FAIR VALUE MEASUREMENTS

The Corporation uses fair value measurements to record fair value adjustments to certain financial assets and liabilities and to determine fair value disclosures. Securities available for sale and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, the Corporation may be required to record at fair value other assets on a nonrecurring basis, such as mortgage loans held for sale, certain impaired loans, OREO and certain other assets.

Fair value is defined as an exit price, representing 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. Fair value measurements are not adjusted for transaction costs. Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure.

In determining fair value, the Corporation uses various valuation approaches, including market, income and cost approaches. ASC Topic 820, Fair Value Measurements and Disclosures, establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability, which are developed based on market data obtained from sources independent of the Corporation. Unobservable inputs reflect the Corporation's assumptions about the assumptions that market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances.

The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:


Level 1		valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets.

Level 2		valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by market data.

Level 3		valuation is derived from other valuation methodologies including discounted cash flow models and similar techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in determining fair value.

A financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

Following is a description of the valuation methodologies the Corporation uses for financial instruments recorded at fair value on either a recurring or nonrecurring basis:

Securities Available For Sale

Securities available for sale consists of both debt and equity securities. These securities are recorded at fair value on a recurring basis. At June 30, 2011, approximately 98.4% of these securities used valuation methodologies involving market-based or market-derived information, collectively Level 1 and Level 2 measurements, to measure fair value. The remaining 1.6% of these securities were measured using model-based techniques, with primarily unobservable (Level 3) inputs.

The Corporation closely monitors market conditions involving assets that have become less actively traded. If the fair value measurement is based upon recent observable market activity of such assets or comparable assets (other than forced or distressed transactions) that occur in sufficient volume, and do not require significant adjustment using unobservable inputs, those assets are classified as Level 1 or Level 2; if not, they are classified as Level 3. Making this assessment requires significant judgment.

The Corporation uses prices from independent pricing services and, to a lesser extent, indicative (non-binding) quotes from independent brokers, to measure the fair value of investment securities. The Corporation validates prices received from pricing services or brokers using a variety of methods, including, but not limited to, comparison to secondary pricing services, corroboration of pricing by reference to other independent market data such as secondary broker quotes and relevant benchmark indices, and review of pricing by Corporate personnel familiar with market liquidity and other market-related conditions.

The Corporation determines the valuation of its investments in trust preferred debt securities with the assistance of a third-party independent financial consulting firm that specializes in advisory services related to illiquid financial investments. The consulting firm provides the Corporation appropriate valuation methodology, performance assumptions, modeling techniques, discounted cash flows, discount rates and sensitivity analyses with respect to levels of defaults and deferrals necessary to produce losses. Additionally, the Corporation utilizes the firm's expertise to reassess assumptions to reflect actual conditions. See the Securities footnote for information on how the Corporation reassesses assumptions to determine the valuation of its trust preferred debt securities. Accessing the services of a financial consulting firm with a focus on financial instruments assists the Corporation in accurately valuing these complex financial instruments and facilitates informed decision-making with respect to such instruments.

Derivative Financial Instruments

The Corporation determines its fair value for derivatives using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects contractual terms of the derivative, including the period to maturity and uses observable market based inputs, including interest rate curves and implied volatilities.

The Corporation incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the respective counterparty's non-performance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of non-performance risk, the Corporation considers the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

Although the Corporation has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2011, the Corporation has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Corporation has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Residential Mortgage Loans Held For Sale

These loans are carried at the lower of cost or fair value. Under lower of cost or fair value accounting, periodically, it may be necessary to record nonrecurring fair value adjustments. Fair value, when recorded, is based on independent quoted market prices and is classified as Level 2.

Impaired Loans

The Corporation reserves for commercial and commercial real estate loans that the Corporation considers impaired as defined in ASC Topic 310 at the time the Corporation identifies the loan as impaired based upon the present value of expected future cash flows available to pay the loan, or based upon the fair value of the collateral less estimated selling costs where a loan is collateral dependent. Collateral may be real estate and/or business assets including equipment, inventory and accounts receivable.

The Corporation determines the value of real estate based on appraisals by licensed or certified appraisers. The value of business assets is generally based on amounts reported on the business's financial statements. Management must rely on the financial statements prepared and certified by the borrower or its accountants in determining the value of these business assets on an ongoing basis which may be subject to significant change over time. Based on the quality of information or statements provided, management may require the use of business asset appraisals and site-inspections to better value these assets. The Corporation may discount appraised and reported values based on management's historical knowledge, changes in market conditions from the time of valuation or management's knowledge of the borrower and the borrower's business. Since not all valuation inputs are observable, the Corporation classifies these nonrecurring fair value determinations as Level 2 or Level 3 based on the lowest level of input that is significant to the fair value measurement.

The Corporation reviews and evaluates impaired loans no less frequently than quarterly for additional impairment based on the same factors identified above.

Other Real Estate Owned

OREO is comprised of commercial and residential real estate properties obtained in partial or total satisfaction of loan obligations plus some bank owned real estate. OREO acquired in settlement of indebtedness is recorded at the lower of carrying amount of the loan or fair value less costs to sell. Subsequently, these assets are carried at the lower of carrying value or fair value less costs to sell. Accordingly, it may be necessary to record nonrecurring fair value adjustments. Fair value is generally based upon appraisals by licensed or certified appraisers and other market information and is classified as Level 2 or Level 3.

The following table presents the balances of assets and liabilities measured at fair value on a recurring basis:

		000000000		000000000		000000000		000000000
	Level 1		Level 2		Level 3		Total
June 30, 2011
Assets measured at fair value:
Available for sale debt securities:
U.S. Treasury and other U.S. government agencies and corporations	$	—	$	333,284	$	—	$	333,284
Residential mortgage-backed securities:
Agency mortgage-backed securities		—		241,148		—		241,148
Agency collateralized mortgage obligations		—		186,985		—		186,985
Non-agency collateralized mortgage obligations		—		35		—		35
States of the U.S. and political subdivisions		—		44,957		—		44,957
Collateralized debt obligations		—		—		6,605		6,605
Other debt securities		—		—		5,946		5,946

		—		806,409		12,551		818,960


Available for sale equity securities:
Financial services industry		375		1,011		467		1,853
Insurance services industry		34		—		—		34

		409		1,011		467		1,887

		409		807,420		13,018		820,847
Derivative financial instruments		—		29,333		—		29,333

	$	409	$	836,753	$	13,018	$	850,180


Liabilities measured at fair value:
Derivative financial instruments		—	$	29,326		—	$	29,326

		—	$	29,326		—	$	29,326


	Level 1		Level 2		Level 3		Total
December 31, 2010
Assets measured at fair value:
Available for sale debt securities:
U.S. Treasury and other U.S. government agencies and corporations	$	—	$	300,568	$	—	$	300,568
Residential mortgage-backed securities:
Agency mortgage-backed securities		—		211,507		—		211,507
Agency collateralized mortgage obligations		—		147,866		—		147,866
Non-agency collateralized mortgage obligations		—		38		—		38
States of the U.S. and political subdivisions		—		58,738		—		58,738
Collateralized debt obligations		—		—		5,974		5,974
Other debt securities		—		—		11,245		11,245

		—		718,717		17,219		735,936


Available for sale equity securities:
Financial services industry		470		1,313		375		2,158
Insurance services industry		31		—		—		31

		501		1,313		375		2,189

		501		720,030		17,594		738,125
Derivative financial instruments		—		25,631		—		25,631

	$	501	$	745,661	$	17,594	$	763,756


Liabilities measured at fair value:
Derivative financial instruments		—	$	25,043		—	$	25,043

		—	$	25,043		—	$	25,043

The following table presents additional information about assets measured at fair value on a recurring basis and for which the Corporation has utilized Level 3 inputs to determine fair value:


	Collateralized Debt Obligations		Other Debt Securities			Equity Securities		Total
Six Months Ended June 30, 2011
Balance at beginning of period	$	5,974	$	11,245		$	375	$	17,594
Total gains (losses) – realized/unrealized:
Included in earnings		—		(48	)		—		(48	)
Included in other comprehensive income		631		844			92		1,567
Redemptions		—		(6,095	)		—		(6,095	)
Transfers in and/or (out) of Level 3		—		—			—

Balance at end of period	$	6,605	$	5,946		$	467	$	13,018


	Collateralized Debt Obligations			Other Debt Securities		Equity Securities		Total
Twelve Months Ended December 31, 2010
Balance at beginning of period	$	4,824		$	10,430	$	333	$	15,587
Total gains (losses) – realized/unrealized:
Included in earnings		(2,281	)		—		—		(2,281	)
Included in other comprehensive income		3,431			815		42		4,288
Purchases, issuances, and settlements		—			—		—		—
Transfers in and/or (out) of Level 3		—			—		—		—

Balance at end of period	$	5,974		$	11,245	$	375	$	17,594

The Corporation reviews fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation attributes may result in reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in/out of Level 3 at fair value at the beginning of the period in which the changes occur.

The amount of total losses included in earnings for the six months ended June 30, 2011 and 2010 and for the full year of 2010 attributable to the change in unrealized gains or losses relating to assets still held as of those dates was $0, $2,281 and $2,281, respectively. These losses are included in net impairment losses on securities reported as a component of non-interest income.

In accordance with GAAP, from time to time, the Corporation measures certain assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or write-downs of individual assets. Valuation methodologies used to measure these fair value adjustments were previously described. For assets measured at fair value on a nonrecurring basis still held in the balance sheet, the following table provides the hierarchy level and the fair value of the related assets or portfolios:


	Level 1		Level 2		Level 3		Total
June 30, 2011
Impaired loans	$	—	$	428	$	6,306	$	6,734
Other real estate owned		—		2,016		12,710		14,726

December 31, 2010
Impaired loans		—		1,157		26,082		27,239
Other real estate owned		—		18,429		12,337		30,766

Impaired loans measured or re-measured at fair value on a non-recurring basis during the six months ended June 30, 2011 had a carrying amount of $10,137 and an allocated allowance for loan losses of $3,921 at June 30, 2011. The allocated allowance is based on fair value of $6,734 less estimated costs to sell of $518. The allowance for loan losses includes a provision applicable to the current period fair value measurements of $3,587 which was included in the provision for loan losses for the six months ended June 30, 2011. For the six months ended June 30, 2010, the allowance and provision for loan losses include losses of $3,861 on fair value measurements or re-measurements applicable to impaired loans occurring during the period.

OREO with a carrying amount of $17,362 was written down to $12,850 (fair value of $14,702 less estimated costs to sell of $1,852), resulting in a loss of $4,512, which was included in earnings for the six months ended June 30, 2011. Earnings for the six months ended June 30, 2010 include losses of $2,600 on fair value measurements or re-measurements applicable to OREO occurring during the period.

Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of each financial instrument:

Cash and Cash Equivalents, Accrued Interest Receivable and Accrued Interest Payable. For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Securities. For both securities available for sale and securities held to maturity, fair value equals the quoted market price from an active market, if available, and is classified within Level 1. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities or pricing models, and is classified as Level 2. Where there is limited market activity or significant valuation inputs are unobservable, securities are classified within Level 3. Under current market conditions, assumptions used to determine the fair value of Level 3 securities have greater subjectivity due to the lack of observable market transactions.

Loans. The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of variable and adjustable rate loans approximates the carrying amount.

Bank Owned Life Insurance. The Corporation owns both general account and separate account bank owned life insurance (BOLI). The fair value of general account BOLI is based on the insurance contract cash surrender value. The fair value of separate account BOLI equals the quoted market price of the underlying securities, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. In connection with the separate account BOLI, the Corporation has purchased a stable value protection product that mitigates the impact of market value fluctuations of the underlying separate account assets.

Deposits. The estimated fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date because of the customers' ability to withdraw funds immediately. The fair value of fixed-maturity deposits is estimated by discounting future cash flows using rates currently offered for deposits of similar remaining maturities.

Short-Term Borrowings. The carrying amounts for short-term borrowings approximate fair value for amounts that mature in 90 days or less. The fair value of subordinated notes is estimated by discounting future cash flows using rates currently offered.

Long-Term and Junior Subordinated Debt. The fair value of long-term and junior subordinated debt is estimated by discounting future cash flows based on the market prices for the same or similar issues or on the current rates offered to the Corporation for debt of the same remaining maturities.

Loan Commitments and Standby Letters of Credit. Estimates of the fair value of these off-balance sheet items were not made because of the short-term nature of these arrangements and the credit standing of the counterparties. Also, unfunded loan commitments relate principally to variable rate commercial loans, typically non-binding, and fees are not normally assessed on these balances.

Nature of Estimates. Many of the estimates presented herein are based upon the use of highly subjective information and assumptions and, accordingly, the results may not be precise. Management believes that fair value estimates may not be comparable to other financial institutions due to the wide range of permitted valuation techniques and numerous estimates which must be made. Further, because the disclosed fair value amounts were estimated as of the balance sheet date, the amounts actually realized or paid upon maturity or settlement of the various financial instruments could be significantly different.

The estimated fair values of the Corporation's financial instruments are as follows:


	June 30, 2011				December 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial Assets
Cash and cash equivalents	$	189,133	$	189,133	$	131,571	$	131,571
Securities available for sale		820,847		820,847		738,125		738,125
Securities held to maturity		1,010,672		1,038,434		940,481		959,414
Net loans, including loans held for sale		6,603,293		6,645,714		5,994,735		6,035,129
Bank owned life insurance		208,714		208,714		208,051		208,051
Accrued interest receivable		26,034		26,034		25,345		25,345

Financial Liabilities
Deposits		7,397,219		7,431,243		6,646,143		6,677,301
Short-term borrowings		728,300		728,300		753,603		754,211
Long-term debt		221,061		226,402		192,058		197,397
Junior subordinated debt		203,941		150,516		204,036		141,061
Accrued interest payable		7,287		7,287		6,866		6,866