Note 8 - Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2016

Notes to Financial Statements

Fair Value Disclosures [Text Block]

8

- FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial Instruments Recorded at Fair Value

. When measuring fair value, the Corporation uses a fair value hierarchy, which is designed to maximize the use of observable inputs and minimize the use of unobservable inputs. The hierarchy involves three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect the Corporation’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Corporation deems transfers between levels of the fair value hierarchy to have occurred on the date of the event or change in circumstance that caused the transfer. There were no transfers between levels of the fair value hierarchy during the six months ended June 30, 2016 or 2015.

The fair values of the Corporation’s investment securities designated as available-for-sale at June 30, 2016 and December 31, 2015 are set forth in the tables that follow. These values are determined on a recurring basis using matrix pricing (Level 2 inputs). Matrix pricing, which is a mathematical technique widely used in the industry to value debt securities, does not rely exclusively on quoted prices for the specific securities but rather on the relationship of such securities to other benchmark quoted securities.

			Fair Value Measurements Using:
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
June 30, 2016:
Available-for-Sale Securities:
State and municipals	$	462,631	$	-	$	462,631	$	-
Pass-through mortgage securities		216,716		-		216,716		-
Collateralized mortgage obligations		182,654		-		182,654		-
	$	862,001	$	-	$	862,001	$	-
December 31, 2015:
Available-for-Sale Securities:
State and municipals	$	435,693	$	-	$	435,693	$	-
Pass-through mortgage securities		147,265		-		147,265		-
Collateralized mortgage obligations		154,742		-		154,742		-
	$	737,700	$	-	$	737,700	$	-

Assets measured at fair value on a nonrecurring basis at June 30, 2016 and December 31, 2015, are set forth in the table that follows. Real estate appraisals utilized in measuring the fair value of impaired loans may employ 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 independent appraisers to adjust for differences between the comparable sales and income data available. In arriving at fair value, the Corporation adjusts the value set forth in the appraisal by deducting costs to sell and a distressed sale adjustment, if needed. The adjustments made by the appraisers and the Corporation are deemed to be significant unobservable inputs and therefore result in a Level 3 classification of the inputs used for determining the fair value of impaired loans. Because the Corporation has a small amount of impaired loans measured at fair value, the impact of unobservable inputs on the Corporation’s financial statements is not material.

			Fair Value Measurements Using:
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
June 30, 2016:
Impaired loan:
Residential mortgage - closed end	$	128	$	-	$	-	$	128
December 31, 2015:
Residential mortgages held-for-sale:
Closed end	$	25	$	-	$	-	$	25
Revolving home equity		80		-		-		80
	$	105	$	-	$	-	$	105
Impaired loan:
Residential mortgage - closed end	$	119	$	-	$	-	$	119

The impaired loan set forth in the preceding table had a principal balance of $152,000 at June 30, 2016 and December 31, 2015, and valuation allowances of $24,000 and $33,000, respectively. During the six month periods ended June 30, 2016 and 2015, the Corporation recorded credit provisions for loan losses of $9,000 and $6,000, respectively, for impaired loans measured at fair value. No such provisions were recorded during the three month periods ended June 30, 2016 or 2015.

The residential mortgage loans held-for-sale at December 31, 2015 in the preceding table were accounted for on a nonaccrual basis and carried at fair value. These loans were sold during the first quarter of 2016 at a loss of $5,000.

Financial Instruments Not Recorded at Fair Value.

Fair value estimates are made at a specific point in time. Such estimates are generally subjective in nature and dependent upon a number of significant assumptions associated with each financial instrument or group of similar financial instruments, including estimates of discount rates, risks associated with specific financial instruments, estimates of future cash flows, and relevant available market information. Changes in assumptions could significantly affect the estimates. In addition, fair value estimates do not reflect the value of anticipated future business, premiums or discounts that could result from offering for sale at one time the Corporation’s entire holdings of a particular financial instrument, or the tax consequences of realizing gains or losses on the sale of financial instruments.

The following table sets forth the carrying amounts and estimated fair values of financial instruments that are not recorded at fair value in the Corporation’s financial statements at June 30, 2016 and December 31, 2015.

	Level of	June 30, 2016				December 31, 2015
	Fair Value	Carrying				Carrying
	Hierarchy	Amount		Fair Value		Amount		Fair Value
		(in thousands)
Financial Assets:
Cash and cash equivalents	Level 1	$	51,026	$	51,026	$	39,635	$	39,635
Held-to-maturity securities	Level 2		10,613		11,044		12,366		12,905
Held-to-maturity securities	Level 3		1,593		1,593		2,005		2,005
Loans	Level 3		2,325,807		2,345,729		2,220,808		2,203,418
Restricted stock	Level 1		23,074		23,074		28,435		28,435
Accrued interest receivable:
Investment securities	Level 2		4,624		4,624		4,403		4,403
Loans	Level 3		5,967		5,967		5,501		5,501
Financial Liabilities:
Checking deposits	Level 1		765,392		765,392		777,994		777,994
Savings, NOW and money market deposits	Level 1		1,562,740		1,562,740		1,195,968		1,195,968
Time deposits	Level 2		296,723		304,325		310,713		313,331
Short-term borrowings	Level 1		57,666		57,666		211,502		211,502
Long-term debt	Level 2		359,212		364,951		365,712		364,935
Accrued interest payable:
Checking, savings, NOW and money market deposits	Level 1		129		129		43		43
Time deposits	Level 2		38		38		3,224		3,224
Short-term borrowings	Level 1		1		1		3		3
Long-term debt	Level 2		536		536		669		669

The following methods and assumptions are used by the Corporation in measuring the fair value of financial instruments disclosed in the preceding table.

Cash and cash equivalents

. The recorded book value of cash and cash equivalents is their fair value.

Investment securities.

Fair values are based on quoted prices for similar assets in active markets or derived principally from observable market data.

Loans

. The total loan portfolio is divided into three segments: (1) residential mortgages; (2) commercial mortgages and commercial loans; and (3) consumer loans. Each segment is further divided into pools of loans with similar financial characteristics (i.e. product type, fixed versus variable rate, time to rate reset, length of term, conforming versus nonconforming). Cash flows for each pool, including estimated prepayments if applicable, are discounted utilizing market or internal benchmarks which management believes are reflective of current market rates for similar loan products. The discounted value of the cash flows is reduced by the related allowance for loan losses to arrive at an estimate of fair value.

Restricted stock

. The recorded book value of Federal Home Loan Bank stock and Federal Reserve Bank stock is their fair value because the stock is redeemable at cost.

Deposit liabilities

. The fair value of deposits with no stated maturity, such as checking deposits, money market deposits, NOW accounts and savings deposits, is equal to their recorded book value. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is equivalent to the rate at which the Bank could currently replace these deposits with wholesale borrowings from the Federal Home Loan Bank.

Borrowed funds

. For short-term borrowings maturing within ninety days, the recorded book value is a reasonable estimate of fair value. The fair value of long-term debt is based on the discounted value of contractual cash flows. The discount rate is equivalent to the rate at which the Bank could currently replace these borrowings with wholesale borrowings from the Federal Home Loan Bank.

Accrued interest receivable and payable

. For these short-term instruments, the recorded book value is a reasonable estimate of fair value.

Off-balance-sheet items.

The fair value of off-balance sheet items is not considered to be material.