Fair Value Instruments Measured at Fair Value

6 Months Ended

Jun. 30, 2011

Fair Value Instruments Measured at Fair Value [Abstract]

FAIR VALUE INSTRUMENTS MEASURED AT FAIR VALUE

NOTE D — FAIR VALUE INSTRUMENTS MEASURED AT FAIR VALUE

In certain circumstances, fair value enables the Company to more accurately align its financial performance with the market value of actively traded or hedged assets and liabilities. Fair values enable a company to mitigate the non-economic earnings volatility caused from financial assets and financial liabilities being carried at different bases of accounting, as well as, to more accurately portray the active and dynamic management of a company’s balance sheet. ASC 820 provides additional guidance for estimating fair value when the volume and level of activity for an asset or liability has significantly decreased. ASC 820 also includes guidance on identifying circumstances that indicate a transaction is not orderly. Under ASC 820, fair value measurements for items measured at fair value at June 30, 2011 and 2010 included:

			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Fair Value		Assets		Inputs		Inputs
(Dollars in thousands)	Measurements		(Level 1)		(Level 2)		(Level 3)
June 30, 2011
Available for sale securities (3)	$	611,231	$	—	$	611,231	$	—
Loans available for sale		4,758		—		4,758		—
Loans (1)		32,124		—		10,873		21,251
Other real estate owned (2)		25,877		—		2,553		23,324
June 30, 2010
Available for sale securities (3)	$	384,449	$	—	$	384,449	$	—
Loans available for sale		7,372		—		7,372		—
Loans (1)		55,824		—		8,968		46,856
Other real estate owned (2)		19,018		—		448		18,570
Long-lived assets held for sale (2)		1,676		—		1,676		—

(1)	See Note E. Nonrecurring fair value adjustments to loans identified as impaired reflect full or partial write-downs that are based on the loan’s observable market price or current appraised value of the collateral in accordance with ASC 310.
(2)	Fair value is measured on a nonrecurring basis in accordance with ASC 360.
(3)	See Note I for further detail of fair value of individual investment categories.

When appraisals are used to determine fair value and the appraisals are based on a market approach, the related loan’s fair value is classified as Level 2 input. The fair value of loans based on appraisals which require significant adjustments to market-based valuation inputs or apply an income approach based on unobservable cash flows, is classified as Level 3 inputs.

Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s monthly and/or quarter valuation process.

During the first six months of 2011 and 2010 transfers into and out of level 2 fair value for available for sale securities consisted of investment purchases, sales, maturities and principal repayments.

For loans classified as level 2, transfers in totaled $3.5 million and $5.3 million for the first six months of 2011 and 2010, respectively, consisting of loans that became impaired. For 2011 and 2010, transfers out consisted of valuation write-downs of $2.9 million and $266,000, respectively, and foreclosures migrating to other real estate owned (“OREO”) and other reductions (including principal payments) totaled $3.6 million and $546,000, respectively. No sales were recorded.

For OREO classified as level 2 during the first six months of 2011 and 2010, transfers out totaled $2.3 million and $2.8 million, respectively, consisting of valuation write-downs of $36,000 and $116,000 and sales of $2.2 million and $2.7 million, respectively, and transfers in consisted of foreclosed loans totaling $2.9 million and $429,000, respectively.

For 2011, loans classified as level 3 transfers in totaled $11.8 million for the first six months, consisting of loans that became impaired and an increase in value on a single impaired loan. For 2011, transfers out consisted of valuation write-downs of $1.1 million and foreclosures migrating to other real estate owned (“OREO”) and other reductions (including principal payments) totaling $24.9 million. No sales were recorded.

For OREO classified as level 3 during the first six months of 2011, transfers out totaled $27.9 million, consisting of valuation write-downs of $1.3 million and sales of $26.6 million, and transfers in consisted of foreclosed loans totaling $27.5 million.

The following table shows the carrying value and fair value of the Company’s financial assets and financial liabilities as of June 30, 2011 and 2010:

	June 30, 2011				June 30, 2010
	Carrying				Carrying
(Dollars in thousands)	Value		Fair Value		Value		Fair Value
Financial Assets
Cash and cash equivalents	$	166,891	$	166,891	$	312,285	$	312,285
Securities		636,390		636,610		393,781		394,063
Loans, net		1,157,714		1,161,725		1,260,319		1,287,176
Loans held for sale		4,758		4,758		7,372		7,372
Financial Liabilities
Deposit liabilities		1,681,461		1,687,501		1,715,894		1,725,565
Borrowings		152,827		156,852		125,310		129,390
Subordinated debt		53,610		17,200		53,610		17,200

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value at June 30, 2011 and 2010:

Cash and cash equivalents: The carrying amount was used as a reasonable estimate of fair value.

Securities: The fair value of U.S. Treasury and U.S. Government agency, mutual fund and mortgage backed securities are based on market quotations when available or by using a discounted cash flow approach. The fair value of many state and municipal securities are not readily available through market sources, so fair value estimates are based on quoted market price or prices of similar instruments.

Loans: Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, mortgage, etc. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories. The fair value of loans, except residential mortgages, is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risks inherent in the loan. For residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusting for prepayment assumptions using discount rates based on secondary market sources. The estimated fair value is not an exit price fair value under ASC 820 when this valuation technique is used.

Loans held for sale: Fair values are based upon estimated values to be received from independent third party purchasers.

Deposit Liabilities: The fair value of demand deposits, savings accounts and money market deposits is the amount payable at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for funding of similar remaining maturities.

Borrowings: The fair value of floating rate borrowings is the amount payable on demand at the reporting date. The fair value of fixed rate borrowings is estimated using the rates currently offered for borrowings of similar remaining maturities.

Subordinated debt: The fair value of the floating rate subordinated debt is estimated using discounted cash flow analysis and the Company’s current incremental borrowing rate for similar instruments.