XML 157 R20.htm IDEA: XBRL DOCUMENT

Note 12 - Fair Value

6 Months Ended

Jun. 30, 2013

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

12. FAIR VALUE

Fair value represents the amount 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. Those assets and liabilities are presented below in the sections titled “Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis” and “Assets and Liabilities Required to be Measured at Fair Value on a Non-Recurring Basis.”

Other assets and liabilities are not required to be measured at fair value in the Consolidated Statements of Financial Condition, but must be disclosed at fair value. 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 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 provides 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. Those 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 fair value for assets and liabilities required to be measured at fair value on a recurring basis in the Consolidated Statements of Financial Condition by level in the fair value hierarchy.

Recurring Fair Value Measurements

(Dollar amounts in thousands)

		June 30, 2013												December 31, 2012
		Level 1				Level 2				Level 3				Level 1				Level 2				Level 3
Assets:
Trading securities:
Money market funds		$	1,291			$	-			$	-			$	1,554			$	-			$	-
Mutual funds			14,160				-				-				12,608				-				-
Total trading securities			15,451				-				-				14,162				-				-
Securities available-for-sale:
U.S. agency securities			-				503				-				-				508				-
CMOs			-				536,423				-				-				400,383				-
Other MBSs			-				126,772				-				-				122,900				-
Municipal securities			-				490,759				-				-				520,043				-
CDOs			-				-				14,917				-				-				12,129
Corporate debt securities			-				15,107				-				-				15,339				-
Hedge fund investment			-				2,741				-				-				1,616				-
Other equity securities			27,454				8,810				-				43				9,442				-
Total securities available-for-sale			27,454				1,181,115				14,917				43				1,070,231				12,129
Mortgage servicing rights ⁽¹⁾			-				-				1,352				-				-				985
Derivative assets ⁽¹⁾			-				241				-				-				-				-
Liabilities:
Derivative liabilities ⁽²⁾		$	-			$	1,971			$	-			$	-			$	2,270			$	-

⁽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

The Company’s trading securities consist of 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 in other noninterest income in the Condensed Consolidated Statements of Income.

Securities Available-for-Sale

Where quoted prices are available in an active market, securities are classified in level 1 of the fair value hierarchy. The Company’s available-for-sale 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.

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.

CDOs are classified in level 3 of the fair value hierarchy. 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 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. Information for each CDO, as well as the significant unobservable assumptions, is presented in the following table.

Characteristics of CDOs and Significant Unobservable Inputs
Used in the Valuation of CDOs as of June 30, 2013

(Dollar amounts in thousands)

		CDO Number
		1				2				3				4				5				6
Characteristics:
Class		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				5,598				12,377				13,922				1,317				6,178
Fair value			3,539				318				3,669				4,773				833				1,785
Lowest credit rating (Moody’s)		Ca				Ca				Ca				Ca				C				Ca
Number of underlying Issuers			44				55				60				61				56				78
Percent of Issuers currently performing			77.3	%			78.2	%			78.3	%			55.7	%			60.7	%			66.7	%
Current deferral and default percent ⁽¹⁾			15.8	%			16.1	%			11.3	%			34.8	%			41.9	%			28.7	%
Expected future deferral and default percent ⁽²⁾			17.6	%			17.9	%			15.2	%			25.2	%			27.4	%			14.7	%
Excess subordination percent ⁽³⁾			-				-				-				-				-				1.9	%
Discount rate risk adjustment ⁽⁴⁾			14.3	%			15.3	%			14.3	%			13.3	%			14.3	%			12.8	%
Significant unobservable inputs, weighted average of Issuers:
Probability of prepayment			15.2	%			7.6	%			5.6	%			5.9	%			7.2	%			4.4	%
Probability of default			21.7	%			26.2	%			21.7	%			27.6	%			39.3	%			30.6	%
Loss given default			88.0	%			90.2	%			89.4	%			92.8	%			92.6	%			95.3	%
Probability of deferral cure			38.1	%			32.6	%			26.3	%			53.0	%			38.1	%			43.6	%

⁽¹⁾

Represents actual deferrals and defaults, net of recoveries, as a percent of the original collateral.

⁽²⁾

Represents expected future net deferrals and defaults, net of recoveries, as a percent of the remaining performing collateral. 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.

⁽³⁾

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.

⁽⁴⁾

Cash flows are discounted at LIBOR plus this adjustment to reflect the higher risk inherent in these securities.

Most Issuers have the right to prepay its securities on the fifth anniversary of issuance and under other limited circumstances. To estimate prepayments, a credit analysis of each Issuer is performed to estimate 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.

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.

Management 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. Management also reviews market activity for the same or similar tranches of the CDOs, when available. Annually, management validates significant assumptions by reviewing detailed back-testing performed by the structured credit valuation firm.

A rollforward of the carrying value of CDOs for the quarters and six months ended June 30, 2013 and 2012 is presented in the following table.

Rollforward of the Carrying Value of CDOs

(Dollar amounts in thousands)

		Quarters Ended June 30,								Six Months Ended June 30,
		2013				2012				2013				2012
Beginning balance		$	12,924			$	13,685			$	12,129			$	13,394
Total income (loss):
Non-cash credit impairment included in earnings ⁽¹⁾			-				(1,405	)			-				(2,126	)
Included in other comprehensive income ⁽²⁾			1,993				(1,198	)			2,788				(186	)
Ending balance ⁽³⁾		$	14,917			$	11,082			$	14,917			$	11,082
Change in unrealized losses recognized in earnings related to securities still held at end of period		$	-			$	(1,405	)		$	-			$	(2,126	)

⁽¹⁾ Included in net securities gains (losses) 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 (losses) in the Consolidated Statements of Comprehensive Income.

⁽³⁾ There were no purchases, issuances, or settlements of CDOs during the periods presented. One CDO with a carrying value of zero was sold during the quarter ended June 30, 2013, resulting in a gain of $101,000.

Mortgage Servicing Rights

The Company services loans for others totaling $177.7 million as of June 30, 2013 and $109.7 million as of December 31, 2012. 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 2012 10-K.

Derivative Assets and Derivative Liabilities

The Company enters into interest rate swaps that 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. The Company also enters into derivative transactions with customers and simultaneously enters into an offsetting interest rate derivative transaction with a third party, which are valued using market consensus prices.

Pension Plan Assets

Although pension plan assets are not consolidated in the Company’s Consolidated Statements of Financial Condition, the fair value of pension plan assets is required to be measured at fair value on an annual basis. Additionally, pension plan assets were remeasured as of June 30, 2013 as a result of the amendment to freeze the benefit accruals under the Pension Plan. Refer to Note 9, “Employee Benefit Plans” for additional discussion regarding this change. The fair value of pension plan assets is presented in the following table by level in the fair value hierarchy.

Fair Value Measurements for Pension Plan Assets

(Dollar amounts in thousands)

		June 30, 2013												December 31, 2012
		Level 1				Level 2				Total				Level 1				Level 2				Total
Pension plan assets:
Mutual funds ⁽¹⁾		$	21,445			$	-			$	21,445			$	16,009			$	-			$	16,009
U.S. government andgovernment agency securities			5,626				6,940				12,566				6,510				7,295				13,805
Corporate bonds			-				5,794				5,794				-				8,653				8,653
Common stocks			14,889				-				14,889				15,001				-				15,001
Common trust funds			-				9,568				9,568				-				10,033				10,033
Total pension plan assets		$	41,960			$	22,302			$	64,262			$	37,520			$	25,981			$	63,501

⁽¹⁾ Includes mutual funds, money market funds, cash, cash equivalents, and accrued interest.

Mutual funds, U.S. government agency securities, and common stocks are based on quoted market prices in active exchange markets and classified in level 1 of the fair value hierarchy. Corporate bonds and U.S. Treasury securities are valued at quoted prices from independent sources that are based on observable market trades or observable prices for similar bonds where a price for the identical bond is not observable and, therefore, are classified as level 2 of the fair value hierarchy. Common trust funds are valued at quoted redemption values on the last business day of the Plan’s year end and are classified as level 2 in the fair value hierarchy.

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

The following table provides the 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 by level in the fair value hierarchy.

Non-Recurring Fair Value Measurements

(Dollar amounts in thousands)

		June 30, 2013												December 31, 2012
		Level 1				Level 2				Level 3				Level 1				Level 2				Level 3
Collateral-dependent impaired loans		$	-			$	-			$	18,164			$	-			$	-			$	61,454
OREO ⁽¹⁾			-				-				7,468				-				-				11,956
Loans held-for-sale ⁽²⁾			-				-				1,589				-				-				-
Assets held-for-sale ⁽³⁾			-				-				1,027				-				-				1,668

⁽¹⁾ Includes OREO and covered OREO with fair value adjustments subsequent to initial transfer.

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

⁽³⁾ 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. Based on the age and/or type, appraisals may be adjusted in the range of 0% - 20%. 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.

OREO

The fair value of OREO is measured using the current appraised value of the properties. In certain circumstances, a current appraisal may not be available or 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 valuation adjustments for reductions in the fair value of OREO are recognized in the Company’s operating results in the period in which they occur.

Loans Held-for-Sale

As of June 30, 2013 loans held-for-sale consisted of multiple commercial and 1-4 family mortgage loans. The loans were transferred into the held-for-sale category at the sales contract price and classified as level 3 in the fair value hierarchy. The Company had no loans classified as held-for-sale as of June 30, 2012.

Assets Held-for-Sale

As of June 30, 2013, assets held-for-sale consisted of two former bank branches that are no longer in operation, which were transferred into the held-for-sale category at their recorded investment as an approximation of fair value. Therefore, they are classified in level 3 of the fair value hierarchy.

Valuation Adjustments Recorded for

Assets Measured at Fair Value on a Non-Recurring Basis

(Dollar amounts in thousands)

		Quarters Ended June 30,								Six Months Ended June 30,
		2013				2012				2013				2012
Charged to allowance for loan and covered loan losses:
Collateral-dependent impaired loans		$	4,426			$	17,674			$	11,208			$	36,414
Loans held-for-sale			1,560				-				1,560				3,135
Charged to earnings:
OREO			19				1,824				586				2,514

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)

						June 30, 2013								December 31, 2012
		Fair Value Hierarchy Level				Carrying Amount				Fair Value				Carrying Amount				Fair Value
Assets:
Cash and due from banks			1			$	130,992			$	130,992			$	149,420			$	149,420
Interest-bearing deposits in other banks			2				653,113				653,113				566,846				566,846
Securities held-to-maturity			2				30,373				32,071				34,295				36,023
FHLB and Federal Reserve Bank stock			2				35,161				35,161				47,232				47,232
Net loans			3				5,365,316				5,312,948				5,288,124				5,305,286
FDIC indemnification asset			3				23,158				15,802				37,051				27,040
Accrued interest receivable			3				27,626				27,626				27,535				27,535
Investment in BOLI			3				207,081				207,081				206,405				206,405
Other interest earning assets			3				8,336				8,904				9,923				10,640
Liabilities:
Deposits			2			$	6,866,747			$	6,864,899			$	6,672,255			$	6,674,510
Borrowed funds			2				196,603				198,184				185,984				189,074
Senior and subordinated debt			1				214,843				226,335				214,779				216,686
Accrued interest payable			2				2,623				2,623				2,884				2,884
Standby letters of credit			2				559				559				740				740

Management uses various methodologies and assumptions 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, and other short-term investments, 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.

FHLB and Federal Reserve Bank Stock - The carrying amounts approximate fair value.

Net Loans - Net loans includes loans, covered loans, and the allowance for loans and covered 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. The primary impact of credit risk on the fair value of the loan portfolio was accommodated through the use of the allowance for loan and covered loan losses, which is believed to represent the current fair value of estimated inherent losses for purposes of the fair value calculation.

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 those 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 in the FDIC Agreements.

Investment in BOLI - The fair value of BOLI approximates the carrying amount as both are based on each policy’s respective 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.

Other Interest-Earning Assets - The fair value of other interest-earning assets is estimated using the present value of the future cash flows of the remaining maturities of the assets.

Deposits - 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 FHLB advances is estimated by discounting the agreements based on maturities using the rates currently offered for repurchase agreements of similar remaining maturities adjusted for prepayment penalties that would be incurred if the borrowings were paid off on the measurement date. The carrying amounts of federal funds purchased, repurchase agreements, 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 agreements and the credit standing of the customers.

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

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References+ Details