12.	Fair Value Disclosures

FASB ASC topic 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. FASB ASC topic 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 1: Valuation is based upon quoted prices for identical instruments traded in active markets. Level 1 instruments include securities traded on active exchange markets, such as the New York Stock Exchange, as well as U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter 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 2 instruments include securities traded in less active dealer or broker markets.

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.

We used the following methods and significant assumptions to estimate fair value:

Securities: Where quoted market prices are available in an active market, securities (trading or available for sale) are classified as Level 1 of the valuation hierarchy. Level 1 securities include certain preferred stocks included in our trading portfolio for which there are quoted prices in active markets. If quoted market prices are not available for the specific security, then fair values are estimated by (1) using quoted market prices of securities with similar characteristics, (2) matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices, or (3) a discounted cash flow analysis whose significant fair value inputs can generally be verified and do not typically involve judgment by management. These securities are classified as Level 2 of the valuation hierarchy and include agency and private label residential mortgage-backed securities, municipal securities, trust preferred securities and corporate securities.

Loans held for sale: The fair value of mortgage loans held for sale is based on mortgage backed security pricing for comparable assets (recurring Level 2). The fair value of loans held for sale relating to branch sale was based on a discount provided for in the branch sale agreement (non-recurring Level 2).

Impaired loans with specific loss allocations based on collateral value: From time to time, certain loans are considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. We measure our investment in an impaired loan based on one of three methods: the loan’s observable market price, the fair value of the collateral or the present value of expected future cash flows discounted at the loan’s effective interest rate. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2013 and December 31, 2012, all of our total impaired loans were evaluated based on either the fair value of the collateral or the present value of expected future cash flows discounted at the loan’s effective interest rate. When the fair value of the collateral is based on an appraised value or when an appraised value is not available we record the impaired loan as nonrecurring Level 3. These 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 independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments can be significant and thus will typically result in a Level 3 classification of the inputs for determining fair value.

Other real estate: At the time of acquisition, other real estate is recorded at fair value, less estimated costs to sell, which becomes the property’s new basis. Subsequent write-downs to reflect declines in value since the time of acquisition may occur from time to time and are recorded in loss on other real estate and repossessed assets in the Condensed Consolidated Statements of Operations. The fair value of the property used at and subsequent to the time of acquisition is typically determined by a third party appraisal of the property. These 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 independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by us. Once received, an independent third party (for commercial properties over $0.25 million) or a member of our special assets group (for commercial properties under $0.25 million and retail properties) reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On an annual basis, we compare the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment, if any, should be made to the appraisal value to arrive at fair value. For commercial properties we typically do not discount an appraisal while for retail properties we generally discount the value by 5%. In addition, we will adjust the appraised values for expected liquidation costs including sales commissions and transfer taxes.

Capitalized mortgage loan servicing rights: The fair value of capitalized mortgage loan servicing rights is based on a valuation model used by an independent third party that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. Since the secondary servicing market has not been active since the later part of 2009, model assumptions are generally unobservable and are based upon the best information available including data relating to our own servicing portfolio, reviews of mortgage servicing assumption and valuation surveys and input from various mortgage servicers and, therefore, are recorded as nonrecurring Level 3. Management evaluates the third party valuation for reasonableness each quarter as part of our financial reporting control processes.

Derivatives: The fair value of rate-lock mortgage loan commitments and mandatory commitments to sell mortgage loans is based on mortgage backed security pricing for comparable assets (recurring Level 2). The fair value of interest rate swap agreements, in general, were determined using a discounted cash flow model whose significant fair value inputs could generally be verified and did not typically involve judgment by management (recurring Level 2). The fair value of the Amended Warrant was determined using a simulation analysis which considers potential outcomes for a large number of independent scenarios regarding the future prices of our common stock and uses several unobservable variables (recurring Level 3).

Assets and liabilities measured at fair value, including financial assets for which we have elected the fair value option, were as follows:

			Fair Value Measurements Using
			Quoted
			Prices
			in Active
			Markets		Significant		Significant
			for		Other		Un-
	Fair Value		Identical		Observable		observable
	Measure-		Assets		Inputs		Inputs
	ments		(Level 1)		(Level 2)		(Level 3)
	(In thousands)
June 30, 2013:
Measured at Fair Value on a Recurring Basis:
Assets
Trading securities	$	293	$	293	$	-	$	-
Securities available for sale
U.S. agency		13,414		-		13,414		-
U.S. agency residential mortgage-backed		185,260		-		185,260		-
Private label residential mortgage-backed		7,482		-		7,482		-
Other asset backed		10,979				10,979
Obligations of states and political subdivisions		124,433		-		124,433		-
Trust preferred		9,812		-		9,812		-
Corporate		2,395		-		2,395		-
Loans held for sale		35,529		-		35,529		-
Derivatives (1)		2,375		-		2,375		-
Liabilities
Derivatives (2)		-		-		-		-

Measured at Fair Value on a Non-recurring basis:
Assets
Capitalized mortgage loan servicing rights (3)		7,506		-		-		7,506
Impaired loans (4)
Commercial
Income producing - real estate		1,771		-		-		1,771
Land, land development & construction-real estate		1,205		-		-		1,205
Commercial and industrial		1,894		-		-		1,894
Mortgage
1-4 Family		1,243		-		-		1,243
Resort Lending		573		-		-		573
Other real estate (5)
Commercial
Land, land development & construction-real estate		1,507		-		-		1,507
Mortgage
1-4 Family		657		-		-		657
Resort Lending		1,735		-		-		1,735
Installment
Home equity installment - 1st lien		82		-		-		82
Payment plan receivables Full refund/partial refund		2,668		-		-		2,668

(1) Included in accrued income and other assets

(2) Included in accrued expenses and other liabilities

(3) Only includes servicing rights that are carried at fair value due to recognition of a valuation allowance.

(4) Only includes impaired loans with specific loss allocations based on collateral value.

(5) Only includes other real estate with subsequent write downs to fair value.

			Fair Value Measurements Using
			Quoted
			Prices
			in Active
			Markets		Significant		Significant
			for		Other		Un-
	Fair Value		Identical		Observable		observable
	Measure-		Assets		Inputs		Inputs
	ments		(Level 1)		(Level 2)		(Level 3)
	(In thousands)
December 31, 2012:
Measured at Fair Value on a Recurring Basis:
Assets
Trading securities	$	110	$	110	$	-	$	-
Securities available for sale
U.S. agency		30,667		-		30,667		-
U.S. agency residential mortgage-backed		127,412		-		127,412		-
Private label residential mortgage-backed		8,194		-		8,194		-
Obligations of states and political subdivisions		39,051		-		39,051		-
Trust preferred		3,089		-		3,089		-
Loans held for sale		47,487		-		47,487		-
Derivatives (1)		1,368		-		1,368		-
Liabilities
Derivatives (2)		1,320		-		861		459

Measured at Fair Value on a Non-recurring basis:
Assets
Capitalized mortgage loan servicing rights (3)		8,814		-		-		8,814
Impaired loans (4)
Commercial
Income producing - real estate		3,727		-		-		3,727
Land, land development &construction-real estate		2,882		-		-		2,882
Commercial and industrial		6,581		-		-		6,581
Mortgage
1-4 Family		2,694		-		-		2,694
Resort Lending		380		-		-		380
Other real estate (5)
Commercial
Income producing - real estate		86		-		-		86
Land, land development &construction-real estate		3,190		-		-		3,190
Mortgage
1-4 Family		405		-		-		405
Resort Lending		3,535		-		-		3,535
Installment
Home equity installment - 1st lien		59		-		-		59
Loans held for sale relating to branch sale		3,292		-		3,292		-

(1) Included in accrued income and other assets

(2) Included in accrued expenses and other liabilities

(3) Only includes servicing rights that are carried at fair value due to recognition of a valuation allowance.

(4) Only includes impaired loans with specific loss allocations based on collateral value.

(5) Only includes other real estate with subsequent write downs to fair value.

There were no transfers between Level 1 and Level 2 during the six months ended June 30, 2013 and 2012.

Changes in fair values for financial assets which we have elected the fair value option for the periods presented were as follows:

	Changes in Fair Values for the Six-Month Periods Ended June 30 for Items Measured at Fair Value Pursuant to Election of the Fair Value Option
	2013										2012
	Net Gains (Losses)						Total Change in Fair Values Included in Current				Net Gains (Losses)						Total Change in Fair Values Included in Current
	on Assets						Period				on Assets						Period
	Securities		Loans				Earnings				Securities			Loans			Earnings
	(In thousands)
Trading securities	$	183		$	-			$	183			$	9		$	-		$	9
Loans held for sale		-			(2,241	)			(2,241	)			-			241			241

For those items measured at fair value pursuant to our election of the fair value option, interest income is recorded within the Condensed Consolidated Statements of Operations based on the contractual amount of interest income earned on these financial assets and dividend income is recorded based on cash dividends.

The following represent impairment charges recognized during the three and six month periods ended June 30, 2013 and 2012 relating to assets measured at fair value on a non-recurring basis:

Capitalized mortgage loan servicing rights, whose individual strata are measured at fair value, had a carrying amount of $7.5 million which is net of a valuation allowance of $3.6 million at June 30, 2013 and had a carrying amount of $8.8 million which is net of a valuation allowance of $6.1 million at December 31, 2012. A recovery (charge) of $1.7 million and $2.5 million was included in our results of operations for the three and six month periods ending June 30, 2013, respectively and $(0.9) million and $(0.2) million during the same periods in 2012.

Loans which are measured for impairment using the fair value of collateral for collateral dependent loans, had a carrying amount of $9.9 million, with a valuation allowance of $3.2 million at June 30, 2013 and had a carrying amount of $22.8 million, with a valuation allowance of $6.5 million at December 31, 2012. The provision for loan losses included in our results of operations relating to impaired loans was a credit of $0.7 million and an expense of $0.6 million for the three month periods ending June 30, 2013 and 2012, respectively and a credit of $0.3 million and an expense of $2.2 million for the six month periods ending June 30, 2013 and 2012, respectively.

Other real estate, which is measured using the fair value of the property, had a carrying amount of $6.6 million which is net of a valuation allowance of $4.6 million at June 30, 2013 and a carrying amount of $7.3 million which is net of a valuation allowance of $6.0 million at December 31, 2012. An additional charge relating to ORE measured at fair value of $1.0 million and $1.6 million was included in our results of operations during the three and six month periods ended June 30, 2013, respectively and $0.5 million and $1.2 million during the same periods in 2012.

A reconciliation for all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30 follows:

	(Liability)
	Amended Warrant
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
	(In thousands)
Beginning balance	$	(1,504	)	$	(328	)	$	(459	)	$	(174	)
Total gains (losses) realized and unrealized:
Included in results of operations		20			(25	)		(1,025	)		(179	)
Included in other comprehensive income		-			-			-			-
Purchases, issuances, settlements, maturities and calls		-			-			-			-
Reclassification to shareholders' equity		1,484			-			1,484			-
Transfers in and/or out of Level 3		-			-			-			-
Ending balance	$	-		$	(353	)	$	-		$	(353	)

Amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at June 30	$	20		$	(25	)	$	(1,025	)	$	(179	)

During 2010, we entered into an amended and restated warrant with the UST that would allow it to purchase our common stock at a fixed price (see Note #15). Because of certain anti-dilution features included in the Amended Warrant, it has not been considered to be indexed to our common stock and was therefore accounted for as a derivative instrument (see Note #7). Any change in value of this warrant was recorded in other income in our Condensed Consolidated Statements of Operations. However, the anti-dilution features in the Amended Warrant which caused it to be accounted for as a derivative and included in accrued expenses and other liabilities expired on April 16, 2013. As a result, the Amended Warrant was reclassified into shareholders’ equity on that date at its then fair value which totaled $1.5 million.

The fair value of the Amended Warrant was determined using a simulation analysis which considered potential outcomes for a large number of independent scenarios regarding the future prices of our common stock. The simulation analysis relied on a binomial lattice model, a standard technique usually applied to the valuation of stock options. The binomial lattice maps out possible price paths of our common stock, the underlying asset of the Amended Warrant. The simulation was based on a 500-step lattice covering the term of the Amended Warrant. The binomial lattice required specification of 14 variables, of which several were unobservable in the market.

Quantitative information about the Amended Warrant at December 31, 2012 follows:

(Liability)
Fair			Valuation	Unobservable	Unobservable
Value			Technique	Inputs	Input Values
(In thousands)

$	(459	)	Binomial Lattice Model	Probability of non-permitted equity raise		0.5	%
				Expected discount to stock price in an
				equity raise		10.0	%
				Dollar amount of expected capital raise	$100 Million
				Expected time of non-permitted equity raise	April, 2013

The significant unobservable inputs used in the fair value measurement of Amended Warrant were probability of a non-permitted capital raise, expected discount to stock price in an equity raise, dollar amount of expected capital raise and expected time of equity raise. Significant increases/(decreases) in any of those inputs in isolation would have resulted in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of a non-permitted capital raise and dollar amount of equity raise would have been accompanied by a directionally consistent change in fair value and a directionally opposite change in the assumption used for expected discount to stock price in an equity raise and expected time of equity raise.

Quantitative information about Level 3 fair value measurements measured on a non-recurring basis follows:

	Asset
	(Liability)
	Fair		Valuation	Unobservable	Weighted
	Value		Technique	Inputs	Average
	(In thousands)
June 30, 2013
Capitalized mortgage loan servicing rights	$	7,506	Present value of net	Discount rate		10.62	%
			servicing revenue	Cost to service	$	82
				Ancillary income		39
				Float rate		1.57	%
Impaired loans
Commercial		4,870	Sales comparison	Adjustment for differences
			approach	between comparable sales		15.6	%
			Income approach	Capitalization rate		9.4
Mortgage		1,816	Sales comparison	Adjustment for differences
			approach	between comparable sales		8.7
Other real estate
Commercial		1,507	Sales comparison	Adjustment for differences
			approach	between comparable sales		(4.5	)
			Income approach	Capitalization rate		11.0
Mortgage and installment		2,474	Sales comparison	Adjustment for differences
			approach	between comparable sales		44.2
Payment plan receivables		2,668	Sales comparison	Adjustment for differences
			approach	between comparable sales		7.5

December 31, 2012
Capitalized mortgage loan servicing rights	$	8,814	Present value of net	Discount rate		11.00	%
			servicing revenue	Cost to service	$	83
				Ancillary income		43
				Float rate		0.84	%
Impaired loans
Commercial		13,190	Sales comparison	Adjustment for differences
			approach	between comparable sales		16.7	%
			Income approach	Capitalization rate		10.8
Mortgage		3,074	Sales comparison	Adjustment for differences
			approach	between comparable sales		9.5
Other real estate
Commercial		3,276	Sales comparison	Adjustment for differences
			approach	between comparable sales		(12.4	)
			Income approach	Capitalization rate		12.3
Mortgage and installment		3,999	Sales comparison	Adjustment for differences
			approach	between comparable sales		(6.3	)

The following table reflects the difference between the aggregate fair value and the aggregate remaining contractual principal balance outstanding for loans held for sale for which the fair value option has been elected for the periods presented.

	Aggregate Fair Value		Difference			Contractual Principal
	(In thousands)
Loans held for sale
June 30, 2013	$	35,529	$	(398	)	$	35,927
December 31, 2012		47,487		1,843			45,644