Fair Value Measurements

9 Months Ended

Sep. 30, 2011

Fair Value Measurements

Fair Value Measurements

Note 15 - 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 Corporation 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:

• 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.

• 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.

• 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.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Corporation's creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Corporation's valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Corporation's valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein. A more detailed description of the valuation

methodologies used for assets and liabilities measured at fair value is set forth in the 2010 Form 10-K. 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 Corporation's monthly and/or quarterly valuation process.

Financial Assets and Financial Liabilities: The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
September 30, 2011
Securities available for sale:
U.S. Treasury	$	799,915	$	—	$	—	$	799,915
Residential mortgage-backed securities		—		2,394,338		—		2,394,338
States and political subdivisions		—		2,107,567		—		2,107,567
Other		—		37,992		—		37,992
Trading account securities:
U.S. Treasury		14,035		—		—		14,035
States and political subdivisions		—		1,788		—		1,788
Derivative assets:
Interest rate swaps, caps and floors		—		60,475		718		61,193
Commodity and foreign exchange derivatives		13		32,917		—		32,930
Derivative liabilities:
Interest rate swaps, caps and floors		—		79,418		—		79,418
Commodity and foreign exchange derivatives		—		32,707		—		32,707
December 31, 2010
Securities available for sale:
U.S. Treasury	$	987,031	$	—	$	—	$	987,031
Residential mortgage-backed securities		—		2,091,330		—		2,091,330
States and political subdivisions		—		2,040,300		—		2,040,300
Other		—		38,809		—		38,809
Trading account securities:
U.S. Treasury		14,986		—		—		14,986
States and political subdivisions		—		115		—		115
Derivative assets:
Interest rate swaps, caps and floors		—		43,633		1,090		44,723
Commodity and foreign exchange derivatives		—		14,177		—		14,177
Derivative liabilities:
Interest rate swaps, caps and floors		—		63,299		—		63,299
Commodity and foreign exchange derivatives		19		14,082		—		14,101

The following table reconciles the beginning and ending balances of derivative assets measured at fair value on a recurring basis using significant unobservable (Level 3) inputs during the nine months ended September 30, 2011 and 2010:

	Nine Months Ended September 30,
	2011			2010
Balance, beginning of period	$	1,090		$	945
Transfers to Level 3		457			—
Cash settlements		(1,393	)		(348	)
Realized gains (losses) included in other non-interest income		515			1,097
Realized gains (losses) included in other non-interest expense		49			(112	)
Balance, end of period	$	718		$	1,582

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments 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). Financial assets measured at fair value on a non-recurring basis during the nine months ended September 30, 2011 and 2010 include certain impaired loans reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. The following table presents impaired loans that were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for loan losses based upon the fair value of the underlying collateral during the nine months ended September 30, 2011 and 2010.

	Nine Months Ended September 30, 2011						Nine Months Ended September 30, 2010
	Level 2			Level 3			Level 2			Level 3
Carrying value of impaired loans	$	9,638		$	3,899		$	23,812		$	15,700
Specific valuation allowance allocations		(3,649	)		(2,431	)		(6,911	)		(6,085	)
Fair value	$	5,989		$	1,468		$	16,901		$	9,615

Non-Financial Assets and Non-Financial Liabilities: The Corporation has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Certain non-financial assets measured at fair value on a non-recurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. Non-financial assets measured at fair value on a non-recurring basis during the nine months ended September 30, 2011 and 2010 include certain foreclosed assets which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for loan losses and certain foreclosed assets which, subsequent to their initial recognition, were remeasured at fair value through a write-down included in other non-interest expense. The fair value of a foreclosed asset is estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. During the reported periods, all fair value measurements for foreclosed assets utilized Level 2 inputs.

The following table presents foreclosed assets that were remeasured and reported at fair value:

	Nine Months Ended September 30,
	2011			2010
Foreclosed assets remeasured at initial recognition:
Carrying value of foreclosed assets prior to remeasurement	$	20,396		$	15,714
Charge-offs recognized in the allowance for loan losses		(3,593	)		(3,007	)
Fair value	$	16,803		$	12,707
Foreclosed assets remeasured subsequent to initial recognition:
Carrying value of foreclosed assets prior to remeasurement	$	6,023		$	5,314
Write-downs included in other non-interest expense		(2,173	)		(1,473	)
Fair value	$	3,850		$	3,841

Charge-offs recognized upon loan foreclosures are generally offset by general or specific allocations of the allowance for loan losses and generally do not, and did not during the reported periods, significantly impact the Corporation's provision for loan losses. Regulatory guidelines require the Corporation to reevaluate the fair value of other real estate owned on at least an annual basis. While the Corporation's policy is to comply with the regulatory guidelines, the Corporation's general practice is to reevaluate the fair value of other real estate owned on a quarterly basis. Thus, appraisals are never considered to be outdated, and the Corporation does not make any adjustments to the appraised values. The fair value of other real estate owned is monitored/evaluated by a third-party service and reviewed with management on a quarterly basis.

FASB ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. A detailed description of the valuation methodologies used in estimating the fair value of financial instruments is set forth in the 2010 Form 10-K.

The estimated fair values of financial instruments were as follows:

	September 30, 2011				December 31, 2010
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	4,487,361	$	4,487,361	$	2,820,977	$	2,820,977
Securities		5,721,902		5,758,840		5,456,200		5,468,799
Loans, net		7,974,259		8,005,005		7,990,704		8,038,760
Cash surrender value of life insurance policies		132,899		132,899		129,922		129,922
Non-hedging commercial loan/lease interest rate swaps, caps and floors		61,193		61,193		44,723		44,723
Commodity and foreign exchange derivatives		32,930		32,930		14,177		14,177
Accrued interest receivable		44,407		44,407		72,328		72,328
Financial liabilities:
Deposits		16,063,873		16,064,926		14,479,342		14,480,725
Federal funds purchased and repurchase agreements		658,246		658,246		475,673		475,673
Junior subordinated deferrable interest debentures		123,712		123,712		123,712		123,712
Subordinated notes payable and other borrowings		100,031		100,297		250,045		256,172
Interest rate swap on junior subordinated deferrable interest debentures designated as a hedge of cash flows		9,137		9,137		9,895		9,895
Commercial loan/lease interest rate swaps designated as hedges of fair value		8,805		8,805		8,350		8,350
Non-hedging commercial loan/lease interest rate swaps, caps and floors		61,476		61,476		45,054		45,054
Commodity and foreign exchange derivatives		32,707		32,707		14,101		14,101
Accrued interest payable		3,234		3,234		9,991		9,991

Under ASC Topic 825, entities may choose to measure eligible financial instruments at fair value at specified election dates. The fair value measurement option (i) may be applied instrument by instrument, with certain exceptions, (ii) is generally irrevocable and (iii) is applied only to entire instruments and not to portions of instruments. Unrealized gains and losses on items for which the fair value measurement option has been elected must be reported in earnings at each subsequent reporting date. During the reported periods, the Corporation had no financial instruments measured at fair value under the fair value measurement option.