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FAIR VALUE | 9 Months Ended
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Sep. 30, 2014
FAIR VALUE [Abstract] |
FAIR VALUE | NOTE K: FAIR VALUE Accounting standards allow entities an irrevocable option to measure certain financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The Company has elected to value loans held for sale at fair value in order to more closely match the gains and losses associated with loans held for sale with the gains and losses on forward sales contracts. Accordingly, the impact on the valuation will be recognized in the Company’s consolidated statement of income. All mortgage loans held for sale are current and in performing status. Accounting standards establish a framework for measuring fair value and require certain disclosures about such fair value instruments. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e. exit price). Inputs used to measure fair value are classified into the following hierarchy:
· | Level 1 – Quoted prices in active markets for identical assets or liabilities.
· | Level 2 – Quoted prices in active markets for similar assets or liabilities, or quoted prices for identical or similar assets or
| liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
· | Level 3 – Significant valuation assumptions not readily observable in a market.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following tables set forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis. There were no transfers between any of the levels for the periods presented.
| September 30, 2014
(000's omitted) | Level 1 | Level 2 | Level 3 | Total Fair Value
Available-for-sale investment securities: |  |  |  |
U.S. Treasury and agency securities | $1,465,231 | $21,396 | $0 | $1,486,627
Obligations of state and political subdivisions | 0 | 688,334 | 0 | 688,334
Government agency mortgage-backed securities | 0 | 244,122 | 0 | 244,122
Corporate debt securities | 0 | 27,287 | 0 | 27,287
Government agency collateralized mortgage obligations | 0 | 19,130 | 0 | 19,130
Marketable equity securities | 431 | 0 | 0 | 431
Total available-for-sale investment securities | 1,465,662 | 1,000,269 | 0 | 2,465,931
Mortgage loans held for sale | 0 | 726 | 0 | 726
Commitments to originate real estate loans for sale | 0 | 0 | 170 | 170
Forward sales commitments | 0 | (7) | 0 | (7)
Total | $1,465,662 | $1,000,988 | $170 | $2,466,820
| December 31, 2013
(000's omitted) | Level 1 | Level 2 | Level 3 | Total Fair Value
Available-for-sale investment securities: |  |  |  |
U.S. Treasury and agency securities | $1,182,261 | $29,886 | $0 | $1,212,147
Obligations of state and political subdivisions | 0 | 668,982 | 0 | 668,982
Government agency mortgage-backed securities | 0 | 254,978 | 0 | 254,978
Corporate debt securities | 0 | 27,587 | 0 | 27,587
Government agency collateralized mortgage obligations | 0 | 22,048 | 0 | 22,048
Marketable equity securities | 421 | 0 | 0 | 421
Total available-for-sale investment securities | 1,182,682 | 1,003,481 | 0 | 2,186,163
Mortgage loans held for sale | 0 | 728 | 0 | 728
Commitments to originate real estate loans for sale | 0 | 0 | 44 | 44
Forward sales commitments | 0 | 27 | 0 | 27
Total | $1,182,682 | $1,004,236 | $44 | $2,186,962
The valuation techniques used to measure fair value for the items in the table above are as follows:
· | Available for sale investment securities – The fair value of available-for-sale investment securities is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using quoted market prices for similar securities or model-based valuation techniques. Level 1 securities include U.S. Treasury obligations and marketable equity securities that are traded by dealers or brokers in active over-the-counter markets. Level 2 securities include U.S. agency securities, mortgage-backed securities issued by government-sponsored entities, municipal securities and corporate debt securities that are valued by reference to prices for similar securities or through model-based techniques in which all significant inputs, such as reported trades, trade execution data, LIBOR swap yield curve, market prepayment speeds, credit information, market spreads, and security’s terms and conditions, are observable. See Note D for further disclosure of the fair value of investment securities.
· | Mortgage loans held for sale – Mortgage loans held for sale are carried at fair value, which is determined using quoted secondary-market prices of loans with similar characteristics and, as such, have been classified as a Level 2 valuation. The unpaid principal value of mortgage loans held for sale at September 30, 2014 is approximately $0.7 million. The unrealized gain on mortgage loans held for sale of approximately $0.02 million was recognized in mortgage banking and other income in the consolidated statement.
· | Forward sales commitments – The Company enters into forward sales commitments to sell certain residential real estate loans. Such commitments are considered to be derivative financial instruments and, therefore, are carried at estimated fair value in the other asset or other liability section of the consolidated balance sheet. The fair value of these forward sales commitments is primarily measured by obtaining pricing from certain government-sponsored entities and reflects the underlying price the entity would pay the Company for an immediate sale on these mortgages. As such, these instruments are classified as Level 2 in the fair value hierarchy.
· | Commitments to originate real estate loans for sale – The Company enters into various commitments to originate residential real estate loans for sale. Such commitments are considered to be derivative financial instruments and, therefore, are carried at estimated fair value in the other asset or other liability section of the consolidated balance sheet. The estimated fair value of these commitments is determined using quoted secondary market prices obtained from certain government-sponsored entities. Additionally, accounting guidance requires the expected net future cash flows related to the associated servicing of the loan to be included in the fair value measurement of the derivative. The expected net future cash flows are based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. Such assumptions include estimates of the cost of servicing loans, appropriate discount rate and prepayment speeds. The determination of expected net cash flows is considered a significant unobservable input contributing to the Level 3 classification of commitments to originate real estate loans for sale.
The changes in Level 3 assets measured at fair value on a recurring basis are summarized in the following tables:
| Three Months Ended September 30,
| 2014 |  | 2013
| Commitments |  |  | Commitments |
| to Originate |  | Pooled Trust | to Originate |
| Real Estate |  | Preferred | Real Estate |
(000's omitted) | Loans for Sale |  | Securities | Loans for Sale | Total
Beginning balance | $142 |  | $47,290 | ($19) | $47,271
Total (losses)/gains included in earnings (1)(3) | (142) |  | 16 | 19 | 35
Total gains included in other comprehensive income(2) | 0 |  | 4,217 | 0 | 4,217
Principal reductions | 0 |  | (272) | 0 | (272)
Commitments to originate real estate loans held for sale, net | 170 |  | 0 | 268 | 268
Ending balance | $170 |  | $51,251 | $268 | $51,519
(1) Amounts included in earnings associated with the pooled trust preferred securities relate to accretion of related discount, which are reported in interest and dividends on taxable investments
(2) Amounts included in other comprehensive income associated with the pooled trust preferred securities relate to changes in unrealized loss and are reported as a component of net unrealized gains/(losses) on available-for sale securities in the Statement of Comprehensive Income.
(3) Amounts included in earnings associated with the commitments to originate real estate loans for sale are reported as a component of other banking services in the Consolidated Statement of Income.
| Nine Months Ended September 30,
| 2014 |  | 2013
| Commitments |  |  | Commitments |
| to Originate |  | Pooled Trust | to Originate |
| Real Estate |  | Preferred | Real Estate |
(000's omitted) | Loans for Sale |  | Securities | Loans for Sale | Total
Beginning balance | $44 |  | $49,600 | $0 | $49,600
Total (losses)/gains included in earnings (1)(3) | (253) |  | 166 | 0 | 166
Total gains included in other comprehensive income(2) | 0 |  | 7,090 | 0 | 7,090
Principal reductions | 0 |  | (5,605) | 0 | (5,605)
Commitments to originate real estate loans held for sale, net | 379 |  | 0 | 268 | 268
Ending balance | $170 |  | $51,251 | $268 | $51,519
(1) Amounts included in earnings associated with the pooled trust preferred securities relate to accretion of related discount, which are reported in interest and dividends on taxable investments.
(2) Amounts included in other comprehensive income associated with the pooled trust preferred securities relate to changes in unrealized loss and are reported as a component of net unrealized gains/(losses) on available-for sale securities in the Statement of Comprehensive Income.
(3) Amounts included in earnings associated with the commitments to originate real estate loans for sale are reported as a component of other banking services in the Consolidated Statement of Income.
Assets and liabilities measured on a non-recurring basis:
| September 30, 2014 |  | December 31, 2013
(000's omitted) | Level 1 | Level 2 | Level 3 | Total Fair Value |  | Level 1 | Level 2 | Level 3 | Total Fair Value
Impaired loans | $0 | $0 | $0 | $0 |  | $0 | $600 | $0 | $600
Other real estate owned | 0 | 0 | 3,619 | 3,619 |  | 0 | 0 | 5,060 | 5,060
Total | $0 | $0 | $3,619 | $3,619 |  | $0 | $600 | $5,060 | $5,660
Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral-dependent loans calculated when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is typically valued using independent appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace, adjusted for non-observable inputs. Thus, the resulting nonrecurring fair value measurements are generally classified as Level 3. Estimates of fair value used for other collateral supporting commercial loans generally are based on assumptions not observable in the marketplace and, therefore, such valuations classify as Level 3. At December 31, 2013, impaired loans recorded at fair value consisted of one loan that was valued using a purchase offer that did not require an adjustment for estimated costs. As such, no unobservable inputs were utilized and it was classified as a Level 2 valuation. Other real estate owned (“OREO”) is valued at the time the loan is foreclosed upon and the asset is transferred to OREO. The value is based primarily on third party appraisals, less costs to sell. The appraisals are sometimes further discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the customer and customer’s business. Such discounts are significant, ranging from 10% to 75% at September 30, 2014 and result in a Level 3 classification of the inputs for determining fair value. OREO is reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above. The Company recovers the carrying value of OREO through the sale of the property. The ability to affect future sales prices is subject to market conditions and factors beyond the Company’s control and may impact the estimated fair value of a property.
Originated mortgage servicing rights are recorded at their fair value at the time of sale of the underlying loan, and are amortized in proportion to and over the estimated period of net servicing income. The fair value of mortgage servicing rights is based on a valuation model incorporating inputs that market participants would use in estimating future net servicing income. Such inputs include estimates of the cost of servicing loans, appropriate discount rate and prepayment speeds and are considered to be unobservable and contribute to the Level 3 classification of mortgage servicing rights. In accordance with GAAP, the Company must record impairment charges, on a nonrecurring basis, when the carrying value of a stratum exceeds its estimated fair value. Impairment is recognized through a valuation allowance. There is no valuation allowance at September 30, 2014 as the fair value of mortgage servicing rights of approximately $1.4 million exceeded the carrying value of approximately $1.1 million.
The Company evaluates goodwill for impairment on an annual basis, or more often if events or circumstances indicate there may be impairment. The fair value of each reporting unit is compared to the carrying amount of that reporting unit in order to determine if impairment is indicated. If so, the implied fair value of the reporting unit’s goodwill is compared to its carrying amount and the impairment loss is measured by the excess of the carrying value of the goodwill over fair value of the goodwill. In such situations, the Company performs a discounted cash flow modeling technique that requires management to make estimates regarding the amount and timing of expected future cash flows of the assets and liabilities of the reporting unit that enable the Company to calculate the implied fair value of the goodwill. It also requires use of a discount rate that reflects the current return expectation of the market in relation to present risk-free interest rates, expected equity market premiums, peer volatility indicators and company-specific risk indicators. The Company did not recognize an impairment charge during 2013 or thus far in 2014. The significant unobservable inputs used in the determination of fair value of assets classified as Level 3 on a recurring or non-recurring basis are as follows:
(000's omitted) | Fair Value at September 30, 2014 | Valuation Technique | Significant Unobservable Inputs | Significant Unobservable Input Range (Weighted Average)
Other real estate owned | $3,619 | Fair Value of Collateral | Estimated cost of disposal/market adjustment | 10.0%-75.1% (25.9%)
Commitments to originate real estate loans for sale | 170 | Discounted cash flow | Embedded servicing value | 1%
The significant unobservable inputs used in the determination of fair value of assets classified as Level 3 on a recurring or non-recurring basis as of December 31, 2013 are as follows:
(000's omitted) | Fair Value at December 31, 2013 | Valuation Technique | Significant Unobservable Inputs | Significant Unobservable Input Range (Weighted Average)
Other real estate owned | $5,060 | Fair value of collateral | Estimated cost of disposal/market adjustment | 11.0% - 54.4% (28.1%)
Commitments to originate real estate loans for sale | 44 | Discounted cash flow | Embedded servicing value | 1%
The Company determines fair values based on quoted market values, where available, estimates of present values, or other valuation techniques. Those techniques are significantly affected by the assumptions used, including, but not limited to, the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from fair value disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The carrying amounts and estimated fair values of the Company’s other financial instruments that are not accounted for at fair value at September 30, 2014 and December 31, 2013 are as follows:
| September 30, 2014 |  | December 31, 2013
| Carrying | Fair |  | Carrying | Fair
(000's omitted) | Value | Value |  | Value | Value
Financial assets: |  |  |  |  |
Net loans | $4,171,971 | $4,217,967 |  | $4,064,764 | $4,044,449
Financial liabilities: |  |  |  |  |
Deposits | 5,967,331 | 5,967,675 |  | 5,896,044 | 5,898,138
Borrowings | 343,805 | 343,805 |  | 141,913 | 141,913
Subordinated debt held by unconsolidated subsidiary trusts | 102,115 | 93,435 |  | 102,097 | 109,284
The following is a further description of the principal valuation methods used by the Company to estimate the fair values of its financial instruments. Loans have been classified as a Level 3 valuation. Fair values for variable rate loans that reprice frequently are based on carrying values. Fair values for fixed rate loans are estimated using discounted cash flows and interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Deposits have been classified as a Level 2 valuation. The fair value of demand deposits, interest-bearing checking deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of time deposit obligations are based on current market rates for similar products. Borrowings have been classified as a Level 2 valuation. The fair value of FHLB overnight advances is the amount payable on demand at the reporting date. Fair values for long-term borrowings are estimated using discounted cash flows and interest rates currently being offered on similar borrowings, and are immaterial as of the reporting dates. Subordinated debt held by unconsolidated subsidiary trusts have been classified as a Level 2 valuation. The fair value of subordinated debt held by unconsolidated subsidiary trusts are estimated using discounted cash flows and interest rates currently being offered on similar securities. Other financial assets and liabilities – Cash and cash equivalents have been classified as a Level 1 valuation, while accrued interest receivable and accrued interest payable have been classified as a Level 2 valuation. The fair values of each approximate the respective carrying values because the instruments are payable on demand or have short-term maturities and present relatively low credit risk and interest rate risk.

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- Definition 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 Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13537-108611 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13433-108611 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=25499696&loc=d3e19207-110258 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13504-108611 + Details
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