Fair Value Disclosures

9 Months Ended

Sep. 30, 2011

Fair Value Disclosures [Abstract]

Fair Value Disclosures

13.  Fair Value Disclosures

FASB ASC topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Valuation is based upon quoted prices for identical instruments traded in active markets. Level 1 instruments include securities traded on active exchange markets, such as the New York Stock Exchange, as well as U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets.

Level 2:  Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 2 instruments include securities traded in less active dealer or broker markets.

Level 3:  Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

We used the following methods and significant assumptions to estimate fair value:

Securities:  Where quoted market prices are available in an active market, securities (trading or available for sale) are classified as Level 1 of the valuation hierarchy.  Level 1 securities include certain preferred stocks included in our trading portfolio for which there are quoted prices in active markets.  If quoted market prices are not available for the specific security, then fair values are estimated by (1) using quoted market prices of securities with similar characteristics, (2) matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities' relationship to other benchmark quoted prices, or (3) a discounted cash flow analysis whose significant fair value inputs can generally be verified and do not typically involve judgment by management. These securities are classified as Level 2 of the valuation hierarchy and include agency and private label residential mortgage-backed securities, municipal securities and trust preferred securities.

Loans held for sale:  The fair value of mortgage loans held for sale is based on mortgage backed security pricing for comparable assets (recurring Level 2).

Impaired loans with specific loss allocations based on collateral value:  From time to time, certain loans are considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. We measure our investment in an impaired loan based on one of three methods: the loan's observable market price, the fair value of the collateral or the present value of expected future cash flows discounted at the loan's effective interest rate. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 30, 2011 and December 31, 2010, all of our total impaired loans were evaluated based on either the fair value of the collateral or the present value of expected future cash flows discounted at the loan's effective interest rate. When the fair value of the collateral is based on an appraised value or when an appraised value is not available we record the impaired loan as nonrecurring Level 3.

Other real estate:  At the time of acquisition, other real estate is recorded at fair value, less estimated costs to sell, which becomes the property's new basis. Subsequent write-downs to reflect declines in value since the time of acquisition may occur from time to time and are recorded in other expense in the Condensed Consolidated Statements of Operations. The fair value of the property used at and subsequent to the time of acquisition is typically determined by a third party appraisal of the property (nonrecurring Level 3).

Capitalized mortgage loan servicing rights:  The fair value of capitalized mortgage loan servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. Since the secondary servicing market has not been active since the later part of 2009, model assumptions are generally unobservable and are based upon the best information available including data relating to our own servicing portfolio, reviews of mortgage servicing assumption and valuation surveys and input from various mortgage servicers and, therefore, are recorded as nonrecurring Level 3.

Derivatives:  The fair value of interest rate swap agreements and interest rate cap agreements, in general, is determined using a discounted cash flow model whose significant fair value inputs can generally be verified and do not typically involve judgment by management (recurring Level 2).  The fair value of the Amended Warrant is determined using a simulation analysis which considers potential outcomes for a large number of independent scenarios regarding the future prices of our common stock and incorporates several unobservable inputs (recurring Level 3). These unobservable inputs include probability of a non-permitted capital raise (2.5% at September 30, 2011 and 40% at December 31, 2010), expected discount to stock price in an equity raise (10%), dollar amount of expected capital raise ($100 million) and expected time of equity raise (June, 2015 at September 30, 2011 and May, 2011 at December 31, 2010).

Assets and liabilities measured at fair value, including financial assets for which we have elected the fair value option, were as follows:

			Fair Value Measurements Using
	Fair Value Measure- ments		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Un- observable Inputs (Level 3)
	(In thousands)
September 30, 2011:
Measured at Fair Value on a Recurring Basis:
Assets
Trading securities	$	99	$	99	$	-	$	-
Securities available for sale
U.S. agency residential mortgage-backed		53,704		-		53,704		-
Private label residential mortgage-backed		8,695		-		8,695		-
Obligations of states and political subdivisions		29,163		-		29,163		-
Trust preferred		3,226		-		3,226		-
Loans held for sale		28,709		-		28,709		-
Derivatives (1)		868		-		868		-
Liabilities
Derivatives (2)		1,840		-		1,554		286
Measured at Fair Value on a Non-recurring basis:
Assets
Capitalized mortgage loan servicing rights (3)		11,486		-		-		11,486
Impaired loans (4)
Commercial
Income producing - real estate		6,318		-		-		6,318
Land, land development & construction-real estate		3,362		-		-		3,362
Commercial and industrial		5,443		-		-		5,443
Mortgage
1-4 Family		3,141		-		-		3,141
Resort Lending		1,613		-		-		1,613
Other real estate (5)
Commercial
Income producing - real estate		1,372		-		-		1,372
Land, land development & construction-real estate		8,310		-		-		8,310
Commercial and industrial		38						38
Mortgage
1-4 Family		1,676		-		-		1,676
Resort Lending		4,468		-		-		4,468
Home equity line of credit - 1st lien		26		-		-		26
Installment
Home equity installment - 1st lien		123		-		-		123

(1) Included in accrued income and other assets

(2) Included in accrued expenses and other liabilities

(3) Only includes servicing rights that are carried at fair value due to recognition of a valuation allowance.

(4) Only includes impaired loans with specific loss allocations based on collateral value.

(5) Only includes other real estate with subsequent write downs to fair value.

			Fair Value Measurements Using
	Fair Value Measure- ments		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Un- observable Inputs (Level 3)
	(In thousands)
December 31, 2010:
Measured at Fair Value on a Recurring Basis:
Assets
Trading securities	$	32	$	32	$	-	$	-
Securities available for sale
U.S. agency residential mortgage-backed		13,331		-		13,331		-
Private label residential mortgage-backed		14,184		-		14,184		-
Obligations of states and political subdivisions		31,259		-		31,259		-
Trust preferred		9,090		-		9,090		-
Loans held for sale		50,098		-		50,098		-
Derivatives (1)		1,775		-		1,775		-
Liabilities
Derivatives (2)		2,716		-		1,405		1,311
Measured at Fair Value on a Non-recurring basis:
Assets
Capitalized mortgage loan servicing rights (3)		9,019		-		-		9,019
Impaired loans (4)
Commercial
Income producing - real estate		9,541		-		-		9,541
Land, land development & construction-real estate		8,885		-		-		8,885
Commercial and industrial		4,456		-		-		4,456
Mortgage
1-4 Family		4,377		-		-		4,377
Resort Lending		1,676		-		-		1,676
Other real estate (5)
Commercial
Income producing - real estate		1,352		-		-		1,352
Land, land development & construction-real estate		5,165		-		-		5,165
Mortgage
1-4 Family		1,888		-		-		1,888
Resort Lending		4,600		-		-		4,600
Installment
Home equity installment - 1st lien		90		-		-		90

(1) Included in accrued income and other assets

(2) Included in accrued expenses and other liabilities

(3) Only includes servicing rights that are carried at fair value due to recognition of a valuation allowance.

(4) Only includes impaired loans with specific loss allocations based on collateral value.

(5) Only includes other real estate with subsequent write downs to fair value.

Changes in fair values for financial assets which we have elected the fair value option for the periods presented were as follows:

	Changes in Fair Values for the Nine-MonthPeriods Ended September 30 for Items Measured atFair Value Pursuant to Election of the Fair Value Option
	2011						2010
	Net Gains (Losses)on Assets				Total Change in Fair  Values Included in Current Period		Net Gains (Losses) on Assets					Total Change in Fair Values Included in CurrentPeriod
	Securities		Loans		Earnings		Securities			Loans		Earnings
		(In thousands)
Trading securities	$	67	$	-	$	67	$	(32	)	$	-	$	(32	)
Loans held for sale		-		807		807		-			1,115		1,115

For those items measured at fair value pursuant to our election of the fair value option, interest income is recorded within the Condensed Consolidated Statements of Operations based on the contractual amount of interest income earned on these financial assets and dividend income is recorded based on cash dividends.

The following represent impairment charges recognized during the nine month periods ended September 30, 2011 and 2010 relating to assets measured at fair value on a non-recurring basis:

· Capitalized mortgage loan servicing rights, whose individual strata are measured at fair value, had a carrying amount of $11.5 million which is net of a valuation allowance of $6.4 million at September 30, 2011 and had a carrying amount of $9.0 million which is net of a valuation allowance of $3.2 million at December 31, 2010.  A recovery (charge) of $(3.1) million and $(3.2) million was included in our results of operations for the three and nine month periods ending September 30, 2011, respectively and $(1.3) million and $(3.7) million during the same periods in 2010.

· Loans which are measured for impairment using the fair value of collateral for collateral dependent loans, had a carrying amount of $27.3 million, with a valuation allowance of $7.4 million at September 30, 2011 and had a carrying amount of $41.0 million, with a valuation allowance of $12.1 million at December 31, 2010.  An additional provision for loan losses relating to impaired loans of $2.7 million and $6.6 million was included in our results of operations for the three and nine month periods ending September 30, 2011, respectively and $3.4 million and $11.5 million during the same periods in 2010.

· Other real estate, which is measured using the fair value of the property, had a carrying amount of $16.0 million which is net of a valuation allowance of $13.9 million at September 30, 2011 and a carrying amount of $13.1 million which is net of a valuation allowance of $10.9 million at December 31, 2010.  An additional charge relating to ORE measured at fair value of $2.1 million and $4.1 million was included in our results of operations during the three and nine month periods ended September 30, 2011, respectively and $1.4 million and $2.0 million during the same periods in 2010.

A reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30 follows:

	Asset					(Liability)
	Securities Available for Sale					Amended Warrant
	2011		2010			2011			2010
	(In thousands)
Beginning balance	$	-	$	36,480		$	(1,311	)	$	-
Total gains (losses) realized and unrealized:
Included in results of operations		-		132			1,025			-
Included in other comprehensive income		-		1,713			-			-
Purchases, issuances, settlements, maturities and calls		-		(16,940	)		-			-
Transfers in and/or out of Level 3		-		(21,385	)		-			-
Ending balance	$	-	$	-		$	(286	)	$	-
Amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at September 30	$	-	$	-		$	1,025		$	-

During the first quarter of 2010, we transferred certain private label residential mortgage- and other asset-backed securities, totaling $21.4 million, to a Level 2 valuation technique. In the first quarter of 2010, while this market was still “closed” to new issuance, secondary market trading activity increased and appeared to be more orderly than compared to 2009. In addition, many bonds were trading at levels near their economic value with fewer distressed valuations relative to 2009. Prices for many securities had been rising, due in part to negative new supply. This improvement in trading activity was supported by sales of 11 securities with a par value of $14.2 million at a $0.2 million gain during the first quarter of 2010 (none of these securities were originally purchased at a discount). The Level 2 valuation technique has also been supported through bids received from dealers on certain private label securities that approximated Level 2 pricing.

During 2010, we entered into an amended and restated warrant with the UST that allows it to purchase our common stock at a fixed price (see note #16). Because of certain anti-dilution features included in the Amended Warrant, it is not considered to be indexed to our common stock and is therefore accounted for as a derivative instrument (see note #8). Any change in value of this warrant is recorded in other income in our Condensed Consolidated Statements of Operations. We determined the fair value of the Amended Warrant using a simulation analysis which considers potential outcomes for a large number of independent scenarios regarding the future prices of our common stock. The simulation analysis relies on a binomial lattice model, a standard technique usually applied to the valuation of stock options. The binomial lattice maps out possible price paths of our common stock, the underlying asset of the Amended Warrant. The simulation is based on a 500-step lattice covering the term of the Amended Warrant. The binomial lattice requires specification of 14 variables, of which several are unobservable in the market. As a result of these unobservable inputs, the resulting fair value of the Amended Warrant was classified as Level 3 pricing.

The following table reflects the difference between the aggregate fair value and the aggregate remaining contractual principal balance outstanding for loans held for sale for which the fair value option has been elected for the periods presented.

	Aggregate Fair Value		Difference			Contractual Principal
	(In thousands)
Loans held for sale
September 30, 2011	$	28,709	$	707		$	28,002
December 31, 2010		50,098		(100	)		50,198