Fair Value Measurement

9 Months Ended

Sep. 30, 2011

(9) Fair Value Measurement

The Corporation uses a fair value hierarchy to measure fair value. The topic describes three levels of inputs that may be used to measure fair value. Level 1: Quoted prices for identical assets in active markets that are identifiable on the measurement date; Level 2: Significant other observable inputs, such as quoted prices for similar assets, quoted prices in markets that are not active and other inputs that are observable or can be corroborated by observable market data; Level 3: Significant unobservable inputs that reflect the Corporation’s own view about the assumptions that market participants would use in pricing an asset.

Securities: The fair values of securities available for sale are determined by 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 by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). Management uses significant unobservable inputs to determine the fair value of one security (Level 3 inputs).

Equity securities: The fair values of equity securities available for sale are determined by review of quoted prices for the specific securities, when available (Level 1 inputs).

Impaired loans: The fair values of impaired loans are determined using the fair values of collateral for collateral dependent loans. The Corporation uses appraisals and other available data to estimate the fair value of collateral (Level 3 inputs).

Other real estate owned: The fair value of other real estate owned is determined using the fair value of collateral. The Corporation uses appraisals and other available data to estimate the fair value of collateral (Level 3 inputs).

Assets measured at fair value are summarized below.


	Fair Value Measurements at September 30, 2011 Using:
	Quoted Prices in				Significant
	Active Markets for		Significant Other		Unobservable
	Identical Assets		Observable Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)
Assets:

Assets measured at fair value on a recurring basis:

U.S. Treasury securities and obligations of U.S. Government agencies	$	—	$	52,031	$	—
Obligations of states and political subdivisions		—		65,934		526
Mortgage-backed securities in government sponsored entities		—		90,541		—
Equity securities in financial institutions		676		—		—

Assets measured at fair value on a nonrecurring basis:

Impaired loans	$	—	$	—	$	20,744
Other real estate owned		—		—		1,080


	Fair Value Measurements at December 31, 2010 Using:
	Quoted Prices in				Significant
	Active Markets for		Significant Other		Unobservable
	Identical Assets		Observable Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)
Assets:

Assets measured at fair value on a recurring basis:

U.S. Treasury securities and obligations of U.S. Government agencies	$	—	$	55,707	$	—
Obligations of states and political subdivisions		—		59,909		560
Mortgage-backed securities in government sponsored agencies		—		68,100		—
Equity securities in financial institutions		676		—		—

Assets measured at fair value on a nonrecurring basis:

Impaired loans	$	—	$	—	$	15,310
Other real estate owned		—		1,795		—

The following table presents the changes in the Level 3 fair-value category for the period ended September 30, 2011. The Corporation classifies financial instruments in Level 3 of the fair value hierarchy when there is reliance on at least one significant unobservable input to the valuation model. In addition to the unobservable inputs, the valuation models for Level 3 financial instruments typically also rely on a number of inputs that are readily observable, either directly or indirectly.


Securities available for sale

Beginning balance January 1, 2011	$	560
Principal payments		(34	)

Ending balance September 30, 2011	$	526

The carrying amount and fair values of financial instruments not previously presented were as follows.


	September 30, 2011				December 31, 2010
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
Financial Assets:
Cash and due from financial institutions	$	85,749	$	85,749	$	79,030	$	79,030
Other securities		15,388		15,388		15,344		15,344
Loans, available for sale		483		483		—		—
Loans, net of allowance for loan losses		755,564		769,402		745,555		763,768
Accrued interest receivable		5,061		5,061		4,382		4,382

Financial Liabilities:
Deposits		911,762		914,474		892,463		895,950
Federal Home Loan Bank advances		70,303		73,369		50,327		53,162
U.S. Treasury interest-bearing demand note payable		2,339		2,339		2,008		2,008
Securities sold under agreement to repurchase		19,283		19,283		21,842		21,842
Subordinated debentures		29,427		21,059		29,427		15,883
Accrued interest payable		344		344		362		362

The fair value approximates carrying amount for all items except those described below. The fair value for securities is based on quoted market values for the individual securities or for equivalent securities. 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 cash flow analysis or underlying collateral values. Fair value of debt is based on current rates for similar financing. 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 and are considered nominal.

For certain homogeneous categories of loans, such as some residential mortgages, credit card receivables, and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of 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.

- Definition

This item represents the complete disclosure regarding the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments, assets, and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the Company is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risk is are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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