FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2012

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

NOTE 14. FAIR VALUE MEASUREMENTS

A description of the valuation methodologies used for assets and liabilities 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 that are carried at fair value.

Recurring fair value measurements

The following table summarizes assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value. There were no transfers between levels during the nine months ended September 30, 2012.

	September 30, 2012
	Level 1		Level 2		Level 3		Total
(In thousands)	Inputs		Inputs		Inputs		Fair Value
Trading account security	$	—	$	—	$	17,237	$	17,237
Available-for-sale securities:
Municipal bonds and obligations	—		82,336		—		82,336
Governmentguaranteed residential mortgage-backed securities	—		44,947		—		44,947
Government-sponsored residential mortgage-backed securities	—		280,012		—		280,012
Corporate bonds	—		9,703		—		9,703
Trust preferred securities	—		18,252		817		19,069
Other bonds and obligations	—		292		—		292
Marketable equity securities	31,085		—		—		31,085
Loans held for sale	—		114,698		—		114,698
Derivative assets	—		15,747		7,833		23,580
Derivative liabilities	4,669		32,244		—		36,913

	December 31, 2011
	Level 1		Level 2		Level 3		Total
(In thousands)	Inputs		Inputs		Inputs		Fair Value
Trading account security	$	—	$	—	$	17,395	$	17,395
Available-for-sale securities:
Municipal bonds and obligations	—		77,854		—		77,854
Government guaranteed residential mortgage-backed securities	—		45,096		—		45,096
Government-sponsored residential mortgage-backed securities	—		247,611		—		247,611
Corporate bonds	—		9,727		—		9,727
Trust preferred securities	—		17,271		544		17,815
Other bonds and obligations	—		644		—		644
Marketable equity securities	21,009		—		—		21,009
Derivative assets	—		13,926		—		13,926
Derivative liabilities	—		26,864		66		26,930

Trading Security at Fair Value. The Company holds one security designated as a trading security. It is a tax advantaged economic development bond issued to the Company by a local nonprofit which provides wellness and health programs. The determination of the fair value for this security is determined based on a discounted cash flow methodology. Certain inputs to the fair value calculation are unobservable and there is little to no market activity in the security; therefore, the security meets the definition of a Level 3 security.  The discount rate used in the valuation of the security is sensitive to movements in the 3-month LIBOR rate.

Securities Available for Sale. AFS securities classified as Level 1 consist of publicly-traded equity securities for which the fair values can be obtained through quoted market prices in active exchange markets. AFS securities classified as Level 2 include most of the Company’s debt securities. The pricing on Level 2 was primarily sourced from third party pricing services, overseen by management, and is based on models that consider standard input factors such as 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 condition, among other things. The Company holds one pooled trust preferred security. The security’s fair value is based on unobservable issuer-provided financial information and discounted cash flow models derived from the underlying structured pool and therefore is classified as Level 3.

Loans held for sale.The Company elected the fair value option for all loans held for sale (HFS) originated on or after May 1, 2012.  Loans HFS are classified as Level 2 as the fair value is based on input factors such as quoted prices for similar loans in active markets.

					Aggregate Fair Value
September 30, 2012	Aggregate		Aggregate		Less Aggregate
(In thousands)	Fair Value		Unpaid Principal		Unpaid Principal
Loans Held for Sale	$	114,698	$	109,746	$	4,952

Derivative Assets and Liabilities.

Interest Rate Swap.  The valuation of the Company’s interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves.

The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s 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 itself and its counterparties.  However, as of September 30, 2012, 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. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Interest Rate Lock Commitments. The Company enters into IRLCs for residential mortgage loans, which commit the Company to lend funds to a potential borrower at a specific interest rate and within a specified period of time.  The estimated fair value of commitments to originate residential mortgage loans for sale is based on quoted prices for similar loans in active markets. However, this value is adjusted by a factor which considers the likelihood that the loan in a lock position will ultimately close, and by the non-refundable costs of originating the loan.  The closing ratio is derived from the Bank’s internal data and is adjusted using significant management judgment.  The costs to originate are primarily based on the Company’s internal commission rates that are not observable. As such, IRLCs are classified as Level 3 measurements.

Forward Commitments. The Company utilizes forward commitments as economic hedges against the potential decreases in the values of the IRLCs.  The forward commitments are classified as Level 1 and consist of publicly-traded debt securities for which identical fair values can be obtained through quoted market prices in active exchange markets.

The table below presents the changes in Level 3 assets that were measured at fair value on a recurring basis at September 30, 2012 and 2011.

	Assets
	Trading			Securities			Interest Rate
	Account			Available			Lock
(In thousands)	Security			for Sale			Commitments
Balance as of December 31, 2011	$	17,395		$	544		$	—
Unrealized gain recognized in other non-interest income	(428		)	—			—
Unrealized loss included in accumulated other comprehensive loss	—			—			—
Paydown of trading account security	(120		)	—			—
Balance as of March 31, 2012	$	16,847		$	544		$	—
Greenpark Acquisition	—			—			2,126
Unrealized (loss) gain recognized in other non-interest income	638			—			4,337
Unrealized loss included in accumulated other comprehensive loss	—			69			—
Paydown of trading account security	(120		)	—			—
Transfers to held for sale loans	—			—			(2,435		)
Balance as of June 30, 2012	$	17,365		$	613		$	4,028
Unrealized (loss) gain recognized in other non-interest income	(7		)	—			10,858
Unrealized loss included in accumulated other comprehensive loss	—			204			—
Paydown of trading account security	(121		)	—			—
Transfers to held for sale loans	—			—			(7,053		)
Balance as of September 30, 2012	$	17,237		$	817		$	7,833
Unrealized gains (losses) relating to instruments still held at September 30, 2012	$	3,502		$	(1,784	)	$	10,858

	Assets
	Trading			Securities
	Account			Available
(In thousands)	Security			for Sale
Balance as of December 31, 2010	$	16,155		$	1,695
Unrealized (loss) gain recognized in other non-interest income	(257		)	—
Unrealized loss included in accumulated other comprehensive loss	—			498
Paydown of trading account security	(117		)	—
Balance as of March 31, 2011	$	15,781		$	2,193
Unrealized (loss) gain recognized in other non-interest income	357			—
Unrealized loss included in accumulated other comprehensive loss	—			112
Paydown of trading account security	(114		)	—
Transfer out of Level 3	—			(1,624		)
Balance as of June 30, 2011	$	16,024		$	681
Unrealized (loss) gain recognized in other non-interest income	1,592			—
Unrealized loss included in accumulated other comprehensive loss	—			(218		)
Paydown of trading account security	(115		)	—
Balance as of September 30, 2011	$	17,501		$	463
Unrealized gains (losses) relating to instruments still held at September 30, 2011	$	3,287		$	(2,136	)

Quantitative information about the significant unobservable inputs within Level 3 recurring assets are as follows:

	Fair Value				Significant Unobservable
(In thousands)	September 30, 2012		Valuation Techniques	Unobservable Inputs	Input Value
Assets
Trading Account Security	$	17,237	Discounted Cash Flow	Discount Rate	2.08	%
Interest Rate Lock Commitment	7,833		Historical Trend	Closing Ratio	88.55	%
			Pricing Model	Origination Costs	2,500
Total Assets	$	25,070

Non-recurring fair value measurements

The Company is required, on a non-recurring basis, to adjust the carrying value or provide valuation allowances for certain assets using fair value measurements in accordance with GAAP. The following is a summary of applicable non-recurring fair value measurements. There are no liabilities measured at fair value on a non-recurring basis.

	September 30, 2012		December 31, 2011		Nine Months Ended September 30, 2012
	Level 3		Level 3		Total
(In thousands)	Inputs		Inputs		Losses
Assets
Impaired loans	$	6,949	$	11,155	4,206
Capitalized mortgage servicing rights	2,494		3,067		573
Other real estate owned	1,399		1,900		—
Total Assets	$	10,842	$	16,122	$	4,779

Quantitative information about the significant unobservable inputs within Level 3 non-recurring assets are, as follows:

	Fair Value				Range (Weighted
(in thousands)	Septemeber 30, 2012		Valuation Techniques	Unobservable Inputs	Average) (a)
Assets
Impaired loans	$	6,949	Fair value of collateral	Loss severity	12.36% to 32.1% (19.43%)
				Appraised value	$126.0 to $2,500.0 ($1,411.5)
Capitaized mortgage servicing rights	2,494		Discounted cash flow	Constant prepayment rate (CPR)	13.85% to 23.93% (17.25%)
				Discount rate	11.00% to 15.50% (11.21%)
Other real estate owned	1,399		Fair value of collateral	Appraised value	$590.0 ($288.8)
Total Assets	$	10,842

(a)    Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individuals properties.

There were no Level 1 or Level 2 nonrecurring fair value measurements for the periods ended September 30, 2012 and December 31, 2011.

Impaired Loans. Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records non-recurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Non-recurring adjustments can also include certain impairment amounts for collateral-dependent loans calculated when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan.  Real estate collateral is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace.  However, the choice of observable data is subject to significant judgment, and there are often adjustments based on judgment in order to make observable data comparable and to consider the impact of time, the condition of properties, interest rates, and other market factors on current values.  Additionally, commercial real estate appraisals frequently involve discounting of projected cash flows, which relies inherently on unobservable data.  Therefore, real estate collateral related nonrecurring fair value measurement adjustments have generally been classified as Level 3. Estimates of fair value for other collateral that supports commercial loans are generally based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3.

Capitalized mortgage loan servicing rights.   A loan servicing right asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing loans are expected to more than adequately compensate the Company for performing the servicing. The fair value of servicing rights is estimated using a present value cash flow model. The most important assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Adjustments are only recorded when the discounted cash flows derived from the valuation model are less than the carrying value of the asset. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy.

Other real estate owned (“OREO”). OREO results from the foreclosure process on residential or commercial loans issued by the Bank. Upon assuming the real estate, the Company records the property at the fair value of the asset less the estimated sales costs. Thereafter, OREO properties are recorded at the lower of cost or fair value. OREO fair values are primarily determined based on Level 3 data including sales comparables and appraisals.

Summary of estimated fair values of financial instruments

The estimated fair values, and related carrying amounts, of the Company’s financial instruments follow. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.

	September 30, 2012										December 31, 2011
	Carrying		Fair								Carrying		Fair
(In thousands)	Amount		Value		Level 1		Level 2		Level 3		Amount		Value
Financial Assets
Cash and cash equivalents	$	48,214	$	48,214	$	48,214	$	—	$	—	$	75,359	$	75,359
Trading security	17,237		17,237		—		—		17,237		17,395		17,395
Securities available for sale	467,444		467,444		31,085		435,542		817		419,756		419,756
Securities held to maturity	51,156		52,892		—		—		52,892		58,912		60,395
Restricted equity securities	37,135		37,135		—		37,135		—		37,118		37,118
Net loans	3,385,302		3,411,331		—		—		3,411,331		2,924,126		2,990,173
Loans held for sale	114,698		114,698		—		114,698		—		1,455		1,455
Accrued interest receivable	13,640		13,640		—		13,640		—		11,350		11,350
Cash surrender value of bank-owned life insurance policies	76,904		76,904		—		76,904		—		75,009		75,009
Derivative assets	23,579		23,579		—		15,747		7,832		13,926		13,926
Financial Liabilities
Total deposits	$	3,453,363	$	3,464,962	$	—	$	3,464,962	$	—	$	3,101,175	$	3,104,204
Short-term debt	61,800		61,800		—		61,800		—		10,000		10,000
Long-term Federal Home Loan Bank advances	388,999		393,703		—		393,703		—		211,938		215,008
Junior subordinated debentures	89,602		87,901		—		87,901		—		15,464		11,436
Derivative liabilities	36,913		36,913		4,669		32,244		—		26,930		26,930

Other than as discussed above, the following methods and assumptions were used by management to estimate the fair value of significant classes of financial instruments for which it is practicable to estimate that value.

Cash and cash equivalents. Carrying value is assumed to represent fair value for cash and cash equivalents that have original maturities of ninety days or less.

Restricted equity securities. Carrying value approximates fair value based on the redemption provisions of the issuers.

Cash surrender value of life insurance policies.Carrying value approximates fair value.

Loans, net. The carrying value of the loans in the loan portfolio is based on the cash flows of the loans discounted over their respective loan origination rates. The origination rates are adjusted for substandard and special mention loans to factor the impact of declines in the loan’s credit standing. The fair value of the loans is estimated by discounting future cash flows using the current interest rates at which similar loans with similar terms would be made to borrowers of similar credit quality.

Accrued interest receivable.Carrying value approximates fair value.

Deposits. The fair value of demand, non-interest bearing checking, savings and money market deposits is determined as the amount payable on demand at the reporting date. The fair value of time deposits is estimated by discounting the estimated future cash flows using market rates offered for deposits of similar remaining maturities.

Borrowed funds. The fair value of borrowed funds is estimated by discounting the future cash flows using market rates for similar borrowings.  Such funds include all categories of debt and debentures in the table above.

Junior subordinated debentures. The Company utilizes a pricing service along with internal models to estimate the valuation of its junior subordinated debentures. The junior subordinated debentures re-price every ninety days.

Off-balance-sheet financial instruments. Off-balance-sheet financial instruments include standby letters of credit and other financial guarantees and commitments considered immaterial to the Company’s financial statements.