Fair Value

6 Months Ended

Jun. 30, 2011

Fair Value [Abstract]

FAIR VALUE

NOTE 12 —FAIR VALUE

Estimated Fair Values of Financial Instruments Not Recorded at Fair Value in their Entirety on a Recurring Basis

Disclosure of the estimated fair values of financial instruments, which differ from carrying values, often requires the use of estimates. In cases where quoted market values in an active market are not available, the Corporation uses present value techniques and other valuation methods to estimate the fair values of its financial instruments. These valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used.

The carrying amount and estimated fair value of financial instruments not recorded at fair value in their entirety on a recurring basis on the Corporation’s consolidated balance sheets are as follows:

	June 30, 2011				December 31, 2010
	Estimated		Carrying		Estimated		Carrying
	Fair Value		Value		Fair Value		Value
ASSETS
Cash and demand deposits due from banks	$	21,792	$	21,792	$	18,109	$	18,109
Certicates of deposit held in other financial institutions		10,935		10,874		15,908		15,808
Mortgage loans available-for-sale		764		764		1,182		1,182
Net loans		747,891		733,916		734,634		722,931
Accrued interest receivable		5,579		5,579		5,456		5,456
Equity securities without readily determinable fair values		17,061		17,061		17,564		17,564
Originated mortgage servicing rights		2,617		2,617		2,673		2,667
LIABILITIES
Deposits with no stated maturities		457,352		457,352		424,978		424,978
Deposits with stated maturities		475,564		466,847		454,332		452,361
Borrowed funds		198,411		186,174		190,180		184,494
Accrued interest payable		1,001		1,001		1,003		1,003

Financial Instruments Recorded at Fair Value

The table below presents the recorded amount of assets and liabilities measured at fair value on:

	June 30, 2011								December 31, 2010
Description	Total		Level 2			Level 3			Total		Level 2			Level 3
Recurring items
Trading securities
States and political subdivisions	$	4,910	$	4,910		$	—		$	5,837	$	5,837		$	—
Total trading securities		4,910		4,910			—			5,837		5,837			—
Available-for-sale investment securities
Government sponsored enterprises		5,403		5,403			—			5,404		5,404			—
States and political subdivisions		167,334		167,334			—			169,717		169,717			—
Auction rate money market preferred		2,834		—			2,834			2,865		—			2,865
Preferred stock		7,570		—			7,570			6,936		—			6,936
Mortgage-backed		106,971		106,971			—			102,215		102,215			—
Collateralized mortgage obligations		90,113		90,113			—			43,587		43,587			—
Total available-for-sale investment securities		380,225		369,821			10,404			330,724		320,923			9,801
Borrowed funds		10,306		10,306			—			10,423		10,423			—
Nonrecurring items
Impaired loans		18,748		—			18,748			12,048		—			12,048
Originated mortgage servicing rights		2,617		2,617			—			2,667		2,667			—
Foreclosed assets		2,230		2,230			—			2,067		2,067			—
	$	419,036	$	389,884		$	29,152		$	363,766	$	341,917		$	21,849
Percent of assets and liabilities measured at fair value				93.04	%		6.96	%				93.99	%		6.01	%

As of June 30, 2011 and December 31, 2010, the Corporation had no assets or liabilities measured utilizing Level 1 valuation techniques.

Following is a description of the valuation methodologies and key inputs used to measure financial assets and liabilities recorded at fair value, as well as a description of the methods and significant assumptions used to estimate fair value disclosures for financial instruments not recorded at fair value in their entirety on a recurring basis. For financial assets and liabilities recorded at fair value, the description includes an indication of the level of the fair value hierarchy in which the assets or liabilities are classified.

Cash and demand deposits due from banks: The carrying amounts of cash and short term investments, including Federal funds sold, approximate fair values.

Certificates of deposit held in other financial institutions: Interest bearing balances held in unaffiliated financial institutions include certificates of deposit and other short term interest bearing balances that mature within 3 years. Fair value is determined using prices for similar assets with similar characteristics.

Investment securities: Investment securities are recorded at fair value on a recurring basis. Level 2 fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss and liquidity assumptions. Level 2 securities include bonds issued by government sponsored enterprises, states and political subdivisions, mortgage-backed securities, and collateralized mortgage obligations issued by government sponsored enterprises.

Securities classified as Level 3 include securities in less liquid markets and include auction rate money market preferred securities and preferred stocks. Due to the limited trading activity of these securities, the fair values were estimated utilizing a hybrid of market value and discounted cash flow analysis as of June 30, 2011 and a discounted cash flow analysis as of December 31, 2010. These analyses considered creditworthiness of the counterparty, the timing of expected future cash flows, the current volume of trading activity, and recent trade prices. The discount rates used were determined by using the interest rates of similarly rated financial institutions debt based on the weighted average of a range of terms for corporate bond interest rates, which were obtained from published sources. All securities have call dates within the next year. The Corporation calculated the present value assuming a 3 year nonamortizing balloon using weighted average discount rates between 5.70% and 6.97% as of June 30, 2011.

Mortgage loans available-for-sale: Mortgage loans available-for-sale are carried at the lower of cost or fair value. The fair value of mortgage loans available-for-sale are based on what price secondary markets are currently offering for portfolios with similar characteristics. As such, the Corporation classifies loans subjected to nonrecurring fair value adjustments as Level 2.

Loans: For variable rate loans with no significant change in credit risk, fair values are based on carrying values. Fair values for fixed rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The resulting amounts are adjusted to estimate the effect of changes in the credit quality of borrowers since the loans were originated.

The Corporation does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and a specific allowance for loan losses may be established. Loans for which it is probable that payment of interest and principal will be significantly different than the contractual terms of the original loan agreement are considered impaired. Once a loan is identified as impaired, management measures the estimated impairment. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value, or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.

The Corporation reviews the net realizable values of the underlying collateral for collateral dependent impaired loans on at least a quarterly basis for all loan types. To determine the collateral value, management utilizes independent appraisals, broker price opinions, or internal evaluations. These valuations are reviewed to determine whether an additional discount should be applied given the age of market information that may have been considered as well as other factors such as costs to carry and sell an asset if it is determined that the collateral will be liquidated in connection with the ultimate settlement of the loan. The Corporation uses this valuation to determine if any charge offs or specific reserves are necessary. The Corporation may obtain new valuations in certain circumstances, including when there has been significant deterioration in the condition of the collateral, if the foreclosure process has begun, or if the existing valuation is deemed to be outdated.

Impaired loans where an allowance is established based on the net realizable value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraisal value, the Corporation records the loan as nonrecurring Level 2. When a current appraised value is not available or management determines the fair value collateral is further impaired below the appraised value, the Corporation records the impaired loans as nonrecurring Level 3.

Accrued interest: The carrying amounts of accrued interest approximate fair value.

Goodwill and other intangible assets: Acquisition intangibles and goodwill are subject to impairment testing. A projected cash flow valuation method is used in the completion of impairment testing. This valuation method requires a significant degree of management judgment. In the event the projected undiscounted net operating cash flows are less than the carrying value, the asset is recorded at fair value as determined by the valuation model. If the testing resulted in impairment, the Corporation would classify goodwill and other acquisition intangibles subjected to nonrecurring fair value adjustments as Level 3. For the six month periods ended June 30, 2011 and 2010, there were no impairments recorded on goodwill and other acquisition intangibles.

Equity securities without readily determinable fair values: The Corporation has investments in equity securities without readily determinable fair values as well as investments in joint ventures. The assets are individually reviewed for impairment on an annual basis, or more frequently if an indication of impairment exists, by comparing the carrying value to the estimated fair value. The lack of an independent source to validate fair value estimates, including the impact of future capital calls and transfer restrictions, is an inherent limitation in the valuation process. The Corporation classifies nonmarketable equity securities and its investments in joint ventures subjected to nonrecurring fair value adjustments as Level 3. For the six month periods ended June 30, 2011 and 2010, there were no impairments recorded on equity securities without readily determinable fair values.

Foreclosed assets: Upon transfer from the loan portfolio, foreclosed assets are adjusted to and subsequently carried at the lower of carrying value or fair value less costs to sell. Net realizable value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral and as such, the Corporation classifies foreclosed assets as a nonrecurring Level 2. When management determines that the net realizable value of the collateral is further impaired below the appraised value but there is no observable market price, the Corporation records the foreclosed asset as nonrecurring Level 3.

Originated mortgage servicing rights: Originated mortgage servicing rights are subject to impairment testing. A valuation model, which utilizes a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and a discount rate determined by management, is used for impairment testing. If the valuation model reflects a value less than the carrying value, originated mortgage servicing rights are adjusted to fair value through a valuation allowance as determined by the model. As such, the Corporation classifies loan servicing rights subject to nonrecurring fair value adjustments as Level 2.

Deposits: Demand, savings, and money market deposits are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for variable rate certificates of deposit approximate their recorded carrying value. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Borrowed funds: The carrying amounts of federal funds purchased, borrowings under overnight repurchase agreements, and other short-term borrowings maturing within ninety days approximate their fair values. The fair values of the Corporation’s other borrowed funds are estimated using discounted cash flow analyses based on the Corporation’s current incremental borrowing arrangements.

The Corporation has elected to measure a portion of borrowed funds at fair value. These borrowings are recorded at fair value on a recurring basis, with the fair value measurement estimated using discounted cash flow analysis based on the Corporation’s current incremental borrowing rates for similar types of borrowing arrangements. Changes in the fair value of these borrowings are included in noninterest income. As such, the Corporation classifies other borrowed funds as Level 2.

Commitments to extend credit, standby letters of credit and undisbursed loans: Fair values for off balance sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into consideration the remaining terms of the agreements and the counterparties’ credit standings. The Corporation does not charge fees for lending commitments; thus it is not practicable to estimate the fair value of these instruments.

The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Corporation believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement.

The table below represents the activity in available-for-sale investment securities measured with Level 3 inputs on a recurring basis for the three and six month periods ended June 30:

	Three Months Ended					Six Months Ended
	June 30					June 30
	2011		2010			2011		2010
Level 3 inputs at beginning of period	$	10,396	$	9,894		$	9,801	$	10,027
Net unrealized gains (losses)		8		(377	)		603		(510	)
Level 3 inputs — June 30	$	10,404	$	9,517		$	10,404	$	9,517

The changes in fair value of assets and liabilities recorded at fair value through earnings on a recurring basis and changes in assets and liabilities recorded at fair value on a nonrecurring basis, for which an impairment, or reduction of an impairment, was recognized in the three and six month periods ended June 30, 2011 and 2010, are summarized as follows:

	Three Months Ended June 30
	2011									2010
	Trading Gains			Other Gains						Trading Gains			Other Gains
Description	and (Losses)			and (Losses)			Total			and (Losses)			and (Losses)			Total
Recurring Items
Trading securities	$	(8	)	$	—		$	(8	)	$	(37	)	$	—		$	(37	)
Borrowed funds		—			37			37			—			(3	)		(3	)
Nonrecurring Items
Foreclosed assets		—			(25	)		(25	)		—			(13	)		(13	)
Originated mortgage servicing rights		—			(25	)		(25	)		—			(185	)		(185	)
Total	$	(8	)	$	(13	)	$	(21	)	$	(37	)	$	(201	)	$	(238	)

	Six Months Ended June 30
	2011									2010
	Trading Gains			Other Gains						Trading Gains			Other Gains
Description	and (Losses)			and (Losses)			Total			and (Losses)			and (Losses)			Total
Recurring items
Trading securities	$	(27	)	$	—		$	(27	)	$	(38	)	$	—		$	(38	)
Borrowed funds		—			117			117			—			53			53
Nonrecurring items
Foreclosed assets		—			(35	)		(35	)		—			(90	)		(90	)
Originated mortgage servicing rights		—			(18	)		(18	)		—			(149	)		(149	)
Total	$	(27	)	$	64		$	37		$	(38	)	$	(186	)	$	(224	)

The activity in borrowings which the Corporation has elected to carry at fair value was as follows for the three and six month periods ended June 30:

	Three Months Ended						Six Months Ended
	June 30						June 30
	2011			2010			2011			2010
Borrowings carried at fair value — beginning of period	$	10,343		$	17,748		$	10,423		$	17,804
Paydowns and maturities		—			(5,000	)		—			(5,000	)
Net change in fair value		(37	)		3			(117	)		(53	)
Borrowings carried at fair value — June 30	$	10,306		$	12,751		$	10,306		$	12,751
Unpaid principal balance — June 30	$	10,000		$	12,154		$	10,000		$	12,154