Note 11 - Fair Value Measurements

6 Months Ended

Jun. 30, 2013

Disclosure Text Block [Abstract]

Fair Value, Measurement Inputs, Disclosure [Text Block]

11. Fair Value Measurements

The Company adopted ASC Topic 820 on January 1, 2008, and determined the fair values of our financial instruments based on the following:

● Level 1 - Quoted prices in active markets for identical assets or liabilities.

● Level 2 - Observable prices in active markets for similar assets or liabilities; prices for identical or similar assets or liabilities in markets that are not active; directly observable market inputs for substantially the full term of the asset and liability; market inputs that are not directly observable but are derived from or corroborated by observable market data.

● Level 3 – Unobservable inputs based on the Company’s own judgments about the assumptions that a market participant would use.

The Company uses the following methodologies to measure the fair value of its financial assets and liabilities on a recurring basis:

Securities Available for Sale. For certain actively traded agency preferred stocks, mutual funds, and U.S. Treasury securities, the Company measures the fair value based on quoted market prices in active exchange markets at the reporting date, a Level 1 measurement. The Company also measures securities by using quoted market prices for similar securities or dealer quotes, a Level 2 measurement. This category generally includes U.S. Government agency securities, state and municipal securities, mortgage-backed securities (“MBS”), commercial MBS, collateralized mortgage obligations, asset-backed securities, corporate bonds and trust preferred securities.

Trading Securities. The Company measures the fair value of trading securities based on quoted market prices in active exchange markets at the reporting date, a Level 1 measurement. The Company also measures the fair value for other trading securities based on quoted market prices for similar securities or dealer quotes, a Level 2 measurement.

Warrants. The Company measures the fair value of warrants based on unobservable inputs based on assumption and management judgment, a Level 3 measurement.

Currency Option and Foreign Exchange Contracts. The Company measures the fair value of currency option and foreign exchange contracts based on dealer quotes on a recurring basis, a Level 2 measurement.

Interest Rate Swaps. Fair value of interest rate swaps is derived from observable market prices for similar assets on a recurring basis, a Level 2 measurement.

The valuation techniques for the assets and liabilities valued on a nonrecurring basis are as follows:

Impaired Loans. The Company does not record loans at fair value on a recurring basis. However, from time to time, nonrecurring fair value adjustments to collateral dependent impaired loans are recorded based on either the current appraised value of the collateral, a Level 2 measurement, or management’s judgment and estimation of value reported on older appraisals that are then adjusted based on recent market trends, a Level 3 measurement.

Goodwill. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350. The two-step impairment testing process, if needed, begins by assigning net assets and goodwill to the three reporting units— Commercial Lending, Retail Banking, and East Coast Operations.  The Company then completes “step one” of the impairment test by comparing the fair value of each reporting unit (as determined based on the discussion below) with the recorded book value (or “carrying amount”) of its net assets, with goodwill included in the computation of the carrying amount.  If the fair value of a reporting unit exceeds its carrying amount, goodwill of that reporting unit is not considered impaired, and “step two” of the impairment test is not necessary.  If the carrying amount of a reporting unit exceeds its fair value, step two of the impairment test is performed to determine the amount of impairment.  Step two of the impairment test compares the carrying amount of the reporting unit’s goodwill to the “implied fair value” of that goodwill.  The implied fair value of goodwill is computed by assuming that all assets and liabilities of the reporting unit would be adjusted to the current fair value, with the offset as an adjustment to goodwill.  This adjusted goodwill balance is the implied fair value used in step two.  An impairment charge is recognized for the amount by which the carrying amount of goodwill exceeds its implied fair value. In connection with the determination of fair value, certain data and information is utilized, including earnings forecasts at the reporting unit level for the next four years.  Other key assumptions include terminal values based on future growth rates and discount rates for valuing the cash flows, which have inputs for the risk-free rate, market risk premium and adjustments to reflect inherent risk and required market returns. Because of the significance of unobservable inputs in the valuation of goodwill impairment, goodwill subject to nonrecurring fair value adjustments is classified as a Level 3 measurement.

Core Deposit Intangibles. Core deposit intangibles is initially recorded at fair value based on a valuation of the core deposits acquired and is amortized over its estimated useful life to its residual value in proportion to the economic benefits consumed. The Company assesses the recoverability of this intangible asset on a nonrecurring basis using the core deposits remaining at the assessment date and the fair value of cash flows expected to be generated from the core deposits, a Level 3 measurement.

Other Real Estate Owned. Real estate acquired in the settlement of loans is initially recorded at fair value based on the appraised value of the property on the date of transfer, less estimated costs to sell, a Level 2 measurement. From time to time, nonrecurring fair value adjustments are made to other real estate owned based on the current updated appraised value of the property, also a Level 2 measurement, or management’s judgment and estimation of value reported on older appraisals that are then adjusted based on recent market trends, a Level 3 measurement.

Investments in Venture Capital. The Company periodically reviews its investments in venture capital for other-than-temporary impairment on a nonrecurring basis. Investments in venture capital were written down to their fair value based on available financial reports from venture capital partnerships and management’s judgment and estimation, a Level 3 measurement.

Equity Investments. The Company records equity investments at fair value on a nonrecurring basis based on quoted market prices in active exchange markets at the reporting date, a Level 1 measurement.

The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of June 30, 2013, and December 31, 2012:

June 30, 2013	Fair Value Measurements Using						Total at
	Level 1		Level 2		Level 3		Fair Value
	(In thousands)
Assets
Securities available-for-sale
U.S. Treasury securities	$	410,035	$	-	$	-	$	410,035
Mortgage-backed securities		-		1,405,348		-		1,405,348
Collateralized mortgage obligations		-		7,668		-		7,668
Asset-backed securities		-		133		-		133
Corporate debt securities		-		182,826		-		182,826
Mutual funds		5,839		-		-		5,839
Preferred stock of government sponsored entities		-		6,456		-		6,456
Total securities available-for-sale		415,874		1,602,431		-		2,018,305
Trading securities		-		4,816		-		4,816
Warrants		-		-		72		72
Option contracts		-		55		-		55
Foreign exchange contracts		-		3,177		-		3,177
Total assets	$	415,874	$	1,610,479	$	72	$	2,026,425
Liabilities
Foreign exchange contracts	$	-	$	6,233	$	-	$	6,233
Total liabilities	$	-	$	6,233	$	-	$	6,233

December 31, 2012	Fair Value Measurements Using						Total at
	Level 1		Level 2		Level 3		Fair Value
	(In thousands)
Assets
Securities available-for-sale
U.S. Treasury securities	$	509,971	$	-	$	-	$	509,971
Mortgage-backed securities		-		416,694		-		416,694
Collateralized mortgage obligations		-		10,168		-		10,168
Asset-backed securities		-		141		-		141
Corporate debt securities		-		335,977		-		335,977
Mutual funds		6,079		-		-		6,079
Preferred stock of government sponsored entities		-		2,335		-		2,335
Trust preferred securities		10,115		-		-		10,115
Total securities available-for-sale		526,165		765,315		-		1,291,480
Trading securities		-		4,703		-		4,703
Warrants		-		-		104		104
Foreign exchange contracts		-		2,924		-		2,924
Total assets	$	526,165	$	772,942	$	104	$	1,299,211
Liabilities
Option contracts	$	-	$	2	$	-	$	2
Foreign exchange contracts		-		1,586		-		1,586
Total liabilities	$	-	$	1,588	$	-	$	1,588

The Company measured the fair value of its warrants on a recurring basis using significant unobservable inputs. The fair value of warrants was $72,000 at June 30, 2013, compared to $104,000 at December 31, 2012. The fair value adjustment of warrants was included in other operating income in the second quarter of 2013.

For financial assets measured at fair value on a nonrecurring basis that were still reflected in the balance sheet at June 30, 2013, the following table provides the level of valuation assumptions used to determine each adjustment the carrying value of the related individual assets as of June 30, 2013, and December 31, 2012, and the total losses/(gains) for the periods indicated:

	June 30, 2013								Total Losses/(gains)
	Fair Value Measurements Using						Total at		Three Months ended					Six Months ended
	Level 1		Level 2		Level 3		Fair Value		June 30, 2013			June 30, 2012		June 30, 2013			June 30, 2012
	(In thousands)
Assets
Impaired loans by type:
Commercial loans	$	-	$	-	$	5,360	$	5,360	$	-		$	6	$	463		$	865
Commercial mortgage loans		-		-		27,389		27,389		65			-		106			-
Construction- residential		-		-		500		500		-			-		-			-
Construction- other		-		-		13,141		13,141		-			-		-			-
Real estate loans		-		-		-		-		-			266		-			301
Residential mortgage and equity lines		-		-		13,067		13,067		31			148		220			551
Land loans		-		-		47		47		-			-		48			-
Total impaired loans		-		-		59,504		59,504		96			420		837			1,717
Other real estate owned (1)		-		38,843		421		39,264		(1,312	)		4,903		(1,378	)		7,727
Investments in venture capital		-		-		9,037		9,037		119			50		211			187
Equity investments		142		-		-		142		-			43		-			43
Total assets	$	142	$	38,843	$	68,962	$	107,947	$	(1,097	)	$	5,416	$	(330	)	$	9,674

(1) Other real estate owned balance of $46.7 million in the condensed consolidated balance sheet is net of estimated disposal costs.

	December 31, 2012								Total Losses
	Fair Value Measurements Using						Total at		Twelve months ended
	Level 1		Level 2		Level 3		Fair Value		December 31, 2012		December 31, 2011
	(In thousands)
Assets
Impaired loans by type:
Commercial loans	$	-	$	-	$	3,492	$	3,492	$	-	$	877
Commercial mortgage loans		-		-		11,295		11,295		440		-
Construction- residential		-		-		500		500		-		-
Construction- other		-		-		46,153		46,153		65		-
Residential mortgage and equity lines		-		-		11,206		11,206		605		820
Land loans		-		-		297		297		162		46
Total impaired loans		-		-		72,943		72,943		1,272		1,743
Other real estate owned (1)		-		27,149		4,841		31,990		10,904		7,003
Investments in venture capital		-		-		9,001		9,001		309		379
Equity investments		142		-		-		142		181		200
Total assets	$	142	$	27,149	$	86,785	$	114,076	$	12,666	$	9,325

(1) Other real estate owned balance of $46.4 million in the condensed consolidated balance sheet is net of estimated disposal costs.

The significant unobservable (Level 3) inputs used in the fair value measurement of collateral for collateral-dependent impaired loans was primarily based on the appraised value of collateral adjusted by estimated sales cost and commissions. The Company generally obtains new appraisal reports every six months. As the Company’s primary objective in the event of default would be to monetize the collateral to settle the outstanding balance of the loan, less marketable collateral would receive a larger discount. During the reported periods, collateral discounts ranged from 45% in the case of accounts receivable collateral to 65% in the case of inventory collateral.

The significant unobservable inputs used in the fair value measurement of loans held for sale was primarily based on the quoted price or sale price adjusted by estimated sales cost and commissions. The significant unobservable inputs used in the fair value measurement of other real estate owned (“OREO”) was primarily based on the appraised value of OREO adjusted by estimated sales cost and commissions.

The Company applies estimated sales cost and commission ranging from 3% to 6% to collateral value of impaired loans, quoted price or loan sale price of loans held for sale, and appraised value of OREOs.

The significant unobservable inputs in the Black-Scholes option pricing model for the fair value of warrants are the expected life of warrant ranging from 1 to 4 years, risk-free interest rate from 0.38% to 1.05%, and stock volatility from 10.4% to 16.7%.