Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUE MEASUREMENTS

 v2.3.0.11
FAIR VALUE MEASUREMENTS
 6 Months Ended
Jun. 30, 2011
FAIR VALUE MEASUREMENTS [Abstract]  
FAIR VALUE MEASUREMENTS
NOTE 10 – FAIR VALUE MEASUREMENTS

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability.  In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach.  Such valuation techniques are consistently applied.  Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability.  ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.  The fair value hierarchy is as follows:

Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity's own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

In general, fair value is based upon quoted market prices, where available.  If such quoted market prices are not available, fair value is based upon models that primarily use, as inputs, observable market-based parameters.  Valuation adjustments may be made to ensure that financial instruments are recorded at fair value.  These adjustments may include amounts to reflect counterparty credit quality, the Company’s creditworthiness, among other things, as well as unobservable parameters.  Any such valuation adjustments are applied consistently over time.  The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.  A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value is set forth in the Company’s 2010 Form 10-K.
 
Financial Assets and Financial Liabilities.  The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2011 segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 
(Dollars in Thousands)
  
 
Level 1 Inputs
    
 
Level 2 Inputs
    
 
Level 3
Inputs
    
 
Total Fair Value
June 30, 2011
                      
ASSETS:
                      
Securities available for sale:
                      
    US Treasury
 $
 170,207
  
$ 
-
  
$ 
 -
  
$ 
170,207
    States and Political Subdivisions
  
1,481
    
55,337
    
 -
    
 56,818
    Residential Mortgage-Backed Securities   -     65,438     -     65,438
    Other Securities   -     11,850     -     11,850
                       
LIABILITIES:
                      
                       
Fair Value Swap
   -       -    
445
    
445

Fair Value Swap.  During the first quarter of 2011, the Company entered into a stand-alone derivative contract with the purchaser of its Visa Class B shares.  The valuation represents an internally developed estimate of the exposure based upon probability-weighted potential Visa litigation losses and related carrying cost obligations required under the contract.

Non-Financial Assets and Non-Financial Liabilities.  Certain non-financial assets measured at fair value on a nonrecurring basis are detailed below; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

Impaired Loans.  On a non-recurring basis, certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the liquidation of collateral.  Collateral values are estimated using Level 2 inputs based on customized discounting criteria.  Impaired loans had a carrying value of $77.8 million, with a valuation allowance of $11.0 million.

Loans Held for Sale.  Loans held for sale were $5.9 million as of June 30, 2011.  These loans are carried at the lower of cost or fair value and are adjusted to fair value on a non-recurring basis.  Fair value is based on observable markets rates for comparable loan products which is considered a Level 2 fair value measurement.

Other Real Estate Owned.  During the first six months of 2011, certain foreclosed assets, upon initial recognition, were measured and reported at fair value through a charge-off to the allowance for loan losses based on the fair value of the foreclosed asset.  The fair value of the foreclosed asset, upon initial recognition, is estimated using Level 2 inputs based on observable market data.  Foreclosed assets measured at fair value upon initial recognition totaled $22.9 million during the six months ended June 30, 2011.  In addition, the Company recognized subsequent losses totaling $2.1 million for foreclosed assets that were re-valued during the six months ended June 30, 2011.  The carrying value of foreclosed assets was $61.0 million at June 30, 2011.

FASB ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring or non-recurring basis.
A detailed description of the valuation methodologies used in estimating the fair value of financial instruments is set forth in the Company’s 2010 Form 10-K.
 
The Company’s financial instruments that have estimated fair values are presented below:
       
   
June 30, 2011
    
December 31, 2010
  
(Dollars in Thousands)
  
Carrying
Value
    
Estimated
Fair
Value
    
Carrying
Value
    
Estimated
Fair
Value
  
Financial Assets:
                        
Cash
  
$
71,554
    
$
71,554
    
$
35,410
    
$
35,410
  
Short-Term Investments
    
223,183
      
223,183
      
200,783
      
200,783
  
Investment Securities
    
304,313
      
304,313
      
309,731
      
309,731
  
Loans, Net of Allowance for Loan Losses
    
1,656,522
      
1,558,801
      
1,723,235
      
1,675,997
  
Total Financial Assets
  
$
2,255,572
    
$
2,157,851
    
$
2,269,159
    
$
2,221,921
  
                                 
Financial Liabilities:
                                
Deposits
  
$
2,101,011
    
$
2,101,972
    
$
2,103,976
    
$
2,105,568
  
Short-Term Borrowings
    
65,237
      
62,744
      
92,928
      
89,287
  
Subordinated Notes Payable
    
62,887
      
62,890
      
62,887
      
62,884
  
Long-Term Borrowings
    
49,196
      
52,106
      
50,101
      
52,302
  
Derivative Instrument – Fair Value Swap
    
445
      
445
      
-
      
-
  
Total Financial Liabilities
  
$
2,278,776
    
$
2,280,157
    
$
2,309,892
    
$
2,310,041
  

All non-financial instruments are excluded from the above table.  The disclosures also do not include certain intangible assets such as client relationships, deposit base intangibles and goodwill.  Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.