12.

Fair Value Measurements

The Company measures certain of its assets and liabilities on a fair value basis using various valuation techniques and assumptions, depending on the nature of the asset or liability. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, fair value is used either annually or on a non-recurring basis to evaluate certain assets and liabilities for impairment or for disclosure purposes. The Company had no liabilities that were accounted for at fair value at June 30, 2015 or 2014 or at December 31, 2014.

The Company applies the following fair value hierarchy.


Level 1 –		Quoted prices for identical instruments in active markets.

Level 2 –		Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable.

Level 3 –		Instruments whose inputs are unobservable.

The following table sets forth the Company’s assets, as of the dates indicated, that are accounted for at fair value.


	Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
June 30, 2015:
Investment securities AFS⁽¹⁾:
Obligations of state and political subdivisions	$	0	$	488,158	$	18,757	$	506,915
U.S. Government agency securities		0		260,753		0		260,753
Corporate obligations		0		3,574		0		3,574
CRA qualified investment fund		1,020		0		0		1,020

Total investment securities AFS		1,020		752,485		18,757		772,262
Impaired non-purchased loans and leases		0		0		12,807		12,807
Impaired purchased loans		0		0		12,347		12,347
Foreclosed assets		0		0		25,973		25,973

Total assets at fair value	$	1,020	$	752,485	$	69,884	$	823,389


December 31, 2014:
Investment securities AFS⁽¹⁾:
Obligations of state and political subdivisions	$	0	$	553,808	$	19,401	$	573,209
U.S. Government agency securities		0		251,233		0		251,233
Corporate obligations		0		654		0		654

Total investment securities AFS		0		805,695		19,401		825,096
Impaired non-purchased loans and leases		0		0		19,480		19,480
Impaired purchased loans		0		0		14,040		14,040
Foreclosed assets		0		0		37,775		37,775

Total assets at fair value	$	0	$	805,695	$	90,696	$	896,391


June 30, 2014:
Investment securities AFS⁽¹⁾:
Obligations of state and political subdivisions	$	0	$	595,965	$	20,600	$	616,565
U.S. Government agency securities		0		258,311		0		258,311
Corporate obligations		0		685		0		685

Total investment securities AFS		0		854,961		20,600		875,561
Impaired non-purchased loans and leases		0		0		16,240		16,240
Impaired purchased loans		0		0		21,205		21,205
Foreclosed assets		0		0		56,356		56,356

Total assets at fair value	$	0	$	854,961	$	114,401	$	969,362

(1)	Does not include $10.0 million at June 30, 2015; $14.2 million at December 31, 2014 and $16.6 million at June 30, 2014 of FHLB and FNBB equity securities that do not have readily determinable fair values and are carried at cost.

The following table presents information related to Level 3 non-recurring fair value measurements as of the date indicated.


Description	Fair Value at June 30, 2015		Technique	Unobservable Inputs
(Dollars in thousands)
Impaired non-purchased loans and leases	$	12,807	Third party appraisal⁽¹⁾ or discounted cash flows	1.	Management discount based on underlying collateral characteristics and market conditions
				2.	Life of loan

Impaired purchased loans	$	12,347	Third party appraisal⁽¹⁾ and/or discounted cash flows	1.	Management discount based on underlying collateral characteristics and market conditions
				2.	Life of loan

Foreclosed assets	$	25,973	Third party appraisal,⁽¹⁾ broker price opinions and/or discounted cash flows	1.	Management discount based on asset characteristics and market conditions
				2.	Discount rate
				3.	Holding period

(1)	The Company utilizes valuation techniques consistent with the market, cost, and income approaches, or a combination thereof in determining fair value.

The following methods and assumptions are used to estimate the fair value of the Company’s assets and liabilities that are accounted for at fair value.

Investment securities – The Company utilizes independent third parties as its principal pricing sources for determining fair value of investment securities which are measured on a recurring basis. As a result, the Company receives estimates of fair values from at least two independent pricing sources for the majority of its individual securities within its investment portfolio. For investment securities traded in an active market, fair values are based on quoted market prices if available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities, broker quotes, comprehensive interest rate tables and pricing matrices or a combination thereof. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs. All fair value estimates of the Company’s investment securities are reviewed and approved on a quarterly basis by its Investment Portfolio Manager and its Chief Financial Officer.

The Company has determined that certain of its investment securities had a limited to non-existent trading market at June 30, 2015. As a result, the Company considers these investments as Level 3 in the fair value hierarchy. Specifically, the fair values of certain obligations of state and political subdivisions consisting primarily of certain unrated private placement bonds (the “private placement bonds”) in the amount of $18.8 million at June 30, 2015 were calculated using Level 3 hierarchy inputs and assumptions as the trading market for such securities was determined to be “not active.” This determination was based on the limited number of trades or, in certain cases, the existence of no reported trades for the private placement bonds. The private placement bonds are generally prepayable at par value at the option of the issuer. As a result, management believes the private placement bonds should be individually valued at the lower of (i) the matrix pricing provided by the Company’s third party pricing services for comparable unrated municipal securities or (ii) par value. At June 30, 2015, the third parties’ pricing matrices valued the Company’s portfolio of private placement bonds at $18.8 million which was equal to the aggregate par value of the private placement bonds. Accordingly, at June 30, 2015, the Company reported the private placement bonds at $18.8 million.

Impaired non-purchased loans and leases – Fair values are measured on a nonrecurring basis and are based on the underlying collateral value of the impaired loan or lease, net of holding and selling costs, or the estimated discounted cash flows for such loan or lease. At June 30, 2015 the Company had reduced the carrying value of its impaired loans and leases (all of which are included in nonaccrual loans and leases) by $5.0 million to the estimated fair value of $12.8 million. The $5.0 million adjustment to reduce the carrying value of impaired loans and leases to estimated fair value consisted of $3.6 million of partial charge-offs and $1.4 million of specific loan and lease loss allocations.

Impaired purchased loans – Impaired purchased loans are measured at fair value on a non-recurring basis. As of June 30, 2015, the Company had identified purchased loans where the expected performance had deteriorated from management’s performance expectations established in conjunction with the determination of the Day 1 Fair Values or where current information indicates it is probable that the Company will not be able to collect all amounts according to the contractual terms thereof (for purchased loans without evidence of credit deterioration at date of acquisition) or the expected performance of such loans had deteriorated from management’s performance expectations established in conjunction with the determination of the Day 1 Fair Values or since management’s most recent review of such portfolio’s performance (for purchased loans with evidence of credit deterioration at date of acquisition). As a result, the Company recorded partial charge-offs totaling $0.4 million and $1.1 million during the second quarter of 2015 and 2014, respectively, and $1.7 million and $1.3 million during the first six months of 2015 and 2014, respectively. The Company also recorded provision for loan and lease losses of $0.4 million and $1.1 million during the second quarter of 2015 and 2014, respectively, and $1.7 million and $1.3 million during the first six months of 2015 and 2014, respectively, to cover such charge-offs. In addition to these charge-offs, the Company transferred certain of these purchased loans to foreclosed assets. As a result of these actions, at June 30, 2015, the Company had $12.3 million of impaired purchased loans.

Foreclosed assets – Repossessed personal properties and real estate acquired through or in lieu of foreclosure are measured on a non-recurring basis and are initially recorded at the lesser of current principal investment or fair value less estimated cost to sell (generally 8% to 10%) at the date of repossession or foreclosure. Purchased foreclosed assets are initially recorded at Day 1 Fair Values. In estimating such Day 1 Fair Values, management considered a number of factors including, among others, appraised value, estimated selling price, estimated holding periods and net present value (calculated using discount rates ranging from 8.0% to 9.5% per annum) of cash flows expected to be received. Valuations of these assets are periodically reviewed by management with the carrying value of such assets adjusted to the then estimated fair value net of estimated selling costs, if lower, until disposition. Fair values of foreclosed and repossessed assets are generally based on third party appraisals, broker price opinions or other valuations of the property.

The following table presents additional information for the periods indicated about assets measured at fair value on a recurring basis and for which the Company has utilized Level 3 inputs to determine fair value.


	Investment Securities AFS
	(Dollars in thousands)

Balance – January 1, 2015	$	19,401
Total realized gains (losses) included in earnings		0
Total unrealized gains (losses) included in comprehensive income		(271	)
Paydowns and maturities		(373	)
Sales		0
Transfers in and/or out of Level 3		0

Balance – June 30, 2015	$	18,757


Balance – January 1, 2014	$	18,682
Total realized gains (losses) included in earnings		0
Total unrealized gains (losses) included in comprehensive income		403
Acquired		1,907
Paydowns and maturities		(392	)
Sales		0
Transfers in and/or out of Level 3		0

Balance – June 30, 2014	$	20,600