(10) FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis

FASB ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:


• Level 1		Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

• Level 2		Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset and liability, either directly or indirectly, for substantially the full term of the financial instrument.

• 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 values are 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. This category includes certain impaired loans, certain other real estate, goodwill, and other intangible assets.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company's financial assets and financial liabilities carried at fair value.

Securities Available for Sale

Securities classified as available for sale are reported at fair value. U.S. Treasuries are valued using Level 1 inputs. Other securities available for sale including U.S. Federal agencies, mortgage backed securities, and states and political subdivisions are valued using prices from an independent pricing service utilizing Level 2 data. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things. The Company also invests in equity securities classified as available for sale for which observable information is not readily available. These securities are reported at fair value utilizing Level 3 inputs. For these securities, management determines the fair value based on replacement cost, the income approach or information provided by outside consultants or lead investors.

The Company reviews the prices for Level 1 and Level 2 securities supplied by the independent pricing service for reasonableness and to ensure such prices are aligned with traditional pricing matrices. In general, the Company does not purchase investment portfolio securities that are esoteric or that have complicated structures. The Company's entire portfolio consists of traditional investments including U.S. Treasury obligations, Federal agency mortgage pass-through securities, general obligation municipal bonds and a small amount of municipal revenue bonds. Pricing for such instruments is fairly generic and is easily obtained. For in-state bond issues that have relatively low issue sizes and liquidity, the Company utilizes the same parameters adjusted for the specific issue. From time to time, the Company will validate, on a sample basis, prices supplied by the independent pricing service by comparison to prices obtained from third party sources.

Derivatives

Derivatives are reported at fair value utilizing Level 2 inputs. The Company obtains dealer and market quotations to value its oil and gas swaps and options. The Company utilizes dealer quotes and observable market data inputs to substantiate internal valuation models.

Loans Held For Sale

The Company originates mortgage loans to be sold. At the time of origination, the acquiring bank has already been determined and the terms of the loan, including interest rate, have already been set by the acquiring bank, allowing the Company to originate the loan at fair value. Mortgage loans are generally sold within 30 days of origination. Loans held for sale are valued using Level 2 inputs. Gains or losses recognized upon the sale of the loans are determined on a specific identification basis.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 2012 and 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:


	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(Dollars in thousands)
March 31, 2012
Securities available for sale	$	—	$	543,069	$	9,373	$	552,442
Derivative assets		—		10,578		—		10,578
Derivative liabilities		—		8,576		—		8,576
Loans held for sale		—		15,585		—		15,585

March 31, 2011
Securities available for sale	$	35,128	$	614,514	$	10,777	$	660,419
Derivative assets		—		10,179		—		10,179
Derivative liabilities		—		8,537		—		8,537
Loans held for sale		—		7,143		—		7,143

The changes in Level 3 assets measured at estimated fair value on a recurring basis during the three months ended March 31, 2012 and 2011 were as follows:


	Three Months Ended March 31,
	2012			2011
	(Dollars in thousands)
Balance at the beginning of the year	$	12,162		$	10,837
Purchases, issuances and settlements		200			—
Sales		(477	)		(53	)
(Losses) gains included in earnings		(447	)		2
Total unrealized losses		(2,065	)		(9	)

Balance at the end of the period	$	9,373		$	10,777

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

Impaired loans are reported at the fair value of the underlying collateral if repayment is dependent on liquidation of the collateral. The impaired loans are adjusted to fair value through a specific allocation of the allowance for loan losses.

Foreclosed assets, upon initial recognition, are measured and adjusted to fair value through a charge-off to the allowance for possible loan losses based upon the fair value of the foreclosed asset.

Other real estate owned is revalued at fair value subsequent to initial recognition, with any losses recognized in net expense from other real estate owned.

The following table summarizes assets measured at fair value on a nonrecurring basis and the related gains or losses recognized during the period:


	Level 1		Level 2		Level 3		Total Fair Value		Gains (Losses)
	(Dollars in thousands)
Three Months Ended March 31, 2012
Impaired loans		—		—	$	46,243	$	46,243	$	—
Foreclosed assets		—		—	$	403	$	403	$	(1	)
Other real estate owned		—		—	$	12,005	$	12,005	$	(154	)

Three Months Ended March 31, 2011
Impaired loans		—		—	$	21,074	$	21,074	$	—
Foreclosed assets		—		—	$	387	$	387	$	4
Other real estate owned		—		—	$	15,587	$	15,587	$	1,040

Financial Assets and Financial Liabilities Estimated at Fair Value

The Company is required under current authoritative accounting guidance to disclose the estimated fair value of their financial instrument assets and liabilities including those subject to the requirements discussed below. For the Company, as for most financial institutions, substantially all of its assets and liabilities are considered financial instruments as defined. The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Cash and Due from Banks; Federal Funds Sold and Interest-Bearing Deposits

The carrying amount of these short-term instruments is a reasonable estimate of fair value.

Securities

For securities, which are generally traded in secondary markets, fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities making adjustments for credit or liquidity if applicable. The Company also invests in equity securities for which observable information is not readily available. These securities are reported at fair valued based on replacement cost, the income approach or information provided by outside consultants or lead advisors.

Loans

For certain homogeneous categories of loans, such as some residential mortgages, fair values are estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. For residential mortgage loans held for sale, the carrying amounts are a reasonable estimate of fair values. The fair values of other types of loans are estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Derivatives

Derivatives are reported at fair value using dealer quotes and observable market data.

Deposits

The fair values of transaction and savings accounts are the amounts payable on demand at the reporting date. The fair values of fixed-maturity certificates of deposit are estimated using the rates currently offered for deposits of similar remaining maturities.

Short-term Borrowings

The amounts payable on these short-term instruments are reasonable estimates of fair value.

Long-term Borrowings

The fair values of fixed-rate long-term borrowings are estimated using the rates that would be charged for borrowings of similar remaining maturities.

Junior Subordinated Debentures

The fair values of junior subordinated debentures are estimated using the rates that would be charged for junior subordinated debentures of similar remaining maturities.

Loan Commitments and Letters of Credit

The fair values of commitments are estimated using the fees currently charged to enter into similar agreements, taking into account the terms of the agreements. The fair values of letters of credit are based on fees currently charged for similar agreements.

The estimated fair values of the Company's financial instruments are as follows:


	March 31,
	2012					2011
	Carrying Amount			Fair Value		Carrying Amount			Fair Value
	(Dollars in thousands)
FINANCIAL ASSETS
Cash and due from banks	$	143,515		$	143,515	$	133,639		$	133,639
Federal funds sold and interest-bearing deposits		1,693,439			1,693,439		1,372,067			1,372,067
Securities		573,801			574,230		681,159			681,825
Loans:
Loans (net of unearned interest)		3,049,376					2,796,390
Allowance for loan losses		(37,633	)				(36,136	)

Loans, net		3,011,743			3,047,715		2,760,254			2,770,479
Derivative assets		10,578			10,578		10,179			10,179
FINANCIAL LIABILITIES
Deposits		5,152,856			5,186,324		4,666,199			4,678,571
Short-term borrowings		7,323			7,323		7,100			7,100
Long-term borrowings		13,403			13,440		33,196			32,539
Derivative liabilities		8,576			8,576		8,537			8,537
Junior subordinated debentures		36,083			39,289		28,866			30,260
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Loan commitments					1,197					1,147
Letters of credit					463					435

Non-financial Assets and Non-financial Liabilities Estimated at Fair Value

The Company has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Certain non-financial assets and non-financial liabilities measured at fair value on a nonrecurring basis include intangible assets and other non-financial long-lived assets measured at fair value and adjusted for impairment. These items are evaluated at least annually for impairment. The overall levels of non-financial assets and non-financial liabilities were not considered to be significant to the Company at March 31, 2012 or 2011.