Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUE MEASUREMENTS

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FAIR VALUE MEASUREMENTS
 3 Months Ended
Mar. 31, 2012
FAIR VALUE MEASUREMENTS [Abstract]  
FAIR VALUE MEASUREMENTS
NOTE 8 - FAIR VALUE MEASUREMENTS

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability.  In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach.  Such valuation techniques are consistently applied.  Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability.  ASC Topic 820 establishes 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.  The fair value hierarchy is as follows:

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

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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, credit risks, etc.) or inputs that are derived principally from, or corroborated, by market data by correlation or other means.

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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.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Securities Available for Sale.  U.S. Treasury securities are reported at fair value utilizing Level 1 inputs.  Other securities classified as available for sale are reported at fair value utilizing Level 2 inputs.  For these securities, the Company obtains fair value measurements from an independent pricing service.  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, credit information and the bond's terms and conditions, among other things.

The Company reviews the prices supplied by the independent pricing service, as well as their underlying pricing methodologies, for reasonableness to ensure such prices are aligned with traditional pricing matrices.  In general, the Company does not purchase securities that have a complicated structure.  The Company's entire portfolio consists of traditional investments, nearly all of which are U.S. Treasury obligations, federal agency bullet or mortgage pass-through securities, or general obligation or revenue based municipal bonds.  Pricing for such instruments is fairly generic and is easily obtained.  From time to time, the Company will validate, on a sample basis, prices supplied by the independent pricing service by comparison to prices obtained from third-party sources or derived using internal models.

Fair Value Swap.  The Company entered into a stand-alone derivative contract with the purchaser of its Visa Class B shares.  The valuation represents an internally developed estimate of the exposure based upon probability-weighted potential Visa litigation losses and related carrying cost obligations required under the contract.
 
A summary of fair values for assets and liabilities recorded at fair value consisted of the following:
 
(Dollars in Thousands)
  
Level 1 Inputs
    
Level 2 Inputs
    
Level 3 Inputs
    
Total Fair Value
  
March 31, 2012
                        
ASSETS:
                        
Securities available for sale:
                        
    U.S. Treasury
   $ 144,819     $ -     $ -     $ 144,819  
    U.S. Government Agency
     -       22,725       -       22,725  
    States and Political Subdivisions
     -       58,459       -       58,459  
    Mortgage-Backed Securities     -       47,130       -       47,130  
    Other Securities     -       11,357       -       11,357  
LIABILITIES:
                                
Fair Value Swap
     -       -       25       25  
 
December 31, 2011
                                
ASSETS:
                                
Securities available for sale:
                                
    U.S. Treasury
   $ 169,464     $ -     $ -     $ 169,464  
    U.S. Government Agency
     14,737       -       -       14,737  
    States and Political Subdivisions
     -       59,094       -       59,094  
    Mortgage-Backed Securities
     -       52,497       -       52,497  
    Other Securities
     -       11,357       -       11,357  
LIABILITIES:
                                
Fair Value Swap
     -       -       572       572  

Assets Measured at Fair Value on a Non-Recurring Basis

Certain assets that are measured at fair value on a non-recurring basis; that is, the assets  are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).  The following is a description of valuation methodologies used for assets measured on a non-recurring basis.

Impaired Loans.  Loans deemed to be impaired are valued based upon the lower of cost or the fair value of the underlying collateral or discounted cash flow analysis.  The fair value of collateral is determined by an independent valuation or professional appraisal in conformance with banking regulations.  Collateral values are estimated using Level 3 inputs due to the volatility in the real estate market, and the judgment and estimation involved in the real estate appraisal process.  The inputs used in performing discounted cash flow analyses are not observable and therefore is considered a Level 3 input.  Impaired loans had a carrying value of $110.2 million with a valuation allowance of $11.3 million at March 31, 2012 and $107.8 million and $11.2 million, respectively, at December 31, 2011.

Loans Held for Sale.  Loans held for sale were $13.6 million and $21.2 million as of March 31, 2012 and December 31, 2011, respectively.  These loans are carried at the lower of cost or fair value and are adjusted to fair value on a non-recurring basis.  Fair value is based on observable markets rates for comparable loan products, which is considered a Level 2 fair value measurement.

Other Real Estate Owned.  During the first three months of 2012, certain foreclosed assets, upon initial recognition, were measured and reported at fair value through a charge-off to the allowance for possible loan losses based on the fair value of the foreclosed asset.  The fair value of the foreclosed asset is determined by an independent valuation or professional appraisal in conformance with banking regulations.  The fair value of foreclosed assets is estimated using Level 3 inputs due to the volatility of the real estate market, and judgment and estimation involved in the real estate valuation process.  Foreclosed assets measured at fair value upon initial recognition totaled $4.1 million during the three months ended March 31, 2012.  The Company disposed of $7.9 million in foreclosed assets and recognized subsequent write-downs totaling $0.7 million for properties that were re-valued during the three months ended March 31, 2012.  The carrying value of foreclosed assets was $58.1 million at March 31, 2012.

Assets and Liabilities Disclosed at Fair Value

The Company is required to disclose the estimated fair value of financial instruments, both assets and liabilities, for which it is practical to estimate fair value and the following is a description of valuation methodologies used for those assets and liabilities.

Cash and Short-Term Investments - The carrying amount of cash and short-term investments is used to approximate fair value, given the short time frame to maturity and as such assets do not present unanticipated credit concerns.

 Loans - The loan portfolio is segregated into categories and the fair value of each loan category is calculated using present value techniques based upon projected cash flows and estimated discount rates that reflect the credit and interest rate risks inherent in each loan category.  The calculated present values are then reduced by an allocation of the allowance for loan losses against each respective loan category.

Deposits - The fair value of Noninterest Bearing Deposits, NOW Accounts, Money Market Accounts and Savings Accounts are the amounts payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using present value techniques and rates currently offered for deposits of similar remaining maturities.

Subordinated Notes Payable - The fair value of each note is calculated using present value techniques, based upon projected cash flows and estimated discount rates as well as rates being offered for similar obligations.

Short-Term and Long-Term Borrowings - The fair value of each note is calculated using present value techniques, based upon projected cash flows and estimated discount rates as well as rates being offered for similar debt.

A summary of estimated fair values of significant financial instruments consisted of the following:
       
   
March 31, 2012
  
(Dollars in Thousands)
  
Carrying Value
   
Level 1 Inputs
    
Level 2 Inputs
    
Level 3 Inputs
  
ASSETS:
                        
Cash
  
$
50,567
    
$
50,567
    
$
-
    
$
-
  
Short-Term Investments
    
418,678
      
418,678
      
-
      
-
  
Investment Securities
    
284,490
      
144,819
      
139,671
      
-
  
Loans, Net of Allowance for Loan Losses
    
1,547,667
      
-
              
1,386,286
  
                                 
LIABILITIES:
                                
Deposits
  
$
2,185,704
    
$
-
    
$
2,186,289
    
$
-
  
Short-Term Borrowings
    
42,188
      
-
      
40,929
      
-
  
Subordinated Notes Payable
    
62,887
      
-
      
62,898
      
-
  
Long-Term Borrowings
    
42,826
      
-
      
46,032
      
-
  
       
   
December 31, 2011
  
(Dollars in Thousands)
  
Carrying Value
   
Level 1 Inputs
    
Level 2 Inputs
    
Level 3 Inputs
  
ASSETS:
                        
Cash
  
$
54,953
    
$
54,953
    
$
      
$
    
Short-Term Investments
    
330,361
      
330,361
                  
Investment Securities
    
307,149
      
184,201
      
122,948
      
-
  
Loans, Net of Allowance for Loan Losses
    
1,597,648
      
-
      
-
      
1,485,813
  
                                 
LIABILITIES:
                                
Deposits
  
$
2,172,519
    
$
-
    
$
2,173,331
    
$
    
Short-Term Borrowings
    
43,372
      
-
      
42,021
          
Subordinated Notes Payable
    
62,887
              
62,858
          
Long-Term Borrowings
    
44,606
              
47,770
          

All non-financial instruments are excluded from the above table.  The disclosures also do not include certain intangible assets such as client relationships, deposit base intangibles and goodwill.  Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.