Fair Value

9 Months Ended

Sep. 30, 2012

Fair Value Disclosures [Abstract]

Fair Value

Fair Value

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. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. Valuation techniques use certain inputs to arrive at fair value. Inputs to valuation techniques are the assumptions that market participants would use in pricing the asset or liability. They may be observable or unobservable. Applicable accounting principles establish a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:

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

Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds or credit risks) or inputs that are derived principally from or corroborated by market data.

Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

Note 2:  (Continued)

The following table summarizes assets and 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:

			Fair Value Measurements at September 30, 2012, Using
	Assets/Liabilities Measured at  Fair Value		Quoted Prices In Active Markets For Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(Dollars in thousands)	September 30, 2012		(Level 1)		(Level 2)		(Level 3)
U.S. Government sponsored entities	$	72,833	$	—	$	72,833	$	—
Mortgage-backed investments	203,659		—		203,659		—
Obligations of states and political subdivisions	63,816		—		63,816		—
Collateralized debt obligations	855		—		—		855
Other debt securities	13,025		—		13,025		—
Total securities available for sale	$	354,188	$	—	$	353,333	$	855
Mortgage derivative assets	862		—		—		862
	$	355,050	$	—	$	353,333	$	1,717
Interest rate swap liability	$	2,653	$	—	$	—	$	2,653
Mortgage derivative liabilities	501		—		—		501
	$	3,154	$	—	$	—	$	3,154

			Fair Value Measurements at December 31, 2011, Using
	Assets/Liabilities Measured at  Fair Value		Quoted Prices In Active Markets For Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(Dollars in thousands)	December 31, 2011		(Level 1)		(Level 2)		(Level 3)
U.S. Government sponsored entities	$	58,792	$	—	$	58,792	$	—
Mortgage-backed investments	203,686		—		203,686		—
Obligations of states and political subdivisions	54,142		—		54,142		—
Collateralized debt obligations	819		—		—		819
Other debt securities	3,335		—		3,335		—
Total available for sale securities	$	320,774	$	—	$	319,955	$	819
Mortgage derivative assets	269		—		—		269
	$	321,043	$	—	$	319,955	$	1,088
Interest rate swap liability	$	1,834	$	—	$	—	$	1,834
Mortgage derivative liabilities	291		—		—		291
	$	2,125	$	—	$	—	$	2,125

Note 2:  (Continued)

U.S. Treasury, Government sponsored entity and mortgage-backed securities. Securities issued by the U.S. Treasury and Government sponsored entities and mortgage-backed securities are traded in a dealer market and are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service that primarily uses trading activity in the dealer market to determine market prices.

Obligations of states and political subdivisions. Municipal securities include investments that are traded in a dealer market and investments that trade infrequently and are reported using Level 2 inputs. The fair value measurements are obtained from bothan independent pricing service and from a pricing matrix that considers observable inputs such as dealer quotes, market yield curves, credit information (including observable default rates) and the instrument’s contractual terms and conditions, obtained from a municipal security data provider.

Other debt securities. Other debt securities trade in a dealer market and are reported using Level 2 inputs. The fair value measurements are provided by an independent pricing service and are derived from trading activity in the dealer market.

Collateralized debt obligations. The Company owns certain beneficial interests in collateralized debt obligations secured by community bank trust preferred securities. These interests do not trade in a liquid market, and therefore, market quotes are not a reliable indicator of their ultimate realizability. The Company utilizes a discounted cash flow model using inputs of (1) market yields of trust-preferred securities as the discount rate and (2) expected cash flows which are estimated using assumptions related to defaults, deferrals and prepayments to determine the fair values of these beneficial interests. Many of the factors that adjust the timing and extent of cash flows are based on judgment and not directly observable in the markets. Therefore, these fair values are classified as Level 3 valuations for accounting and disclosure purposes.

Mortgage Derivatives. Mortgage derivative assets and liabilities represent the fair values of the interest rate lock commitments (IRLCs) of the Company to originate mortgages at certain rates as well as the commitments, or forward sale agreements (FSAs), to sell the mortgages to investors at locked prices within a specified period of time. The Company uses an internal valuation model with observable market data inputs consisting primarily of dealer quotes, market yield curves and estimated servicing values, and non-observable inputs such as credit-related adjustments and estimated pull-through rates. These instruments are classified as Level 3 fair values. Mortgage derivative assets are included in other assets and mortgage derivative liabilities are included in other liabilities in the Company’s statement of condition.

Interest rate swap. The interest rate swap is valued using a discounted cash flow model. Future net cash flows are estimated based on the forward LIBOR rate curve, the payment terms of the swap and potential credit events. These cash flows are discounted using a rate derived from the forward swap curve, with the resulting fair value being classified as a Level 3 valuation.

Note 2:  (Continued)

The following table reports the activity for the third quarter and first nine months of 2012 and 2011 in assets measured at fair value on a recurring basis using significant unobservable (Level 3) inputs.

(Dollars in thousands)	Three Months Ended									Nine Months Ended
	September 30, 2012									September 30, 2012
	Collateralized Debt Obligations			Mortgage Derivatives			Interest Rate Swap			Collateralized Debt Obligations			Mortgage Derivatives			Interest Rate Swap
Beginning Balance	$	850		$	272		$	(2,349	)	$	819		$	(22	)	$	(1,834	)
Total gains or losses (realized/unrealized):
Other-than-temporary impairment included in earnings	(25		)	—			—			(29		)	—			—
Other-than-temporary impairment (included in) transferred from other comprehensive income	25			—			—			21			—			—
Other gains/losses included in other comprehensive income	5			—			(457		)	44			—			(1,269		)
Net swap settlement recorded	—			—			153			—			—			450
IRLC and FSA issuances	—			767			—			—			862			—
IRLC and FSA expirations and fair value changes included in earnings	—			(441		)	—			—			(391		)	—
IRLC transfers into closed loans/FSA transferred on sales	—			(237		)	—			—			(88		)	—
Ending Balance	$	855		$	361		$	(2,653	)	$	855		$	361		$	(2,653	)
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date	$	(25	)	$	—		$	(153	)	$	(29	)	$	—		$	(450	)

	Three Months Ended									Nine Months Ended
(Dollars in thousands)	September 30, 2011									September 30, 2011
	Collateralized Debt Obligations			Mortgage Derivatives			Interest Rate Swap			Collateralized Debt Obligations			Mortgage Derivatives		Interest Rate Swap
Beginning Balance	$	946		$	34		$	103		$	934		218		$	817
Total gains or losses (realized/unrealized):
Other-than-temporary impairment included in earnings	(200		)	—			—			(581		)	—		—
Other-than-temporary impairment (included in) transferred from other comprehensive income	71			—			—			214			—		—
Other gains/losses included in other comprehensive income	(87		)	—			(2,001		)	163			—		(2,908		)
Net swap settlement recorded	—			—			169			—			—		362
IRLC and FSA issuances	—			171			—			—			377		—
IRLC and FSA expirations and fair value changes included in earnings	—			81			—			—			(146	)	—
IRLC transfers into closed loans/FSA transferred on sales	—			(155		)	—			—			(318	)	—
Ending Balance	$	730		$	131		$	(1,729	)	$	730		131		$	(1,729	)
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date	$	(200	)	$	—		$	(169	)	$	(581	)	—		$	(362	)

Note 2:  (Continued)

The following table summarizes certain quantitative information about valuation techniques and significant unobservable inputs used in determining Level 3 fair value measurements.

	Fair Value at			Valuation	Unobservable			Weighted
(Dollars in thousands)	September 30, 2012			Techniques	Inputs	Range		Average
Collateralized debt obligations	$	855		Discounted cash flow	Discount margin Default rates	15.00% - 25.00% 0.25% - 1.20%		18.15% .57%
Mortgage interest rate lock agreements	665			Discounted cash flow	Pull-through rates	85.00	%	85.00	%
Mortgage forward sale agreements	(304		)	Consensus pricing	Pull-through rates	85.00	%	85.00	%
Interest rate swap	(2,653		)	Discounted cash flow	Discount rate	.31% - .85%		0.50	%

Collateralized debt obligations: The discount margins for the collateralized debt obligations is the margin added to the LIBOR yield curve. The margins are based on averages of observed market transactions for similar preferred securities and adjusted to reflect the lack of liquidity in the trust preferred CDO market. The default rates are annual rates based on a credit scoring analysis of the underlying collateral issuers. The default rates are used in estimating the timing and amounts of expected cash flows.

Mortgage interest rate lock agreements: The pull-through rate is estimated based on closing activity from a sample time period. The pull-though rate is applied as a probability estimate that is multiplied by the estimated price in arriving at an expected price.

Mortgage forward sale agreements: The pull-through rate is estimated based on data provided by mortgage investors. The pull-through rate is applied as a probability estimate that is multiplied by the estimated price in arriving at an expected price.

Interest rate swap: A LIBOR swap yield curve is used to discount the expected cash flows. The yield curve is constructed from swap quotes derived by a third party.

The following tables summarize assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2012, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

			Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(Dollars in thousands)	09/30/12 (a)		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	21,243	$	—	$	—	$	21,243
Loan foreclosures	1,901		—		—		1,901
Other real estate	7,503		—		—		7,503

Note 2:  (Continued)

The following tables summarize assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

			Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(Dollars in thousands)	12/31/11 (a)		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	15,533	$	—	$	—	$	15,533
Loan foreclosures	11,304		—		—		11,304
Other real estate	13,788		—		—		13,788

(a) These amounts represent the resulting carrying amounts on the consolidated statement of condition for impaired real estate-secured loans and other real estate for which fair value re-measurements took place during the period. Loan foreclosures represent the fair value portion of the carrying amounts of other real estate properties that were re-measured at the point of foreclosure during the period.

The following table summarizes certain quantitative information about valuation techniques and significant unobservable inputs used in determining Level 3 nonrecurring fair value measurements.

	Fair Value at		Valuation	Unobservable		Weighted
(Dollars in thousands)	September 30, 2012		Techniques	Inputs	Range	Average
Impaired loans	$	21,243	Appraisals from comparable properties	Adjustments for market conditions since appraisal	$2 thousand - $490 thousand	$60 thousand
Loan foreclosures	1,901		Appraisals from comparable properties	Adjustments for market conditions since appraisal	$1 thousand - $91 thousand	$24 thousand
Other real estate	7,503		Appraisals from comparable properties	Adjustments for market conditions since appraisal	$1 thousand - $526 thousand	$95 thousand

Collateral dependent loans and foreclosed properties are primarily valued using appraisals based on sales of comparable properties in the same or similar markets. These valuations are updated by appraisal staff using an internal database of factors. The values of foreclosed properties may also be revised when sale discussions indicate or when sale contracts are negotiated that require an additional write-down to the buyers' expectations.

Note 2:  (Continued)

The following table summarizes losses recognized related to nonrecurring fair value measurements of individual assets or portfolios:

	Three Months Ended				Nine Months Ended
	September 30				September 30
(Dollars in thousands)	2012		2011		2012		2011
Impaired loans (a)	$	1,331	$	1,805	$	6,773	$	6,221
Loan foreclosures (b)	282		1,904		1,785		2,721
Other real estate (c)	645		670		2,281		3,777

(a) Represents additional impairments on loans which are based on the appraised value of the collateral. These impairments are accrued in the allowance for loan losses and charged to provision for loan loss expense.

(b) Represents foreclosures of loans secured by real estate when the foreclosed value is lower than the carrying value of the loan. These amounts are charged to the allowance for loan losses with the fair value of the foreclosed property being recorded in other real estate.

(c) Represents related losses of foreclosed properties that were measured at fair value subsequent to their initial acquisition.

Impaired Loans. Collateral dependent loans, which are loans for which the repayment is expected to be provided solely by the underlying collateral, are valued for impairment purposes by using the fair value of the underlying collateral. For collateral dependent loans, collateral values are estimated using Level 3 inputs based on observable market data and other internal estimates.

Loan Foreclosures. Certain foreclosed assets, upon initial recognition, were re-measured and reported at fair value through a charge-off to the allowance for possible loan losses based upon the fair value of the foreclosed asset. The fair value of a foreclosed asset, upon initial recognition, is estimated using Level 3 inputs based on appraisals, observable market data and other internal estimates.

Other real estate. Other real estate consists primarily of real estate from loans that have been foreclosed on. It is carried at the lower of cost or fair value less costs to sell. Subsequent to foreclosure, these properties may experience further market declines. When this occurs, the Company writes the property down to management’s best estimate of what the market may be willing to pay. Management considers recent appraisals when available, what other properties have sold for, how long properties have been on the market, the condition of the property, the availability of liquid buyers and other assumptions that market participants may use in determining a price at which they would acquire the property. Since certain significant inputs to these estimates are management-derived and unobservable, fair values are reported as using Level 3 inputs.

Note 2:  (Continued)

Fair Value of Financial Instruments

The following tables present the carrying amounts and fair values of the Company’s financial instruments at September 30, 2012 and December 31, 2011:

							Fair Value Measurements at September 30, 2012, Using
	September 30, 2012						Quoted Prices In Active Markets For Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(Dollars in thousands)	Carrying			Estimated
	Amount			Fair Value			(Level 1)		(Level 2)		(Level 3)
Financial assets:
Cash and short-term investments	$	84,382		$	84,382		$	84,382	$	—	$	—
Securities available for sale	354,188			354,188			—		353,333		855
Loans held for sale	23,548			24,450			—		—		24,450
Loans held for investment	970,671			900,750			—		—		900,750
Agency accounts receivable	322			322			322		—		—
Accrued interest receivable	6,123			6,123			14		1,668		4,441
Nonmarketable equity investments	2,197			2,197			—		—		2,197
Investments in unconsolidated VIEs	3,209			3,209			—		—		3,209
Mortgage derivative assets	862			862			—		—		862
Financial liabilities:
Noninterest-bearing deposits	233,684			233,684			233,684		—		—
NOW, MMDA and savings deposits	720,395			720,395			720,395		—		—
Certificates of deposit	395,395			401,738			—		—		401,738
Short-term borrowings	5,225			5,225			5,225		—		—
Other borrowings	38,984			40,600			—		—		40,600
Junior subordinated debt	30,928			25,224			—		—		25,224
Agency accounts payable	859			859			859		—		—
Accrued interest payable	806			806			51		—		755
Mortgage derivative liabilities	501			501			—		—		501
Other financial instruments:
Commitments to extend credit and letters of credit	(5		)	(340		)	—		—		(340		)
Interest rate swap	(2,653		)	(2,653		)	—		—		(2,653		)

Note 2:  (Continued)

	December 31, 2011
(Dollars in thousands)	Carrying Amount			Estimated Fair Value
Financial assets:
Cash and short-term investments	$	104,367		$	104,367
Securities available for sale	320,774			320,774
Loans held for sale	26,073			27,053
Loans held for investment	981,387			921,351
Agency accounts receivable	217			217
Accrued interest receivable	6,122			6,122
Nonmarketable equity investments	7,380			7,380
Investments in unconsolidated VIEs	3,425			3,425
Mortgage derivative assets	269			269
Financial liabilities:
Noninterest-bearing deposits	231,718			231,718
NOW, MMDA and savings deposits	707,798			707,798
Certificates of deposit	431,947			439,518
Short-term borrowings	4,398			4,398
Other borrowings	43,001			45,193
Junior subordinated debt	30,928			25,204
Agency accounts payable	641			641
Accrued interest payable	1,023			1,023
Mortgage derivative liabilities	291			291
Other financial instruments:
Commitments to extend credit and letters of credit	(4		)	(320		)
Interest rate swap	(1,834		)	(1,834		)

The following methods and assumptions were used by the Company in estimating the fair value of financial instruments:

Cash and due from banks, interest-bearing deposits with banks and Federal funds sold are valued at their carrying amounts which are reasonable estimates of fair value due to the relatively short period to maturity of the instruments.

Securities available for sale are predominantly valued based on prices obtained from an independent nationally recognized pricing service and market yield matrices. An external pricing service is used to electronically provide prices by CUSIP number. These prices include exchange quoted prices, dealer quoted prices and prices derived from market yields published by specialized financial database providers. The price per instrument provided by the pricing service is used and not adjusted. Typically, all securities except for some small municipal issues and the collateralized debt obligations are priced by the primary external provider. For issues that are not priced by the primary provider, we use a third-party value provided by a broker-dealer affiliate of a correspondent bank. The broker-dealer’s valuation system uses prices provided by (1) the same external pricing service that the Company uses, (2) Standard & Poor’s, (3) matrix pricing with market yield inputs provided by Bloomberg and a municipal securities market data provider and (4) the broker-dealer’s trading staff. Any quotes provided by a broker-dealer are usually non-binding. However, the Company rarely uses solicited broker-dealer quotes to price any of its securities. The broker-dealer prices all municipal securities through its pricing matrix. At September 30, 2012, the only securities that were not priced by the primary provider were 10 municipal bonds representing 5 issuers and the collateralized debt obligations. The broker-dealer’s matrix prices were used for the municipal securities and a third-party provider’s modeled prices were used for the collateralized debt obligations (CDOs).

CDOs are valued by an external party using a model. The model inputs are (1) discount margins based on current market activity and (2) cash flows based upon contractual amounts adjusted for expected defaults, expected deferrals and expected prepayments. Expected defaults and deferrals are determined through a credit analysis of and risk rating assignment to each obligor of the collateral that funds the investment vehicles. Most of these inputs are not directly observable in the market, resulting in the fair values being classified as Level 3 valuations within the fair value accounting hierarchy.

The primary method of validation of investment security values is the comparison of the prices that are received from the primary pricing service provider with the prices that are used in the broker-dealer’s valuation system. The fair values used for selected agency, mortgage-backed and corporate securities are also periodically checked by comparing them to prices obtained from Bloomberg. The CDOs are validated by comparing the fair values with market activity of similar instruments. Management reviews the documentation provided with the CDO pricing and impairment models to assure that sound valuation methodologies are used and to determine whether or not the significant inputs are reasonable.

Note 2:  (Continued)

Loans held for sale are valued by discounting the estimated cash flows using current market rates for instruments with similar credit ratings and maturities and adjusting those rates using dealer pricing adjustments for characteristics unique to the borrower’s circumstances or the structuring of the credit.

Loans held for investment are valued by discounting the estimated future cash flows, using rates at which these loans would currently be made to borrowers with similar credit ratings and similar maturities.

Agency accounts receivable are trade receivables of M&F Insurance Group, Inc. These receivables are short-term in nature and therefore the fair value is assumed to be the carrying value. These receivables are carried in other assets in the statement of condition.

Accrued interest receivable is short-term in nature and therefore the fair value is assumed to be the carrying value.

Nonmarketable equity securities are primarily securities of the Federal Home Loan Banks for which the carrying value is estimated to be an accurate approximation of fair value. These equity securities are carried in other assets in the statement of condition.

Investments in unconsolidated VIEs are the Company’s investment in the First M&F Statutory Trust I, which acquired the Company’s junior subordinated debt through funding provided by the issuance of trust preferred securities, and an investment in a low income housing tax credit entity. The investment in the statutory trust depends on the Company’s own cash flows and therefore, the carrying value is an accurate approximation of fair value. The low income housing tax credit investment is a limited partnership interest for which the carrying value is assumed to be a reasonable estimate of its fair value. These investments are carried in other assets in the statement of condition.

Noninterest-bearing deposits do not pay interest and do not have defined maturity dates. Therefore, the carrying value is estimated to be equivalent to fair value for these deposits.

NOW, MMDA and savings deposits pay interest and generally do not have defined maturity dates. Although there are some restrictions on access to certain savings deposits, these restrictions are not expected to have a material effect on the value of the deposits. Therefore, the fair value for NOW, MMDA and savings deposits is estimated to be their carrying value.

Certificates of deposit pay interest and do have defined maturity dates. The fair value of certificates of deposit is estimated by discounting the future cash flows, using current market rates for certificates of deposit of similar maturities.

Short-term borrowings are highly liquid and therefore the net book value of the majority of these financial instruments approximates fair value due to the short term nature of these items.

The fair value of other borrowings, which consist of Federal Home Loan Bank advances and borrowings from correspondent banks is estimated by discounting the future cash flows, using current market rates for borrowings of similar terms and maturities.

Junior subordinated debt is valued by discounting the expected cash flows using a current market rate for similar instruments.

Agency accounts payable are trade payables of M&F Insurance Group, Inc. due to insurance companies. These payables are very short term in nature and therefore the fair value of the payables is estimated to be their carrying value. These payables are carried in other liabilities in the statement of condition.

Accrued interest payable is short-term in nature and therefore the fair value is estimated to be the carrying value.

Commitments to extend credit and letters of credit are valued based on the fees charged to enter into similar credit arrangements.

Mortgage origination and sale commitments are considered derivatives and are therefore carried at fair value with the changes in fair value recorded in mortgage banking income. Mortgage-related commitments with positive values are carried in other assets and those with negative values are carried in other liabilities in the statement of condition. Mortgage derivatives are valued using a combination of market discount rates, dealer quotes, estimated servicing values and pull-through rates.

The interest rate swap is being used to hedge the interest cash flows on the Company’s junior subordinated debentures. It is valued using a discounted cash flow methodology with cash flows being estimated from the 3-month LIBOR curve and discount rates derived from the swap curve.