Fair Value Measurement

3 Months Ended

Mar. 31, 2011

Fair Value Measurement [Abstract]

Fair Value Measurement

10.       Fair Value Measurement - (2011 Restated)

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

Valuation techniques including the market approach, the income approach and/or the cost approach are utilized to determine fair value.  Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability.  An entity must consider all aspects of nonperforming risk, including the entity's own credit standing when measuring fair value of a liability.  Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.  A fair value hierarchy for valuation inputs 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.

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

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, we obtain 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, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things.

Securities Carried at Fair Value through Income - 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, we obtain 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, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things.

We review the prices supplied by the independent pricing service, as well as their underlying pricing methodologies and their Statement on Standards for Attestation Engagements - Reporting on Controls at a Service Organization ("SSAE 16") for reasonableness and to ensure such prices are aligned with traditional pricing matrices.  We validate prices supplied by the independent pricing service by comparison to prices obtained from, in most cases, three additional third party sources.  For securities where prices are outside a reasonable range, we further review those securities to determine what a reasonable price estimate is for that security, given available data.

Certain financial assets are measured at fair value in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of fair value accounting or write-downs of individual assets.  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 our monthly and/or quarterly valuation process.  There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2011.

Loans Held for Sale - These loans are reported at the lower of cost or fair value. Fair value is determined based on expected proceeds, which are based on sales contracts and commitments and are considered Level 2 inputs.   At March 31, 2011, based on our estimates of fair value, no valuation allowance was recognized.

Impaired Loans - Certain impaired loans may be reported at the fair value of the underlying collateral if repayment is expected solely from the collateral.  Collateral values are estimated using Level 3 inputs based on customized discounting criteria or appraisals.  At March 31, 2011, the impact of loans with specific reserves based on the fair value of the collateral was reflected in our allowance for loans losses.

The following table summarizes impaired loans measured at fair value through a specific valuation allowance allocation of the allowance for possible loan losses based upon fair value of the underlying collateral utilizing Level 3 valuation inputs as follows (in thousands):

	At March 31, 2011		At December 31, 2010		At March 31, 2010
Carrying Value	$	16,290	$	16,768	$	20,438
Valuation Allowance		3,457		3,864		4,363
Total Reported Fair Value	$	12,833	$	12,904	$	16,075

Certain non-financial assets and non-financial liabilities measured at fair value on a recurring basis include reporting units measured at fair value in the first step of a goodwill impairment test. Certain non-financial assets measured at fair value on a non-recurring basis include non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, as well as intangible assets and other non-financial long-lived assets (such as real estate owned) that are measured at fair value in the event of an impairment. The framework became applicable to these fair value measurements beginning January 1, 2009.

The following tables summarize financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 2011 and December 31, 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

	As of March 31, 2011
	Level 1		Level 2		Level 3		Total
Securities Available For Sale	Input		Input		Input		Fair Value
Investment Securities:
U.S. Treasury	$	4,700	$	-	$	-	$	4,700
State and Political Subdivisions		-		315,015		-		315,015
Other Stocks and Bonds		-		-		1,005		1,005
Mortgage-backed Securities:
U.S. Government Agencies		-		166,083		-		166,083
Government-Sponsored Enterprise		-		708,610		-		708,610
Total	$	4,700	$	1,189,708	$	1,005	$	1,195,413

	As of March 31, 2011
	Level 1			Level 2			Level 3			Total
Securities Carried at Fair Value through Income	Input			Input			Input			Fair Value
Mortgage-backed Securities:
U.S. Government Agencies		$	-		$	3,875		$	-		$	3,875
Government-Sponsored Enterprise			-			229,385			-			229,385
Total		$	-		$	233,260		$	-		$	233,260

	As of December 31, 2010
	Level 1		Level 2		Level 3		Total
Securities Available For Sale	Input		Input		Input		Fair Value
Investment Securities:
U.S. Treasury	$	4,700	$	-	$	-	$	4,700
State and Political Subdivisions		-		294,262		-		294,262
Other Stocks and Bonds		193		-		189		382
Mortgage-backed Securities:
U.S. Government Agencies		-		150,273		-		150,273
Government-Sponsored Enterprise		-		736,301		-		736,301
Total	$	4,893	$	1,180,836	$	189	$	1,185,918

	As of December 31, 2010
	Level 1			Level 2			Level 3			Total
Securities Carried at Fair Value through Income	Input			Input			Input			Fair Value
Mortgage-backed Securities:
U.S. Government Agencies		$	-		$	5,392		$	-		$	5,392
Government-Sponsored Enterprise			-			66,784			-			66,784
Total		$	-		$	72,176		$	-		$	72,176

The following tables present additional information about financial assets and liabilities measured at fair value on a recurring basis and for which we have utilized Level 3 inputs to determine fair value (in thousands):

	Three Months Ended March 31,
	2011		2010
Other Stocks and Bonds
Balance at Beginning of Period	$	189	$	270
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)		-		(75	)
Included in other comprehensive income (loss)		816		36
Purchases		-		-
Issuances		-		-
Settlements		-		-
Transfers in and/or out of Level 3		-		-
Balance at End of Period	$	1,005	$	231
The amount of total gains or losses for the periods included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at reporting date	$	-	$	(75	)

We reported at fair value through income certain of our mortgage-backed securities with embedded derivatives and purchased at a significant premium, which we defined as greater than 111.111% as opposed to bifurcating the embedded derivative and valuing it on a stand alone basis as these embedded derivatives are not readily identifiable and measurable and as such cannot be bifurcated.  At March 31, 2011, we had $233.3 million classified as securities carried at fair value through income.  The changes in fair value recorded in income was an increase of $1.6 million for the three months ended March 31, 2011. At March 31, 2010, we had no securities classified as securities carried at fair value through income.  We did not have any changes in fair value recorded in income during the three months ended March 31, 2010.

Assets and liabilities accounted for at fair value through income are initially measured at fair value with subsequent changes in fair value recognized in earnings.  Such changes in the fair value of assets for which we reported at fair value through income are included in current period earnings with classification in the income statement line item reflected in the following table (in thousands):

	Three Months Ended March 31,
	2011			2010
Changes in fair value included in net income:
Mortgage-backed Securities:
U.S. Government Agencies	$	(11	)	$	-
Government-Sponsored Enterprises		1,638			-
Total	$	1,627		$	-

Disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet is required, for which it is practicable to estimate that value.  In cases where quoted market prices are not available, fair values are based on estimates using present value or other estimation techniques.  Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.  Such techniques and assumptions, as they apply to individual categories of our financial instruments, are as follows:

Cash and cash equivalents - The carrying amounts for cash and cash equivalents is a reasonable estimate of those assets' fair value.

Investment and mortgage-backed and related securities - Fair values for these securities are based on quoted market prices, where available.  If quoted market prices are not available, fair values are based on quoted market prices for similar securities or estimates from independent pricing services.

FHLB stock and other investments - The carrying amount of FHLB stock is a reasonable estimate of those assets' fair value.

Loans receivable - For adjustable rate loans that reprice frequently and with no significant change in credit risk, the carrying amounts are a reasonable estimate of those assets' fair value.  The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.  Nonperforming loans are estimated using discounted cash flow analyses or the underlying value of the collateral where applicable.

Deposit liabilities - The fair value of demand deposits, savings accounts, and certain money market deposits is the amount on demand at the reporting date, that is, the carrying value.  Fair values for fixed rate certificates of deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities.

Federal funds purchased and repurchase agreements - Federal funds purchased and repurchase agreements generally have an original term to maturity of one day and thus are considered short-term borrowings.  Consequently, their carrying value is a reasonable estimate of fair value.

FHLB advances - The fair value of these advances is estimated by discounting the future cash flows using rates at which advances would be made to borrowers with similar credit ratings and for the same remaining maturities.

Long-term debt - The carrying amount for the long-term debt is estimated by discounting future cash flows using estimated rates at which long-term debt would be made to borrowers with similar credit ratings and for the remaining maturities.  This type of debt is not issued as frequently since the economic crisis beginning in 2007 and change to the capital rates issued in 2010.  Therefore, the discount rate is a best estimate.

The following table presents our financial assets, financial liabilities, and unrecognized financial instruments at both their respective carrying amounts and fair value:

	At March 31, 2011				At December 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(in thousands)
Financial assets:
Cash and cash equivalents	$	49,620	$	49,620	$	79,073	$	79,073
Investment securities:
Available for sale, at estimated fair value		320,720		320,720		299,344		299,344
Held to maturity, at amortized cost		1,495		1,596		1,495		1,553
Mortgage-backed and related securities:
Available for sale, at estimated fair value		874,693		874,693		886,574		886,574
Securities carried at fair value through income		233,260		233,260		72,176		72,176
Held to maturity, at amortized cost		396,579		402,902		405,367		413,865
FHLB stock and other investments, at cost		31,280		31,280		36,776		36,776
Loans, net of allowance for loan losses		1,043,864		1,048,970		1,057,209		1,066,125
Loans held for sale		2,665		2,665		6,583		6,583
Financial liabilities:
Retail deposits	$	2,200,823	$	2,206,155	$	2,134,428	$	2,138,587
Federal funds purchased and repurchase agreements		2,981		2,981		3,844		3,844
FHLB advances		536,698		552,821		562,573		578,561
Long-term debt		60,311		45,526		60,311		50,673

As discussed earlier, the fair value estimate of financial instruments for which quoted market prices are unavailable is dependent upon the assumptions used.  Consequently, those estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments.  Accordingly, the aggregate fair value amounts presented in the above fair value table do not necessarily represent their underlying value.

The estimated fair value of our commitments to extend credit, credit card arrangements and letters of credit, was not material at March 31, 2011 or December 31, 2010.