Fair Value Measurements

3 Months Ended

Mar. 31, 2012

Fair Value Measurements [Abstract]

Fair Value Measurements

(11)       Fair Value Measurements

(a) Fair Value Hierarchy and Fair Value Measurement: The Company groups its assets and liabilities that are recorded at fair value in three levels, based on the markets, if any, in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

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 or whose significant value drives are observable.

Level 3:   Significant inputs to the valuation model are unobservable.

The following table presents the Company's financial instruments measured at fair value on a recurring basis at March 31, 2012 and December 31, 2011:

(dollars in thousands)	Fair value at March 31, 2012
	Level 1		Level 2		Level 3		Total
U.S. government agencies	$	-	$	81,392	$	-	$	81,392
U.S. Treasuries		-		27,127		-		27,127
Pass-through securities		-		141,267		-		141,267
Taxable state and political subdivisions		-		9,951		-		9,951
Tax exempt state and political subdivisions		-		38,526		-		38,526
Corporate obligations		-		10,628		-		10,628
Agency-issued collateralized mortgage obligations		-		9,799		-		9,799
Investments in mutual funds and other equities		-		4,094		-		4,094
Total	$	-	$	322,784	$	-	$	322,784

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2012.

(dollars in thousands)	Fair value at December 31, 2011
	Level 1		Level 2		Level 3		Total
U.S. government agencies	$	-	$	76,574	$	-	$	76,574
U.S. Treasuries		-		42,597		-		42,597
Pass-through securities		-		117,398		-		117,398
Taxable state and political subdivisions		-		9,757		-		9,757
Tax exempt state and political subdivisions		-		37,335		-		37,335
Corporate obligations		-		10,287		-		10,287
Investments in mutual funds and other equities		-		3,926		-		3,926
Total	$	-	$	297,874	$	-	$	297,874

There were no transfers between Level 1 and Level 2 during the year ended December 31, 2011.

When available, the Company uses quoted market prices to determine the fair value of investment securities. These investments are included in Level 1. When quoted market prices are unobservable, the Company uses quotes from independent pricing vendors based on recent trading activity and other relevant information including market interest rate curves, referenced credit spreads and estimated prepayment rates where applicable. These investments are included in Level 2 and comprise the Company's portfolio of U.S. agency securities, U.S. treasury securities, pass-through securities, municipal bonds and other corporate bonds.

Certain financial assets of the Company may be measured at fair value on a non-recurring basis. These assets are subject to fair value adjustments that result from application of lower-of-cost-or-market accounting or write-downs of individual assets. For example, when a loan is identified as impaired, it is reported at the lower of cost or fair value, measured based on the loan's observable market price (Level 1), the present value of expected future cash flows discounted at the loan's original effective interest rate (Level 2), or the current appraised value of the underlying collateral securing the loan if the loan is collateral dependent (Level 3).  

The following table presents the carrying value of financial instruments by level within the fair value hierarchy, for which a non-recurring change in fair value has been recorded:

(dollars in thousands)	Fair value at March 31, 2012
	Level 1		Level 2		Level 3		Total		Total losses for the period
Non-covered impaired loans (1)	$	-	$	-	$	46,541	$	46,541	$	(4,494	)
Non-covered other real estate owned (2)		-		-		1,830		1,830		(208	)
Covered other real estate owned (2)		-		-		25,973		25,973		-
Total	$	-	$	-	$	74,344	$	74,344	$	(4,702	)

(dollars in thousands)	Fair value at December 31, 2011
	Level 1		Level 2		Level 3		Total		Total losses for the period
Non-covered impaired loans (1)	$	-	$	-	$	44,845	$	44,845	$	(8,182	)
Non-covered other real estate owned (2)		-		-		1,976		1,976		(272	)
Covered other real estate owned (2)		-		-		26,622		26,622		-
Total	$	-	$	-	$	73,443	$	73,443	$	(8,454	)

(1) Represents carrying value and related specific valuation allowances, which are included in the allowance for loan losses.

(2) Represents the fair value and related losses of foreclosed real estate and other collateral owned that were measured at fair value subsequent to their initial classification as non-covered other real estate owned and covered other real estate owned.

Following is a description of methods and assumptions used to estimate the fair value of each class of financial instrument for which a non-recurring change in fair value has been recorded:

Non-covered impaired loans: A loan is considered impaired when, based upon currently known information, it is deemed probable that the Company will be unable to collect all amounts due as scheduled according to the original terms of the agreement. The non-covered impaired loans above represent impaired, collateral dependent loans that have been adjusted to fair value using the current fair value of the collateral, less selling costs.

Non-covered and covered other real estate owned: Non-covered and covered other real estate owned includes properties acquired through foreclosure. These properties are recorded at the lower of cost or estimated fair value (less estimated cost to sell), based on periodic evaluations.

The Company generally obtains appraisals for collateral dependent loans on an annual basis.  Depending on the loan, the Company may obtain appraisals more frequently than 12 months, particularly if the credit is deteriorating.  If the loan is performing and market conditions are stable, the Company may not obtain appraisals on an annual basis. This policy does not vary by loan type.

The Company deducts a minimum of 10% of the appraised value for selling costs.  If the property has been actively listed for sale for more than nine months and has had limited interest, the Company will typically reduce the fair value further based upon input from third party industry experts. This includes adjustments for outdated appraisals based on knowledgeable third party opinions.

Impaired loans that are collateral dependent are reviewed quarterly.  The review involves a collateral valuation review, which also contemplates an assessment of whether the last appraisal is outdated.  Recent appraisals, adjustments to outdated appraisals, knowledgeable third party opinions of value and current market conditions are combined to determine whether a specific reserve and/or a loan charge-off is required.  The Company does not specifically consider the potential for outdated appraisals in its calculation of the formula portion of the allowance for loan losses.

In the rare case where an appraisal is not available, the Company consults with third party industry specific experts for estimates as well as relies upon the Company's market knowledge and expertise.

(b) Disclosures about Fair Value of Financial Instruments: The table below is a summary of fair value estimates for financial instruments at March 31, 2012 and December 31, 2011, excluding financial instruments recorded at fair value on a recurring basis (summarized in a separate table). The carrying amounts in the following table are recorded in the statement of condition under the indicated captions. The Company has excluded non-financial assets and non-financial liabilities defined by the Codification (ASC 820-10-15-1A), such as Bank premises and equipment, deferred taxes and other liabilities.  In addition, the Company has not disclosed the fair value of financial instruments specifically excluded from disclosure requirements of the Financial Instruments Topic of the Codification (ASC 825-10-50-8), such as Bank-owned life insurance policies.

(dollars in thousands)	March 31, 2012
			Fair value measurements using:
	Carrying value		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	22,010	$	22,010	$	22,010	$	-	$	-
Interest-bearing deposits		109,154		109,154		109,154		-		-
Investment securities available for sale		322,784		322,784		-		322,784		-
FHLB stock		7,576		7,576		7,576		-		-
Loans held for sale		10,011		10,011		-		10,011		-
Non-covered loans		818,650		799,328		-		-		799,328
Covered loans		255,711		277,694		-		-		277,694
FDIC indemnification asset		60,898		45,511		-		-		45,511
Financial liabilities:
Deposits		1,486,025		1,490,234		-		-		1,490,234
Junior subordinated debentures		25,774		12,190		-		-		12,190

(dollars in thousands)	December 31, 2011
			Fair value measurements using:
	Carrying value		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	25,399	$	25,399	$	25,399	$	-	$	-
Interest-bearing deposits		80,514		80,514		80,514		-		-
Investment securities available for sale		297,874		297,874		-		297,874		-
FHLB stock		7,576		7,576		7,576		-		-
Loans held for sale		22,421		22,421		-		22,421		-
Non-covered loans		812,830		796,663		-		-		796,663
Covered loans		269,081		304,145		-		-		304,145
FDIC indemnification asset		65,586		41,041		-		-		41,041
Financial liabilities:
Deposits		1,466,344		1,471,615		-		-		1,471,615
Junior subordinated debentures		25,774		9,802		-		-		9,802

Following is a description of methods and assumptions used to estimate the fair value of each class of financial instrument not recorded at fair value but required for disclosure purposes:

Cash and Cash Equivalents:The carrying value of cash and cash equivalent instruments approximates fair value.

Interest-bearing Deposits:  The carrying values of interest-bearing deposits maturing within ninety days approximate their fair values. Fair values of other interest-earning deposits are estimated using discounted cash flow analyses based on current rates for similar types of deposits.

Investment Securities: Fair values for investment securities are based on quoted market prices when available or through the use of alternative approaches, such as matrix or model pricing, or broker indicative bids, when market quotes are not readily accessible or available.

FHLB stock: The Bank's investment in FHLB stock is carried at par value, which approximates its fair value.

Loans Held for Sale:The carrying value of loans held for sale approximates fair value.

Non-covered Loans: The loan portfolio is composed of commercial, consumer, real estate construction and real estate loans.  The carrying value of variable rate loans approximates their fair value. The fair value of fixed rate loans is estimated by discounting the estimated future cash flows of loans, sorted by type and security, by the weighted average rate of such loans and rising rates currently offered by the Bank for similar loans.

Covered Loans: Covered loans are measured at estimated fair value on the date of acquisition. Subsequent to acquisition, the fair value of covered loans is measured using the same methodology as that of non-covered loans.

FDIC Indemnification Asset: The FDIC indemnification asset is calculated as the expected future cash flows under the loss share agreement discounted by a rate reflective of a U.S. government agency security.

Deposits: For deposits with no contractual maturity such as checking accounts, money market accounts and savings accounts, fair values approximate book values. The fair value of certificates of deposit are based on discounted cash flows using the difference between the actual deposit rate and an alternative cost of funds rate, currently offered by the Bank for similar types of deposits.

Trust Preferred Securities/Junior Subordinated Debentures: The fair value of trust preferred securities is estimated at their recorded value due to the cost of the instrument re-pricing on a quarterly basis.

Off-Balance Sheet Items: Commitments to extend credit represent the principal category of off-balance sheet financial instruments. The fair value of these commitments are not material since they are for relatively short periods of time and are subject to customary credit terms, which would not include terms that would expose the Company to significant gains or losses.