Fair Value Disclosures

12 Months Ended

Dec. 31, 2011

Fair Value Disclosures [Abstract]

Fair Value Disclosures

Note 17. 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, most U.S. treasury securities and money market mutual funds.

• 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 (CMOs) and impaired loans and leases.

Following is a description of the valuation methodologies used for instruments measured at fair value, 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, most equity securities and money market mutual funds. Mutual funds are registered investment companies which are valued at net asset value of shares on a market exchange as of the close of business at year end. 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 corporate 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.

Fair values for securities are determined using independent pricing services and market-participating brokers. The Corporation’s independent pricing service utilizes evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information for structured securities, cash flow and, when available, loan performance data. Because many fixed income securities do not trade on a daily basis, the pricing service’s evaluated pricing applications apply information as applicable through processes, such as benchmarking of like securities, sector groupings, and matrix pricing, to prepare evaluations. If at any time, the pricing service determines that it does have not sufficient verifiable information to value a particular security, the Corporation will utilize valuations from another pricing service. Management has a sufficient understanding of the third party service’s valuation models, assumptions and inputs used in determining the fair value of securities to enable management to maintain an appropriate system of internal control.

On a quarterly basis, the Corporation reviews changes, as submitted by the pricing service, in the market value of its security portfolio. Individual changes in valuations are reviewed for consistency with general interest rate movements and any known credit concerns for specific securities. Additionally, on an annual basis, the Corporation has its security portfolio priced by a second pricing service to determine consistency with another market evaluator, except for municipal bonds which are priced by another service provider on a sample basis. If, on the Corporation’s review or in comparing with another servicer, a material difference between pricing evaluations were to exists, the Corporation may submit an inquiry to its current pricing service regarding the data used to make the valuation of a particular security. If the Corporation determines it has market information that would support a different valuation than its current pricing service’s evaluation it can submit a challenge for a change to that security’s valuation. There were no material differences in valuations noted in 2011.

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 December 31, 2011 and 2010, classified using the fair value hierarchy:

	At December 31, 2011
							Assets/
							Liabilities at
(Dollars in thousands)	Level 1		Level 2		Level 3		Fair Value
Assets:
Available-for-sale securities:
U.S government treasuries	$	2,525	$	—	$	—	$	2,525
U.S government corporations and agencies		—		154,264		—		154,264
State and political subdivisions		—		117,005		—		117,005
Residential mortgage-backed securities		—		78,801		—		78,801
Commercial mortgage obligations		—		61,464		—		61,464
Corporate bonds		—		4,767		—		4,767
Money market mutual funds		3,851		—		—		3,851
Equity securities		2,684		—		—		2,684
Total available-for-sale securities		9,060		416,301		—		425,361
Interest rate locks with customers		—		1,079		—		1,079
Total assets	$	9,060	$	417,380	$	—	$	426,440
Liabilities:
Interest rate swap	$	—	$	1,435	$	—	$	1,435
Forward loan commitments		—		302		—		302
Total liabilities	$	—	$	1,737	$	—	$	1,737

	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
Residential mortgage-backed securities		—		85,101		—		85,101
Commercial mortgage obligations		—		68,760		4,331		73,091
Corporate bonds		—		7,974		—		7,974
Money market mutual funds		1,693		—		—		1,693
Equity securities		2,985		—		—		2,985
Total available-for-sale securities		4,678		457,983		4,331		466,992
Interest rate swap		—		492		—		492
Interest rate locks with customers		—		530		—		530
Forward loan commitments		—		269		—		269
Total assets	$	4,678	$	459,274	$	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 years ended December 31, 2011 and 2010:

			Total			Total
	Balance at		Unrealized			Realized								Balance at
	December 31,		Gains or			Gains or					Transfers			December 31,
(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	)	$	—

			Total			Total
	Balance at		Unrealized			Realized					Balance at
	December 31,		Gains or			Gains or					December 31,
(Dollars in thousands)	2009		(Losses)			(Losses)		Paydowns			2010
Available-for-sale securities:
Commercial mortgage obligations	$	5,172	$	375		$	—	$	(1,216	)	$	4,331
Asset-backed securities		573		(9	)		—		(564	)		—
Total Level 3 assets	$	5,745	$	366		$	—	$	(1,780	)	$	4,331

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 years ended December 31, 2011 or 2010. The CMO security which was previously classified at Level 3 at 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 remain observable at December 31, 2011.

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

	At December 31, 2011
							Assets/Liabilities
(Dollars in thousands)	Level 1		Level 2		Level 3		at Fair Value
Impaired loans and leases	$	—	$	—	$	40,847		40,847
Mortgage servicing rights		—		2,739		—		2,739
Other real estate owned		—		6,600		—		6,600
Total	$	—	$	9,339	$	40,847	$	50,186

	At December 31, 2010
							Assets/Liabilities
(Dollars in thousands)	Level 1		Level 2		Level 3		at 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 December 31, 2011 and 2010 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 16 — Derivative Instruments and Hedging Activities) 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 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 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 December 31, 2011, impaired loans and leases had a carrying amount of $42.1 million with a valuation allowance of $1.3 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 MSR’s 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. MSR’s are classified within Level 2 of the valuation hierarchy. MSR’s 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 2011 and 2010, there were no triggering events to fair value goodwill and other intangible assets.

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

	At December 31, 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	$	107,377	$	107,377		$	29,187	$	29,187
Investment securities		471,165		471,000			467,024		467,024
Loans held for sale		3,157		3,255			4,178		4,178
Net loans and leases		1,416,536		1,453,129			1,440,288		1,499,065
Interest rate swap		—		—			20,000		492
Interest rate locks with customers		35,934		1,079			37,691		530
Forward loan commitments		—		—			41,842		269
Liabilities:
Deposits		1,749,232		1,709,444			1,686,270		1,666,566
Short-term borrowings		109,740		106,677			114,871		114,908
Long-term borrowings		27,494		27,654			28,994		29,363
Interest rate swap		20,000		1,435			—		—
Forward loan commitments		39,080		302			—		—
Off-Balance-Sheet:
Commitments to extend credit		—		(1,227	)		—		(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 investments 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 December 31, 2011, the fair value 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 values 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 includes 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.