Fair Value

6 Months Ended

Jun. 30, 2012

Fair Value

Fair Value

4.  Fair Value

FASB ASC No. 820-10 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) of 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 I 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 fair value of most securities available for sale is 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).

For those securities that cannot be priced using quoted market prices or observable inputs a Level 3 valuation is determined. These securities are primarily trust preferred securities, which are priced using Level 3 due to current market illiquidity and certain investments in bank equities and state and municipal securities. The fair value of the trust preferred securities is obtained from a third party provider without adjustment. As described previously, management obtains values from other pricing sources to validate the Standard & Poors pricing that they currently utilize. The fair value of certain investments in bank equities is based on the prices of recent stock trades and is considered Level 3 because these stocks are not publicly traded. The fair value of state and municipal obligations are derived by comparing the securities to current market rates plus an appropriate credit spread to determine an estimated value. Illiquidity spreads are then considered. Credit reviews are performed on each of the issuers. The significant unobservable inputs used in the fair value measurement of the Corporation’s state and municipal obligations are credit spreads related to specific issuers. Significantly higher credit spread assumptions would result in significantly lower fair value measurement.  Conversely, significantly lower credit spreads would result in a significantly higher fair value measurement.

The fair value of derivatives is based on valuation models using observable market data as of the measurement date (Level 2 inputs).

	June 30, 2012
	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
(Dollar amounts in thousands)	Level 1		Level 2			Level 3		Total
U.S. Government agencies	$	—	$	1,984		$	—	$	1,984
Mortgage Backed Securities-residential	—		306,392			—		306,392
Mortgage Backed Securities-commercial	—		51			—		51
Collateralized mortgage obligations	—		147,044			—		147,044
State and municipal	—		188,515			10,066		198,581
Collateralized debt obligations	—		—			4,379		4,379
Equities	320		—			—		320
TOTAL	$	320	$	643,986		$	14,445	$	658,751
Derivative Assets			2,673
Derivative Liabilities			(2,673		)

	December 31, 2011
	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
(Dollar amounts in thousands)	Level 1		Level 2			Level 3		Total
U.S. Government agencies	$	—	$	4,013		$	—	$	4,013
Mortgage Backed Securities-residential	—		311,788			—		311,788
Mortgage Backed Securities-commercial	—		101			—		101
Collateralized mortgage obligations	—		147,947			—		147,947
State and municipal	—		186,056			9,525		195,581
Collateralized debt obligations	—		—			4,771		4,771
Equities	375		—			1,711		2,086
TOTAL	$	375	$	649,905		$	16,007	$	666,287
Derivative Assets			2,447
Derivative Liabilities			(2,447		)

There were no transfers between Level 1 and Level 2 during 2012 and 2011.

The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2012 and the year ended December 31, 2011.

	Three months ended June 30, 2012
				State and			Collateralized
				municipal			debt
	Equities			obligations			obligations			Total
Beginning balance, April 1	$	1,711		$	9,525		$	4,486		$	15,722
Total realized/unrealized gains or losses
Included in earnings	435			—			229			664
Included in other comprehensive income	(446		)	—			—			(446		)
Transfers & Purchases	—			1,186			—			1,186
Settlements	(1,700		)	(645		)	(336		)	(2,681		)
Ending balance, June 30	$	—		$	10,066		$	4,379		$	14,445

	Six months ended June 30, 2012
				State and			Collateralized
				municipal			debt
	Equities			obligations			obligations			Total
Beginning balance, January 1	$	1,711		$	9,525		$	4,771		$	16,007
Total realized/unrealized gains or losses
Included in earnings	435			—			229			664
Included in other comprehensive income	(446		)	—			(285		)	(731		)
Transfers & Purchases	—			1,186			—			1,186
Settlements	(1,700		)	(645		)	(336		)	(2,681		)
Ending balance, June 31	$	—		$	10,066		$	4,379		$	14,445

	December 31, 2011
			State and			Collateralized
			municipal			debt
	Equities		obligations			obligations		Total
Beginning balance, January 1	$	1,518	$	—		$	2,190	$	3,708
Total realized/unrealized gains or losses
Included in earnings	—		—			—		—
Included in other comprehensive income	193		—			2,581		2,774
Transfers & Purchases	—		9,672			—		9,672
Settlements	—		(147		)	—		(147		)
Ending balance, December 31	$	1,711	$	9,525		$	4,771	$	16,007

The following table presents quantitative information about recurring and non-recurring Level 3 fair value measurements at June 30, 2012.

	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range
State and municipal obligations	$	10,066	Discounted cash flow	Discount rate	3.05%-5.50%
				Probability of default	0%
Other real estate	$	7,163	Sales comparison/income approach	Discount rate for age of appraisal and market conditions	5.00%-20.00%
Impaired Loans	21,389		Sales comparison/income approach	Discount rate for age of appraisal and market conditions	0.00%-20.00%

All impaired loans disclosed in footnote 2 are valued at Level 3 and are carried at a fair value of $21.4 million, net of a valuation allowance of $4.6 million at June 30, 2012. At December 31, 2011 impaired loans valued at Level 3 were carried at a fair value of $28.4 million, net of a valuation allowance of $4.3 million. The impact to the provision for loan losses was $1.4 and $0.6 million for the three and six months ended June 30, 2012, and was $3.3 million for the year ended December 31, 2011. Fair value is measured based on the value of the collateral securing those loans, and is determined using several methods. Generally the fair value of real estate is determined based on appraisals by qualified licensed appraisers. Appraisals for real estate generally use three methods to derive value: cost, sales or market comparison and income approach. The cost method bases value on the cost to replace current property. The market comparison evaluates the sales price of similar properties in the same market area. The income approach considers net operating income generated by the property and the investor’s required return. The final fair value is based on a reconciliation of these three approaches. If an appraisal is not available, the fair value may be determined by using a cash flow analysis, a broker’s opinion of value, the net present value of future cash flows, or an observable market price from an active market. Fair value of other real estate is based upon the current appraised values of the properties as determined by qualified licensed appraisers and the Company’s judgment of other relevant market conditions. Appraisals are obtained annually and reductions in value are recorded as a valuation through a charge to expense. The primary unobservable input used by management in estimating fair value are additional discounts to the appraised value to consider selling costs and the age of the appraisal, which are based on management’s past experience in resolving these types of properties. These discounts range from 5% to20% for costs to sell and marketability. Other real estate and impaired loans carried at fair value are primarily comprised of smaller balance properties. One impaired loan has an estimated fair value of $5.3 million. The collateral securing this loan is a hotel and was appraised based on income and sales comparison approaches. Given the current distressed market, it was difficult for the appraiser to identify recent and relevant comparable sales, therefore the value was based predominantly on the income method which applied a 9.5% capitalization rate to projected net operating income.

The following tables presents loans identified as impaired by class of loans as of June 30, 2012 and December 31, 2011, which are all considered Level 3.

	June 30, 2012
(Dollar amounts in thousands)	Unpaid Principal Balance		Allowance for Loan Losses Allocated		Fair Value
Commercial
Commercial & Industrial	$	18,060	$	4,040	$	14,020
Farmland	891		49		842
Non Farm, Non Residential	4,484		198		4,286
Agriculture	—		—		—
All Other Commercial	1,311		93		1,218
Residential
First Liens	1,213		190		1,023
Home Equity	—		—		—
Junior Liens	—		—		—
Multifamily	—		—		—
All Other Residential	—		—		—
Consumer
Motor Vehicle	—		—		—
All Other Consumer	—		—		—
TOTAL	$	25,959	$	4,570	$	21,389

	December 31, 2011
(Dollar amounts in thousands)	Unpaid Principal Balance		Allowance for Loan Losses Allocated		Fair Value
Commercial
Commercial & Industrial	$	17,890	$	2,664	$	15,226
Farmland	891		49		842
Non Farm, Non Residential	9,260		957		8,303
Agriculture	—		—		—
All Other Commercial	1,517		66		1,451
Residential
First Liens	1,963		190		1,773
Home Equity	—		—		—
Junior Liens	879		347		532
Multifamily	250		—		250
All Other Residential	—		—		—
Consumer
Motor Vehicle	—		—		—
All Other Consumer	—		—		—
TOTAL	$	32,650	$	4,273	$	28,377

	June 30, 2012
	Fair Value Measurment Using
(Dollar amounts in thousands)	Carrying Value		Level 1		Level 2		Level 3
Other real estate - commercial	$	4,763	$	—	$	—	$	4,763
Other real estate - residential	2,400		—		—		2,400
TOTAL	$	7,163	$	—	$	—	$	7,163

	December 31, 2011
	Fair Value Measurment Using
(Dollar amounts in thousands)	Carrying Value		Level 1		Level 2		Level 3
Other real estate - commercial	$	2,080	$	—	$	—	$	2,080
Other real estate - residential	2,884		—		—		2,884
TOTAL	$	4,964	$	—	$	—	$	4,964

The carrying amounts and estimated fair value of financial instruments at June 30, 2012 and December 31, 2011, are shown below.  Carrying amount is the estimated fair value for cash and due from banks, federal funds sold, short-term borrowings, accrued interest receivable and payable, demand deposits, short-term debt and variable-rate loans or deposits that reprice frequently and fully. Security fair values were described previously. For fixed-rate, non-impaired loans or deposits, variable rate loans or deposits with infrequent repricing or repricing limits, and for longer-term borrowings, fair value is based on discounted cash flows using current market rates applied to the estimated life and considering credit risk. The valuation of impaired loans was described previously. Loan fair value estimates do not necessarily represent an exit price. Fair values of loans held for sale are based on market bids on the loans or similar loans. It was not practicable to determine the fair value of Federal Home Loan Bank stock due to restrictions placed on its transferability. For the FDIC indemnification asset the carrying value is the estimated fair value as it represents amounts to be received from the FDIC in the near term. Fair value of debt is based on current rates for similar financing. The fair value of off-balance sheet items is not considered material.

	June 30, 2012
	Carrying			Fair Value
(Dollar amounts in thousands)	Value			Level 1			Level 2			Level 3		Total
Cash and due from banks	$	84,669		$	18,484		$	66,185		$	—	$	84,669
Federal funds sold	27,472			—			27,472			—		27,472
Securities available—for—sale	658,751			320			643,986			14,445		658,751
Restricted stock	21,296			n/a			n/a			n/a		n/a
Loans, net	1,857,631			—						1,953,612		1,953,612
FDIC Indemnification Asset	1,608			—			1,608			—		1,608
Accrued interest receivable	11,829			—			3,087			8,742		11,829
Deposits	(2,253,221		)	—			(2,258,753		)	—		(2,258,753		)
Short—term borrowings	(47,091		)	—			(47,091		)	—		(47,091		)
Federal Home Loan Bank advances	(140,013		)	—			(147,351		)	—		(147,351		)
Other borrowings	(6,098		)	—			(6,098		)	—		(6,098		)
Accrued interest payable	(1,299		)	—			(1,299		)	—		(1,299		)
	December 31, 2011
	Carrying			Fair
(Dollar amounts in thousands)	Value			Value
Cash and due from banks	134,280			134,280
Federal funds sold	11,725			11,725
Securities available—for—sale	666,287			666,287
Restricted stock	22,282			n/a
Loans, net	1,874,438			1,888,263
FDIC Indemnification Asset	2,384			2,384
Accrued interest receivable	12,947			12,947
Deposits	(2,274,499		)	(2,279,739		)
Short—term borrowings	(100,022		)	(100,022		)
Federal Home Loan Bank advances	(140,231		)	(144,089		)
Other borrowings	(6,196		)	(6,196		)
Accrued interest payable	(1,829		)	(1,829		)