Note 22 - Fair Value

12 Months Ended

Dec. 31, 2011

Fair Value Disclosures [Text Block]

22.   FAIR VALUE

The Company measures, monitors, and discloses certain of its assets and liabilities at fair value in accordance with fair value accounting guidance. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Fair value is used on a recurring basis to account for trading securities, securities available-for-sale, mortgage servicing rights, derivative assets, and derivative liabilities. It is also used on an annual basis to disclose the fair value of pension plan assets. In addition, fair value is used on a non-recurring basis (i) to apply lower-of-cost-or-market accounting to OREO, loans held-for-sale (excluding mortgage loans held-for-sale), and assets held-for-sale; (ii) to evaluate assets or liabilities for impairment, including collateral-dependent impaired loans, goodwill, and other intangible assets; and (iii) for disclosure purposes.

Depending upon the nature of the asset or liability, the Company uses various valuation techniques and assumptions when estimating fair value. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. GAAP establishes a fair value hierarchy that prioritizes the inputs used to measure fair value into three levels. The three levels of the fair value hierarchy are 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 for substantially the full term of the asset or liability.

·   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.

The categorization of an asset or liability within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Transfers between levels of the fair value hierarchy are recognized on the actual date of circumstance that resulted in the transfer. There were no transfers of assets or liabilities between levels of the fair value hierarchy during 2010 or 2011. In 2009, there was a transfer of certain mortgage-backed securities from level 3 to level 2. The transfer out of level 3 represents securities that were manually priced using broker quotes (a level 3 input) at the beginning of the year, but valued by an external pricing service using level 2 inputs at the end of the year.

Assets and Liabilities Measured at Fair Value

The following table provides the hierarchy level and fair value for each class of assets and liabilities measured at fair value.

Fair Value Measurements

(Dollar amounts in thousands)

	December 31, 2011
	Level 1			Level 2			Level 3		Total
Assets and liabilities measured at fair value on a recurring basis
Assets:
Trading securities:
Money market funds		$	1,565		$	-	$	-	$	1,565
Mutual funds			12,904			-		-		12,904
Total trading securities			14,469			-		-		14,469
Securities available-for-sale:
U.S. agency securities			-			5,035		-		5,035
CMOs			-			384,104		-		384,104
Other residential mortgage-backed securities			-			87,691		-		87,691
Municipal securities			-			490,071		-		490,071
CDOs			-			-		13,394		13,394
Corporate debt securities			-			30,014		-		30,014
Hedge fund investment			-			1,616		-		1,616
Other equity securities			41			1,040		-		1,081
Total securities available-for-sale			41			999,571		13,394		1,013,006
Mortgage servicing rights (1)			-			-		929		929
Total assets		$	14,510		$	999,571	$	14,323	$	1,028,404
Liabilities:
Derivative liabilities (1)		$	-		$	2,459	$	-	$	2,459
Assets measured at fair value on an annual basis
Pension plan assets:
Mutual funds (2)		$	17,970		$	-	$	-	$	17,970
U.S. government and government agency securities			5,954			7,029		-		12,983
Corporate bonds			-			5,954		-		5,954
Common stocks			16,537			-		-		16,537
Common trust funds			-			9,546		-		9,546
Total pension plan assets		$	40,461		$	22,529	$	-	$	62,990
Assets measured at fair value on a non-recurring basis
Collateral-dependent impaired loans (3)		$	-		$	-	$	96,220	$	96,220
OREO (4)			-			-		57,430		57,430
Loans held-for-sale (5)			-			-		4,200		4,200
Assets held-for-sale (6)			-			-		7,933		7,933
Total assets		$	-		$	-	$	165,783	$	165,783

Refer to the following page for footnotes.

	December 31, 2010
	Level 1			Level 2			Level 3		Total
Assets and liabilities measured at fair value on a recurring basis
Assets:
Trading securities:
Money market funds		$	1,196		$	-	$	-	$	1,196
Mutual funds			14,086			-		-		14,086
Total trading securities			15,282			-		-		15,282
Securities available-for-sale:
U.S. agency securities			-			17,886		-		17,886
CMOs			-			379,589		-		379,589
Other residential mortgage-backed securities			-			106,451		-		106,451
Municipal securities			-			503,991		-		503,991
CDOs			-			-		14,858		14,858
Corporate debt securities			-			32,345		-		32,345
Hedge fund investment			-			1,683		-		1,683
Other equity securities			38			961		-		999
Total securities available-for-sale			38			1,042,906		14,858		1,057,802
Mortgage servicing rights (1)			-			-		942		942
Total assets		$	15,320		$	1,042,906	$	15,800	$	1,074,026
Liabilities:
Derivative liabilities (1)		$	-		$	1,833	$	-	$	1,833
Assets measured at fair value on an annual basis
Pension plan assets:
Mutual funds (2)		$	8,995		$	-	$	-	$	8,995
U.S. government and government agency securities			2,670			4,950		-		7,620
Corporate bonds			-			10,500		-		10,500
Common stocks			16,155			-		-		16,155
Common trust funds			-			11,443		-		11,443
Total pension plan assets		$	27,820		$	26,893	$	-	$	54,713
Assets measured at fair value on a non-recurring basis
Collateral-dependent impaired loans (3)		$	-		$	-	$	125,258	$	125,258
OREO (4)			-			-		53,439		53,439
Total assets		$	-		$	-	$	178,697	$	178,697

(1)	Mortgage servicing rights are included in other assets, and derivative liabilities are included in other liabilities in the Consolidated Statements of Financial Condition.
(2)	Includes mutual funds, money market funds, cash, cash equivalents, and accrued interest.
(3)	Represents the carrying value of loans for which adjustments are based on the appraised or market-quoted value of the collateral, net of selling costs. Collateral-dependent loans for which no fair value adjustments were necessary during the year ended December 31, 2011 are not included.
(4)	Represents the estimated fair value, net of selling costs, based on appraised value and includes covered OREO.
(5)	Included in other assets in the Consolidated Statements of Financial Condition.
(6)	Included in premises, furniture, and equipment in the Consolidated Statements of Financial Condition.

Valuation Methodology

The following describes the valuation methodologies used by the Company for assets and liabilities measured at fair value.

Trading Securities – Trading securities represent diversified investment securities held in a rabbi 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 classified in level 1 of the fair value hierarchy. All trading securities are reported at fair value with changes in the fair value included in other noninterest income.

Securities Available-for-Sale – Securities available-for-sale are primarily fixed income instruments that are not quoted on an exchange, but may be traded in active markets. The fair value of these securities is based on quoted prices in active markets obtained from external pricing services or dealer market participants and is classified in level 2 of the fair value hierarchy. The Company has evaluated the methodologies used by its external pricing services to develop the fair values to determine whether such valuations are representative of an exit price in the Company’s principal markets. Examples of such securities measured at fair value are U.S. agency securities, municipal bonds, CMOs, and other mortgage-backed securities.

The following table provides inputs used in the evaluation of the Company’s CMOs and other mortgage-backed securities.

	Collateralized Mortgage Obligations			Other Mortgage- Backed Securities
Weighted-average coupon rate		4.5	%		1.8	%
Weighted-average maturity, in years		2.2			3.9
Information on underlying residential mortgages:
Origination dates	2000 to 2010			2000 to 2010
Weighted-average coupon rate		5.7	%		5.8	%
Weighted-average maturity, in years		8.3			9.2

The Company’s hedge fund investment is also 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.

In certain cases, where there is limited market activity or less transparent inputs to the valuation, securities are classified in level 3 of the fair value hierarchy. For instance, in the valuation of CDOs, the determination of fair value requires benchmarking to similar instruments or analyzing default and recovery rates. Due to the illiquidity in the secondary market for the Company’s CDOs, the Company estimates the value of these securities using discounted cash flow analyses with the assistance of a structured credit valuation firm. The valuation for each of the CDOs relies on historical financial data for the obligors of the underlying collateral. The valuation firm performs a credit analysis of each of the entities comprising the collateral underlying each CDO in order to estimate the entities’ likelihood of default on their trust-preferred obligations. Cash flows are modeled according to the contractual terms of the CDO, discounted to their present values, and are used to derive the estimated fair value of the individual CDO. The discount rates used in the discounted cash flow analyses range from LIBOR plus 1,300 to LIBOR plus 1,500 basis points depending upon the specific CDO and reflects the higher risk inherent in these securities given the current market environment. Changes in the assumptions used to value these securities could result in a significantly higher or lower fair value measurement.

Carrying Value of Level 3 Securities Available-for-Sale

(Dollar amounts in thousands)

	Years Ended December 31,
	2011			2010			2009
	Collateralized Debt Obligations			Collateralized Debt Obligations			Mortgage- Backed Securities			Collateralized Debt Obligations			Total
Balance at beginning of year	$	14,858		$	11,728		$	16,632		$	42,086		$	58,718
Total income (loss):
Included in earnings (1)		(936	)		(4,664	)		-			(24,509	)		(24,509	)
Included in other comprehensive income (loss)		(528	)		7,794			566			(5,834	)		(5,268	)
Principal paydowns		-			-			(1,590	)		(22	)		(1,612	)
Accretion		-			-			(2	)		7			5
Transfer out of Level 3 (2)		-			-			(15,606	)		-			(15,606	)
Balance at end of year	$	13,394		$	14,858		$	-		$	11,728		$	11,728
Change in unrealized losses recognized in earnings relating to securities still held at end of period	$	(936	)	$	(4,664	)	$	-		$	(24,509	)	$	(24,509	)

(1)	Included in securities gains, net in the Consolidated Statements of Income and related to securities still held at the end of the year.
(2)	The transfer out of level 3 represents securities that were manually priced using broker quotes (a level 3 input) at the beginning of the year, but valued by an external pricing service using level 2 inputs at the end of the year.

Mortgage Servicing Rights– In 2009, the Company securitized $25.7 million of 1-4 family mortgages, converting the loans into mortgage-backed securities issued through the Federal National Mortgage Association. The Company retained servicing responsibilities for the mortgages supporting these securities and collects servicing fees equal to a percentage of the outstanding principal balance of the loans being serviced. The Company also services loans from prior securitizations and loans for which the servicing was acquired as part of a 2006 bank acquisition. As of December 31, 2011, the Company had no recourse for credit losses on loans being serviced.

The Company records its mortgage servicing rights at fair value and includes them in other assets in the Consolidated Statements of Financial Condition. Mortgage servicing rights do not trade in an active market with readily observable prices. Accordingly, the Company determines the fair value of mortgage servicing rights by estimating the present value of the future cash flows associated with the mortgage loans being serviced. Key economic assumptions used in measuring the fair value of mortgage servicing rights at December 31, 2011 included prepayment speeds, maturities, and discount rates. While market-based data is used to determine the assumptions, the Company incorporates its own estimates of the assumptions market participants would use in determining the fair value of mortgage servicing rights, which results in a level 3 classification in the fair value hierarchy Changes in the assumptions used to value the mortgage servicing rights could result in a higher or lower fair value measurement.

Carrying Value of Mortgage Servicing Rights

(Dollar amounts in thousands)

	Years Ended December 31,
	2011			2010			2009
Balance at beginning of year	$	942		$	1,238		$	1,461
New servicing assets		-			-			237
Total gains (losses) included in earnings (1):
Due to changes in valuation inputs and assumptions (2)		179			(28	)		(145	)
Other changes in fair value (3)		(192	)		(268	)		(315	)
Balance at end of year	$	929		$	942		$	1,238
Key economic assumptions used in measuring fair value, at end of year:
Weighted-average prepayment speed		12.4	%		17.3	%		20.1	%
Weighted-average discount rate		11.6	%		11.5	%		11.4	%
Weighted-average maturity, in months		199.7			202.2			210.7
Contractual servicing fees earned during the year (1)	$	235		$	301		$	324
Total amount of loans being serviced for the benefit of others, at end of year (4)	$	78,594		$	114,720		$	123,842

(1)	Included in other service charges, commissions, and fees in the Consolidated Statements of Income and relate to assets still held at the end of the year.
(2)	Principally reflects changes in prepayment speed assumptions.
(3)	Primarily represents changes in expected cash flows over time due to payoffs and paydowns.
(4)	These loans are serviced for and owned by third parties and are not included in the Company’s Consolidated Statements of Financial Condition.

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 that transacted the derivative contract. The market quotes were developed by the counterparty using market observable inputs, which primarily include LIBOR for swaps. 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 has a policy of executing derivative transactions only with counterparties above a certain credit rating. Credit risk is also mitigated through the pledging of collateral when certain thresholds are reached.

Pension Plan Assets – Mutual funds, money market funds, 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, U.S. Treasury securities, and U.S. government agency 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.

Collateral-Dependent Impaired Loans –The carrying value of impaired loans is disclosed in Note 6, “Past Due Loans, Allowance for Credit Losses, and Impaired Loans.” The Company does not record loans at fair value on a recurring basis. However, from time to time, fair value adjustments are recorded in the form of specific reserves or charge-offs on these loans to reflect (i) specific reserves or partial charge-offs that are based on the current appraised value of the underlying collateral or (ii) the full charge-off of the loan’s carrying value. The fair value adjustments are primarily determined by current appraised values of underlying collateral, net of estimated selling costs. For collateral-dependent impaired loans, new appraisals are generally required every annually for construction loans and every two years for all other commercial real estate loans. In limited circumstances, such as cases of outdated appraisals, the appraised values may be reduced by a certain percentage depending upon the specific facts and circumstances, or an internal valuation may be used when the underlying collateral is located in areas where comparable sales data is limited, outdated, or unavailable. Accordingly, collateral-dependent impaired loans are classified in level 3 of the fair value hierarchy.

Other Real Estate Owned – OREO consists of properties acquired through foreclosure in partial or total satisfaction of certain loans. Upon initial transfer into OREO, a current appraisal is required (generally less than six months old for residential and commercial land and less than one year old for all other commercial property). Properties are recorded at the lower of the recorded investment in the loans for which the properties previously served as collateral or the fair value, which represents the current appraised value of the properties, less estimated selling costs. Fair value assumes an orderly disposition except where a specific disposition strategy is expected, which would require the use of other appraised values, such as forced liquidation or as-completed/stabilized values.

In certain circumstances, the current appraised value may not represent an accurate measurement of the property’s current fair value due to imprecision, subjectivity, outdated market information, or other factors. In these cases, the fair value is determined based on the lower of the (i) current appraised value, (ii) internal valuation, (iii) current listing price, or (iv) signed sales contract. Any appraisal that is greater than twelve months old is adjusted to account for estimated declines in the real estate market until an updated appraisal can be obtained. Given these valuation methods, OREO is classified in level 3 of the fair value hierarchy. Any write-downs in the carrying value of a property at the time of initial transfer into OREO are charged against the allowance for credit losses.

Subsequent to the initial transfer, periodic impairment analyses of OREO are performed, and new appraisals are obtained annually unless circumstances warrant an earlier appraisal. Periodic impairment analyses take into consideration current real estate market trends and adjustments to listing prices. Any write-downs 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 operating results in the period in which they occur.

Loans Held-for-Sale– The loans held-for-sale consist of one office, retail, and industrial loan and one other commercial real estate loan. During the last half of 2011, 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, less costs to sell. The fair value was determined by the sales contract price. Accordingly, the loans held-for-sale are classified in level 3 of the fair value hierarchy.

Assets Held-for-Sale – In second quarter 2011, the Company entered into an agreement to sell property held for expansion and classified it as held-for-sale. Based on the sales contract price, the Company wrote-down the book value of the property and classified it in level 3 of the fair value hierarchy. The sale of the property is expected to close in early 2012.

Fair Value Measurements Recorded for

Assets Measured at Fair Value on a Non-Recurring Basis

(Dollar amounts in thousands)

	Year Ended December 31, 2011
	Charged to Allowance for Loan Losses		Charged to Earnings
Collateral-dependent impaired loans	$	88,017	$	-
OREO		-		3,785
Loans held-for-sale		2,191		-
Assets held-for-sale		-		671

Goodwill and Other Intangible Assets – Goodwill represents the excess of purchase price over the fair value of net assets acquired using the purchase method of accounting. Other intangible assets represent purchased assets that also lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability.

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

As discussed in Note 8, “Goodwill and Other Intangible Assets,” the annual impairment tests indicated no impairment existed.

If the testing had resulted in impairment, the Company would have classified goodwill and other intangible assets subjected to nonrecurring fair value adjustments 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.”

Fair Value Disclosure of Other Assets and Liabilities

GAAP requires disclosure of the estimated fair values of certain financial instruments, both assets and liabilities, on and off-balance sheet, for which it is practical to estimate the fair value. Since the estimated fair values provided herein exclude disclosure of the fair value of certain other financial instruments and all non-financial instruments, any aggregation of the estimated fair value amounts presented would not represent the underlying value of the Company. Examples of non-financial instruments having significant value include the future earnings potential of significant customer relationships and the value of the Company’s wealth management operations and other fee-generating businesses. In addition, other significant assets including premises, furniture, and equipment and goodwill and other intangible assets are not considered financial instruments and, therefore, have not been valued.

Various methodologies and assumptions have been utilized in management’s determination of the estimated fair value of the Company’s financial instruments, which are detailed below. The fair value estimates are made at a discrete point in time based on relevant market information. Since no market exists for a significant portion of these financial instruments, fair value estimates are based on judgments regarding future expected economic conditions, loss experience, and risk characteristics of the financial instruments. These estimates are subjective, involve uncertainties, and cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

In addition to the valuation methodology explained above for financial instruments recorded at fair value, the following methods and assumptions were used in estimating the fair value of financial instruments that are carried at cost in the Consolidated Statements of Financial Condition.

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 present value techniques by discounting the future cash flows of the remaining maturities of the loans. Prepayment assumptions were considered based on historical experience and current economic and lending conditions. The discount rate was based on the LIBOR yield curve with rate adjustments for liquidity and credit risk.

Covered Loans (included in Loans, net of Allowance for Loan Losses) – The fair value of the covered loan portfolio is determined by discounting the expected cash flows at a market interest rate based on certain input assumptions. The market interest rate (discount rate) is derived from LIBOR swap rates over the expected weighted-average life of the loans. The expected cash flows are based on contractual terms and default timing and loss given default assumptions.

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. These cash flows are estimated by multiplying expected losses by the reimbursement rates set forth in the FDIC Agreements.

Investment in Bank-Owned Life Insurance – The fair value of investments in bank-owned life insurance is based on each policy’s respective CSV.

Deposit Liabilities – The fair values disclosed for demand deposits, savings deposits, NOW accounts, and money market deposits are, by definition, 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 present value techniques by discounting the future cash flows 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 available market quotes.

Standby Letters of Credit – The fair value of standby letters of credit represent 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 has 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.

Financial Instruments

(Dollar amounts in thousands)

	December 31,
	2011				2010
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial Assets:
Cash and due from banks	$	123,354	$	123,354	$	102,495	$	102,495
Interest-bearing deposits in other banks		518,176		518,176		483,281		483,281
Loans held-for-sale		4,200		4,200		236		236
Trading securities		14,469		14,469		15,282		15,282
Securities available-for-sale		1,013,006		1,013,006		1,057,802		1,057,802
Securities held-to-maturity		60,458		61,477		81,320		82,525
Loans, net of allowance for loan losses		5,229,153		5,224,254		5,329,717		5,323,830
FDIC indemnification asset		65,609		65,609		95,899		95,899
Accrued interest receivable		29,826		29,826		29,953		29,953
Investment in bank-owned life insurance		206,235		206,235		197,644		197,644
Financial Liabilities:
Deposits	$	6,479,175	$	6,479,309	$	6,511,476	$	6,512,626
Borrowed funds		205,371		208,728		303,974		306,703
Senior and subordinated debt		252,153		237,393		137,744		122,261
Accrued interest payable		4,019		4,019		4,557		4,557
Derivative liabilities		2,459		2,459		1,833		1,833
Standby letters of credit		668		668		696		696