Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value Measurements [Abstract]

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 September 30, 2012, and December 31, 2011, are as follows

       Fair Value Measurements at September 30, 2012

	Basis	Total	Level 1	Level 2	Level 3
In thousands
U.S. Government and agencies		$        25,347	$                  –	$         25,347	$                  –
Mortgage-backed securities		90,342	–	90,342	–
State and municipal		50,950	–	50,950	–
Corporate bonds		7,355	–	7,355	–
CRA mutual fund		1,102	1,102	–	–
Stock in other banks		793	793	–	–
Total securities available for sale	Recurring	$     175,889	$           1,895	$       173,994	$                  –
Impaired loans	Nonrecurring	$          3,951	$                   –	$                  –	$           3,951
Foreclosed assets held for resale	Nonrecurring	$          2,065	$                   –	$                  –	$           2,065

Fair Value Measurements at December 31, 2011               

	Basis	Total	Level 1	Level 2	Level 3
In thousands
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 September 30, 2012, and December 31, 2011:

Cash and Cash Equivalents (Carried at Cost)

The carrying amounts reported in the consolidated statements 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. 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 and/or charge-offs.

Foreclosed Assets Held for Resale

Fair value of real estate acquired through foreclosure is based on independent third-party appraisals of the properties. 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.

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Corporation's financial instruments as of September 30, 2012:

	September 30, 2012
	Carrying Amount	Fair Value	Level 1	Level 2	Level 3
In thousands
Financial assets:
Cash and due from banks	$       12,338	$       12,338	$       12,338	$                 –	$                 –
Interest-bearing deposits in banks	52,165	52,165	52,165	–	–
Investment securities:
Available for sale	175,889	175,889	1,895	173,994	–
Held to maturity	48,016	48,971	–	48,971	–
Loans held for sale	3,618	3,618	3,618	–	–
Loans, less allowance for loan losses	686,082	719,483	–	–	719,483
Accrued interest receivable	3,587	3,587	3,587	–	–
Restricted investment in bank stocks	5,887	5,887	5,887	–	–
Financial liabilities:
Deposits	831,351	832,828	547,787	285,041	–
Short-term borrowings	52,926	52,926	52,926	–	–
Long-term borrowings	70,015	72,978	–	72,978	–
Accrued interest payable	1,320	1,320	1,320	–	–
Off-balance sheet financial instruments	–	–	–	–	–

The following presents the carrying amount and fair value of the Corporation's financial instruments as of December 31, 2011:

December 31, 2011
Carrying Amount	Fair Value

        In thousands

Financial assets:
Cash and due from banks	$     14,423	$     14,423
Interest bearing deposits in banks	8,200	8,200
Investment securities:
Available for sale	209,227	209,227
Held to maturity	10,032	10,680
Loans held for sale	337	337
Loans, less allowance for loan losses	678,986	710,671
Accrued interest receivable	3,674	3,674
Restricted investment in bank stocks	7,146	7,146
Financial liabilities:
Deposits	782,795	784,784
Short-term borrowings	45,962	45,962
Long-term borrowings	71,191	75,792
Accrued interest payable	1,429	1,429
Off-balance sheet financial instruments	–	–

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

	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value Estimate	Valuation Technique		Unobservable Input		Range
In thousands
September 30, 2012
Impaired loans	$           3,951	Appraisal of collateral	(1)	Appraisal adjustments	(2)	10 - 50%
Foreclosed assets held for resale	$           2,065	Appraisal of collateral	(1) (3)	Appraisal adjustments	(2)	10 - 50%

(1)Fair value is generally determined through independent third-party appraisals of the underlying collateral, which generally includes various Level 3 inputs which are not identifiable.

(2)Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percentage of the appraisal.

(3)Includes qualitative adjustments by management and estimated liquidation expenses.