Fair Value Disclosures

9 Months Ended

Sep. 30, 2011

Fair Value Disclosures [Abstract]

Fair Value Disclosures

Note 11. Fair Value Disclosures

Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. The Corporation determines the fair value of its financial instruments based on the fair value hierarchy. The Corporation maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Corporation. Unobservable inputs are inputs that reflect the Corporation’s assumptions that the market participants would use in pricing the asset or liability based on the best information available in the circumstances. Three levels of inputs are used to measure fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input significant to the fair value measurement.

Level 1: Valuations are based on quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. Assets and liabilities utilizing Level 1 inputs include: Exchange-traded equity and most U.S. treasury securities.

Level 2: Valuations are based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Assets and liabilities generally utilizing Level 2 inputs include: most U.S. Government agency mortgage-backed debt securities (MBS), corporate debt securities, corporate and municipal bonds, residential mortgage loans held for sale, certain commercial loans, certain equity securities, mortgage servicing rights, other real estate owned and derivative financial instruments.

Level 3: Valuations are based on inputs that are unobservable and significant to the overall fair value measurement. Assets and liabilities utilizing Level 3 inputs include: financial instruments whose value is determined using pricing models, discounted cash-flow methodologies, or similar techniques, as well as instruments for which the fair value calculation requires significant management judgment or estimation. These assets and liabilities include: certain commercial mortgage obligations (CMO’s) securities and impaired loans and leases.

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Investment Securities

Where quoted prices are available in an active market for identical instruments, investment securities are classified within Level 1 of the valuation hierarchy. Level 1 investment securities include highly liquid U.S. Treasury securities and most equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Examples of instruments, which would generally be classified within Level 2 of the valuation hierarchy, include U.S. Government sponsored enterprises, certain MBS, CMOs, and municipal bonds and certain equity securities. In cases where there is limited activity or less transparency around inputs to the valuation, investment securities are classified within Level 3 of the valuation hierarchy. Investment securities classified within Level 3 include certain CMO securities.

Derivative Financial Instruments

The fair values of derivative financial instruments are based upon the estimated amount the Corporation would receive or pay to terminate the contracts or agreements, taking into account current interest rates and, when appropriate, the current creditworthiness of the counterparties. Derivative financial instruments are classified within Level 2 of the valuation hierarchy.

The following table presents the assets and liabilities measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010, classified using the fair value hierarchy:

	At September 30, 2011
							Assets/
							Liabilities at
(Dollars in thousands)	Level 1		Level 2		Level 3		Fair Value
Assets:
Available-for-sale securities:
U.S. government corporations and agencies	$	—	$	123,964	$	—	$	123,964
State and political subdivisions		—		113,869		—		113,869
Mortgage-backed securities		—		68,449		—		68,449
Commercial mortgage obligations		—		63,041		—		63,041
Corporate bonds		—		4,813		—		4,813
Other debt securities		—		5,193		—		5,193
Equity securities		2,485		—		—		2,485
Total available-for-sale securities		2,485		379,329		—		381,814
Interest rate swap		—		—		—		—
Interest rate locks with customers		—		1,359		—		1,359
Forward loan commitments		—		—		—		—
Total assets	$	2,485	$	380,688	$	—	$	383,173
Liabilities:
Interest rate swap		—		1,347		—		1,347
Forward loan commitments		—		336		—		336
Total liabilities	$	—	$	1,683	$	—	$	1,683

	At December 31, 2010
							Assets/
							Liabilities at
(Dollars in thousands)	Level 1		Level 2		Level 3		Fair Value
Assets:
Available-for-sale securities:
U.S. government corporations and agencies	$	—	$	188,100	$	—	$	188,100
State and political subdivisions		—		108,048		—		108,048
Mortgage-backed securities		—		85,101		—		85,101
Commercial mortgage obligations		—		68,760		4,331		73,091
Corporate bonds		—		7,974		—		7,974
Other debt securities		—		1,693		—		1,693
Equity securities		2,985		—		—		2,985
Total available-for-sale securities		2,985		459,676		4,331		466,992
Interest rate swaps		—		492		—		492
Interest rate locks with customers		—		530		—		530
Forward loan commitments		—		269		—		269
Total assets	$	2,985	$	460,967	$	4,331	$	468,283
Liabilities:
Liabilities	$	—	$	—	$	—	$	—
Total liabilities	$	—	$	—	$	—	$	—

The following table presents a reconciliation for all assets measured at fair value on a recurring basis and for which the Corporation utilized Level 3 inputs to determine fair value for the three months ended September 30, 2010. There was no activity to report for the three months ended September 30, 2011.

	Three Months Ended September 30, 2010
			Total
	Balance at		Unrealized			Total Realized					Balance at
	June 30,		Gains or			Gains or					September 30,
(Dollars in thousands)	2010		(Losses)			(Losses)		Paydowns			2010
Available-for-sale securities:
Commercial mortgage obligations	$	4,752	$	130		$	—	$	(323	)	$	4,559
Asset-backed securities		301		(1	)		—		(300	)		—
Total Level 3 assets	$	5,053	$	129		$	—	$	(623	)	$	4,559

The following table presents a reconciliation for all assets measured at fair value on a recurring basis and for which the Corporation utilized Level 3 inputs to determine fair value for the nine months ended September 30, 2011 and 2010.

	Nine Months Ended September 30, 2011
			Total			Total
	Balance at		Unrealized			Realized								Balance at
	December 31,		Gains or			Gains or					Transfers			September 30,
(Dollars in thousands)	2010		(Losses)			(Losses)		Paydowns			to Level 2			2011
Available-for-sale securities:
Commercial mortgage obligations	$	4,331	$	(26	)	$	—	$	(135	)	$	(4,170	)	$	—
Total Level 3 assets	$	4,331	$	(26	)	$	—	$	(135	)	$	(4,170	)	$	—

	Nine Months Ended September 30, 2010
						Total
	Balance at		Total Unrealized			Realized					Balance at
	December 31,		Gains Or			Gains or					September 30,
(Dollars in thousands)	2009		(Losses)			(Losses)		Paydowns			2010
Available-for-sale securities:
Commercial mortgage obligations	$	5,172	$	276		$	—	$	(889	)	$	4,559
Asset-backed securities		573		(9	)		—		(564	)		—
Total Level 3 assets	$	5,745	$	267		$	—	$	(1,453	)	$	4,559

Realized gains or losses are recognized in the consolidated statements of income. There were no realized gains or losses recognized on Level 3 assets during the three or nine month periods ended September 30, 2011 or 2010. The CMO security which was previously classified at Level 3 at September 30, 2010 and December 31, 2010 was transferred to Level 2 at March 31, 2011 as the CMO market for these types of securities are again being actively traded in the market and quoted prices are again observable at September 30, 2011.

The following table represents assets measured at fair value on a non-recurring basis as of September 30, 2011 and December 31, 2010.

	At September 30, 2011
							Assets/Liabilities at
(Dollars in thousands)	Level 1		Level 2		Level 3		Fair Value
Impaired loans and leases	$	—	$	—	$	39,947	$	39,947
Mortgage servicing rights		—		2,360		—		2,360
Other real estate owned		—		7,711		—		7,711
Total	$	—	$	10,071	$	39,947	$	50,018

	At December 31, 2010
							Assets/Liabilities at
(Dollars in thousands)	Level 1		Level 2		Level 3		Fair Value
Loans held for sale	$	—	$	4,178	$	—	$	4,178
Real estate-commercial loan		—		17,650		—		17,650
Impaired loans and leases		—		—		44,159		44,159
Mortgage servicing rights		—		2,441		—		2,441
Other real estate owned		—		2,438		—		2,438
Total	$	—	$	26,707	$	44,159	$	70,866

The fair value of the Corporation’s loans held for sale are generally determined using a pricing model based on current market information obtained from external sources, including, interest rates, and bids or indications provided by market participants on specific loans that are actively marketed for sale. The Corporation’s loans held for sale are primarily residential mortgage loans and are generally classified in Level 2 due to the observable pricing data. Loans held for sale at September 30, 2011 were carried at the lower of cost or estimated fair value.

The fair value of the hedged real estate-commercial loan (as discussed in Note 10) was based on a discounted cash flow model which takes into consideration the changes in market value due to changes in LIBOR. Commercial loans are classified within Level 2 of the valuation hierarchy. During the fourth quarter of 2009, the Corporation participated $5.0 million of the hedged real estate-commercial loan and at that time the remaining $17.0 million loan was marked to fair value due to the de-designation of the fair value hedge. During the first quarter of 2010, the swap was re-designated and the hedged loan was being marked to fair value on a recurring basis. During the third quarter of 2010 the swap was terminated and the loan was marked to fair value. The fair value is being amortized to par value over the remaining life of the loan using the level-yield method.

Impaired loans and leases include those collateral-dependent loans and leases for which the practical expedient was applied, resulting in a fair-value adjustment to the loan or lease. Impaired loans and leases are evaluated and valued at the time the loan and lease is identified as impaired, at the lower of cost or fair value. Fair value is measured based on the value of the collateral securing these loans and leases less cost to sell and is classified at a Level 3 in the fair value hierarchy. The fair value of collateral is based on appraisals performed by qualified licensed appraisers hired by the Corporation. At September 30, 2011, impaired loans and leases had a carrying amount of $42.1 million with a valuation allowance of $2.2 million. At December 31, 2010, impaired loans and leases had a carrying amount of $45.8 million with a valuation allowance of $1.6 million.

The Corporation estimates the fair value of mortgage servicing rights using discounted cash flow models that calculate the present value of estimated future net servicing income. The model uses readily available prepayment speed assumptions for the current interest rates of the portfolios serviced. Mortgage servicing rights are classified within Level 2 of the valuation hierarchy. The Corporation reviews the mortgage servicing rights portfolio on a quarterly basis for impairment and the mortgage servicing rights are carried at the lower of amortized cost or estimated fair value.

The fair value of other real estate owned is estimated based upon its appraised value less costs to sell. The real estate is stated at an amount equal to the loan balance prior to foreclosure, plus costs incurred for improvements to the property but no more than the fair value of the properly, less estimated costs to sell. New appraisals are generally obtained at least on an annual basis. Other real estate owned is classified within Level 2 of the valuation hierarchy.

Certain non-financial assets subject to measurement at fair value on a non-recurring basis include goodwill and other intangible assets. During the nine months ended September 30, 2011, there were no triggering events that required valuation to fair value of goodwill and other intangible assets.

The following table represents the estimates of fair value of financial instruments:

	At September 30, 2011					At December 31, 2010
	Carrying,					Carrying,
	Notional or					Notional or
	Contract					Contract
(Dollars in thousands)	Amount		Fair Value			Amount		Fair Value
Assets:
Cash and short-term interest- earning assets	$	147,030	$	147,030		$	29,187	$	29,187
Investment securities		412,340		412,026			467,024		467,024
Loans held for sale		1,724		1,773			4,178		4,178
Net loans and leases		1,405,409		1,438,907			1,440,288		1,499,065
Interest rate swaps		—		—			20,000		492
Interest rate locks with customers		51,569		1,359			37,691		530
Forward loan commitments		—		—			41,842		269
Liabilities:
Deposits		1,725,063		1,619,996			1,686,270		1,666,566
Short-term borrowings		107,621		104,394			114,871		114,908
Long-term borrowings		27,869		28,077			28,994		29,363
Interest rate swaps		20,000		1,347			—		—
Forward loan commitments		53,270		336			—		—
Off-Balance-Sheet:
Commitments to extend credit		—		(1,204	)		—		(1,069	)

The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments:

Cash and short-term interest-earning assets: The carrying amounts reported in the balance sheets for cash and due from banks, interest-earning deposits with other banks, and federal funds sold and other short-term investments approximates those assets’ fair values.

Investment securities: Fair values for the held-to-maturity and available-for-sale investment securities are based on quoted market prices that are available in an active market for identical instruments. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.

Loans held for sale: The fair value of the Corporation’s loans held for sale are generally determined using a pricing model based on current market information obtained from external sources, including, interest rates, and bids or indications provided by market participants on specific loans that are actively marketed for sale. The Corporation’s loans held for sale are primarily residential mortgage loans. Loans held for sale are carried at the lower of cost or estimated fair value.

Loans and leases: The fair values for loans are estimated using discounted cash flow analyses, using a discount rate consisting of an appropriate risk free rate, as well as components for credit risk, operating expense and embedded prepayment options. As permitted, the fair value of the loans and leases are not based on the exit price concept as discussed in the first paragraph of this note.

Derivative Financial Instruments: The fair values of derivative financial instruments are based upon the estimated amount the Corporation would receive or pay to terminate the contracts or agreements, taking into account current interest rates and, when appropriate, the current creditworthiness of the counterparties.

Deposit liabilities: The fair values for deposits with fixed maturities are estimated by discounting the final maturity. At September 30, 2011, the fair values for non-maturing deposits are established based on expected cash flows and repricing characteristics for the instruments and incorporates Corporation developed, market-based assumptions regarding the impact of changing interest rates on these financial instruments. At December 31, 2010, the fair value for non-maturing deposits were established using a decay factor estimate of cash flows based upon industry-accepted assumptions with the discount rate consisting of an appropriate risk free rate and including components for operating expense.

Short-term borrowings: The carrying amounts of securities sold under repurchase agreements, and fed funds purchased approximate their fair values. Short-term FHLB advances with embedded options are estimated using a discounted cash flow analysis using a discount rate consisting of an appropriate risk free rate, as well as operating expense, and embedded prepayment options.

Long-term borrowings: The fair values of the Corporation’s long-term borrowings (other than deposits) are estimated using a discounted cash flow analysis using a discount rate consisting of an appropriate risk free rate, as well as components for credit risk, operating expense, and embedded prepayment options.

Off-balance-sheet instruments: Fair values for the Corporation’s off-balance-sheet instruments are based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.