Fair Value

9 Months Ended

Sep. 30, 2011

Fair Value [Abstract]

Fair Value

FAIR VALUE

Fair Value Option

Management elected to adopt the fair value option for its investment in certain equity securities in order to provide financial statement users with greater visibility into the Corporation's financial instruments that do not have a defined maturity date.

Fair value changes attributable to unrealized losses that were included in earnings for the three and nine months ended September 30, 2011 were ($313) and ($226), respectively. Fair value changes attributable to unrealized gains that were included in earnings for the three and nine month ended September 30, 2010 were $23 and $26. Realized gains on the sale of securities for which the fair value option was elected were $0 and $10 during the three and nine months ended September 30, 2011. Realized losses on the sale of securities for which the fair value option was elected were ($8) and ($68) during the three and nine months ended September 30, 2010.

Dividend income is recorded based on cash dividends and comprises the "Dividends" line item in the accompanying consolidated statement of income. Dividend income was $8 and $23 for the three and nine months ended September 30, 2011 and $6 and $20 for the three and nine months ended September 30, 2010.

Fair Value Measurement

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy has also been established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The following three levels of inputs are used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other 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.

Level 3: Significant unobservable inputs that reflect a company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair values of most trading securities and securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs). The fair values of certain residential mortgage-backed securities, one corporate bond, and one bond issued by a government sponsored entity classified as available for sale have been determined by using Level 3 inputs. The Corporation has engaged a valuation expert to price these securities using a proprietary model, which incorporates assumptions that market participants would use in pricing the securities, including bid/ask spreads and liquidity and credit premiums.

Trust preferred securities which are issued by financial institutions and insurance companies are priced using Level 3 inputs. The decline in the level of observable inputs and market activity in this class of investments by the measurement date has been significant and resulted in unreliable external pricing. Broker pricing and bid/ask spreads, when available, vary widely, and the once-active market has become comparatively inactive. The Corporation engaged a third party consultant who has developed a model for pricing these securities. Information such as historical and current performance of the underlying collateral, deferral and default rates, collateral coverage ratios, break in yield calculations, cash flow projections, liquidity and credit premiums required by a market participant, and financial trend analysis with respect to the individual issuing financial institutions and insurance companies are utilized in determining individual security valuations. Due to the current market conditions as well as the limited trading activity of these securities, the market value of the securities is highly sensitive to assumption changes and market volatility. The Corporation's derivative instrument is an interest rate swap that is similar to those that trade in liquid markets. As such, significant fair value inputs can generally be verified and do not typically involve significant management judgments (Level 2 inputs).

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Assets and liabilities measured at fair value on a recurring basis are as follows at September 30, 2011 and December 31, 2010:

				Fair Value Measurements at September 30, 2011 Using
Description	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Assets:
Securities Available For Sale:
U.S. Treasury	$	8,162		$	—	$	8,162		$	—
U.S. Government sponsored entities		97,912			6,000		91,912			—
States and political subdivisions		142,044			7,131		134,913			—
Residential mortgage and asset backed		280,428			21,056		259,372			—
Commercial mortgage and asset backed		2,050			—		2,050			—
Corporate notes and bonds		14,541			1,000		11,681			1,860
Pooled trust preferred		1,227			—		—			1,227
Pooled SBA		44,432			44,432		—			—
Other securities		1,709			1,709		—			—
Total Securities Available For Sale	$	592,505		$	81,328	$	508,090		$	3,087
Trading Securities:
Equity securities – financial services	$	621		$	621	$	—		$	—
Equity securities – industrials		323			323		—			—
International mutual funds		257			257		—			—
Equity securities – health care		186			186		—			—
Equity securities – utilities		171			171		—			—
Certificates of deposit		156			156		—			—
Corporate notes and bonds		150			—		150			—
Large cap growth mutual funds		138			138		—			—
U.S. Government sponsored entities		129			—		129			—
Money market mutual funds		111			111		—			—
Real estate investment trust mutual funds		105			105		—			—
Equity securities – energy		103			103		—			—
Large cap value mutual funds		97			97		—			—
Equity securities – consumer staples		62			62		—			—
Equity securities – consumer discretionary		49			49		—			—
Mid cap mutual funds		35			35		—			—
Small cap mutual funds		33			33		—			—
Equity securities – materials		30			30		—			—
Total Trading Securities	$	2,756		$	2,477	$	279		$	—
Liabilities,
Interest rate swaps	$	(1,665	)	$	—	$	(1,665	)	$	—
				Fair Value Measurements at December 31, 2010 Using
Description	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Assets:
Securities Available For Sale:
U.S. Treasury	$	8,205		$	—	$	8,205		$	—
U.S. Government sponsored entities		105,941			2,000		101,941			2,000
States and political subdivisions		116,411			4,750		111,661			—
Residential mortgage and asset backed		222,419			20,405		199,745			2,269
Corporate notes and bonds		10,751			—		9,511			1,240
Pooled trust preferred		1,292			—		—			1,292
Pooled SBA		33,962			28,489		5,473			—
Other securities		1,696			1,696		—			—
Total Securities Available For Sale	$	500,677		$	57,340	$	436,536		$	6,801
Trading Securities:
Equity securities – financial services	$	523		$	523	$	—		$	—
International mutual funds		430			430		—			—
Large cap value mutual funds		247			247		—			—
Certificates of deposit		208			208		—			—
Equity securities – health care		151			151		—			—
U.S. Government sponsored entities		147			—		147			—
Large cap growth mutual funds		139			139		—			—
Equity securities – energy		119			119		—			—
Equity securities – industrials		98			98		—			—
Corporate notes and bonds		96			—		96			—
Money market mutual funds		75			75		—			—
Equity securities – utilities		61			61		—			—
Small cap mutual funds		29			29		—			—
Mid cap mutual funds		28			28		—			—
Total Trading Securities	$	2,351		$	2,108	$	243		$	—
Liabilities,
Interest rate swap	$	(867	)	$	—	$	(867	)	$	—

The table below presents a reconciliation and income statement classification of gains and losses for all securities available for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended September 30, 2011:

	Residential mortgage and asset backed			Corporate notes and bonds		Pooled trust preferred
Balance, July 1, 2011	$	3,988		$	1,860	$	1,362
Transfers out of Level 3 (a)(b)		(3,988	)		—		—
Total gains or losses (realized/unrealized):
Included in other comprehensive income		—			—		(130	)
Purchases, issuances, sales, and settlements:
Settlements		—			—		(5	)
Balance, September 30, 2011	$	—		$	1,860	$	1,227

(a) Transferred from Level 3 to Level 2 since observable market data became available to value the security.

(b) The Corporation's policy is to recognize transfers in and transfers out as of the actual date of the event or change in circumstances that caused the transfer.

The table below presents a reconciliation and income statement classification of gains and losses for all securities available for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2011:

	Residential mortgage and asset backed			Corporate notes and bonds		U.S. Gov't Sponsored Entities			Pooled trust preferred
Balance, January 1, 2011	$	2,269		$	1,240	$	2,000		$	1,292
Transfers out of Level 3 (a)(b)		(3,988	)		—		(2,000	)		—
Total gains or losses (realized/unrealized):
Included in earnings		—			—		—			(398	)
Included in other comprehensive income		—			620		—			338
Purchases, issuances, sales, and settlements:
Purchases		1,917			—		—			—
Settlements		(198	)		—		—			(5	)
Balance, September 30, 2011	$	—		$	1,860	$	—		$	1,227

(a) Transferred from Level 3 to Level 2 since observable market data became available to value the security.

(b) The Corporation's policy is to recognize transfers in and transfers out as of the actual date of the event or change in circumstances that caused the transfer.

The table below presents a reconciliation and income statement classification of gains and losses for all securities available for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2010:

	Three months ended September 30, 2010									Nine months ended September 30, 2010
	Residential mortgage and asset backed			Corporate notes and bonds			Pooled trust preferred			Residential mortgage and asset backed			Corporate notes and bonds		Pooled trust preferred
Beginning balance	$	415		$	1,300		$	1,524		$	503		$	—	$	1,909
Transfers into Level 3 (a) (b)		—			—			—			—			1,040		—
Transfers out of Level 3		—			—			—			—			—		—
Total gains or losses (realized/unrealized):
Included in earnings		—			—			(821	)		—			—		(1,923	)
Included in other comprehensive income		—			(20	)		709			—			240		1,436
Purchases, issuances, sales, and settlements:
Sales		—			—			—			—			—		—
Settlements		(52	)		—			—			(140	)		—		(10	)
Ending balance	$	363		$	1,280		$	1,412		$	363		$	1,280	$	1,412

(a) Transferred from Level 2 to Level 3 because of lack of observable market data due to decrease in market activity for this security.

(b) The Corporation's policy is to recognize transfers in and transfers out as of the actual date of the event or change in circumstances that caused the transfer.

The unrealized losses reported in earnings for the three and nine months ended September 30, 2011 and 2010 for Level 3 assets that are still held at the balance sheet date relate to pooled trust preferred securities deemed to be other-than-temporarily impaired.

During the three months ended September 30, 2011 and 2010, the following available for sale securities reported as Level 1 securities as of the beginning of the period were transferred to the Level 2 category:

	2011		2010
U.S. Government sponsored entities	$	—	$	16,502
States and political subdivisions		—		11,085
Residential mortgage and asset backed		—		25,636
Total	$	—	$	53,223

During the nine months ended September 30, 2011 and 2010, the following available for sale securities reported as Level 1 securities as of the beginning of the period were transferred to the Level 2 category:

	2011		2010
U.S. Government sponsored entities	$	2,000	$	18,643
States and political subdivisions		4,750		3,273
Residential mortgage and asset backed		20,405		5,625
Total	$	27,155	$	27,541

These securities were transferred from the Level 1 category to the Level 2 category since there were no longer quoted prices for identical assets in active markets that the Corporation had the ability to access.

During the nine months ended September 30, 2011, two pooled Small Business Administration ("SBA") securities that were classified as Level 2 securities at December 31, 2010 were transferred to the Level 1 category. The fair value on the date of transfer was $3,437. There were no transfers of securities from the Level 2 category to the Level 1 category during the three months ended September 30, 2011. During the three months ended September 30, 2010, one pooled SBA security that was classified as a Level 2 security at June 30, 2010 was transferred to the Level 1 category. The fair value on the date of transfer was $884. During the nine months ended September 30, 2010, two pooled SBA securities that were classified as Level 2 securities at December 31, 2009 were transferred to the Level 1 category. The fair value on the date of transfer was $1,798. These securities were transferred since the Corporation was able to access a quoted price for identical assets in an active market.

Assets and liabilities measured at fair value on a non-recurring basis are as follows at September 30, 2011 and December 31, 2010:

			Fair Value Measurements at September 30, 2011 Using
Description	Total		Quoted Prices in Active  Markets for Identical Assets (Level 1)		Significant Other Observable  Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans:
Commercial mortgages	$	13,822	$	—	$	—	$	13,822
Commercial, industrial, and agricultural		2,426		—		—		2,426
Residential real estate		122		—		—		122

			Fair Value Measurements at December 31, 2010 Using
Description	Total		Quoted Prices in Active  Markets for Identical Assets (Level 1)		Significant Other Observable  Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans:
Commercial mortgages	$	9,721	$	—	$	—	$	9,721
Commercial, industrial, and agricultural		2,474		—		—		2,474
Residential real estate		166		—		—		166

Impaired loans, which are measured for impairment using the fair value of collateral for collateral dependent loans, had a principal balance of $18,010 with a valuation allowance of $1,640 as of September 30, 2011, resulting in an additional provision for loan losses of $530 and $782 for the three and nine months then ended. Impaired loans had a principal balance of $13,324 with a valuation allowance of $963 as of December 31, 2010, resulting in an additional provision for loan losses of $951 for the year then ended.

Fair Value of Financial Instruments

Carrying amount is the estimated fair value for cash and cash equivalents, accrued interest receivable and payable, demand deposits, other borrowings, and variable rate loans, deposits or borrowings that reprice frequently and fully. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair value of loans held for sale is based on market quotes. Fair value of debt is based on current rates for similar financing. It is not practical to determine the fair value of Federal Home Loan Bank stock and other equity interests due to restrictions placed on the transferability of these instruments. The fair value of off balance sheet items is based on the current fees or cost that would be charged to enter into or terminate such arrangements. The fair value of off balance sheet items is not material.

While estimates of fair value are based on management's judgment of the most appropriate factors as of the balance sheet date, there is no assurance that the estimated fair values would have been realized if the assets had been disposed of or the liabilities settled at that date, since market values may differ depending on various circumstances. The estimated fair values would also not apply to subsequent dates.

In addition, other assets and liabilities that are not financial instruments, such as premises and equipment, are not included in the disclosures. Also, non-financial assets such as, among other things, the estimated earnings power of core deposits, the earnings potential of trust accounts, the trained workforce, and customer goodwill, which typically are not recognized on the balance sheet may have value but are not included in the fair value disclosures.

The following table presents the carrying amount and fair value of financial instruments at September 30, 2011 and December 31, 2010:

	September 30, 2011						December 31, 2010
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
ASSETS
Cash and cash equivalents	$	41,176		$	41,176		$	37,432		$	37,432
Interest bearing time deposits with other banks		224			229			2,817			2,719
Securities available for sale		592,505			592,505			500,677			500,677
Trading securities		2,756			2,756			2,351			2,351
Loans held for sale		1,049			1,070			4,451			4,518
Net loans		823,414			844,580			783,742			807,972
FHLB and other equity interests		6,594			N/A			6,415			N/A
Accrued interest receivable		6,476			6,476			5,867			5,867
LIABILITIES
Deposits	$	(1,297,562	)	$	(1,301,803	)	$	(1,162,868	)	$	(1,167,071	)
FHLB, Treasury, tax and loan, and other borrowings		(75,424	)		(83,771	)		(106,507	)		(109,963	)
Subordinated debentures		(20,620	)		(10,746	)		(20,620	)		(10,660	)
Interest rate swaps		(1,665	)		(1,665	)		(867	)		(867	)
Accrued interest payable		(1,355	)		(1,355	)		(1,666	)		(1,666	)