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FAIR VALUE MEASUREMENT
12 Months Ended
Dec. 31, 2011
FAIR VALUE MEASUREMENT  
FAIR VALUE MEASUREMENT

Note 3—FAIR VALUE MEASUREMENT

        The company adopted FASB ASC Fair Value Measurement Topic 820, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. 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 standard describes three levels of inputs that may be used to measure fair value:

Level l   Quoted prices in active markets for identical assets or liabilities.

Level 2

 

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 for substantially the full term of the assets or liabilities.

Level 3

 

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

        Following is a description of valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis:

        Investment Securities Available for Sale:    Measurement is on a recurring basis based upon quoted market prices, if available. If quoted market 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 prepayment assumptions, projected credit losses, and liquidity. Level 1 securities include those traded on an active exchange or by dealers or brokers in active over-the-counter markets. Level 2 securities include mortgage-backed securities issued both by government sponsored enterprises and private label mortgage-backed securities. Generally these fair values are priced from established pricing models. Level 3 securities include corporate debt obligations and asset-backed securities that are less liquid or for which there is an inactive market.

        Investment Securities Held-to-Maturity:    Investment securities that are held-to-maturity and considered other-than-temporarily- impaired are recorded at fair value in accordance with FASB ASC Topic on "Investments- Debt and Equity Securities" on a non-recurring basis. If the company does not expect to recover the entire amortized cost basis of the security, OTTI is considered to have occurred. See Note 5 for determining allocation between current earnings and comprehensive income. Measurement is based upon quoted market prices, if available. If quoted market 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 prepayment assumptions, projected credit losses, and liquidity. Level 2 securities include private label mortgage-backed securities. Generally these fair values are priced from established pricing models.

        Loans:    Loans that are considered impaired are recorded at fair value on a non-recurring basis. Once a loan is considered impaired, measurement is based upon FASB ASC 310-10-35 "Loan Impairment." The fair value is estimated using one of several methods, including collateral liquidation value, market value of similar debt and discounted cash flows. Those impaired loans not requiring a specific charge against the allowance represent loans for which the fair value of the expected repayments or collateral meet or exceed the recorded investment in the loan. At December 31, 2011 and 2010, substantially all of the total impaired loans were evaluated based on the fair value of the underlying collateral. When the company records the fair value based upon a current appraisal the fair value measurement is considered Level 2. When a current appraisal is not available or there is estimated further impairment the measurement is considered a Level 3 measurement.

        Other Real Estate Owned (OREO):    OREO is carried at the lower of carrying value or fair value on a non-recurring basis. Fair value is based upon independent appraisals or management's estimation of the collateral. When the OREO value is based upon a current appraisal it is considered a Level 2 measurement. When a current appraisal is not available or there is estimated further impairment the measurement is considered a Level 3 measurement.

        Derivative Financial Instruments:    Interest rate swaps are carried at fair value and measured on a recurring basis. The measurement is based on valuation techniques including discounted cash flows analysis for each derivative. The analysis reflects the contractual remaining term of derivative, interest rates, volatility and expected cash payments. The measurement of the interest rate swap is considered to be a Level 3 measurement.

        Goodwill and Other Intangible Assets:    Goodwill and other intangible assets are measured for impairment on an annual basis, as of September 30, or more frequently if there is a change in circumstances. If the goodwill or other intangibles exceed the fair value, an impairment charge is recorded in an amount equal to the excess. Impairment is tested utilizing accepted valuation techniques utilizing discounted cash flows of the business unit, and implied fair value based on a multiple of earnings and tangible book value for merger transactions. The measurement of these fair values is considered a Level 3 measurement.

        The following tables summarize quantitative disclosures about the fair value measurement for each category of assets and liabilities that are measured on a recurring basis carried at fair value as of December 31, 2011 and 2010.

Description
  December 31,
2011
  Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  Significant Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 

Available for sale securities

                         

Government sponsored enterprises

  $ 34   $   $ 34   $  

Mortgage-backed securities

    141,631         141,631      

Small Business Administration securities

    36,479         36,479      

State and local government

    20,488         20,488      

Corporate and other securities

    2,400     926     1,474      
                   

 

    201,032     926     200,106      

Interest rate swap

   
(602

)
 
   
   
(602

)
                   

Total

  $ 200,430   $ 926   $ 200,106   $ (602 )
                   

Description
  December 31,
2010
  Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  Significant Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 

Available for sale securities

                         

Government sponsored enterprises

  $ 13,738   $   $ 13,738   $  

Mortgage-backed securities

    121,257         121,257      

Small Business Administration securities

    31,496         31,496      

State and local government

    19,055         18,430     625  

Corporate and other securities

    3,763     1,118     2,463     182  
                   

 

    189,309     1,118     187,384     807  

Interest rate swap

   
(778

)
 
   
   
(778

)
                   

Total

  $ 188,531   $ 1,118   $ 187,384   $ 29  
                   

        During the fourth quarter of 2011, a state and local government bond with a fair value of $579 thousand was called and removed from the Level 3 category.

        The following tables reconcile the changes in Level 3 financial instruments for the year ended December 31, 2011 and 2010 measured on a recurring basis:

 
  2011  
(Dollars in thousands)
  State and local
government
securities
  Corporate and
other
securities
  Interest
rate
Swap
 

Beginning Balance

  $ 625   $ 182   $ (778 )

Total gains or losses (realized/unrealized)

                   

Included in earnings

   
   
(103

)
 
(166

)

Included in other comprehensive income

   
   
(79

)
 
 

Purchases, issuances, and settlements

   
(625

)
 
   
342
 

Transfers in and/or out of Level 3

   
   
   
 
               

Ending Balance

  $   $   $ (602 )
               

 

 
  2010  
(Dollars in thousands)
  State and local
government
securities
  Corporate and
other
securities
  Interest
rate
Swap
 

Beginning Balance

  $   $ 5,780   $ (535 )

Total gains or losses (realized/unrealized)

                   

Included in earnings

   
   
(2,782

)
 
(581

)

Included in other comprehensive income

   
   
1,384
   
 

Purchases, issuances, and settlements

   
(44

)
 
(4,200

)
 
338
 

Transfers in and/or out of Level 3

   
669
   
   
 
               

Ending Balance

  $ 625   $ 182   $ (778 )
               

        The following tables reflect the changes in fair values for the year ended December 31, 2011, 2010 and 2009 and where these changes are included in the income statement.

 
  2011   2010   2009  
(Dollars in thousands)
  Non-interest
income:
Fair-value
adjustment
gain (loss)
  Non-interest
income:
Fair-value
adjustment
gain (loss)
  Non-interest
income:
Fair-value
adjustment
gain (loss)
 

Trading securities

  $   $   $ 33  

Interest rate swap

    (166 )   (581 )   7  

Federal Home Loan Bank Advance

            18  
               

Total

  $ (166 ) $ (581 ) $ 58  
               

        The following tables summarize quantitative disclosures about the fair value for each category of assets carried at fair value as of December 31, 2011 and December 31, 2010 that are measured on a non-recurring basis.

(Dollars in thousands)
Description
  December 31,
2011
  Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  Significant Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 

Impaired loans:

                         

Commercial & Industrial

  $ 44   $   $ 44   $  

Real estate:

                         

Mortgage-residential

    622         622      

Mortgage-commercial

    8,666         8,666      

Consumer:

                         

Home equity

                 

Other

    19         19      
                   

Total impaired

    9,351         9,351      
                   

Other real estate owned:

                     

Construction

    2,156         2,156      

Mortgage-residential

    4,278         4,278      

Mortgage-commercial

    917         917      
                   

Total other real estate owned

    7,351         7,351      
                   

Total

  $ 16,702   $   $ 16,702   $  
                   

 

(Dollars in thousands)
Description
  December 31,
2010
  Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  Significant Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 

Impaired loans:

                         

Commercial & Industrial

  $ 96   $   $ 96   $  

Real estate:

                         

Mortgage-residential

    1,527         1,527      

Mortgage-commercial

    7,818         7,818      

Consumer:

                         

Home equity

    38         38      

Other

    12         12      
                   

Total impaired

    9,491         9,491      
                   

Other real estate owned:

                     

Construction

    2,331         2,331      

Mortgage-residential

    3,306         3,306      

Mortgage-commercial

    1,267         1,267      
                   

Total other real estate owned

    6,904         6,904      
                   

Total

  $ 16,395   $   $ 16,395   $  
                   

        The company has a large percentage of loans with real estate serving as collateral. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair value of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the company considers to be level 2 inputs. The aggregate amount of impaired loans was $9.4 million and $9.6 million for the years ended December 31, 2011 and 2010, respectively.

        Goodwill and other intangible assets are measured on a non-recurring basis at least annually. The valuation is performed at September 30 of each year. Market capitalization and acquisition multiples have significantly declined since 2004 and 2006, which are the dates of the acquisition of Dutchfork Bankshares and DeKalb Bancshares, respectively. The multiples and the resulting valuations declined dramatically throughout 2008 and 2009 as a result of the current economic downturn. The test at September 30, 2009 reflected goodwill impairment. As a result, the company recognized an impairment charge in the amount of $27.8 million in the third quarter of 2009. The impairment charge resulted in all of the goodwill intangible related to these two acquisitions, being written off as of September 30, 2009. As a result of the acquisition of Palmetto South mortgage on July 31, 2011, we have recorded goodwill in the amount of $571 thousand. Beginning in 2012 and each year, thereafter, this goodwill will be tested for impairment.