FAIR VALUE MEASUREMENTS

12 Months Ended

Dec. 31, 2016

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

NOTE 19 — FAIR VALUE MEASUREMENTS

Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. This guidance provides additional information on determining when the volume and level of activity for the asset or liability has significantly decreased. The guidance also includes information on identifying circumstances when a transaction may not be considered orderly.

Fair value measurement and disclosure guidance provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with the fair value measurement and disclosure guidance.

This guidance clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The guidance provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own belief about the assumptions market participants would use in pricing the asset or liability based upon the best information available in the circumstances. Fair value measurement and disclosure guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

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

Level 2 Inputs:   Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability;

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

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth as follows.

Financial Assets Measured at Fair Value on a Recurring Basis

At December 31, 2016 and 2015, investments measured at fair value on a recurring basis and the valuation methods used are as follows:

(Dollars in thousands)
December 31, 2016	Level 1		Level 2		Level 3		Total
Available-for-Sale Securities:
U.S. Treasury securities	$	—	$	1,010	$	—	$	1,010
Obligations of U.S. Government Corporations and Agencies:
Mortgaged-backed		—		110,907		—		110,907
Other		—		20,970		—		20,970
Obligations of state and political subdivisions		—		211,134		—		211,134
Corporate debt securities		—		33,976		—		33,976
Marketable equity securities		1,640		—		—		1,640
Total	$	1,640	$	377,997	$	—	$	379,637

(Dollars in thousands)
December 31, 2015	Level 1		Level 2		Level 3		Total
Available-for-Sale Securities:
U.S. Treasury securities	$	—	$	1,021	$	—	$	1,021
Obligations of U.S. Government Corporations and Agencies:
Mortgaged-backed		—		112,474		—		112,474
Other		—		21,592		—		21,592
Obligations of state and political subdivisions		—		200,314		—		200,314
Corporate debt securities		—		47,833		—		47,833
Marketable equity securities		2,007		—		—		2,007
Total	$	2,007	$	383,234	$	—	$	385,241

The estimated fair values of equity securities classified as Level 1 are derived from quoted market prices in active markets; these assets consist mainly of stocks held in other banks. The estimated fair values of all debt securities classified as Level 2 are obtained from nationally-recognized third-party pricing agencies. The estimated fair values are derived primarily from cash flow models, which include assumptions for interest rates, credit losses, and prepayment speeds. The significant inputs utilized in the cash flow models are based on market data obtained from sources independent of the Corporation (observable inputs), and are therefore classified as Level 2 within the fair value hierarchy. The Corporation does not have any Level 3 inputs for investments. There were no transfers between Level 1 and Level 2 during 2016 and 2015.

Financial Assets Measured at Fair Value on a Nonrecurring Basis

At December 31, 2016 and 2015, impaired loans measured at fair value on a nonrecurring basis and the valuation methods used are as follows:

(Dollars in thousands)
	Level 1		Level 2		Level 3		Total
Assets at December 31, 2016
Impaired loans:
Commercial Real Estate	$	—	$	—	$	4,763	$	4,763
Residential Real Estate		—		—		524		524
Total impaired loans	$	—	$	—	$	5,287	$	5,287

(Dollars in thousands)
	Level 1		Level 2		Level 3		Total
Assets at December 31, 2015
Impaired loans:
Commercial Real Estate	$	—	$	—	$	1,665	$	1,665
Residential Real Estate		—		—		631		631
Total impaired loans	$	—	$	—	$	2,296	$	2,296

The Bank’s impaired loan valuation procedure for any loans greater than $250,000 requires an appraisal to be obtained and reviewed annually at year end. A quarterly collateral evaluation is performed which may include a site visit, property pictures and discussions with realtors and other similar business professionals to ascertain current values. For impaired loans less than $250,000 upon classification and annually at year end, the Bank completes a Certificate of Inspection, which includes an onsite inspection, insured values, tax assessed values, recent sales comparisons and a review of the previous evaluations. These assets are included as Level 3 fair values, based upon the lowest level that is significant to the fair value measurements. The fair value consists of the impaired loan balances less the valuation allowance and/or charge-offs. There were no transfers between valuation levels in 2016 and 2015.

Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis

At December 31, 2016, foreclosed assets held for resale measured at fair value on a nonrecurring basis and the valuation methods used are as follows:

(Dollars in thousands)
	Level 1		Level 2		Level 3		Total
Assets at December 31, 2016
Other foreclosed assets held for resale:
Commercial Real Estate	$	—	$	—	$	248	$	248
Total foreclosed assets held for resale	$	—	$	—	$	248	$	248

At December 31, 2015, there were no nonfinancial assets measured at fair value on a non-recurring basis.

The Bank’s foreclosed asset valuation procedure requires an appraisal, which considers the sales prices of similar properties in the proximate vicinity, to be completed periodically with the exception of those cases which the Bank has obtained a sales agreement. These assets are included as Level 3 fair values, based upon the lowest level that is significant to the fair value measurements. There were no transfers between valuation levels in 2016 and 2015.

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Bank has utilized Level 3 inputs to determine the fair value:

(Dollars in thousands) 

	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value						Weighted
	Estimate		Valuation Technique	Unobservable Input	Range		Average
December 31, 2016
Impaired loans	$	2,119	Appraisal of collateral1,3	Appraisal adjustments2		(10%) – (79%)		(21)	%
Impaired loans	$	3,168	Discounted cash flow	Discount rate		(7%) – (7%)		(7)	%
Foreclosed assets held for sale	$	248	Appraisal of collateral1,3	Appraisal adjustments2		(23%) – (37%)		(32)	%
December 31, 2015
Impaired loans	$	2,296	Appraisal of collateral1,3	Appraisal adjustments2		(10%) – (63%)		(29)	%
Impaired loans	$	—	Discounted cash flow	Discount rate		(0%) – (0%)		(0)	%
Foreclosed assets held for sale	$	—	Appraisal of collateral1,3	Appraisal adjustments2		(0%) – (0%)		(0)	%

______________________

¹Fair value is generally determined through independent appraisals of the underlying collateral, as defined by Bank regulators.

²Appraisals may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses. The typical range of appraisal adjustments are presented as a percent of the appraisal value.

³Includes qualitative adjustments by management and estimated liquidation expenses.

Fair Value of Financial Instruments

(Dollars in thousands)	Carrying		Fair Value Measurements at December 31, 2016
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	8,338	$	8,338	$	—	$	—	$	8,338
Interest-bearing deposits in other banks		790		—		790		—		790
Time deposits with other banks		1,482		—		1,482		—		1,482
Investment securities available-for-sale		379,637		1,640		377,997		—		379,637
Investment securities held-to-maturity		4		—		4		—		4
Restricted investment in bank stocks		5,477		—		5,477		—		5,477
Net loans		515,025		—		—		504,206		504,206
Mortgage servicing rights		431		—		—		431		431
Accrued interest receivable		3,917		—		3,917		—		3,917
FINANCIAL LIABILITIES:
Deposits		725,982		—		725,473		—		725,473
Short-term borrowings		69,290		—		69,290		—		69,290
Long-term borrowings		75,116		—		75,718		—		75,718
Accrued interest payable		427		—		427		—		427
OFF-BALANCE SHEET FINANCIAL  INSTRUMENTS		—		—		—		—		—

(Dollars in thousands)	Carrying		Fair Value Measurements at December 31, 2015
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	7,474	$	7,474	$	—	$	—	$	7,474
Interest-bearing deposits in other banks		1,534		—		1,534		—		1,534
Time deposits with other banks		1,482		—		1,482		—		1,482
Investment securities available-for-sale		385,241		2,007		383,234		—		385,241
Investment securities held-to-maturity		26		—		27		—		27
Restricted investment in bank stocks		5,742		—		5,742		—		5,742
Net loans		509,871		—		—		498,671		498,671
Mortgage servicing rights		493		—		—		493		493
Accrued interest receivable		4,086		—		4,086		—		4,086
FINANCIAL LIABILITIES:
Deposits		720,598		—		720,341		—		720,341
Short-term borrowings		80,539		—		80,539		—		80,539
Long-term borrowings		70,232		—		71,302		—		71,302
Accrued interest payable		382		—		382		—		382
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS		—		—		—		—		—

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 Corporation’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 Corporation’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 Corporation’s financial instruments at December 31, 2016 and December 31, 2015:

Cash and Due From Banks, Interest-Bearing Deposits in Other Banks, Time Deposits with Other Banks, Restricted Investment in Bank Stocks, Accrued Interest Receivable and Accrued Interest Payable

The fair values are equal to the current carrying values.

Investment Securities

The fair value of investment securities are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1) or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying on the securities’ relationship to other benchmark quoted prices.

Loans

Fair values are estimated for categories of loans with similar financial characteristics. Loans were segregated by type such as Commercial and Industrial, Commercial and Residential Real Estate mortgages and Consumer. For estimation purposes, each loan category was further segmented into fixed and adjustable rate interest terms.

The fair value of each category of performing loans is calculated by discounting 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.

Fair value for impaired loans is based on management’s estimate of future cash flows discounted using a rate commensurate with the risk associated with the estimated future cash flows or based on the value of the collateral if repayment is expected solely from collateral. The assumptions used by management are judgmentally determined using information regarding each specific borrower.

Mortgage Servicing Rights

Servicing rights are carried at cost. The carrying amount approximates fair value.

Deposits

The fair value of deposits with no stated maturity, such as demand deposits, savings accounts and money market accounts, is equal to the amount payable on demand at December 31, 2016 and 2015.

Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar term borrowings, to a schedule of aggregated expected monthly maturities on time deposits.

Short-Term and Long-Term Borrowings

The fair values of short-term borrowings are equal to the current carrying values, and long-term borrowings are estimated using discounted cash flow analyses based on the Corporation’s incremental borrowing rate for similar instruments.

Off-Balance Sheet Financial Instruments

The fair values for the Corporation’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.