Disclosures about fair value of assets and liabilities

12 Months Ended

Dec. 31, 2011

Disclosures about fair value of assets and liabilities and Fair Value of Financial Instruments [Abstract]

Disclosures about fair value of assets and liabilities

Note 21—Disclosures about fair value of assets and liabilities

Fair value is defined 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. A fair value hierarchy is also established which requires an entity to maximize the use of observable and minimize the use of unobservable inputs. There are three levels of inputs that may be used to measure fair value:

Level 1 Quoted prices in active markets for identical assets or liabilities

Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

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

Available for sale securities

When quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. 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. Level 2 securities include, Treasury and federal agency securities, state and municipal securities, federal agency mortgage obligations and mortgage-backed pools, and corporate notes. Level 2 securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs. Observable inputs include dealer quotes, market spreads, cash flow analysis, the Treasury yield curve, trade execution data, market consensus prepayment spreads and available credit information and the bond’s terms and conditions. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of securities with similar characteristics and, because many fixed-income securities do not trade on a daily basis, apply available information through processes such as benchmark curves, benchmarking of like securities, sector grouping, and matrix pricing. In addition, model processes, such as an option adjusted spread model is used to develop prepayment and interest rate scenarios for securities with prepayment features.

Hedged loans

Certain fixed rate loans have been converted to variable rate loans through entering into interest rate swap agreements. Fair value of those fixed rate loans is based on discounting estimated cash flows using interest rates determined by a respective interest rate swap agreement. Loans are classified within Level 3 of the valuation hierarchy based on the unobservable inputs used.

Forward sale commitments

The Company enters into non-hedging derivatives in the form of mortgage loan forward sale commitments with investors and commitments to originate mortgage loans as part of its mortgage banking business. Loans are classified within Level 3 of the valuation hierarchy based on the unobservable inputs used.

Interest rate swap agreements

The fair value is estimated by a third party using inputs that are primarily unobservable and cannot be corroborated by observable market data and, therefore, are classified within Level 3 of the valuation hierarchy.

The following table presents the fair value measurements of assets and liabilities recognized in the accompanying financial statements measured at fair value on a recurring basis and the level within the FASB ASC fair value hierarchy in which the fair value measurements fall at the following:

	Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2011
Available-for-sale securities
U.S. Treasury and federal agencies	$	13,022		$	—	$	13,022	$	—
State and municipal		143,890			—		143,890		—
Federal agency collateralized mortgage obligations		91,122			—		91,122		—
Federal agency mortgage-backed pools		179,351			—		179,351		—
Private labeled mortgage-backed pools		3,636			—		3,636		—
Corporate notes		24			—		24		—
Total available-for-sale securities		431,045			—		431,045		—
Hedged loans		54,362			—		—		54,362
Forward sale commitments		662			—		—		662
Interest rate swap agreements		(7,102	)		—		—		(7,102	)
Commitments to originate loans		—			—		—		—
December 31, 2010
Available-for-sale securities
U.S. Treasury and federal agencies	$	25,251		$	—	$	25,251	$	—
State and municipal		131,489			—		131,489		—
Federal agency collateralized mortgage obligations		101,837			—		101,837		—
Federal agency mortgage-backed pools		117,895			—		117,895		—
Private labeled mortgage-backed pools		5,323			—		5,323		—
Corporate notes		549			456		20		—
Total available-for-sale securities		382,344			456		381,815		—
Hedged loans		50,088			—		—		50,088
Forward sale commitments		407			—		—		407
Interest rate swap agreements		(3,415	)		—		—		(3,415	)
Commitments to originate loans		—			—		—		—

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying consolidated balance sheet using significant unobservable (level 3) inputs:

	Hedged Loans			Forward Sale Commitments		Interest Rate Swaps			Commitments to Originate Loans
Beginning balance December 31, 2010	$	50,088		$	407	$	(3,415	)	$	—
Total realized and unrealized gains and losses
Included in net income		147			255		(147	)		—
Included in other comprehensive income, gross		—			—		(3,539	)		—
Purchases, issuances, and settlements		9,091			—		—			—
Principal payments		(4,964	)		—		—			—
Ending balance December 31, 2011	$	54,362		$	662	$	(7,101	)	$	—

	Hedged Loans			Forward Sale Commitments		Interest Rate Swaps			Commitments to Originate Loans
Beginning balance December 31, 2009	$	31,153		$	265	$	(715	)	$	(135	)
Total realized and unrealized gains and losses
Included in net income		898			142		(898	)		135
Included in other comprehensive income, gross		—			—		(1,802	)		—
Purchases, issuances, and settlements		19,167			—		—			—
Principal payments		(1,130	)		—		—			—
Ending balance December 31, 2010	$	50,088		$	407	$	(3,415	)	$	—

Realized gains and losses included in net income for the periods are reported in the consolidated statements of income as follows:

	Years Ended December 31
	2011			2010			2009
Non Interest Income
Total gains and losses from:
Hedged loans	$	147		$	898		$	(565	)
Fair value interest rate swap agreements		(147	)		(898	)		565
Derivative loan commitments		255			(538	)		(101	)
	$	255		$	(538	)	$	(101	)

Certain other assets are measured at fair value on a nonrecurring basis in the course of business and are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment):

	Fair Value		Quoted Prices in Active  Markets for Identical Assets (Level 1)		Significant  Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2011
Impaired loans	$	5,822	$	—	$	—	$	5,822
December 31, 2010
Impaired loans	$	6,625	$	—	$	—	$	6,625

Impaired loans (collateral dependent): Fair value adjustments for impaired loans typically occur when there is evidence of impairment. Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. The Company measures fair value based on the value of the collateral securing the loans. Collateral may be in the form of real estate or personal property including equipment and inventory. The value of the collateral is determined based on internal estimates as well as third party appraisals or non-binding broker quotes. These measurements were classified as Level 3. The fair value of the Company’s other real estate owned is determined using Level 3 inputs, which include current and prior appraisals and estimated costs to sell.