Note 12 - Fair Value

9 Months Ended

Sep. 30, 2012

Fair Value Disclosures [Text Block]

12.  FAIR VALUE

Fair value represents the amount that would be received to sell an asset or paid to transfer a liability in its principal or most advantageous market in an orderly transaction between market participants at the measurement date. In accordance with fair value accounting guidance, the Company measures, records, and reports various types of assets and liabilities at fair value on either a recurring or non-recurring basis in the Consolidated Statements of Financial Condition. Other assets and liabilities are not required to be measured at fair value in the Consolidated Statements of Financial Condition, but must be disclosed for reporting purposes. Refer to the “Financial Instruments Not Required to be Measured at Fair Value” section of this footnote. Any aggregation of the estimated fair values presented in this footnote does not represent the underlying value of the Company.

Depending on the nature of the asset or liability, the Company uses various valuation methodologies and assumptions to estimate fair value. GAAP establishes a three-tiered fair value hierarchy based on the inputs used to measure fair value. The hierarchy is defined as follows:

· Level 1 – Quoted prices in active markets for identical assets or liabilities.

· Level 2 – Observable inputs other than level 1 prices, such as quoted prices for similar instruments, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

· Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. These inputs require significant management judgment or estimation, some of which use model-based techniques and may be internally developed.

Assets and liabilities are assigned to a level within the fair value hierarchy based on the lowest level of significant input used to measure fair value. Assets and liabilities may change levels within the fair value hierarchy due to market conditions or other circumstances. These transfers are recognized on the date of the event that prompted the transfer. There were no transfers of assets or liabilities between levels of the fair value hierarchy during the periods presented.

Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis

The following table provides the level in the fair value hierarchy and corresponding fair value for assets and liabilities required to be measured at fair value on a recurring basis in the Consolidated Statements of Financial Condition.

Recurring Fair Value Measurements

(Dollar amounts in thousands)

	September 30, 2012						December 31, 2011
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Assets:
Trading securities:
Money market funds	$	1,445	$	-	$	-	$	1,565	$	-	$	-
Mutual funds		14,067		-		-		12,904		-		-
Total trading securities		15,512		-		-		14,469		-		-
Securities available-for-sale:
U.S. agency securities		-		2,002		-		-		5,035		-
CMOs		-		513,432		-		-		384,104		-
Other residential MBSs		-		135,135		-		-		87,691		-
Municipal securities		-		503,315		-		-		490,071		-
CDOs		-		-		11,546		-		-		13,394
Corporate debt securities		-		15,312		-		-		30,014		-
Hedge fund investment		-		2,214		-		-		1,616		-
Other equity securities		42		8,584		-		41		1,040		-
Total securities available-for-sale		42		1,179,994		11,546		41		999,571		13,394
Mortgage servicing rights (1)		-		-		818		-		-		929
Liabilities:
Derivative liabilities (2)	$	-	$	2,433	$	-	$	-	$	2,459	$	-

(1)	Included in other assets in the Consolidated Statements of Financial Condition.
(2)	Included in other liabilities in the Consolidated Statements of Financial Condition.

The following sections describe the specific valuation techniques and inputs used to measure financial assets and liabilities at fair value.

Trading Securities

Trading securities represent diversified investment securities held in a grantor trust and are invested in money market and mutual funds. The fair value of these money market and mutual funds is based on quoted market prices in active exchange markets and is classified in level 1 of the fair value hierarchy. Changes in the fair value of trading securities are included as a separate component of noninterest income in the Condensed Consolidated Statements of Income.

Securities Available-for-Sale

U.S. Agency Securities, CMOs, Other Residential MBSs, Municipal Securities, Corporate Debt Securities, and Other Equity Securities– These securities are primarily fixed income instruments that are not quoted on an exchange, but may be traded in active markets. The fair values are based on quoted prices in active markets or market prices for similar securities obtained from external pricing services or dealer market participants and are classified in level 2 of the fair value hierarchy. Quarterly, the Company evaluates the methodologies used by its external pricing services to develop the fair values to determine whether the results of the valuations are representative of an exit price in the Company’s principal markets and an appropriate representation of fair value.

CDOs– CDOs are classified in level 3 of the fair value hierarchy.

Rollforward of the Carrying Value of CDOs

(Dollar amounts in thousands)

	Quarters Ended September 30,					Nine Months Ended September 30,
	2012		2011			2012			2011
Balance at beginning of period	$	11,082	$	16,487		$	13,394		$	14,858
Total income (loss):
Included in earnings (1)		-		(177	)		(2,126	)		(177	)
Included in other comprehensive income (2)		464		(2,093	)		278			(464	)
Balance at end of period (3)	$	11,546	$	14,217		$	11,546		$	14,217
Change in unrealized losses recognized in earnings related to securities still held at end of period	$	-	$	(177	)	$	(2,126	)	$	(177	)

(1)	Included in net securities (losses) gains in the Condensed Consolidated Statements of Income and related to securities still held at the end of the period.
(2)	Included in unrealized holding gains in the Consolidated Statements of Comprehensive Income.
(3)	There were no purchases, sales, issuances, or settlements of CDOs during the periods presented.

The Company estimates the fair values for each CDO using discounted cash flow analyses with the assistance of a structured credit valuation firm. This methodology relies on credit analysis and review of historical financial data for each of the issuers of the securities underlying the individual CDO (the “Issuers”) to estimate the cash flows. These estimates are highly subjective and sensitive to several significant, unobservable inputs, including prepayment assumptions, default probabilities, loss given default assumptions, and deferral cure probabilities. The cash flows for each Issuer are then discounted to the present values using LIBOR plus an adjustment to reflect the higher risk inherent in these securities given their complex structures and the impact of market factors. Finally, the discounted cash flows for each Issuer are aggregated to derive the estimated fair value for the specific CDO. Specific information for each CDO, as well as the significant unobservable assumptions, is presented in the following table.

Characteristics of CDOs and Unobservable Inputs Significant

to the Valuation of CDOs as of September 30, 2012

(Dollar amounts in thousands)

	CDO Number (1)
		1			2			3			4			5			6
Characteristics:
Class (2)		C-1			C-1			C-1			B1			C			C
Original par	$	17,500		$	15,000		$	15,000		$	15,000		$	10,000		$	6,500
Amortized cost		7,140			5,597			12,478			13,922			1,317			6,179
Fair value		2,560			260			2,980			3,947			359			1,440
Lowest credit rating (Moody’s)	Ca			Ca			Ca			Ca				C		Ca
Number of underlying Issuers		46			56			62			63			56			78
Percent of Issuers currently performing		76.1	%		76.8	%		77.4	%		54.0	%		58.9	%		65.4	%
Current deferral and default percent (3)		17.6	%		17.6	%		11.8	%		38.0	%		45.1	%		29.4	%
Expected future deferral and default percent (4)		20.4	%		17.7	%		15.9	%		30.3	%		32.0	%		16.1	%
Excess subordination percent (5)		0.0	%		0.0	%		1.9	%		0.0	%		0.0	%		2.4	%
Discount rate risk adjustment (6)		14.5	%		15.5	%		14.5	%		13.5	%		14.5	%		13.0	%
Significant unobservable assumptions, weighted average of Issuers:
Probability of prepayment		8.9	%		4.9	%		3.9	%		7.1	%		7.3	%		2.6	%
Probability of default		23.3	%		28.2	%		22.4	%		28.8	%		40.7	%		31.0	%
Loss given default		88.1	%		88.6	%		89.7	%		92.6	%		92.6	%		94.7	%
Probability of deferral cure		43.1	%		25.3	%		23.3	%		52.4	%		38.9	%		39.8	%

(1)	The Company has a seventh CDO, but no information is reported for that CDO since the security had an amortized cost and fair value of zero as of September 30, 2012.
(2)	Class refers to the Company’s tranche within the security. In a structured investment, a tranche is one of a number of related securities offered as part of the same transaction and relates to the order in which investors receive principal and interest payments (i.e., tranche B pays before tranche C).
(3)	Represents actual deferrals and defaults, net of recoveries, as a percent of the original collateral.
(4)	Represents expected future net deferrals and defaults, net of recoveries, as a percent of the remaining performing collateral.
(5)	Represents additional defaults that the CDO can absorb before the security experiences any credit impairment. The excess subordination percentage is calculated by dividing the amount of potential additional loss that can be absorbed (before the receipt of all expected future principal and interest payments is affected) by the total balance of performing collateral.
(6)	Cash flows are discounted at LIBOR plus this adjustment to reflect the higher risk inherent in these securities given the current market environment.

Most Issuers have the right to prepay the securities on the fifth anniversary of issuance and under other limited circumstances. To estimate prepayments, a credit analysis of each Issuer is performed to ascertain its ability and likelihood to fund a prepayment. If a prepayment occurs, the Company receives cash equal to the par value for the portion of the CDO associated with that Issuer. Since there are a number of Issuers underlying each CDO, prepayments by a small number of Issuers would not likely have a material impact on the fair value of the CDO.

The probability of future defaults is derived for each Issuer based on a credit analysis. The associated assumed loss given default is based on historical default and recovery information provided by a nationally recognized credit rating agency and is assumed to be 90% for banks, 85% for insurance companies, and 100% for Issuers that have already defaulted.

The likelihood that an Issuer who is currently deferring payment on the securities will pay all deferred amounts and remain current thereafter is based on an analysis of the Issuer’s asset quality, leverage ratios, and other measures of financial viability.

The impact of changes in these key inputs could result in a significantly higher or lower fair value measurement for each CDO. The timing of the default, the magnitude of the default, and the timing and magnitude of the cure probability are directly interrelated. Defaults that occur sooner and/or are greater than anticipated have a negative impact on the valuation. In addition, a high cure probability assumption has a positive effect on the fair value, and, if a cure event takes place sooner than anticipated, the impact on the valuation is also favorable.

The Company’s Treasury Department monitors the valuation results of each CDO on a quarterly basis, which includes an analysis of historical pricing trends for these types of securities, overall economic conditions (such as tracking LIBOR curves), and the performance of the Issuers’ industries. The Company’s Treasury Department also reviews market activity for the same or similar tranches of the CDOs, when available. Annually, it validates significant assumptions by reviewing detailed back-testing performed by the valuation firm.

Hedge Fund Investment– The Company’s hedge fund investment is classified in level 2 of the fair value hierarchy. The fair value is derived from monthly and annual financial statements provided by hedge fund management. The majority of the hedge fund’s investment portfolio is held in securities that are freely tradable and are listed on national securities exchanges.

Mortgage Servicing Rights

The Company services loans for others totaling $69.1 million as of September 30, 2012 and $78.6 million as of December 31, 2011. These loans are owned by third parties and are not included in the Consolidated Statements of Condition. The Company estimates the fair value of mortgage servicing rights by using a discounted cash flow analysis and classifies them in level 3 of the fair value hierarchy. Additional information regarding the Company’s mortgage servicing rights can be found in Note 22, “Fair Value,” in the Company’s 2011 10-K.

Derivative Assets and Derivative Liabilities

The interest rate swaps entered into by the Company are executed in the dealer market, and pricing is based on market quotes obtained from the counterparty. The market quotes were developed using market observable inputs, which primarily include LIBOR. Therefore, derivatives are classified in level 2 of the fair value hierarchy. For its derivative assets and liabilities, the Company also considers non-performance risk, including the likelihood of default by itself and its counterparties, when evaluating whether the market quotes from the counterparty are representative of an exit price.

Assets and Liabilities Required to be Measured at Fair Value on a Non-recurring Basis

The following table provides the hierarchy level and corresponding fair value for each class of assets and liabilities required to be measured at fair value on a non-recurring basis in the Consolidated Statements of Financial Condition.

Non-Recurring Fair Value Measurements

(Dollar amounts in thousands)

	September 30, 2012						December 31, 2011
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Collateral-dependent impaired loans	$	-	$	-	$	74,300	$	-	$	-	$	96,220
OREO (1)		-		-		45,216		-		-		57,430
Loans held-for-sale		-		-		90,011		-		-		4,200
Assets held-for-sale (2)		-		-		7,318		-		-		7,933

(1)	Includes covered OREO.
(2)	Included in premises, furniture, and equipment in the Consolidated Statements of Financial Condition.

Collateral-Dependent Impaired Loans

Certain collateral-dependent impaired loans are subject to fair value adjustments to reflect the difference between the carrying value of the loans and the value of the underlying collateral. The fair values of collateral-dependent impaired loans are primarily determined by current appraised values of the underlying collateral, net of estimated selling costs, which range from 0% - 6%. Circumstances may warrant an adjustment to the appraised value based on the age and/or type of appraisal, and these adjustments typically range from 0% - 20%. Generally, appraisals greater than twelve months old are adjusted to account for estimated declines in the real estate market until an updated appraisal can be obtained. In addition, the Company may adjust appraised values to account for differences in remediation strategies, such as adjusting a “stabilized” value to an “orderly liquidation” value. In certain cases, an internal valuation may be used when the underlying collateral is located in areas where comparable sales data is limited or unavailable. Accordingly, collateral-dependent impaired loans are classified in level 3 of the fair value hierarchy.

Collateral-dependent impaired loans for which the fair value is greater than the recorded investment are not measured at fair value in the Consolidated Statements of Financial Condition and are not included in this disclosure.

Other Real Estate Owned

OREO consists of properties acquired through foreclosure in partial or total satisfaction of certain loans. Upon initial transfer into OREO, properties are recorded at the lower of the recorded investment in the related loan(s) or the fair value, which represents the current appraised value of the properties, less estimated selling costs ranging from 0% - 6%. In certain circumstances, a current appraisal may not be available or the current appraised value may not represent an accurate measurement of the property’s fair value due to outdated market information or other factors. In these cases, the fair value is determined based on the lower of the (i) most recent appraised value, (ii) broker price opinion, (iii) current listing price, or (iv) signed sales contract. Given these valuation methods, OREO is classified in level 3 of the fair value hierarchy. Any write-downs of the carrying value of a property at the time of initial transfer into OREO are charged against the allowance for loan losses.

Subsequent to the initial transfer, periodic impairment analyses of OREO are performed, and new appraisals are obtained as necessary taking into consideration current real estate market trends and adjustments to listing prices. Any valuation adjustments of the properties subsequent to initial transfer, as well as gains or losses on disposition and income or expense from the operations of OREO, are recognized in the Company’s operating results in the period in which they occur.

Loans Held-for-Sale

During third quarter 2012, the Company identified certain performing and non-performing loans for accelerated disposition through wholesale loan transactions. The Company determined that the loans met the held-for-sale criteria and transferred them into the held-for-sale category at the lower of the recorded investment in the loan or the estimated fair value as determined by the estimated bid price of the potential sale.

As of December 31, 2011, loans held-for-sale consisted of one office loan and one other commercial real estate loan. The loans were  transferred into the held-for-sale category at the sales contract price. Accordingly, the loans held-for-sale were classified in level 3 of the fair value hierarchy.

Assets Held-for-Sale

As of September 30, 2012, two properties were classified as held-for-sale. For one office property, the Company entered into a final sales agreement in third quarter 2012, resulting in a $1.3 million valuation adjustment charged to noninterest expense. In addition, a former branch was transferred to held-for-sale in September 2012. Prior to the transfer, the Company entered into a definitive sales agreement, which is expected to close during fourth quarter  2012. Since the fair value of both properties is based on the lower of carrying value or sales contract price, they are classified in level 3 of the fair value hierarchy.

Fair Value Adjustments Recorded for

Assets Measured at Fair Value on a Non-Recurring Basis

(Dollar amounts in thousands)

	Quarters Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Charged to allowance for loan and covered loan losses:
Collateral-dependent impaired loans	$	43,414	$	26,137	$	79,828	$	62,406
Loans held-for-sale		80,260		1,596		82,647		1,796
Charged to earnings:
OREO		1,410		674		3,924		3,309
Assets held-for-sale		1,255		75		1,255		1,111

Goodwill and Other Intangible Assets

Goodwill and other intangible assets are subject to impairment testing, which requires a significant degree of management judgment and the use of significant unobservable inputs. Goodwill is tested at least annually for impairment or more often if events or circumstances between annual tests indicate that there may be impairment.

If the impairment testing results in impairment, the Company will classify goodwill and other intangible assets as a level 3 nonrecurring fair value measurement. Additional information regarding goodwill, other intangible assets, and impairment policies can be found in Note 1, “Summary of Significant Accounting Policies,” and Note 8, “Goodwill and Other Intangible Assets,” in the Company’s 2011 10-K.

Financial Instruments Not Required to be Measured at Fair Value

For certain financial instruments that are not required to be measured at fair value in the Consolidated Statements of Financial Condition, the Company must disclose the estimated fair values and the level within the fair value hierarchy as shown in the following table.

Financial Instruments Not Required to be Measured at Fair Value

(Dollar amounts in thousands)

	September 30, 2012										December 31, 2011
	Carrying Amount			Fair Value							Carrying Amount			Fair Value
				Level 1		Level 2		Level 3						Level 1		Level 2		Level 3
Assets:
Cash and due from banks	$	124,447		$	124,447	$	-	$	-		$	123,354		$	123,354	$	-	$	-
Interest-bearing deposits in other banks		393,927			-		393,927		-			518,176			-		518,176		-
Securities held-to-maturity:
Municipal securities		41,944			-		45,633		-			60,458			-		61,477		-
Loans, net of allowance for loan losses:
Commercial and industrial		1,610,169			-		-		1,614,183			1,458,446			-		-		1,460,972
Agricultural		259,787			-		-		258,274			243,776			-		-		243,035
Office, retail, and industrial		1,330,331			-		-		1,338,700			1,299,082			-		-		1,303,288
Multi-family		309,509			-		-		310,937			288,336			-		-		290,645
Residential construction		61,920			-		-		62,085			105,836			-		-		106,145
Commercial construction		136,509			-		-		136,791			144,909			-		-		145,305
Other commercial real estate		780,712			-		-		784,255			888,146			-		-		890,275
Home equity		397,506			-		-		385,692			416,194			-		-		394,404
1-4 family mortgages		292,908			-		-		305,045			201,099			-		-		206,115
Installment loans		38,994			-		-		39,423			42,289			-		-		43,030
Covered loans		216,610			-		-		247,593			260,502			-		-		288,021
Allowance for loan and covered loan losses		(102,445	)		-		-		(102,445	)		(119,462	)		-		-		(119,462	)
Loans, net of allowance for loan and covered loan losses		5,332,510			-		-		5,380,533			5,229,153			-		-		5,251,773
FDIC indemnification asset		47,191			-		-		28,113			65,609			-		-		37,173
Accrued interest receivable		30,688			-		-		30,688			29,826			-		-		29,826
Investment in BOLI		206,043			-		-		206,043			206,235			-		-		206,235
Liabilities:
Deposits
Demand deposits	$	1,773,928		$	-	$	1,773,928	$	-		$	1,593,773		$	-	$	1,593,773	$	-
Savings deposits		1,052,426			-		1,052,426		-			970,016			-		970,016		-
NOW accounts		1,148,612			-		1,148,612		-			1,057,887			-		1,057,887		-
Money market deposits		1,278,692			-		1,278,692		-			1,198,382			-		1,198,382		-
Time deposits		1,495,397			-		1,496,432		-			1,659,117			-		1,659,251		-
Total deposits		6,749,055			-		6,750,090		-			6,479,175			-		6,479,309		-
Borrowed funds		183,691			-		187,191		-			205,371			-		208,728		-
Senior and subordinated debt		231,171			235,738		-		-			252,153			237,393		-		-
Accrued interest payable		6,740			-		6,740		-			4,019			-		4,019		-
Standby letters of credit		697			-		697		-			668			-		668		-

Management uses various methodologies and assumptions as described below to determine the estimated fair values of the financial instruments in the table above. The fair value estimates are made at a discrete point in time based on relevant market information and consider management’s judgments regarding future expected economic conditions, loss experience, and specific risk characteristics of the financial instruments.

Short-Term Financial Assets and Liabilities - For financial instruments with a shorter-term or with no stated maturity, prevailing market rates, and limited credit risk, the carrying amounts approximate fair value. Those financial instruments include cash and due from banks, interest-bearing deposits in other banks, federal funds sold and other short-term investments, mortgages held-for-sale, accrued interest receivable, and accrued interest payable.

Securities Held-to-Maturity - The fair value of securities held-to-maturity is based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans, Net of Allowance for Loan Losses - The fair value of loans is estimated using the present value of the future cash flows of the remaining maturities of the loans. Prepayment assumptions that consider the Company’s historical experience and current economic and lending conditions were included. The discount rate was based on the LIBOR yield curve with adjustments for liquidity and credit risk.

Covered Loans - The fair value of the covered loan portfolio is determined by discounting the estimated cash flows at a market interest rate, which is derived from LIBOR swap rates over the life of these loans. The estimated cash flows are determined using the contractual terms of the covered loans, net of any projected credit losses. For valuation purposes, these loans are placed into groups with similar characteristics and risk factors, where appropriate. The timing and amount of credit losses for each group are estimated using historical default and loss experience, current collateral valuations, borrower credit scores, and internal risk ratings. For individually significant loans or credit relationships, the estimated fair value is determined by a specific loan level review utilizing appraised values for collateral and projections of the timing and amount of cash flows.

FDIC Indemnification Asset - The fair value of the FDIC indemnification asset is calculated by discounting the cash flows expected to be received from the FDIC. The future cash flows are estimated by multiplying expected losses on covered loans and covered OREO by the reimbursement rates set forth in the FDIC Agreements. Improvements in estimated cash flows on covered loans and covered OREO generally result in a corresponding decline in the indemnification asset, while reductions in expected reimbursements from the FDIC lead to an increase in the indemnification asset.

Investment in BOLI - The fair value of BOLI approximates the carrying amount as both are based on each policy’s respective cash surrender value (“CSV”), which is the amount the Company would receive upon liquidation of these investments. The CSV is derived from monthly reports provided by the managing brokers and is determined using the Company’s initial insurance premium and earnings of the underlying assets, offset by management fees.

Deposit Liabilities - The fair values disclosed for demand deposits, savings deposits, NOW accounts, and money market deposits are equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The fair value for fixed-rate time deposits was estimated using the future cash flows discounted based on the LIBOR yield curve, plus or minus the spread associated with current pricing.

Borrowed Funds - The fair value of repurchase agreements and FHLB advances is estimated by discounting the agreements based on maturities using the rates currently offered for repurchase agreements of similar remaining maturities. The carrying amounts of federal funds purchased, federal term auction facilities, and other borrowed funds approximate their fair value due to their short-term nature.

Senior and Subordinated Debt - The fair value of senior and subordinated debt was determined using quoted market prices.

Standby Letters of Credit- The fair value of standby letters of credit represents deferred fees arising from the related off-balance sheet financial instruments. These deferred fees approximate the fair value of these instruments and are based on several factors, including the remaining terms of the agreement and the credit standing of the customer.

Commitments - The Company estimated the fair value of commitments outstanding to be immaterial based on the following factors: (i) the limited interest rate exposure posed by the commitments outstanding due to their variable nature, (ii) the general short-term nature of the commitment periods entered into, (iii) termination clauses provided in the agreements, and (iv) the market rate of fees charged.