan losses of $4,226 for the year ended December 31, 2011. Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $13,902 with a valuation allowance of $4,583, resulting in an additional provision for loan losses of $4,036 for the year ended December 31, 2010.

Other Real Estate which is measured at the lower of carrying or fair value less costs to sell had a carrying value of $250 at December 31, 2011. A charge to earnings through Other Operating Income of $150 was included in the year ended December 31, 2011. Other Real Estate which is measured at the lower of carrying or fair value less costs to sell had a carrying amount of $460 at December 31, 2010. A charge to earnings through Other Operating Income of $119 was included in the year ended December 31, 2010.

Fair Value of Financial Instruments

The estimated fair values of the Company’s financial instruments not previously presented are provided in the table below. Not all of the Company’s assets and liabilities are considered financial instruments, and therefore are not included in the table. Because no active market exists for a significant portion of the Company’s financial instruments, fair value estimates were based on subjective judgments, and therefore cannot be determined with precision.

	December 31, 2011						December 31, 2010
	Carrying			Fair			Carrying			Fair
	Value			Value			Value			Value
Financial Assets:
Cash and Short-term Investments	$	67,089		$	67,089		$	19,271		$	19,271
Securities Held-to-Maturity		690			697			1,604			1,613
FHLB Stock and Other Restricted Stock		8,340			N/A			9,207			N/A
Loans, Net		1,100,863			1,111,532			894,600			894,463
Accrued Interest Receivable		7,793			7,793			6,687			6,687
Financial Liabilities:
Demand, Savings, and Money Market Deposits		(1,181,919	)		(1,181,919	)		(725,736	)		(725,736	)
Other Time Deposits		(374,279	)		(380,584	)		(361,550	)		(363,274	)
Short-term Borrowings		(40,019	)		(40,019	)		(72,701	)		(72,701	)
Long-term Debt		(90,974	)		(96,047	)		(81,016	)		(86,714	)
Accrued Interest Payable		(1,884	)		(1,884	)		(2,281	)		(2,281	)
Unrecognized Financial Instruments:
Commitments to Extend Credit		—			—			—			—
Standby Letters of Credit		—			—			—			—
Commitments to Sell Loans		—			—			—			—

The fair value for cash and short-term investments and accrued interest receivable is estimated to be equal to their carrying value. The fair values of securities held to maturity are based on quoted market prices or dealer quotes, if available, or by using quoted market prices for similar instruments. The fair value of loans are estimated by discounting future cash flows using the current rates at which similar loans would be made for the average remaining maturities. It was not practicable to determine the fair value of FHLB stock and other restricted stock due to restrictions placed on its transferability. The fair value of demand deposits, savings accounts, money market deposits, short-term borrowings and accrued interest payable is the amount payable on demand at the reporting date. The fair value of fixed-maturity time deposits and long-term borrowings are estimated using the rates currently offered on these instruments for similar remaining maturities. Commitments to extend credit and standby letters of credit are generally short-term or variable rate with minimal fees charged. These instruments have no carrying value, and the fair value is not significant. The fair value of commitments to sell loans is the cost or benefit of settling the commitments with the counter-party at the reporting date. At December 31, 2011 and 2010, none of the Company’s commitments to sell loans were mandatory, and there is no cost or benefit to settle these commitments.