FAIR VALUE OF INSTRUMENTS

6 Months Ended

Jun. 30, 2014

Fair Value Disclosures [Abstract]

FAIR VALUE OF INSTRUMENTS

NOTE 5 FAIR VALUE OF INSTRUMENTS

FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair values of financial instruments are management’s estimate of the values at which the instruments could be exchanged in a transaction between willing parties. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, other significant assets are not considered financial assets including deferred tax assets, premises, equipment and intangibles. Further, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered in any of the estimates.

The following assumptions and methods were used in estimating the fair value for financial instruments.

Cash and Cash Equivalents

The carrying amounts reported in the balance sheet for cash, cash equivalents and federal funds sold approximate their fair values. Also included in this line item are the carrying amounts of interest-bearing deposits maturing within ninety days which approximate their fair values. Fair values of other interest-bearing deposits are estimated using discounted cash flow analyses based on current rates for similar types of deposits.

Securities

Fair values for securities, excluding Federal Home Loan Bank stock, are based on quoted market price, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Other Securities

The carrying value of Federal Home Loan Bank stock, listed as “other securities”, approximates fair value based on the redemption provisions of the Federal Home Loan Bank.

Loans

For those variable-rate loans that re-price frequently, and with no significant change in credit risk, fair values are based on carrying values. The fair values of the fixed rate and all other loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality.

Deposits - Interest Bearing, Non-interest Bearing and Time

The fair values disclosed for deposits with no defined maturities are equal to their carrying amounts, which represent the amount payable on demand. The carrying amounts for variable-rate, fixed term money market accounts and certificates of deposit approximate their fair value at the reporting date. Fair value for fixed-rate certificates of deposit are estimated using a discounted cash flow analysis that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Short-Term Borrowings

The carrying value of short-term borrowings approximates fair values.

FHLB Advances

Fair values of FHLB advances are estimated using discounted cash flow analysis based on the Company’s current incremental borrowing rates for similar types or borrowing arrangements.

Accrued Interest Receivable and Payable

The carrying amounts of accrued interest approximate their fair values.

Dividends Payable

The carrying amounts of dividends payable approximate their fair values and are generally paid within forty days of declaration.

Off Balance Sheet Financial Instruments

Fair values for off-balance sheet, credit related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counter-parties’ credit standing.

The estimated fair values, and related carrying or notional amounts, for on and off-balance sheet financial instruments as of June 30, 2014 and December 31, 2013 are reflected below.

	(In Thousands)
	June 2014
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and Cash Equivalents	$	19,098	$	19,098	$	19,098	$	—	$	—
Securities - available for sale		284,628		284,628		25,331		251,222		8,074
Other Securities		3,717		3,717		—		—		3,717
Loans, net		592,176		602,149		—		—		602,149
Interest receivable		3,659		3,659		—		—		359
Total Assets	$	903,278	$	913,251	$	44,429	$	251,222	$	614,299
Financial Liabilities:
Interest bearing Deposits	$	427,881	$	429,276	$	—	$	—	$	429,276
Non-interest bearing Deposits		115,371		115,371		—		115,371		—
Time Deposits		217,820		217,498		—		—		217,498
Total Deposits	$	761,072	$	762,145	$	—	$	115,371	$	646,774
Short-term debt		70,066		70,066		—		—		70,066
Interest payable		205		205		—		—		205
Dividends payable		963		963		—		963		—
Total Liabilities	$	832,306	$	833,379	$	—	$	116,334	$	717,045

	(In Thousands)
	December 2013
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and Cash Equivalents	$	19,263	$	19,263	$	19,263	$	—	$	—
Securities - available for sale		324,509		324,509		25,272		288,891		10,346
Other Securities		4,216		4,216		—		—		4,216
Loans, net		570,919		579,992		—		—		579,992
Interest receivable		3,694		3,694		—		—		3,694
Total Assets	$	922,601	$	931,674	$	44,535	$	288,891	$	598,248
Financial Liabilities:
Interest bearing Deposits	$	429,652	$	429,750	$	—	$	—	$	429,750
Non-interest bearing Deposits		110,452		110,452		—		110,452		—
Time Deposits		236,360		236,027		—		—		236,027
Total Deposits	$	776,464	$	776,229	$	—	$	110,452	$	665,777
Short-term debt		69,756		69,756		—		—		69,756
Federal Home Loan Bank advances		4,500		4,570		—		—		4,570
Interest payable		223		223		—		—		223
Dividends payable		967		967		—		967		—
Total Liabilities	$	851,910	$	851,745	$	—	$	111,419	$	740,326

Fair Value Measurements

In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities in active markets that the Company has the ability to access.

Available-for-sale securities, when quoted prices are available in an active market, securities are valued using the quoted price and are classified as Level 1.

Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Available-for-sale securities classified as Level 2 are valued using the prices obtained from an independent pricing service. The prices are not adjusted. Securities of obligations of state and political subdivisions are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating. Substantially all assumptions used by the independent pricing service are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the market place.

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability. The Bank holds some local municipals that the Bank evaluates based on the credit strength of the underlying project such as hospital or retirement housing. The fair value is determined by valuing similar credit payment streams at similar rates.

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 Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset.

The following summarizes financial assets measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013, segregated by level or the valuation inputs within the fair value hierarchy utilized to measure fair value:

Assets and Liabilities Measured at Fair Value on a Recurring Basis (In Thousands)
June 30, 2014	Quoted Prices in Active Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Observable Inputs (Level 3)
Assets-(Securities Available for Sale)
U.S. Treasury	$	25,331	$	—	$	—
U.S. Government agency				147,146		—
Mortgage-backed securities				33,182		—
State and local governments		—		70,895		8,074
Total Securities Available for Sale	$	25,331	$	251,223	$	8,074
December 31, 2013	Quoted Prices in Active Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Observable Inputs (Level 3)
Assets-(Securities Available for Sale)
U.S. Treasury	$	25,272	$	—	$	—
U.S. Government agency		—		172,972		—
Mortgage-backed securities		—		44,792		—
State and local governments		—		71,127		10,346
Total Securities Available for Sale	$	25,272	$	288,891	$	10,346

The following table represents the changes in the Level 3 fair-value category of which unobservable inputs are relied upon as of June 30, 2014 and June 30, 2013.

	(In Thousands)
	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	State and Local Governments Tax-Exempt			State and Local Governments Taxable			State and Local Governments Total
Balance at January 1, 2014	$	8,802		$	1,544		$	10,346
Change in Market Value		(1,093	)		(359	)		(1,452	)
Payments & Maturities		(820	)		—			(820	)
Balance at June 30, 2014	$	6,889		$	1,185		$	8,074
	(In Thousands)
	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	State and Local Governments Tax-Exempt			State and Local Governments Taxable			State and Local Governments Total
Balance at January 1, 2013	$	14,863		$	1,545		$	16,408
Change in Market Value		(116	)		1			(115	)
Purchases		519			—			519
Payments & Maturities		(4,388	)		—			(4,388	)
Balance at June 30, 2013	$	10,878		$	1,546		$	12,424

Most of the Company’s available for sale securities, including any bonds issued by local municipalities, have CUSIP numbers or have similar characteristics of those in the municipal markets, making them marketable and comparable as Level 2.

The Company also has assets that, under certain conditions, are subject to measurement at fair value on a non-recurring basis. At June 30, 2014 and December 31, 2013, such assets consist primarily of impaired loans. Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. The Company estimates the fair value of the loans based on the present value of expected future cash flows using management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals.)

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements:

	Fair Value at June 30, 2014		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
State and political subdivision securities	$	8,074	Discounted cash flow	Credit strength of underlying project or entity / Discount rate		0-5	%
Impaired Loans	$	1,587	Collateral based measurements	Discount to reflect current market conditions and ultimate collectability		0-50	%
Other real estate owned - residential	$	734	Appraisals	Discount to reflect current market		0-20	%
Other real estate owned - commercial	$	807	Appraisals	Discount to reflect current market		0-20	%
	Fair Value at December 31, 2013		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
State and political subdivision securities	$	10,346	Discounted cash flow	Credit strength of underlying project or entity / Discount rate		0-5	%
Impaired Loans	$	1,924	Collateral based measurements	Discount to reflect current market conditions and ultimate collectability		0-50	%
Other real estate owned - residential	$	964	Appraisals	Discount to reflect current market		0-20	%
Other real estate owned - commercial	$	1,127	Appraisals	Discount to reflect current market		0-20	%

At June 30, 2014 and December 31, 2013, impaired loans categorized as Level 3 were $1.8 and $1.9 million, respectively. The specific allocation for impaired loans was $202 and $516 thousand as of June 30, 2014 and December 31, 2013, respectively, which are accounted for in the allowance for loan losses (see Note 4).

Other real estate is reported at either the lower of the fair value of the real estate minus the estimated costs to sell the asset or the cost of the asset. The determination of fair value of the real estate relies primarily on appraisals from third parties. If the fair value of the real estate, minus the estimated costs to sell the asset, is less than the asset’s cost, the deficiency is recognized as a valuation allowance against the asset through a charge to expense. The valuation allowance is therefore increased or decreased, through charges or credits to expense, for changes in the asset’s fair value or estimated selling costs.

The following table presents impaired loans and other real estate owned as recorded at fair value on June 30, 2014 and December 31, 2013:

	Assets Measured at Fair Value on a Nonrecurring Basis at June 30, 2014
			Quoted Prices in Active
(In Thousands)	Balance at June 30, 2014		Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	1,587	$	—	$	—	$	1,587
Other real estate owned residential mortgages	$	734	$	—	$	—	$	734
Other real estate owned commercial	$	807	$	—	$	—	$	807
	Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2013
			Quoted Prices in Active
(In Thousands)	Balance at December 31, 2013		Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	1,924	$	—	$	—	$	1,924
Other real estate owned residential mortgages	$	964	$	—	$	—	$	964
Other real estate owned commercial	$	1,127	$	—	$	—	$	1,127

The Company also has other assets, which under certain conditions, are subject to measurement at fair value. These assets include loans held for sale, bank owned life insurance, and mortgage servicing rights. The Company estimated the fair values of these assets utilizing Level 3 inputs, including, the discounted present value of expected future cash flows. At June 30, 2014 and December 31, 2013, the Company estimates that there is no impairment of these assets.