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Fair Value Measurements
12 Months Ended
Dec. 31, 2011
Fair Value Measurements  
Fair Value Measurements
Note 19 Fair Value Measurements
 
FASB ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.  FASB ASC Topic 820 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
 
The three levels of the fair value hierarchy are:

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 – 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, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).  
 
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of December 31, 2011 and 2010 segregated by the level of valuation inputs within the fair value hierarchy used to measure fair value.
 
Recurring Fair Value Measurements
 
December 31, 2011
                       
   
Fair Value
                   
   
12/31/11
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Trading securities
                       
Obligations of U.S. Government sponsored entities
  $ 12,693     $ 12,693     $ 0     $ 0  
Mortgage-backed securities - residential
    6,905       6,905       0       0  
                                 
Available-for-sale securities
                               
U.S. Treasury securities
    2,070       2,070       0       0  
Obligations of U.S. Government sponsored entities
    422,590       0       422,590       0  
Obligations of U.S. states and political subdivisions
    59,653       0       59,653       0  
Mortgage-backed securities - residential
                               
U.S. Government agencies
    129,773       0       129,773       0  
U.S. Government sponsored entities
    517,378       0       517,378       0  
Non-U.S. Government agencies or sponsored entities
    5,876       0       5,876       0  
U.S. corporate debt securities
    5,183       0       5,183       0  
Equity securities
    1,023       0       0       1,023  
                                 
Borrowings
                               
Other borrowings
    12,093       0       12,093       0  
 
The change in the fair value of the $1.0 million of available-for-sale securities valued using significant unobservable inputs (level 3), between January 1, 2011 and December 31, 2011 was immaterial.

Recurring Fair Value Measurements
 
December 31, 2010
                       
   
Fair Value
                   
   
12/31/10
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Trading securities
                       
Obligations of U.S. Government sponsored entities
  $ 13,139     $ 13,139     $ 0     $ 0  
Mortgage-backed securities - residential
    9,698       9,698       0       0  
                                 
Available-for-sale securities
                               
U.S. Treasury securities
    2,129       2,129       0       0  
Obligations of U.S. Government sponsored entities
    407,440       0       407,440       0  
Obligations of U.S. states and political subdivisions
    63,037       0       63,037       0  
Mortgage-backed securities - residential
                               
U.S. Government agencies
    146,013       0       146,013       0  
U.S. Government sponsored entities
    405,478       0       405,478       0  
Non-U.S. Government agencies or sponsored entities
    9,283       0       9,283       0  
U.S. corporate debt securities
    5,203       0       5,203       0  
Equity securities
    1,025       0       0       1,025  
                                 
Borrowings
                               
Other borrowings
    11,629       0       11,629       0  
 
The change in the fair value of the $1.0 million of available-for-sale securities valued using significant unobservable inputs (level 3), between January 1, 2010 and December 31, 2010 was immaterial.
 
The Company determines fair value for its trading securities using independently quoted market prices.

The Company determines fair value for its available-for-sale securities using an independent bond pricing service for identical assets or very similar securities.  The pricing service uses a variety of techniques to determine fair value, including market maker bids, quotes and pricing models.  Inputs to the model include recent trades, benchmark interest rates, spreads, and actual and projected cash flows.  The Company reviews the prices supplied by the independent pricing service, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices. In general, the Company’s investment 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 municipal bonds. Pricing for such instruments is fairly generic and is easily obtained.   At least annually, the Company will validate prices supplied by the independent pricing service by comparing to prices obtained from a second third-party source. Based on the inputs used by our independent pricing services, the Company identifies the appropriate level within the fair value hierarchy to report these fair values.
 
Fair values of borrowings are estimated using Level 2 inputs based upon observable market data.  The Company determines fair value for its borrowings using a discounted cash flow technique based upon expected cash flows and current spreads on FHLB advances with the same structure and terms. The Company also receives pricing information from third parties, including the FHLB. The pricing obtained is considered representative of the transfer price if the liabilities were assumed by a third party.  The Company’s potential credit risk did not have a material impact on the quoted settlement prices used in measuring the fair value of the FHLB borrowings for the twelve months ended December 31, 2011.
 
Certain assets are measured at fair value on a nonrecurring basis, that is, they are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances.  For the Company, these include loans held for sale, collateral dependent impaired loans, other real estate owned, goodwill and other intangible assets.  During 2011, certain collateral dependent impaired loans and other real estate owned at December 31, 2011, were adjusted down to fair value.  Collateral values are estimated using Level 2 inputs based upon observable market data.
 
Non-Recurring Fair Value Measurements
 
December 31, 2011
 
 
   
 
   
 
   
 
 
 
 
Fair Value
   
 
   
 
   
 
 
(in thousands)
 
12/31/11
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
                                 
Collateral Dependent Impaired Loans
  $ 21,931     $ 0     $ 21,931     $ 0  
                                 
Other Real Estate Owned
    1,335       0       1,335       0  

Non-Recurring Fair Value Measurements
 
December 31, 2010
 
 
   
 
   
 
   
 
 
 
 
Fair Value
   
 
   
 
   
 
 
(in thousands)
 
12/31/10
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
 
 
 
   
 
   
 
   
 
 
Collateral Dependent Impaired Loans
  $ 17,691     $ 0     $ 17,691     $ 0  
 
                               
Other Real Estate Owned
    1,256       0       1,256       0  

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments at December 31, 2011 and 2010. The carrying amounts shown in the table are included in the Consolidated Statements of Condition under the indicated captions.  The fair value estimates, methods and assumptions set forth below for the Company’s financial instruments, including those financial instruments carried at cost, are made solely to comply with disclosures required by generally accepted accounting principles in the United States and does not always incorporate the exit-price concept of fair value prescribed by ASC Topic 820-10 and should be read in conjunction with the financial statements and notes included in this Report.
 
Estimated Fair Value of Financial Instruments
 
2011
   
2010
 
(in thousands)
 
Carrying Amount
   
Fair Value
   
Carrying Amount
   
Fair Value
 
Financial Assets:
                               
                                 
Cash and cash equivalents
  $ 49,567     $ 49,567     $ 49,665     $ 49,665  
Securities – trading
    19,598       19,598       22,837       22,837  
Securities – available-for-sale
    1,143,546       1,143,546       1,039,608       1,039,608  
Securities – held-to-maturity
    26,673       27,255       54,973       56,064  
Loans and leases, net 1
    1,954,256       2,003,257       1,882,526       1,928,287  
FHLB and FRB stock
    19,070       19,070       21,985       21,985  
Accrued interest receivable
    12,420       12,420       11,513       11,513  
                                 
Financial Liabilities:
                               
Time deposits
  $ 687,321     $ 690,480     $ 741,829     $ 746,434  
Other deposits
    1,973,243       1,973,243       1,754,044       1,754,044  
Securities sold under agreements to repurchase
    169,090       179,840       183,609       193,510  
Securities sold under agreements to repurchase (valued at
                               
Other borrowings
    173,982       188,062       232,564       245,891  
Other borrowings (valued at fair value)
    12,093       12,093       11,629       11,629  
Trust preferred debentures
    25,065       25,314       25,060       25,513  
Accrued interest payable
    1,354       1,354       1,803       1,803  

Lease receivables, although excluded from the scope of ASC Topic 825, are included in the estimated fair value amounts at their carrying value.
 
The following methods and assumptions were used in estimating fair value disclosures for financial instruments.
 
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the Consolidated Statements of Condition for cash, noninterest-bearing deposits, money market funds, and Federal funds sold approximate the fair value of those assets.
 
SECURITIES:  Fair values for U.S. Treasury securities are based on quoted market prices.  Fair values for obligations of U.S. government sponsored entities, mortgage-backed securities-residential, obligations of U.S. states and political subdivisions, and U.S. corporate debt securities are based on quoted market prices, where available, as provided by third party pricing vendors. If quoted market prices were not available, fair values are based on quoted market prices of comparable instruments in active markets and/or based upon matrix pricing methodology, which uses comprehensive interest rate tables to determine market price, movement and yield relationships. For miscellaneous equity securities, carrying value is cost.  These securities are reviewed periodically to determine if there are any events or changes in circumstances that would adversely affect their value.
 
FHLB AND FRB STOCK:  The carrying amount of FHLB and FRB stock approximates fair value.  If the stock is redeemed, the Company will receive an amount equal to the par value of the stock.
 
LOANS AND LEASES:  The fair values of residential loans are estimated using discounted cash flow analyses, based upon available market benchmarks for rates and prepayment assumptions.  The fair values of commercial and consumer loans are estimated using discounted cash flow analyses, based upon interest rates currently offered for loans and leases with similar terms and credit quality.  The fair value of loans held for sale are determined based upon contractual prices for loans with similar characteristics.
 
ACCRUED INTEREST RECEIVABLE AND ACCRUED INTEREST PAYABLE:  The carrying amount of these short term instruments approximate fair value.
 
DEPOSITS: The fair values disclosed for noninterest bearing accounts and accounts with no stated maturities are equal to the amount payable on demand at the reporting date. The fair value of time deposits is based upon discounted cash flow analyses using rates offered for FHLB advances, which is the Company’s primary alternative source of funds.
 
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE: The carrying amounts of repurchase agreements and other short-term borrowings approximate their fair values. Fair values of long-term borrowings are estimated using a discounted cash flow approach, based on current market rates for similar borrowings. For securities sold under agreements to repurchase where the Company has elected the fair value option, the Company also receives pricing information from third parties, including the FHLB.
 
OTHER BORROWINGS:  The fair values of other borrowings are estimated using discounted cash flow analysis, discounted at the Company’s current incremental borrowing rate for similar borrowing arrangements.  For other borrowings where the Company has elected the fair value option, the Company also receives pricing information from third parties, including the FHLB.
 
TRUST PREFERRED DEBENTURES: The fair value of the trust preferred debentures has been estimated using a discounted cash flow analysis which uses a discount factor of a market spread over current interest rates for similar instruments.