FAIR VALUE MEASUREMENTS

Financial assets and financial liabilities measured at fair value on a recurring basis are as follows:



	Fair Value Measurements at Reporting Date Using
As of December 31, 2012	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Investment securities available-for-sale:
Obligations of U.S. government agencies	$	754,856	$	—	$	754,856	$	—
U.S. agencies mortgage-backed securities & collateralized mortgage obligations	1,239,851		—		1,239,851		—
Private mortgage-backed securities	551		—		551		—
Mortgage servicing rights	16,373		—		16,373		—



	Fair Value Measurements at Reporting Date Using
As of December 31, 2011	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Investment securities available-for-sale:
Obligations of U.S. government agencies	$	1,138,118	$	—	$	1,138,118	$	—
U.S. agencies mortgage-backed securities & collateralized mortgage obligations	877,997		—		877,997		—
Private mortgage-backed securities	749		—		749		—
Mortgage servicing rights	11,910		—		11,910		—
Derivative liability contract	383		—		—		383

The following table reconciles the beginning and ending balances of the derivative liability contract measured at fair value on a recurring basis using significant unobservable (Level 3) inputs during the twelve months ended December 31, 2012 and 2011:



For the Twelve Months Ended December 31,	2012			2011
Balance, beginning of period	$	383		$	86
Accruals during the period	—			425
Cash payments during the period	(383		)	(128		)
Balance, end of period	$	—		$	383

The methodologies used by the Company in determining the fair values of each class of financial instruments are based primarily on the use of independent, market-based data to reflect a value that would be reasonably expected in an orderly transaction between market participants at the measurement date. The Company obtains fair value measurements for investment securities from an independent pricing service and evaluates mortgage servicing rights for impairment using an independent valuation service. The vendors chosen by the Company are widely recognized vendors whose evaluations support the pricing functions of financial institutions, investment and mutual funds, and portfolio managers. The Company has documented and evaluated the pricing methodologies used by the vendors and maintains internal processes that regularly test valuations. These internal processes include obtaining and reviewing available reports on internal controls, evaluating the prices for reasonableness given market changes, obtaining and evaluating the inputs used in the model for a sample of securities, investigating anomalies and confirming determinations through discussions with the vendor. For investment securities, if needed, a broker may be utilized to determine the reported fair value. Further details on the methods used to estimate the fair value of each class of financial instruments above are discussed below:

Investment Securities Available-for-Sale. The fair value measurements consider observable data that may include 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 investment's terms and conditions, among other things.

Mortgage Servicing Rights. Mortgage servicing rights are initially recorded at fair value based on comparable market quotes and are amortized in proportion to and over the period of estimated net servicing income. Mortgage servicing rights are evaluated quarterly for impairment using an independent valuation service. The valuation service utilizes discounted cash flow modeling techniques, which consider observable data that includes market consensus prepayment speeds and the predominant risk characteristics of the underlying loans including loan type, note rate and loan term. Management believes the significant inputs utilized in the valuation model are observable in the market.

Derivative Liability Contract. In conjunction with the sale of all of its Class B shares of Visa, Inc. (“Visa”) common stock in 2009, the Company entered into a derivative liability contract with the purchaser whereby the Company will make or receive cash payments based on subsequent changes in the conversion rate of the Class B shares into Class A shares of Visa. The conversion rate is dependent upon the resolution of certain litigation involving Visa U.S.A. Inc. card association or its affiliates. The value of the derivative liability contract is estimated using an internal valuation model with significant unobservable inputs including the Company's expectations regarding the ultimate resolution of the visa litigations and loss severity in the event of unfavorable litigaiton outcomes. The probability of unfavorable outcomes and the estimation of loss severity is determined through review of visa's press releases and public filings made with the Securities and Exchange Commission and managements estimation of the effect of changes in litigation status on the value of the derivative liability contract. On November 9, 2012, the court granted preliminary approval of a settlement agreement resolving the litigation. If finalized, the proposed settlement will not result in additional material liability to the Company.

Additionally, from time to time, certain assets are measured at fair value on a non-recurring basis. Adjustments to fair value generally result from the application of lower-of-cost-or-market accounting or write-downs of individual assets due to impairment.

The following table presents information about the Company’s assets and liabilities measured at fair value on a non-recurring basis.



			Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Total Gains (Losses)
	Total		(Level 1)		(Level 2)		(Level 3)
As of December 31, 2012
Impaired loans	$	74,623	$	—	$	—	$	74,623	$	(32,624	)
Other real estate owned	15,745		—		—		15,745		(20,797		)

As of December 31, 2011
Impaired loans	$	100,035	$	—	$	—	$	100,035	$	(67,043	)
Other real estate owned	17,000		—		—		17,000		(21,282		)

Impaired Loans. Collateralized impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from collateral. The impaired loans are reported at fair value through specific valuation allowance allocations. In addition, when it is determined that the fair value of an impaired loan is less than the recorded investment in the loan, the carrying value of the loan is adjusted to fair value through a charge to the allowance for loan losses. Collateral values are estimated using independent appraisals and management estimates of current market conditions. As of December 31, 2012, certain impaired loans with a carrying value of $107,247 were reduced by specific valuation allowance allocations of $10,297 and partial loan charge-offs of $22,327 resulting in a reported fair value of $74,623. As of December 31, 2011, certain impaired loans with a carrying value of $167,078 were reduced by specific valuation allowance allocations of $32,838 and partial loan charge-offs of $34,205 resulting in a reported fair value of $100,035.

OREO.The fair values of OREO are estimated using independent appraisals and management estimates of current market conditions. Upon initial recognition, write-downs based on the foreclosed asset's fair value at foreclosure are reported through charges to the allowance for loan losses. Periodically, the fair value of foreclosed assets is remeasured with any subsequent write-downs charged to OREO expense in the period in which they are identified.

Long-lived Assets to be Disposed of by Sale. Long-lived assets to be disposed of by sale are carried at the lower of carrying value or fair value less estimated costs to sell. The fair values of long-lived assets to be disposed of by sale are based upon observable market data and management estimates of current market conditions. As of December 31, 2012, a long-lived asset to be disposed of by sale with a carrying value of $566 was reduced by write-downs of $70 charged to other expense resulting in a reported fair value of $496. As of December 31, 2011, the company had a long-lived assets to be disposed of by sale of $1,513 that was carried at cost.

In addition, mortgage loans held for sale are required to be measured at the lower of cost or fair value. The fair value of mortgage loans held for sale is based upon binding contracts or quotes or bids from third party investors. As of December 31, 2012 and 2011, all mortgage loans held for sale were recorded at cost.

The Company is required to disclose the fair value of financial instruments for which it is practical to estimate fair value. The methodologies for estimating the fair value of financial instruments that are measured at fair value on a recurring or non-recurring basis are discussed above. The methodologies for estimating the fair value of other financial instruments are discussed below. For financial instruments bearing a variable interest rate where no credit risk exists, it is presumed that recorded book values are reasonable estimates of fair value.

Financial Assets. Carrying values of cash, cash equivalents and accrued interest receivable approximate fair values due to the liquid and/or short-term nature of these instruments. Fair values for investment securities held-to-maturity are obtained from an independent pricing service, which considers observable data that may include 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 investment’s terms and conditions, among other things. Fair values of fixed rate loans and variable rate loans that reprice on an infrequent basis are estimated by discounting future cash flows using current interest rates at which similar loans with similar terms would be made to borrowers of similar credit quality. Carrying values of variable rate loans that reprice frequently, and with no change in credit risk, approximate the fair values of these instruments.

Financial Liabilities. The fair values of demand deposits, savings accounts, securities sold under repurchase agreements and accrued interest payable are the amounts payable on demand at the reporting date. The fair values of fixed-maturity certificates of deposit are estimated using external market rates currently offered for deposits with similar remaining maturities. The carrying values of the interest bearing demand notes to the United States Treasury are deemed an approximation of fair values due to the frequent repayment and repricing at market rates. The fair value of the derivative liability contract was estimated by discounting cash flows using assumptions regarding the expected outcome of related litigation. The floating rate subordinated debenture, floating rate subordinated term loan, notes payable to the FHLB, fixed rate subordinated term debt, fixed rate subordinated debentures and capital lease obligation are estimated by discounting future cash flows using current rates for advances with similar characteristics. The carrying value of the preferred stock pending redemption approximates fair value due to the short-term nature of this instrument.

Commitments to Extend Credit and Standby Letters of Credit. The fair value of commitments to extend credit and standby letters of credit, based on fees currently charged to enter into similar agreements, is not significant.

A summary of the estimated fair values of financial instruments follows:



	`				Fair Value Measurements at Reporting Date Using
As of December 31, 2012	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents	$	801,332	$	801,332	$	—	$	801,332	$	—
Investment securities available-for-sale	1,995,258		1,995,258		—		1,995,258		—
Investment securities held-to-maturity	208,223		218,933		—		218,933		—
Accrued interest receivable	28,869		28,869		—		28,869		—
Mortgage servicing rights, net	12,653		16,373		—		16,373
Net loans	4,123,401		4,142,426		—		4,067,803		74,623
Total financial assets	$	7,169,736	$	7,203,191	$	—	$	7,128,568	$	74,623

Financial liabilities:
Total deposits, excluding time deposits	$	4,854,927	$	4,854,927	$	—	$	4,854,927	$	—
Time deposits	1,385,484		1,394,403		—		1,394,403		—
Securities sold under repurchase agreements	505,785		505,785		—		505,785		—
Other borrowed funds	32		32		—		32		—
Accrued interest payable	6,502		6,502		—		6,502		—
Long-term debt	37,160		35,104		—		35,104		—
Preferred stock pending redemption	50,000		50,000		—		50,000		—
Subordinated debentures held by subsidiary trusts	82,477		62,409		—		62,409
Total financial liabilities	$	6,922,367	$	6,909,162	$	—	$	6,909,162	$	—



					Fair Value Measurements at Reporting Date Using
As of December 31, 2011	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents	$	472,447	$	472,447	$	—	$	472,447	$	—
Investment securities available-for-sale	2,016,864		2,016,864		—		2,016,864		—
Investment securities held-to-maturity	152,781		161,877		—		161,877		—
Accrued interest receivable	31,974		31,974		—		31,974		—
Mortgage servicing rights, net	11,555		11,910		—		11,910		—
Net loans	4,073,968		4,064,718		—		3,964,683		100,035
Total financial assets	$	6,759,589	$	6,759,790	$	—	$	6,659,755	$	100,035

Financial liabilities:
Total deposits, excluding time deposits	$	4,269,631	$	4,269,631	$	—	$	4,269,631	$	—
Time deposits	1,557,340		1,565,558		—		1,565,558		—
Securities sold under repurchase agreements	516,243		516,243		—		516,243		—
Other borrowed funds	7		7		—		7		—
Accrued interest payable	8,123		8,123		—		8,123		—
Long-term debt	37,200		34,341		—		34,341		—
Subordinated debentures held by subsidiary trusts	123,715		102,525		—		102,525		—
Derivative contract liability	383		383				—		383
Total financial liabilities	$	6,512,642	$	6,496,811	$	—	$	6,496,428	$	383