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FAIR VALUE MEASUREMENT AND FAIR VALUES OF FINANCIAL INSTRUMENTS
 12 Months Ended
Dec. 31, 2011
Fair Value Measurement and Fair Values Of Financial Instruments [Abstract]  
Fair Value Measurement and Fair Values Of Financial Instruments [Text Block]

18. FAIR VALUE MEASUREMENT AND FAIR VALUES OF FINANCIAL INSTRUMENTS

     A financial instrument is defined as cash, evidence of an ownership interest in an entity, or a contract that conveys or imposes the contractual right or obligation to either receive or deliver cash or another financial instrument. Examples of financial instruments included in Bancorp’s balance sheet are cash, federal funds sold, debt and equity securities, loans, demand, savings and other interest-bearing deposits, notes and debentures. Examples of financial instruments which are not included in the Bancorp balance sheet are commitments to extend credit and standby letters of credit.

     Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

     Accounting standards require the fair value of deposit liabilities with no stated maturity, such as demand deposits, NOW and money market accounts, to equal the carrying value of these financial instruments and does not allow for the recognition of the inherent value of core deposit relationships when determining fair value.

     Bancorp has estimated fair value based on quoted market prices where available. In cases where quoted market prices were not available, fair values were based on the quoted market price of a financial instrument with similar characteristics, the present value of expected future cash flows or other valuation techniques that utilize assumptions which are subjective and judgmental in nature. Subjective factors include, among other things, estimates of cash flows, the timing of cash flows, risk and credit quality characteristics, interest rates and liquidity premiums or discounts. Accordingly, the results may not be precise, and modifying the assumptions may significantly affect the values derived. Further, fair values may or may not be realized if a significant portion of the financial instruments are sold in a bulk transaction or a forced liquidation. Therefore, any aggregate unrealized gains or losses should not be interpreted as a forecast of future earnings or cash flows. Furthermore, the fair values disclosed should not be interpreted as the aggregate current value of Bancorp.

     The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

     Cash and cash equivalents - The carrying amount is a reasonable estimate of fair value.

     Trading securities – Trading securities held at December 31, 2011, are related solely to bonds, equity securities and mutual funds held in a rabbi trust for benefit of the Company’s deferred compensation plans. Fair values for trading securities are based on quoted market prices.

     Investment securities - For substantially all securities within the categories U.S. Treasuries, U.S. Government agencies, mortgage-backed, obligations of state and political subdivisions, and equity investments and other securities held for investment purposes, fair values are based on quoted market prices or dealer quotes if available. When quoted market prices are not readily accessible or available, the use of alternative approaches, such as matrix or model pricing or indicators from market makers, is used. If a quoted market price is not available due to illiquidity, fair value is estimated using quoted market prices for similar securities or other modeling techniques. If neither a quoted market price nor market prices for similar securities are available, fair value is estimated by discounting expected cash flows using a market derived discount rate as of the valuation date.

     Our level 3 assets consist of pooled trust preferred securities, certain municipal securities and auction rate securities. The fair values of these securities were estimated using the discounted cash flow method. The fair value for these securities used inputs for base case default, recovery and prepayment rates to estimate the probable cash flows for the security. The estimated cash flows were discounted using a rate for comparably rated securities adjusted for an additional liquidity premium.

     Loans - The fair value of loans is estimated by discounting the future cash flows using the current rate at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. An additional liquidity discount is also incorporated to more closely align the fair value with observed market prices.

     Impaired loans - A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both interest and principal) according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair market value of the collateral. A significant portion of the Bank's impaired loans are measured using the fair market value of the collateral.

     Bank owned life insurance - The carrying amount is the cash surrender value of all policies, which approximates fair value.

     Other real estate owned - Management obtains third party appraisals as well as independent fair market value assessments from realtors or persons involved in selling OREO in determining the fair value of particular properties. Accordingly, the valuation of OREO is subject to significant external and internal judgment. Management periodically reviews OREO and obtains periodic appraisals to determine whether the property continues to be carried at the lower of its recorded book value or fair value less estimated selling costs.

     Goodwill – The method used to determine the impairment charge taken first quarter 2009 involved a two-step process. The first step estimated fair value using a combination of quoted market price and an estimate of a control premium. It was determined that the fair value of the Company’s Banking reporting unit was less than its book value and the carrying amount of the Company’s Banking reporting unit goodwill exceeded its implied fair value. The second step calculated the implied fair value of goodwill which required allocation of the fair value to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis.

     Deposit liabilities - The fair value of demand deposits, savings accounts and other deposits is the amount payable on demand at the reporting date. The fair value of time deposits is estimated using the rates currently offered for deposits of similar remaining maturities.

     Short-term borrowings - The carrying amount is a reasonable estimate of fair value given the short-term nature of these financial instruments.

     Long-term borrowings - The fair value of the long-term borrowings is estimated by discounting the future cash flows using the current rate at which similar borrowings with similar remaining maturities could be made.

     Junior subordinated debentures - The fair value of the variable rate junior subordinated debentures issued in connection with our trust preferred securities approximates the pricing of a preferred security at current market prices.

     Commitments to extend credit, standby letters of credit and financial guarantees - The majority of our commitments to extend credit carry current market interest rates if converted to loans.

     The tables below present fair value information on certain assets broken down by recurring or nonrecurring measurement status. Recurring assets are initially measured at fair value and are required to be reflected at fair value in the financial statements at each reporting date. Assets measured on a nonrecurring basis are assets that due to an event or circumstance were required to be re-measured at fair value after initial recognition in the financial statements at some time during the reporting period.

     Assets are classified as level 1-3 based on the lowest level of input that has a significant effect on fair value. The following definitions describe the level 1-3 categories for inputs used in the tables presented below.

  • Quoted prices in active markets for identical assets (Level 1): Inputs that are quoted unadjusted prices in active markets for identical assets that the Company has the ability to access at the measurement date. An active market for the asset is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

  • Other observable inputs (Level 2): Inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity including quoted prices for similar assets, quoted prices for securities in inactive markets and inputs derived principally from or corroborated by observable market data by correlation or other means.

  • Significant unobservable inputs (Level 3): Inputs that reflect the reporting entity's own estimates about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

     The following table presents fair value measurements for assets that are measured at fair value on a recurring basis subsequent to initial recognition:

      Fair value measurements at December 31, 2011, using
Quoted prices in active Other observable Significant
Total fair value markets for identical assets inputs unobservable inputs
(Dollars in thousands)       December 31, 2011       (Level 1)       (Level 2)       (Level 3)
Trading securities $      747 $      747 $      - $      -
Available for sale securities:
       U.S. Treasury securities 203 - 203 -
       U.S. Government agency securities 219,631 - 219,631 -
       Corporate securities 8,507 - - 8,507
       Mortgage-backed securities 428,725 - 428,725 -
       Obligations of state and political subdivisions 60,732 - 60,732 -
       Equity investments and other securities 12,046 1,980 10,066 -
Total recurring assets measured at fair value $ 730,591 $ 2,727 $ 719,357 $ 8,507
 
      Fair value measurements at December 31, 2010, using
Quoted prices in active Other observable Significant
Total fair value markets for identical assets inputs unobservable inputs
(Dollars in thousands)       December 31, 2010       (Level 1)       (Level 2)       (Level 3)
Trading securities $ 808 $ 808 $ - $ -
Available for sale securities:
       U.S. Treasury securities 14,392 - 14,392 -
       U.S. Government agency securities 194,230 - 194,230 -
       Corporate securities 9,392 - - 9,392
       Mortgage-backed securities 363,618 - 363,618 -
       Obligations of state and political subdivisions 52,645 - 51,688 957
       Equity investments and other securities 11,835 1 11,834 -
Total recurring assets measured at fair value $ 646,920 $ 809 $ 635,762 $ 10,349
 

     During second quarter 2011, the Company transferred $2.0 million in equity investments and other securities from a level 2 instrument to a level 1 instrument. The Company transferred $14.4 million in U.S. Treasury securities from a level 1 instrument to a level 2 instrument at December 31, 2010. In addition, the Company had no material changes in valuation techniques for recurring and nonrecurring assets measured at fair value during the year ended December 31, 2011.

     The following table represents a reconciliation of level 3 instruments for assets that are measured at fair value on a recurring basis for the full year 2011 and 2010:

      Twelve months ended December 31, 2011
(Dollars in thousands)       Balance January
1, 2011		       Gains (loss)
included in other
comprehensive
income (loss)		       Reclassification of
losses from adjustment
for impairment of
securities		       Purchases, Issuances,
and Sales		       Balance
December 31,
2011
Corporate securities $ 9,392 $ (1,064 ) $ 179 $ - $ 8,507
Obligations of state and political
subdivisions 957 (109 ) - (848 ) -
Fair value $ 10,349 $ (1,173 ) $ 179 $ (848 ) $ 8,507
 
      Twelve months ended December 31, 2010
(Dollars in thousands) Balance January
1, 2010		 Gains (loss)
included in other
comprehensive
income (loss)		 Reclassification of
losses from adjustment
for impairment of
securities		 Purchases, Issuances,
and Sales		 Balance
December 31,
2010
Corporate securities $      9,753 $      (361 ) $      - $      - $      9,392
Obligations of state and political
subdivisions 973 (16 ) - - 957
Fair value $ 10,726 $ (377 ) $ - $ - $ 10,349
 

     The losses from adjustments for OTTI of securities were recognized in noninterest income in the consolidated income statement.

     Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as loans held for sale, loans measured for impairment and OREO. For the twelve months ended December 31, 2011, and 2010, loans held for sale were subject to the lower of cost or market method of accounting. There was no impairment recognized on loans held for sale at December 31, 2011, or 2010. For the twelve months ended December 31, 2011, loans amounting to $56.4 million in Bancorp’s loan portfolio were deemed impaired. OREO that was taken into possession during 2011 was measured at fair value less sales expense. In addition, during 2011, certain properties were written down $4.8 million to reflect additional decreases in their fair market value after initial recognition at the time the property was placed into OREO.

     There were no nonrecurring level 1 or 2 fair value measurements in 2011 or 2010. The following table represents the level 3 fair value measurements for nonrecurring assets for the periods presented:

      Twelve months ended December 31, 2011
(Dollars in thousands)       Impairment       Fair Value 1
Loans measured for impairment $      15,410 $      68,466
OREO 4,832 60,491
Total nonrecurring assets measured at fair value $ 20,242 $ 128,957
 
Twelve months ended December 31, 2010
(Dollars in thousands) Impairment Fair Value 1
Loans measured for impairment $ 19,476 $ 82,910
OREO 6,649 74,146
Total nonrecurring assets measured at fair value $ 26,125 $ 157,056
 
1        Fair value excludes costs to sell collateral.

     The fair values of financial instruments at December 31, 2011, are as follows:

(Dollars in thousands)       Carrying Value       Fair Value
      FINANCIAL ASSETS:
Cash and cash equivalents $      92,227 $      92,227
Trading securities 747 747
Investment securities available for sale 729,844 729,844
Federal Home Loan Bank stock 12,148 12,148
Net loans (net of allowance for loan losses
       and including loans held for sale) 1,469,370 1,394,586
Bank owned life insurance 26,228 26,228
 
FINANCIAL LIABILITIES:
Deposits $ 1,915,569 $ 1,916,030
Long-term borrowings 120,000 120,032
 
Junior subordinated debentures-variable 51,000 27,350
 

     The fair values of financial instruments at December 31, 2010, are as follows:

(Dollars in thousands)       Carrying Value       Fair Value
      FINANCIAL ASSETS:
Cash and cash equivalents $      177,991 $      177,991
Trading securities 808 808
Investment securities available for sale 646,112 646,112
Federal Home Loan Bank stock 12,148 12,148
Net loans (net of allowance for loan losses
       and including loans held for sale) 1,499,155 1,407,366
Bank owned life insurance 25,313 25,313
 
FINANCIAL LIABILITIES:
Deposits $ 1,940,522 $ 1,942,301
Long-term borrowings 168,599 175,305
 
Junior subordinated debentures-variable 51,000 26,597