Fair Value Measurements

6 Months Ended

Jun. 30, 2013

ASC Topic 820, Fair Value Measurements and Disclosures, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels of valuations are defined 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 or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement, and require significant management judgment or estimation using pricing models, discounted cash flow methodologies or similar techniques.

Fair Value on a Recurring Basis – The Company measures certain assets at fair value on a recurring basis and the following is a general description of the methods used to value such assets.

Investment Securities Available-for-Sale – The fair value of our investment securities available-for-sale are determined by a third-party pricing service. The valuations provided by the third-party pricing service are based on observable market inputs, which include benchmark yields, reported trades, issuer spreads, benchmark securities, bids, offers and reference data obtained from market research publications. The valuation of mortgage-backed securities also includes new issue data, monthly payment information and “To Be Announced” prices. The valuation of state and municipal securities also include the use of material event notices. We review the prices supplied by the independent pricing service, as well as their underlying pricing methodologies, for reasonableness. At least annually, we will validate prices supplied by the independent pricing service by comparing to prices obtained from a second third-party source. The Company classifies these investment securities as Level 2 valuation.

Derivative Assets and Liabilities – The values of derivative instruments held or issued by the Company for risk management purposes are traded in over-the-counter markets where quoted market prices are not readily available. For those derivatives, the Company measures fair value using models that use primarily market observable inputs, such as yield curves and option volatilities, and include the value associated with counterparty credit risk. The Company classifies derivative instruments held or issued for risk management purposes as Level 2 valuation.

Below is a table that presents information about certain assets and liabilities measured at fair value on a recurring basis (dollars in thousands):

			Assets
			Measured at		Fair Value Measured Using
Description			Fair Value		Level 1		Level 2		Level 3
At June 30, 2013:
Assets:
Investment securities available-for-sale:
	U.S. government agencies		$	15,520	$	-	$	15,520	$	-
	State and municipals			159,234		-		159,234		-
	Corporate debt securities			7,903		-		7,903		-
	Mortgage-backed securities:
		Residential government sponsored		51,156		-		51,156		-
		Other government sponsored		8,763		-		8,763		-
Total investment securities available-for-sale				242,576		-		242,576		-
Derivative instruments:
	Interest rate swap			2,967				2,967
	Interest rate cap			10		-		10		-
Total derivative instruments				2,977		-		2,977		-
Total assets measured at fair value on a recurring basis			$	245,553	$	-	$	245,553	$	-

At December 31, 2012:
Assets:
Investment securities available-for-sale:
	U.S. government agencies		$	16,395	$	-	$	16,395	$	-
	State and municipals			223,886		-		223,886		-
	Mortgage-backed securities:
		Residential government sponsored		86,890		-		86,890		-
		Other government sponsored		14,368		-		14,368		-
Total investment securities available-for-sale				341,539		-		341,539		-
Interest rate cap				40		-		40		-
Total assets measured at fair value on a recurring basis			$	341,579	$	-	$	341,579	$	-

Fair Value on a Nonrecurring Basis – The Company measures certain assets at fair value on a nonrecurring basis and the following is a general description of the methods used to value such assets.

Loans Held for Sale – Loans held for sale are carried at the lower of cost or market value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies loans subjected to nonrecurring fair value adjustments as Level 2 valuation.

Impaired Loans – The Company considers a loan impaired when it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the note agreement, including both principal and interest. Management has determined that nonaccrual loans and loans that have had their terms restructured in a troubled debt restructuring meet this impaired loan definition. For individually evaluated impaired loans, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan's effective interest rate or the estimated fair value of the underlying collateral for collateral-dependent loans, which the Company classifies as a Level 3 valuation.

Other Real Estate Owned – Other real estate owned is initially recorded at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management's estimation of the value of the collateral, which the Company classifies as a Level 3 valuation.

Below is a table that presents information about certain assets and liabilities measured at fair value on a nonrecurring basis (dollars in thousands):

	Assets
	Measured at		Fair Value Measured Using
Description	Fair Value		Level 1		Level 2		Level 3
June 30, 2013:
Loans held for sale	$	39,954	$	-	$	39,954	$	-
Impaired loans		261,111		-		-		261,111
Other real estate owned		46,811		-		-		46,811
Total assets measured at fair value on a nonrecurring basis	$	347,876	$	-	$	39,954	$	307,922

December 31, 2012:
Loans held for sale	$	57,414	$	-	$	57,414	$	-
Impaired loans		290,085		-		-		290,085
Other real estate owned		51,913		-		-		51,913
Total assets measured at fair value on a nonrecurring basis	$	399,412	$	-	$	57,414	$	341,998

Below is a table that presents the valuation and unobservable inputs for Level 3 assets and liabilities measured at fair value on a nonrecurring basis at June 30, 2013 (dollars in thousands):

	Fair Value at		Valuation		Range of
Description	June 30, 2013		Methodology	Unobservable Inputs	Inputs

Impaired loans	$	261,111	Appraised value	Discount to reflect current market conditions and ultimate collectability	0% - 20%

Other real estate owned	$	46,811	Appraised value	Discount to reflect current market conditions	0% - 20%

Estimated fair values of financial instruments have been estimated by the Company using the provisions of ASC Topic 825, Financial Instruments (“ASC 825”), which requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.

Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The carrying value and estimated fair values of the Company’s financial instruments, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis, at the dates indicated are as follows (dollars in thousands):

		June 30, 2013
		Carrying		Estimated
		Value		Fair Value		Level 1		Level 2		Level 3
Financial assets:
	Cash and cash equivalents	$	83,443	$	83,443	$	83,443	$	-	$	-
	Investment securities available-for-sale		242,576		242,576		-		242,576		-
	Investment securities held-to-maturity		223,503		216,625		-		216,625		-
	Federal Home Loan Bank stock		9,780		9,780		-		9,780		-
	Loans held for sale		39,954		39,954		-		39,954		-
	Loans receivable, net		2,016,082		2,075,634		-		1,814,523		261,111
	Accrued interest receivable		11,675		11,675		-		11,675		-
	FDIC indemnification asset		38,166		38,166		-		-		38,166
	Investment in bank-owned life insurance		71,956		71,956		-		71,956		-
	Interest rate cap derivative		10		10		-		10		-
	Interest rate swap derivative		2,967		2,967		-		2,967		-
Financial liabilities:
	Demand deposits and savings	$	1,428,763	$	1,428,763	$	-	$	1,428,763	$	-
	Time deposits		999,552		1,012,669		-		1,012,669		-
	Short-term borrowings		112,105		112,105		-		112,105		-
	Long-term debt		115,592		109,571		-		109,571		-
	Accrued interest payable		1,803		1,803		-		1,803		-


		December 31, 2012
		Carrying		Estimated
		Value		Fair Value		Level 1		Level 2		Level 3
Financial assets:
	Cash and cash equivalents	$	234,071	$	234,071	$	234,071	$	-	$	-
	Investment securities available-for-sale		341,539		341,539		-		341,539		-
	Investment securities held-to-maturity		114,805		118,235		-		118,235		-
	Federal Home Loan Bank stock		7,604		7,604		-		7,604		-
	Loans held for sale		57,414		57,414		-		57,414		-
	Loans receivable, net		1,994,966		1,976,745		-		1,686,660		290,085
	Accrued interest receivable		11,363		11,363		-		11,363		-
	FDIC indemnification asset		53,519		53,519		-		-		53,519
	Investment in bank-owned life insurance		70,756		70,756		-		70,756		-
	Interest rate cap derivative		40		40		-		40		-
Financial liabilities:
	Demand deposits and savings	$	1,496,694	$	1,496,694	$	-	$	1,496,694	$	-
	Time deposits		1,159,615		1,170,560		-		1,170,560		-
	Short-term borrowings		32,382		32,382		-		32,382		-
	Long-term debt		88,173		83,292		-		83,292		-
	Accrued interest payable		2,158		2,158		-		2,158		-

The following methods and assumptions were used to estimate the fair value of financial instruments that have not been previously discussed:

Cash and cash equivalents - The carrying amounts reported in the balance sheets for cash and cash equivalents approximate the fair value of those assets.

Investment securities held-to-maturity - The fair value of our investment securities held-to-maturity are determined by a third-party pricing service. The valuations provided by the third-party pricing service for state and municipal securities are based on observable market inputs, which include benchmark yields, reported trades, issuer spreads, benchmark securities, bids, offers and the use of material event notices.

We review the prices supplied by the independent pricing service, as well as their underlying pricing methodologies, for reasonableness. At least annually, we will validate prices supplied by the independent pricing service by comparing to prices obtained from a second third-party source.

Federal home loan bank stock - The fair value for FHLB stock is its carrying value, since this is the amount for which it could be redeemed. There is no active market for this stock and the Company, in order to be a member of the FHLB, is required to maintain a minimum investment.

Loans receivable, net - The fair values for loans are estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms and credit ratings for the same remaining maturities, adjusted for the allowance for loan losses.

FDIC indemnification asset - The fair value for the FDIC indemnification asset is estimated based on discounted future cash flows using current discount rates.

Investment in bank-owned life insurance - The carrying value of life insurance approximates fair value because this investment is carried at cash surrender value, as determined by the insurer.

Accrued interest receivable and accrued interest payable - The carrying amount of accrued interest is assumed to approximate fair value.

Deposits - The fair values disclosed for deposits with no stated maturity (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for deposits with a stated maturity date (time deposits) are estimated using a discounted cash flow calculation that applies interest rates currently being offered on these accounts to a schedule of aggregated expected monthly maturities on time deposits.

Short-term borrowings - The carrying amount of short-term borrowings is assumed to approximate fair value.

Long-term debt – The fair value is estimated by discounting the future contractual cash flows using current market interest rates for similar debt over the same remaining term.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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Reference 1: http://www.xbrl.org/2003/role/presentationRef

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-Name Statement of Financial Accounting Standard (FAS)

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