FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2014

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

NOTE 21—FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (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. There are three levels of inputs that may be used to measure fair value:

FASB ASC 820-10-05 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

FASB ASC 820-10-65 provides additional guidance for estimating fair value in accordance with FASB ASC 820-10-05 when the volume and level of activity for the asset or liability have significantly decreased. This ASC also includes guidance on identifying circumstances that indicate a transaction is not orderly.

FASB ASC 820-10-05 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC 820-10-05 are as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (for example, supported with little or no market activity).

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The following information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis at December 31, 2014 and December 31, 2013:

Securities Available-for-Sale

Where quoted prices are available in an active market, securities are classified with Level 1 of the valuation hierarchy. Level 1 inputs include securities that have quoted prices in active markets for identical assets. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of instruments, which would generally be classified within Level 2 of the valuation hierarchy, include municipal bonds and certain agency collateralized mortgage obligations. In certain cases where there is limited activity in the market for a particular instrument, assumptions must be made to determine their fair value and are classified as Level 3. Due to the inactive condition of the markets amidst the financial crisis, the Company treated certain securities as Level 3 securities in order to provide more appropriate valuations. For assets in an inactive market, the infrequent trades that do occur are not a true indication of fair value. When measuring fair value, the valuation techniques available under the market approach, income approach and/or cost approach are used. The Company’s evaluations are based on market data and the Company employs combinations of these approaches for its valuation methods depending on the asset class.

Derivatives

The fair value of derivatives are based on valuation models using observable market data as of the measurement date (level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rate, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.

Loans Held for Sale

Loans held for sale are required to be measured at the lower of cost or fair value. Under FASB ASC 820-10-05, market value is to represent fair value. Management obtains quotes or bids on all or part of these loans directly from the purchasing financial institutions.

Loans Receivable

The fair value of performing loans, except residential mortgages, is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risks inherent in the loan. The estimate of maturity is based on the historical experience of the Bank with prepayments for each loan classification, modified as required by an estimate of the effect of current economic and lending conditions. For performing residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources adjusted to reflect differences in servicing and credit costs.

Off-Balance Sheet Financial Instruments

The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rate and the committed rates.

The fair value of financial standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2014 and December 31, 2013 are as follows:

	December 31, 2014			Fair Value Measurements at Reporting Date Using
				Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Financial Assets Measured at Fair Value on a Recurring Basis:
Federal agency obligations		$	32,817		$	—		$	32,817		$	—
Residential mortgage pass-through securities			60,356			—			60,356			—
Commercial mortgage pass-through securities			3,046			—			3,046			—
Obligations of U.S. states and political subdivision			8,406			—			8,406			—
Trust preferred securities			16,306			—			16,306			—
Corporate bonds and notes			125,777			—			125,777			—
Asset-backed securities			27,502			—			27,502			—
Certificates of deposit			2,123			—			2,123			—
Equity securities			307			307			—			—
Other securities			12,892			12,892			—			—
Securities available-for-sale		$	289,532		$	13,199		$	276,333		$	—
Derivatives		$	48		$	—		$	48		$	—

	December 31, 2013			Fair Value Measurements at Reporting Date Using
				Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Financial Assets Measured at Fair Value on a Recurring Basis:
U.S. treasury and agency securities		$	13,519		$	13,519		$	—		$	—
Federal agency obligations			19,941			—			19,941			—
Residential mortgage pass-through securities			48,874			—			48,874			—
Commercial mortgage pass-through securities			6,991			—			6,991			—
Obligations of U.S. states and political subdivision			31,460			—			31,460			—
Trust preferred securities			19,403			—			19,403			36
Corporate bonds and notes			158,630			—			158,630			—
Collateralized mortgage obligations			15,979			—			15,979			—
Asset-backed securities			15,979			—			15,979			—
Equity securities			287			287			—			—
Other securities			5,724			5,724			—			—
Securities available-for-sale		$	323,070		$	19,530		$	303,540		$	36

The fair values used by the Company are obtained from an independent pricing service and represent either quoted market prices for the identical securities (Level 1 inputs) or fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level 2). The fair values of the federal agency obligations, obligations of states and political subdivision and corporate bonds and notes measured at fair value using Level 1 inputs at December 31, 2014 and 2013 represented the purchase price of the securities since they were acquired near year-end 2013 and 2012.

The following table presents the changes in securities available-for-sale with significant unobservable inputs (Level 3) for the year ended December 31, 2014 and December 31, 2013:

	2014			2013
	(Dollars in Thousands)
Beginning balance, January 1,		$	—		$	36
Transfers out of Level 3			—			(260	)
Principal interest deferrals			—			58
Principal paydown			—			—
Total net losses included in net income			—			(628	)
Total net unrealized gains			—			794
Ending balance, December 31,		$	—		$	—

There are no transfers between Level 1, Level 2 and Level 3 during the years ended December 31, 2014 and 2013.

Assets Measured at Fair Value on a Non-Recurring Basis

The Company may be required periodically to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or impairment write-downs of individual assets. The Company primarily utilized appraisal value less cost to sell and other unobservable market inputs to determine fair value of assets, and therefore, is classified as a Level 3 measurement. For assets measured at fair value on a non-recurring basis, the fair value measurements at December 31, 2014 and 2013 are as follows:

			Range
Impaired Loans	Valuation Techniques	Range of Unobservable Inputs	Minimum	Maximum
Residential	Appraisals of collateral value	Adjustment for age of comparable sales	0%	25%
Commercial real estate	Appraisals of collateral value	Market capitalization rates, Market rental rates for similar properties	8%	12%
Construction	Appraisals of collateral value	Adjustment for age comparable sales	5%	0%
Other Real Estate Owned
Residential	Appraisals of collateral value	Adjustment for age of comparable sales	0%	25%
Residential	Appraisals of collateral value	Estimated selling costs	6%	8%
Commercial	Appraisals of collateral value	Adjustment for age of comparable sales	15%	0%
Commercial	Appraisals of collateral value	Estimated selling costs	6%	8%

2013

			Range
Impaired Loans	Valuation Techniques	Range of Unobservable Inputs	Minimum	Maximum
Residential	Appraisals of collateral value	Adjustment for age of comparable sales	0%	25%
Commercial real estate	Appraisals of collateral value	Market capitalization rates, Market rental rates for similar properties	8%	12%
Construction	Appraisals of collateral value	Adjustment for age comparable sales	5%	0%
Other Real Estate Owned
Residential	Appraisals of collateral value	Adjustment for age of comparable sales	0%	25%
Residential	Appraisals of collateral value	Estimated selling costs	6%	8%
Commercial	Appraisals of collateral value	Adjustment for age of comparable sales	15%	0%
Commercial	Appraisals of collateral value	Estimated selling costs	6%	8%

For assets measured at fair value on a non-recurring basis, the unobservable inputs used to derive fair value measurements at December 31, 2014 and December 31, 2013 were as follows:

	December 31, 2014			Fair Value Measurements at Reporting Date Using
				Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Assets Measured at Fair Value on a Non-Recurring Basis:
Impaired loans		$	3,907		$	—		$	—		$	3,907
Other real estate owned			1,108			—			—			1,108

	December 31, 2013			Fair Value Measurements at Reporting Date Using
				Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Assets Measured at Fair Value on a Non-Recurring Basis:
Impaired loans		$	4,601		$	—		$	—		$	4,601
Other real estate owned			220			—			—			220

The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a non-recurring basis at December 31, 2014 and 2013:

Impaired Loans. The value of an impaired loan is measured based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral dependent. Smaller balance homogeneous loans that are collectively evaluated for impairment, such as residential mortgage loans and installment loans, are specifically excluded from the impaired loan portfolio. The Company’s impaired loans are primarily collateral dependent. Impaired loans are individually assessed to determine that each loan’s carrying value is not in excess of the fair value of the related collateral or the present value of the expected future cash flows. At December 31, 2014 and 2013, impaired loans with related valuation allowance totaled $3.9 million and $5.0 million, respectively. The amount of related valuation allowances was $262,000 at December 31, 2014 and $415,000 at December 31, 2013.

Other Real Estate Owned. Certain assets such as OREO are measured at fair value less cost to sell. The Company believes that the fair value component in its valuation follows the provisions of FASB ASC 820-10-05. Fair value of OREO is determined by sales agreements or appraisals by qualified licensed appraisers approved and hired by the Company. Costs to sell associated with OREO are based on estimation per the terms and conditions of the sales agreements or appraisal.

Fair Value of Financial Instruments

FASB ASC 825-10 requires all entities to disclose the estimated fair value of their financial instrument assets and liabilities. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in FASB ASC 825-10. Many of the Company’s financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. It is also the Company’s general practice and intent to hold its financial instruments to maturity and not to engage in trading or sales activities except for loans held-for-sale and investment securities available-for-sale. Therefore, significant estimations and assumptions, as well as present value calculations, were used by the Company for the purposes of this disclosure.

Investment Securities Held-to-Maturity. The fair value of the Company’s investment securities held-to-maturity was primarily measured using information from a third-party pricing service. If quoted prices were not available, fair values were estimated primarily by obtaining quoted prices for similar assets in active markets or through the use of pricing models. In cases where there may be limited or less transparent information provided by the Company’s third-party pricing service, fair value may be estimated by the use of secondary pricing services or through the use of non-binding third- party broker quotes.

Loans. The fair value of the Company’s loans was estimated by discounting the expected future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans were segregated by types such as commercial, residential and consumer loans. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments.

Interest-Bearing Deposits. The fair values of the Company’s interest-bearing deposits were estimated using discounted cash flow analyses. The discounted rates used were based on rates currently offered for deposits with similar remaining maturities. The fair values of the Company’s interest-bearing deposits do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value.

Term Borrowings and Subordinated Debentures. The fair value of the Company’s long-term borrowings and subordinated debentures were calculated using a discounted cash flow approach and applying discount rates currently offered based on weighted remaining maturities.

Accrued Interest Receivable/Payable. The carrying amounts of accrued interest approximate fair value resulting in a level 2 or level 3 classification based on the level of the asset or liability with which the accrual is associated.

Cash and cash equivalents. The carrying amounts of cash and short-term instruments approximate fair values.

FHLB stock. It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of December 31, 2014 and December 31, 2013.

	Carrying Amount			Fair Value			Fair Value Measurements
							Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(in thousands)
December 31, 2014
Financial assets:
Cash and due from banks		$	126,847		$	126,847		$	126,847		$	—		$	—
Investment securities available-for-sale			289,532			289,532			13,199			276,333			—
Investment securities held-to-maturity			224,682			231,445			29,184			183,489			18,772
Restricted investment in bank stocks			23,535			n/a			n/a			n/a			n/a
Net loans			2,524,481			2,538,415			—			—			2,538,415
Derivatives			48			48			—			48			—
Accrued interest receivable			11,700			11,700			68			3,674			7,958
Financial liabilities:
Noninterest-bearing deposits			492,516			492,516			492,516			—			—
Interest-bearing deposits			1,983,091			1,990,484			—			1,990,484			—
Borrowings			495,553			505,641			—			505,641			—
Subordinated debentures			5,155			4,768			—			4,768			—
Accrued interest payable			3,930			3,930			—			3,930			—
December 31, 2013
Financial assets:
Cash and due from banks		$	82,692		$	82,692		$	82,692		$	—		$	—
Investment securities available-for-sale			323,070			323,070			19,530			303,540			—
Investment securities held-to-maturity			215,286			210,958			27,037			164,940			18,981
Restricted investment in bank stocks			8,986			n/a			n/a			n/a			n/a
Net loans			950,610			948,606			—			—			948,606
Accrued interest receivable			6,802			6,802			102			4,034			2,666
Financial liabilities:
Noninterest-bearing deposits			227,370			227,370			227,370			—			—
Interest-bearing deposits			1,114,635			1,115,781			—			1,115,781			—
Long-term borrowings			146,000			157,440			—			157,440			—
Subordinated debentures			5,155			5,143			—			5,143			—
Accrued interest payable			963			963			—			963			—

The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.

Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values.

The Company’s remaining assets and liabilities, which are not considered financial instruments, have not been valued differently than has been customary with historical cost accounting. No disclosure of the relationship value of the Company’s core deposit base is required by FASB ASC 825-10.

Fair value estimates are based on existing 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, there are certain significant assets and liabilities that are not considered financial assets or liabilities, such as the brokerage network, deferred taxes, premises and equipment, and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

Management believes that reasonable comparability between financial institutions may not be likely, due to the wide range of permitted valuation techniques and numerous estimates which must be made, given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.