XML 21 R17.htm IDEA: XBRL DOCUMENT

FAIR VALUE MEASUREMENT AND FAIR VALUES OF FINANCIAL INSTRUMENTS

3 Months Ended

Mar. 31, 2012

Fair Value Measurement and Fair Values of Financial Instruments [Abstract]

Fair Value Measurement and Fair Values of Financial Instruments [Text Block]

10. FAIR VALUE MEASUREMENT AND FAIR VALUES OF FINANCIAL INSTRUMENTS

Bancorp measures or discloses certain financial assets and liabilities at fair value in accordance with GAAP, which defines fair value 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.

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 were 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.

GAAP established a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement. The three levels within the fair value hierarchy are described as follows:

Level 1 - Quoted prices in active markets for identical assets utilizing 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.
Level 2 - Other observable 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.
Level 3 - Significant unobservable 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 estimated fair values of financial instruments and respective level classifications at March 31, 2012, are as follows:

					Fair value measurements using
					Quoted prices in				Significant
					active markets for		Other observable		unobservable
					identical assets		inputs		inputs
(Dollars in thousands)	Carrying Value		Fair Value		(Level 1)		(Level 2)		(Level 3)
FINANCIAL ASSETS:
Cash and cash equivalents	$	169,684	$	169,684	$	169,684	$	-	$	-
Trading securities		797		797		797		-		-
Investment securities		670,534		670,534		1,978		660,039		8,517
Federal Home Loan Bank stock		12,148		12,148		-		12,148		-
Loans held for sale		1,302		1,302		-		1,302		-
Net loans (net of allowance for loan losses)		1,436,994		1,329,681		-		6,881		1,322,800
Bank owned life insurance		26,423		26,423		-		26,423		-

FINANCIAL LIABILITIES:
Deposits	$	1,894,505	$	1,894,753	$	-	$	1,894,753	$	-
Long-term borrowings		120,000		120,460		-		120,460		-

Junior subordinated debentures-variable		51,000		27,216		-		27,216		-

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 Company’s Asset/Liability Management Committee (“ALCO”) oversees the bank’s valuation process and reports such valuations to the Loan, Investment & ALCO Committee of the Board of Directors. 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 March 31, 2012, are recorded at fair value on a recurring basis and 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 available for sale investments 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 unadjusted, 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 pricing models. Securities measured with these valuation techniques are generally classified as Level 2 of the hierarchy.

Level 3 investment securities measured on a recurring basis consist of pooled trust preferred securities. The fair values of these securities were estimated using discounted expected cash flows. 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 and adjusted for an additional liquidity premium.

Federal Home Loan Bank stock – FHLB stock is carried at cost which approximates fair value and equals its par value because the shares can only be redeemed with the FHLB at par.

Loans held for sale - Loans held for sale includes mortgage loans that are carried at the lower of cost or market value. The fair value of loans held for sale is based on prices from current offerings of secondary markets. Fair value generally approximates cost because of the short duration these assets on our balance sheet.

Loans - The fair value of loans disclosed and not measured on a recurring or nonrecurring basis 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. These estimates differentiate loans based on their financial characteristics such as loan category, pricing features, and remaining maturity. Prepayment and credit loss estimates are also incorporated into loan fair value estimates as well as an additional liquidity discount to more closely align the fair value with observed market prices.

Loans that are deemed impaired are measured on a nonrecurring basis and based on the present value of expected future cash flows discounted at the loan’s effective interest rate. Loans may also, as a practical expedient, be measured at the loan’s observable market price or the fair market value of the collateral less selling costs if the loan is collateral dependent.

Bank owned life insurance – Bank owned life insurance is carried at 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.

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.

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 and 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 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 for the periods shown. 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.

Certain assets, such as loans held for sale, loans measured for impairment, and OREO, are measured at fair value on a nonrecurring basis after initial recognition. As of March 31, 2012, loans amounting to $56.0 million in Bancorp’s loan portfolio were deemed impaired. In addition, during the first quarter, certain OREO properties were written down by a total of $.5 million to reflect additional decreases in estimated fair market value subsequent to the time such properties were placed into OREO.

The observable inputs for Level 2 nonrecurring measurements for loans measured for impairment and OREO balances are generally multiples derived from prices in observed transactions involving comparable properties in similar locations.

			Fair value measurements at March 31, 2012, using
			Quoted prices in active
			markets for identical		Other observable		Significant		Impairment
	Fair Value		assets		inputs		unobservable inputs		recognized
(Dollars in thousands)	March 31, 2012		(Level 1)		(Level 2)		(Level 3)
Recurring fair value measurements:
Trading securities	$	797	$	797	$	-	$	-
Available for sale securities:
U.S. Treasury securities		201		-		201		-
U.S. Government agency securities		194,468		-		194,468		-
Corporate securities		8,517		-		-		8,517
Mortgage-backed securities		394,234		-		394,234		-
Obligations of state and political subdivisions		61,186		-		61,186		-
Equity investments and other securities		11,928		1,978		9,950		-
Total recurring assets measured at fair value	$	671,331	$	2,775	$	660,039	$	8,517

Nonrecurring fair value measurements:
Loans measured for impairment ¹	$	6,881	$	-	$	6,881	$	-	$	2,357
OREO ¹		11,676		-		7,108		4,568		521
Total nonrecurring fair value measurements	$	18,557	$	-	$	13,989	$	4,568	$	2,878

¹ Fair value amounts exclude the estimated selling costs of impaired loan collateral and OREO properties.

			Fair value measurements at December 31, 2011, using
			Quoted prices in active
			markets for identical		Other observable		Significant		Impairment
	Fair Value		assets		inputs		unobservable inputs		recognized
(Dollars in thousands)	December 31, 2011		(Level 1)		(Level 2)		(Level 3)
Recurring fair value measurements:
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

Nonrecurring fair value measurements:
Loans measured for impairment ¹	$	68,466	$	-	$	-	$	68,466	$	15,410
OREO ¹		60,491		-		-		60,491		4,832
Total nonrecurring fair value measurements	$	128,957	$	-	$	-	$	128,957	$	20,242

¹ Fair value amounts exclude the estimated selling costs of impaired loan collateral and OREO properties.

The Company made no transfers between hierarchy levels in the first quarter of 2012. It is the Company’s policy to recognize hierarchy level changes as of the end of the reporting period. 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. In addition, the Company had no material changes in valuation techniques for recurring and nonrecurring assets measured at fair value in the quarter ended March 31, 2012.

The following table represents a reconciliation of Level 3 instruments for assets that are measured at fair value on a recurring basis for the three months ended March 31, 2012, and 2011:

			Three months ended March 31, 2012
						Reclassification of
			Gains (losses)			losses from
			included in other			adjustment for		Purchases,
	Balance		comprehensive			impairment of		Issuances, and			Balance
(Dollars in thousands)	January 1, 2012		income			securities		Settlements			March 31, 2012
Corporate securities	$	8,507	$	(39	)	$	49	$	-	$	8,517
Balance	$	8,507	$	(39	)	$	49	$	-	$	8,517

			Three months ended March 31, 2011
						Reclassification of
			Gains (losses)			losses from
			included in other			adjustment for		Purchases,
	Balance		comprehensive			impairment of		Issuances, and			Balance
(Dollars in thousands)	January 1, 2011		income			securities		Settlements			March 31, 2011
Corporate securities	$	9,392	$	458		$	-	$	-	$	9,850
Obligations of state and political subdivisions		957		(68	)		-		-		889
Balance	$	10,349	$	390		$	-	$	-	$	10,739

The following table presents quantitative information about Level 3 fair value measurements:

(Dollars in thousands)
	March 31, 2012		Valuation	Unobservable		Weighted
	Fair Value		technique	inputs	Range	average
Corporate securities	$	8,517	Discounted cash flow	Prepayment rate	0-1%	0.50%
				Deferral/default rate	.25-1.5%	0.88%
				Recovery rate	0-50%	25%
				Recovery lag	0-5 years	2.5 years
				Discount rate	7.8-9.0%	8.30%
OREO		4,568	Income approach	Capitalization rate	7.5 - 8.5%	7.95%

The Company estimates the fair value of its Level 3 securities quarterly based on both observable and unobservable inputs. Observable inputs include discount rates derived from current rates on traded corporate bonds. Unobservable inputs are primarily estimates of future cash flows from the Level 3 securities. The Level 3 fair value measurements of our corporate securities are highly sensitive to our estimate of the cash flow from these securities. Higher default or deferral rates and lower recovery rates reduce the overall estimated cash flows and would reduce the estimated fair value of these securities. Prepayment assumptions, recovery lag assumptions and discount rates have a reduced relative effect on the fair value estimates.