FAIR VALUE MEASUREMENTS

Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. If there has been a significant decrease in the volume and level of activity for the asset or liability, regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. The Company uses prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from one level to another.

The Fair Value Measurements and Disclosures Topic of the FASB ASC defines fair value and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under the Fair Value Measurements and Disclosures Topic of the FASB ASC are described below:

Level 1 – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Valuation Techniques

There have been no changes in the valuation techniques used during the current period.

Securities:

U.S. Government Agency Securities

Fair value is estimated using either multi-dimensional spread tables or benchmarks. The inputs used include benchmark yields, reported trades, and broker/dealer quotes. These securities are classified as Level 2.

Agency Mortgage-Backed Securities

Fair value is estimated using either a matrix or benchmarks. The inputs used include benchmark yields, reported trades, broker/dealer quotes, and issuer spreads. These securities are categorized as Level 2.

Agency Collateralized Mortgage Obligations and Private Mortgage-Backed Securities

The valuation model for these securities is volatility-driven and ratings based, and uses multi-dimensional spread tables. The inputs used include benchmark yields, recent reported trades, new issue data, broker and dealer quotes, and collateral performance. If there is at least one significant model assumption or input that is not observable, these securities are categorized as Level 3 within the fair value hierarchy; otherwise, they are classified as Level 2.

Single and Pooled Issuer Trust Preferred Securities

The fair value of trust preferred securities, including pooled and single issuer preferred securities, is estimated using external pricing models, discounted cash flow methodologies or similar techniques. The inputs used in these valuations include benchmark yields, recent reported trades, new issue data, broker and dealer quotes and collateral performance. If there is at least one significant model assumption or input that is not observable, these securities are categorized as Level 3 within the fair value hierarchy; otherwise, they are classified as Level 2.

Marketable Equity Securities

These equity and fixed income securities are valued based on market quoted prices. These securities are categorized in Level 1 as they are actively traded and no valuation adjustments have been applied.

Loans Held for Sale

The Company elects to account for new originations of loans held for sale at fair value, which is measured using quoted market prices when available. If quoted market prices are not available, comparable market values or discounted cash flow analysis may be utilized. These assets are typically categorized as Level 2.

Derivative Instruments:

Derivatives

The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The Company incorporates credit valuation adjustments to appropriately reflect nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings. Although the Company has determined that the majority of the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. However, as of September 30, 2012 and December 31, 2011, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. Additionally, in conjunction with fair value measurement guidance, the Company has made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2.

Residential Mortgage Loan Commitments and Forward Sales Agreements

The fair value of the commitments and agreements are estimated using the anticipated market price based on pricing indications provided from syndicate banks. These commitments and agreements are categorized as Level 2.

Impaired Loans

Loans that are deemed to be impaired are valued based upon the lower of cost or fair value of the underlying collateral. The inputs used in the appraisals of the collateral are not always observable, and therefore the loans may be categorized as Level 3 within the fair value hierarchy; otherwise, they are classified as Level 2.

Other Real Estate Owned

The fair values are estimated based upon recent appraisal values of the property less costs to sell the property. Certain inputs used in appraisals are not always observable, and therefore Other Real Estate Owned may be categorized as Level 3 within the fair value hierarchy. When inputs in appraisals are observable, they are classified as Level 2.

Goodwill and Other Intangible Assets

Goodwill and identified intangible assets are subject to impairment testing. The Company conducts an annual impairment test of goodwill in the third quarter of each year and more frequently, if necessary. To estimate the fair value of goodwill and other intangible assets the Company utilizes both a comparable analysis of relevant price multiples in recent market transactions and discounted cash flow analysis. Both valuation models require a significant degree of management judgment. In the event the fair value as determined by the valuation model is less than the carrying value, the intangibles may be impaired. If the impairment testing resulted in impairment, the Company would classify the impaired goodwill and other intangible assets subjected to nonrecurring fair value adjustments as Level 3.

Assets and Liabilities Measured at Fair Value at the periods indicated were as follows:



			Fair Value Measurements at the End of the Reporting Period Using:
	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)
	September 30, 2012
	(Dollars in Thousands)
RECURRING FAIR VALUE MEASUREMENTS:
ASSETS
SECURITIES AVAILABLE FOR SALE:
U.S. Government Agency Securities	$	20,907	$	—	$	20,907	$	—
Agency Mortgage-Backed Securities	211,745		—		211,745		—
Agency Collateralized Mortgage Obligations	73,372		—		73,372		—
Private Mortgage-Backed Securities	4,112		—		—		4,112
Pooled Trust Preferred Securities Issued by Banks and Insurers	3,052		—		—		3,052
Marketable Equity Securities	9,968		9,968		—		—
LOANS HELD FOR SALE	42,393		—		42,393		—
DERIVATIVE INSTRUMENTS	32,672		—		32,672		—
LIABILITIES
DERIVATIVE INSTRUMENTS	51,364		—		51,364		—
TOTAL RECURRING FAIR VALUE MEASUREMENTS	$	346,857	$	9,968	$	420,719	$	7,164

NONRECURRING FAIR VALUE MEASUREMENTS:
ASSETS
COLLATERAL DEPENDENT IMPAIRED LOANS	$	7,450	$	—	$	—	$	7,450	$	(676	)
OTHER REAL ESTATE OWNED	8,751		—		—		8,751		—
TOTAL NONRECURRING FAIR VALUE MEASUREMENTS	$	16,201	$	—	$	—	$	16,201	$	(676	)



	December 31, 2011
	(Dollars in Thousands)
RECURRING FAIR VALUE MEASUREMENTS:
ASSETS
TRADING SECURITIES	$	8,240	$	8,240	$	—	$	—
SECURITIES AVAILABLE FOR SALE:
Agency Mortgage-Backed Securities	238,391		—		238,391		—
Agency Collateralized Mortgage Obligations	53,801		—		53,801		—
Private Mortgage-Backed Securities	6,110		—		—		6,110
Single Issuer Trust Preferred Securities Issued by Banks	4,210		—		—		4,210
Pooled Trust Preferred Securities Issued by Banks and Insurers	2,820		—		—		2,820
LOANS HELD FOR SALE	20,500		—		20,500		—
DERIVATIVE INSTRUMENTS	25,841		—		25,841		—
LIABILITIES
DERIVATIVE INSTRUMENTS	44,407		—		44,407		—
TOTAL RECURRING FAIR VALUE MEASUREMENTS	$	315,506	$	8,240	$	294,126	$	13,140

NONRECURRING FAIR VALUE MEASUREMENTS:
ASSETS
IMPAIRED LOANS (1)	$	36,861	$	—	$	—	$	36,861	$	(2,682	)
OTHER REAL ESTATE OWNED	6,658		—		—		6,658		—
TOTAL NONRECURRING FAIR VALUE MEASUREMENTS	$	43,519	$	—	$	—	$	43,519	$	(2,682	)

(1) Represents all impaired loans with an associated specific reserve at December 31, 2011. Included in this amount are $9.0 million of collateral dependent loans

The table below presents a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3). These instruments were valued using pricing models and discounted cash flow methodologies.



	Securities Available for Sale:
	Pooled Trust Preferred Securities			Single Trust Preferred Securities			Private Mortgage- Backed Securities			Total
	(Dollars in Thousands)
BALANCE AT JUNE 30, 2012	$	2,754		$	—		$	4,739		$	7,493
GAINS AND LOSSES (REALIZED/UNREALIZED):
Included in Earnings	—			—			—			—
Included in Other Comprehensive Income	332			—			50			382
SETTLEMENTS	(34		)	—			(677		)	(711		)
TRANSFERS INTO(OUT OF) OF LEVEL 3	—			—			—			—
BALANCE AT SEPTEMBER 30, 2012	$	3,052		$	—		$	4,112		$	7,164
BALANCE AT JANUARY 1, 2011	$	2,828		$	4,221		$	10,254		$	17,303
GAINS AND LOSSES (REALIZED/UNREALIZED):
Included in Earnings	(8		)	—			(235		)	(243		)
Included in Other Comprehensive Income	37			(11		)	49			75
SETTLEMENTS	(37		)	—			(3,958		)	(3,995		)
BALANCE AT DECEMBER 31, 2011	$	2,820		$	4,210		$	6,110		$	13,140
GAINS AND LOSSES (REALIZED/UNREALIZED):
Included in Earnings	—			—			(76		)	(76		)
Included in Other Comprehensive Income	286			703			280			1,269
SETTLEMENTS	(54		)	—			(2,202		)	(2,256		)
TRANSFERS INTO(OUT OF) OF LEVEL 3	—			(4,913		)	—			(4,913		)
BALANCE AT SEPTEMBER 30, 2012	$	3,052		$	—		$	4,112		$	7,164

During the first quarter of 2012 the Company transferred the Single Issuer Trust Preferred Security from Level 3 to Level 2. The reason for this transfer was increased trading of the security, enabling the use of more observable inputs. It is the Company’s policy to recognize the transfers as of the end of the reporting period. There were no transfers between the Levels of the fair value hierarchy for any assets or liabilities measured at fair value on a recurring basis during the second and third quarter of 2012 or the year ended December 31, 2011.

The following table sets forth certain unobservable inputs regarding the Company’s investment in securities that are classified as Level 3:



	Fair Value at September 30, 2012		Valuation Technique(s)	Unobservable Inputs	Range	Weighted Average
				(Dollars in Thousands)
POOLED TRUST PREFERRRED SECURITIES	$	3,052	Discounted cash flow methodology	Cumulative Prepayment	0%-100%	4.3%
				Cumulative Default	4.0%-100%	20.0%
				Loss Given Default	85% - 100%	94.9%
				Cure Given Default	0% - 75%	31.9%
PRIVATE MORTGAGE-BACKED SECURITIES	$	4,112	Multi-dimensional spread tables	Cumulative Prepayment Rate	10.3%-14.5%	13.9%
				Constant Default Rate	0.8% -20.5%	3.6%
				Severity	25.0% -62.5%	38.9%
IMPAIRED LOANS	$	7,450	Appraisals of collateral (1)
OTHER REAL ESTATE OWNED	$	8,751	Appraisals of collateral (1)


(1)	Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable. Appraisals may be adjusted by management for qualitative factors such as economic factors and estimated liquidation expenses. The range of these possible adjustments may vary.

For the fair value measurements in the table above, which are classified as Level 3 within the fair value hierarchy, the Company’s Treasury and Finance groups determine the valuation policies and procedures. For the pricing of the securities, the Company uses third-party pricing information, without adjustment. Depending on the type of the security, management employs various techniques to analyze the pricing it receives from third-parties, such as analyzing changes in market yields and in certain instances reviewing the underlying collateral of the security. Management reviews changes in fair value from period to period and performs testing to ensure that prices received from the third parties are consistent with their expectation of the market. For the securities categorized as Level 3, the market is deemed to be inactive, the fair value models are calibrated and to the extent possible, significant inputs are back tested on a quarterly basis. This testing is done by the third party service provider, who performs this testing by comparing anticipated inputs to actual results. For example, modeled default and prepayment rates for private mortgage-backed securities will be compared to actual rates for the previous period. Significant changes in fair value from period to period are closely scrutinized to ensure fair value models are not flawed. The driver(s) of the respective change in fair value and the method for forecasting the driver(s) is closely considered by management.

The significant unobservable inputs used in the fair value measurement of the Company’s pooled trust preferred securities are cumulative prepayment rates, cumulative defaults, loss given defaults and cure given defaults. Significant increases (decreases) in deferrals or defaults, in isolation would result in a significantly lower (higher) fair value measurement. Alternatively, significant increases (decreases) in cure rates, in isolation would result in a significantly higher (lower) fair value measurement.

The significant unobservable inputs used in the fair value measurement of the Company’s private mortgage-backed securities are constant prepayment rates, constant default rates, and loss severity in the event of default. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates.

Additionally, the Company has financial instruments which are marked to fair value on a nonrecurring basis which are categorized within Level 3. These instruments include collateral dependent impaired loans and OREO. The determination of the fair value amount is derived from the use of independent third party appraisals and evaluations, prepared by firms from a predetermined list of qualified and approved appraisers or evaluators. Upon receipt of an appraisal or evaluation, the internal Commercial Real Estate Appraisal Department will review the report for compliance with regulatory and Bank standards, as well as reasonableness and acceptance of the value conclusions. Any issues or concerns regarding compliance or value conclusions will be addressed with the engaged firm and the report may be adjusted or revised. If a disagreement cannot be resolved, the Commercial Real Estate Appraisal Department will either address the key issues and modify the report for acceptance or reject the report and re-order a new report. Ultimately the Company’s Commercial Real Estate Appraisal Department will confirm the collateral value as part of its review process. Once it is determined that an impaired loan is collateral dependent, a new appraisal or evaluation is obtained to determine the fair value of the collateral.

The estimated fair values and related carrying amounts for assets and liabilities for which fair value is only disclosed are shown below as of the periods indicated:



					Fair Value Measurements at Reporting Date Using
	Book Value		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	September 30, 2012
	(Dollars in Thousands)
FINANCIAL ASSETS
SECURITIES HELD TO MATURITY (a):
U.S. Treasury Securities	$	1,013	$	1,143	—		$	1,143	—
Agency Mortgage-Backed Securities	81,523		86,762		—		86,762		—
Agency Collateralized Mortgage Obligations	91,845		94,769		—		94,769		—
State, County, and Municipal Securities	915		929		—		929		—
Single Issuer trust preferred Securities Issued by Banks	6,538		6,601		—		6,601		—
Corporate Debt Securities	5,008		5,250		—		5,250		—
LOANS, NET OF ALLOWANCE FOR LOAN LOSSES (b)	4,006,389		4,009,976		—		—		4,009,976
FINANCIAL LIABILITIES
TIME CERTIFICATES OF DEPOSITS (c)	$	630,419	$	636,197	—		$	636,197	—
FEDERAL HOME LOAN BANK ADVANCES (c)	189,464		189,785		—		189,785		—
WHOLESALE AND CUSTOMER REPURCHASE AGREEMENTS (c)	208,578		206,199		—		—		206,199
JUNIOR SUBORDINATED DEBENTURES (d)	61,857		61,238		—		61,238		—
SUBORDINATED DEBENTURES (c)	30,000		23,375		—		—		23,375
	December 31, 2011
	(Dollars in Thousands)
FINANCIAL ASSETS
SECURITIES HELD TO MATURITY (a):
U.S. Treasury Securities	$	1,014	$	1,117	$	—	$	1,117	$	—
Agency Mortgage-Backed Securities	109,553		113,959		—		113,959		—
Agency Collateralized Mortgage Obligations	77,804		80,298		—		80,298		—
State, County, and Municipal Securities	3,576		3,610		—		3,610		—
Single Issuer trust preferred Securities Issued by Banks	8,000		7,346		—		7,346		—
Corporate Debt Securities	5,009		5,164		—		5,164		—
LOANS, NET OF ALLOWANCE FOR LOAN LOSSES (b)	3,746,130		3,807,938		—		—		3,807,938
FINANCIAL LIABILITIES
TIME CERTIFICATES OF DEPOSITS (c)	$	630,162	$	639,333	$	—	$	639,333	$	—
FEDERAL HOME LOAN BANK ADVANCES (c)	229,701		233,880		—		233,880		—
WHOLESALE AND CUSTOMER REPURCHASE AGREEMENTS (c)	216,128		219,857		—		—		219,857
JUNIOR SUBORDINATED DEBENTURES (d)	61,857		60,620		—		60,620		—
SUBORDINATED DEBENTURES (c)	30,000		27,217		—		—		27,217


(a)	The fair values presented are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments and/or discounted cash flow analyses.


(b)	Fair value is 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 or cash flows.


(c)	Fair value was determined by discounting anticipated future cash payments using rates currently available for instruments with similar remaining maturities.


(d)	Fair value was determined based upon market prices of securities with similar terms and maturities.

This summary excludes financial assets and liabilities for which the carrying value approximates fair value. For financial assets, these include cash and due from banks, federal funds sold, short-term investments, Federal Home Loan Bank stock, and cash surrender value of life insurance policies. For financial liabilities, these include demand, savings, money market deposits, and federal funds purchased. The estimated fair value of demand, savings and money market deposits is the amount payable at the reporting date. These instruments would all be considered to be classified within Level 1 of the fair value hierarchy. Also excluded from the summary are financial instruments measured at fair value on a recurring and nonrecurring basis, as previously described.

The Company believes its financial instruments current use is considered to be the highest and best use of the instruments.