(12) Estimated Fair Value of Financial Instruments

The Corporation discloses estimated fair values for its financial instruments. Fair value estimates, methods and assumptions are set forth below for the Corporation’s financial instruments.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Limitations

Estimates of fair value are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Estimates of fair value are based on existing on-and-off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Corporation has a substantial Investment and Trust Services Division that contributes net fee income annually. The Investment and Trust Services Division is not considered a financial instrument and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial instruments include property, plant and equipment, goodwill and deferred tax liabilities. In addition, it is not practicable for the Corporation to estimate the tax ramifications related to the realization of the unrealized gains and losses and they have not been reflected in any of the estimates of fair value. The impact of these tax ramifications can have a significant effect on estimates of fair value.

The estimated fair values of the Corporation’s financial instruments at June 30, 2012 and December 31, 2011 are summarized as follows:

The fair value of financial assets and liabilities is categorized in three levels. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. These levels are:

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Corporation’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

The following information pertains to assets measured by fair value on a recurring basis (in thousands):

There were no transfers between Levels 1 and 2 of the fair value hierarchy during the three and six months ended June 30, 2012. For the available for sale securities, the Corporation obtains fair value measurements from an independent third party service and or from independent brokers.

The following tables present the balances of assets and liabilities measured at fair value on a nonrecurring basis at June 30, 2012 and December 31, 2011:

The Corporation has assets that, under certain conditions, are subject to measurement at fair value on a non-recurring basis. The fair value of collateral-dependent impaired loans and other real estate owned is determined through the use of an independent third-party appraisal (Level 3 input), once a loan is identified as impaired or the Corporation takes ownership of a property. The Corporation maintains a disciplined approach of obtaining updated independent third-party appraisals relating to such loans or property on at least an annual basis, at which time the determination of fair value is updated as necessary to reflect the appraisal. In addition, Management reviews the fair value of those collateral-dependent impaired loans in amounts that it considers to be material ($250,000 or greater) on a monthly basis and makes necessary adjustments to the fair value based on individual facts and circumstances, which review may include obtaining new third-party appraisals.

Mortgage Servicing Rights (MSR). The Corporation carries its mortgage servicing rights at lower of cost or fair value, and therefore, can be subject to fair value measurements on a nonrecurring basis. Since sales of mortgage servicing rights occur in private transactions and the precise terms and conditions of the sales are typically not readily available (Level 3), there is a limited market to refer to in determining the fair value of mortgage servicing rights. As such the Corporation utilizes a third party vendor to perform a valuation on the mortgage servicing rights to estimate the fair value. The Corporation reviews the estimated fair values and assumptions used by the third party vendor on a quarterly basis.

Impaired Loans. Impaired loans valued using Level 3 inputs consist of non-homogeneous loans that are considered impaired. The Corporation estimates the fair value of these loans based on the estimated realizable values of available collateral, which is typically based on current independent third-party appraisals.

Other Real Estate Owned. Other real estate owned (“OREO”) is measured and reported at fair value when the current book value exceeds the estimated fair value of the property. Management’s determination of the fair value for these loans uses a market approach representing the estimated net proceeds to be received from the sale of the property based on observable market prices and market value provided by independent, licensed or certified appraisers (Level 3 Inputs).