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Fair Value
 12 Months Ended
Dec. 31, 2011
Fair Value [Abstract]  
Fair Value

19.  Fair Value

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 December 31, 2011 and 2010:

 

                                 
          

Fair Value Measurements at December 31, 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

    $ 8,130      $ -       $ 8,130      $ -   

U.S. Government sponsored entities

      107,492        2,000         105,492        -   

States and political subdivisions

      158,437        4,655         153,782        -   

Residential mortgage and asset backed

      300,126        8,577         291,549        -   

Commercial mortgage and asset backed

      2,122        -         2,122        -   

Corporate notes and bonds

      13,860        -         11,800        2,060   

Pooled trust preferred

      340        -         -        340   

Pooled SBA

      46,056        46,056         -        -   

Other securities

      1,544        1,544         -        -   
    

 

 

    

 

 

     

 

 

    

 

 

  

Total Securities Available For Sale

    $ 638,107      $ 62,832       $ 572,875      $ 2,400   
    

 

 

    

 

 

     

 

 

    

 

 

  

Trading Securities:

                                  

Equity securities – financial services

    $ 779      $ 779       $ -      $ -   

Equity securities – industrials

      324        324         -        -   

International mutual funds

      257        257         -        -   

Certificates of deposit

      255        255         -        -   

Money market mutual funds

      241        241         -        -   

Equity securities – health care

      204        204         -        -   

Equity securities – utilities

      197        197         -        -   

Large cap growth mutual funds

      145        145         -        -   

Equity securities – consumer staples

      145        145         -        -   

Equity securities – consumer discretionary

      126        126         -        -   

Large cap value mutual funds

      105        105         -        -   

Corporate notes and bonds

      100        -         100        -   

Equity securities – technology

      75        75         -        -   

Equity securities – energy

      72        72         -        -   
         

Real estate investment trust mutual funds

      68        68         -        -   

U.S. Government sponsored entities

      55        -         55        -   

Equity securities – materials

      37        37         -        -   

Small cap mutual funds

      25        25         -        -   

Mid cap mutual funds

      23        23         -        -   
    

 

 

    

 

 

     

 

 

    

 

 

  

Total Trading Securities

    $ 3,233      $ 3,078       $ 155      $ -   
    

 

 

    

 

 

     

 

 

    

 

 

  

Liabilities,

                                  

Interest rate swaps

    $ (1,669 )    $ -       $ (1,669 )    $ -   
    

 

 

    

 

 

     

 

 

    

 

 

  

 

                                 
          

Fair Value Measurements at December 31, 2010 Using

  

Description

   

Total

    

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

     

Significant Other
Observable0 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 year ended December 31, 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

      -        820         -        438   

Purchases, issuances, sales, and settlements:

                                  

Purchases

      1,917        -         -        -   

Settlements

      (198 )      -         -        (992 ) 
    

 

 

    

 

 

     

 

 

    

 

 

  

Balance, December 31, 2011

    $ -      $ 2,060       $ -      $ 340   
    

 

 

    

 

 

     

 

 

    

 

 

  

 

  (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 beginning of the reporting period.

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 years ended December 31, 2010:

 

                                 
     Residential
mortgage and
asset backed		     Corporate
notes and
bonds		      U.S. Gov't
Sponsored
Entities		      Pooled
trust
preferred		  

Beginning balance

    $ 503      $ -       $ -       $ 1,909   

Transfers into Level 3 (a) (b)

      -        1,040         -         -   

Total gains or losses (realized/unrealized):

                                   

Included in earnings

      -        -         -         (2,241 ) 

Included in other comprehensive income

      -        200         -         1,787   

Purchases, issuances, sales, and settlements:

                                   

Purchases

      1,982        -         2,000         -   

Sales

      -        -         -         -   

Settlements

      (216 )      -         -         (163 ) 
    

 

 

    

 

 

     

 

 

     

 

 

  

Ending balance

    $ 2,269      $ 1,240       $ 2,000       $ 1,292   
    

 

 

    

 

 

     

 

 

     

 

 

  

 

  (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 beginning of the reporting period.

The unrealized losses reported in earnings for the years ended December 31, 2011 and 2010 for Level 3 assets that are still held at December 31, 2011 and 2010 relate to structured pooled trust preferred securities deemed to be other-than-temporarily impaired.

 

During the year ended December 31, 2011 and 2010, the following available for sale securities reported as Level 1 securities as of the beginning of the year were transferred to the Level 2 category:

 

                 
     2011      2010  

U.S. Government sponsored entities

    $ 2,000       $ 14,598   

States and political subdivisions

      4,750         3,273   

Residential mortgage and asset backed

      20,405         5,625   
    

 

 

     

 

 

  

Total

    $ 27,155       $ 23,496   
    

 

 

     

 

 

  

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. The Corporation's policy is to recognize transfers as of the beginning of the reporting period.

During the year ended December 31, 2011, two pooled 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. During the year ended December 31, 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 $1,985. 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 December 31, 2011 and 2010:

 

                                 
          Fair Value Measurements at December 31, 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

   $ 7,219      $ -      $ -      $ 7,219   

Commercial, industrial, and agricultural

     3,190        -        -        3,190   

Residential real estate

     105        -        -        105   

 

                                 
            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

    $ 8,250       $ -       $ -       $ 8,250   

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 $22,384, with a valuation allowance of $1,493 as of December 31, 2011, resulting in an additional provision for loan losses of $583 for the year 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 December 31, 2011 and 2010:

 

                                 
     December 31, 2011     December 31, 2010  
    

Carrying
Amount

    

Fair

Value

    

Carrying
Amount

    

Fair

Value

  

ASSETS

                                 

Cash and cash equivalents

    $ 39,703      $ 39,703      $ 37,432      $ 37,432   

Interest bearing time deposits with other banks

      224        229        2,817        2,719   

Securities available for sale

      638,107        638,107        500,677        500,677   

Trading securities

      3,233        3,233        2,351        2,351   

Loans held for sale

      1,442        1,470        4,451        4,518   

Net loans

      837,268        862,389        783,742        807,972   

FHLB and other equity interests

      6,537        N/A        6,415        N/A   

Accrued interest receivable

      6,567        6,567        5,867        5,867   
         

LIABILITIES

                                 

Deposits

    $ (1,353,851 )    $ (1,357,415 )    $ (1,162,868 )    $ (1,167,071 ) 

FHLB, Treasury, tax and loan, and other borrowings

      (74,456 )      (83,042 )      (106,507 )      (109,963 ) 

Subordinated debentures

      (20,620 )      (10,906 )      (20,620 )      (10,660 ) 

Interest rate swaps

      (1,669 )      (1,669 )      (867 )      (867 ) 

Accrued interest payable

      (1,308 )      (1,308 )      (1,666 )      (1,666 )