Fair Value Measurements

3 Months Ended

Mar. 31, 2012

Fair Value of Financial Instruments

Fair Value Measurements

9.Fair Value Measurements

Management uses its best judgment in estimating the fair value of the Corporation's financial instruments; however, there are inherent weaknesses in any estimation technique.  Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Corporation could have realized in a sales transaction on the dates indicated.  The estimated fair value amounts have been measured as of their respective reporting dates and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates.  As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period end.

Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions.

Fair value measurement and disclosure guidance provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability.  When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with fair value measurement and disclosure guidance.

This guidance further clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly.  In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly.  The guidance provides a list of circumstances that may indicate that a transaction is not orderly.  A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.

Fair value measurement and disclosure guidance establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy are as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

An asset or liability's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

For assets measured at fair value, the fair value measurements by level within the fair value hierarchy, and the basis on measurement used at March 31, 2012, and December 31, 2011, are as follows:

Fair Value Measurements at March 31, 2012

In thousands	Basis	Total		Level 1		Level 2		Level 3
U.S. Government and agencies		$	35,096	$	—	$	35,096	$	—
Mortgage-backed securities		104,845		—		104,845		—
State and municipal		51,717		—		51,717		—
Corporate bonds		13,371		—		13,371		—
CRA mutual fund		1,082		1,082		—		—
Stock in other banks		801		801		—		—
Total securities available for sale	Recurring	$	206,912	$	1,883	$	205,029	$	—
Impaired loans	Nonrecurring	$	4,388	$	—	$	—	$	4,388
Foreclosed assets held for resale	Nonrecurring	$	1,270	$	—	$	—	$	1,270

Fair Value Measurements at December 31, 2011

In thousands	Basis	Total		Level 1		Level 2		Level 3
U.S. Government and agencies		$	40,169	$	—	$	40,169	$	—
Mortgage-backed securities		107,527		—		107,527		—
State and municipal		46,317		—		46,317		—
Corporate bonds		13,379		—		13,379		—
CRA mutual fund		1,081		1,081		—		—
Stock in other banks		754		754		—		—
Total securities available for sale	Recurring	$	209,227	$	1,835	$	207,392	$	—
Impaired loans	Nonrecurring	$	8,075	$	—	$	—	$	8,075
Foreclosed assets held for resale	Nonrecurring	$	1,176	$	—	$	—	$	1,176

The following information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation's assets and liabilities.  Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation's disclosures and those of other companies may not be meaningful.  The following methods and assumptions were used to estimate the fair values of certain of the Corporation's assets and liabilities at March 31, 2012, and December 31, 2011:

Cash and Cash Equivalents (Carried at Cost)

The carrying amounts reported in the consolidated statement of condition for cash and short-term instruments approximate those assets' fair value.

Securities

The fair values of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or by matrix pricing (Level 2) which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the security's relationship to other benchmark quoted prices.  The Corporation uses an independent service provider to provide matrix pricing and uses the valuation of another provider to compare for reasonableness.

Loans Held for Sale (Carried at Lower of Cost or Fair Value)

The fair values of loans held for sale are determined based on amounts to be received at settlement by establishing the respective buyer requirement or market interest rates.

Loans (Carried at Cost)

The fair values of loans are estimated using discounted cash flow analyses, as well as using market rates at the balance sheet date that reflect the credit and interest rate risk inherent in the loans.  Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments, and prepayments of principal.  Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

Impaired Loans (Generally Carried at Fair Value)

Loans for which the Corporation has measured impairment are generally based on the fair value of the loan's collateral.  Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. Third-party appraisals are generally discounted by 10%, however, in some cases they could be discounted by 50%, based on the facts and circumstances of the individual appraisals.  These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.  The fair value consists of the loan balances less the valuation allowance.

Foreclosed Assets Held for Resale

Fair value of real estate acquired through foreclosure is based on independent third-party appraisals of the properties. Third-party appraisals are generally discounted by 10%, however, in some cases they could be discounted by 50%, based on the facts and circumstances of the individual appraisals.  These assets are included as Level 3 fair values, based upon appraisals that consider the sales prices of similar properties in the proximate vicinity.

Restricted Investment in Bank Stock (Carried at Cost)

The carrying amount of required and restricted investment in correspondent bank stock approximates fair value, and considers the limited marketability of such securities.

Accrued Interest Receivable and Payable (Carried at Cost)

The carrying amounts of accrued interest receivable and accrued interest payable approximate their fair value.

Deposits (Carried at Cost)

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (e.g., their carrying amounts).  Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Short-Term Borrowings (Carried at Cost)

The carrying amounts of short-term borrowings approximate their fair values.

Long-Term Borrowings (Carried at Cost)

Fair values of Federal Home Loan Bank (FHLB) advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms, and remaining maturity.  These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.

Off-Balance Sheet Credit-Related Instruments

Fair values for the Corporation's off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing.

Estimated fair values of financial instruments at March 31, 2012, and December 31, 2011, were as follows:

	March 31, 2012				December 31, 2011
In thousands	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and due from banks	$	12,259	$	12,259	$	14,423	$	14,423
Interest bearing deposits in banks	17,943		17,943		8,200		8,200
Investment securities:
Available for sale	206,912		206,912		209,227		209,227
Held to maturity	10,028		10,641		10,032		10,680
Loans held for sale	2,181		2,181		337		337
Loans, less allowance for loan losses	687,866		719,599		678,986		710,671
Accrued interest receivable	3,655		3,655		3,674		3,674
Restricted investment in bank stocks	6,804		6,804		7,146		7,146
Financial liabilities:
Deposits	787,957		790,478		782,795		784,784
Short-term borrowings	44,420		44,420		45,962		45,962
Long-term borrowings	80,133		84,375		71,191		75,792
Accrued interest payable	1,290		1,290		1,429		1,429
Off-balance sheet financial instruments	—		—		—		—

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Corporation's financial instruments as of March 31, 2012.  This table excludes financial instruments for which the carrying amount approximates fair value.  For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to a relatively short time between the origination of the instrument and its expected realization.  For financial liabilities such as non-interest bearing demand, interest bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.

Fair Value Measurements at March 31, 2012

In thousands	Carrying Amount		Fair value		Level 1	Level 2		Level 3
Financial assets:
Investment securities held to maturity	$	10,028	$	10,641	—	$	10,641	—
Loans, less allowance for loan losses	687,866		719,599		—	719,599		—
Financial liabilities:
Time deposits	281,688		284,209		—	284,209		—
Long-term borrowings	80,133		84,375		—	84,375		—