Note 10 – Fair Value Disclosures

Accounting Standards Codification (ASC) 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements, but clarifies and standardizes some divergent practices that have emerged since prior guidance was issued. ASC 820 creates a three-level hierarchy under which individual fair value estimates are to be ranked based on the relative reliability of the inputs used in the valuation.

ASC 820 defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market in which those assets or liabilities are sold and considers assumptions that market participants would use when pricing those assets or liabilities. Fair values determined using Level 1 inputs rely on active and observable markets to price identical assets or liabilities. In situations where identical assets and liabilities are not traded in active markets, fair values may be determined based on Level 2 inputs, which exist when observable data exists for similar assets and liabilities. Fair values for assets and liabilities for which identical or similar assets and liabilities are not actively traded in observable markets are based on Level 3 inputs, which are considered to be unobservable.

Among the Company’s assets and liabilities, investment securities available for sale are reported at their fair values on a recurring basis. Certain other assets are adjusted to their fair value on a nonrecurring basis, including other real estate owned, impaired loans, loans held for sale, which are carried at the lower of cost or market; loan servicing rights, where fair value is determined using similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions; and goodwill, which is periodically tested for impairment. Deposits, short-term borrowings and long-term obligations are not reported at fair value.

Prices for US Treasury securities are readily available in the active markets in which those securities are traded, and the resulting fair values are shown in the ‘Level 1 input’ column. Prices for government agency securities, mortgage-backed securities and for state, county and municipal securities are obtained for similar securities, and the resulting fair values are shown in the ‘Level 2 input’ column. Prices for all other non-marketable investments are determined based on various assumptions that are not observable. The fair values for these investment securities are shown in the ‘Level 3 input’ column. Non-marketable investment securities, which are carried at their purchase price, include those that may only be redeemed by the issuer. The changes in securities between Level 1 and Level 2 were related to the purchase and sale of several securities and not the migration of securities between levels.

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment by using one of several methods including collateral value, fair value of similar debt and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the present value of the expected repayments or fair value of collateral exceed the recorded investments in such loans. At June 30, 2014, substantially all of the total impaired loans were evaluated based on the fair value of the underlying collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an internal assessment of fair value based upon market data issued or management determines the fair value of the underlying collateral is further impaired below the appraised value, the Company records the impaired loan as nonrecurring Level 3.

Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charged to earnings if the estimated fair value of the property less estimated selling costs declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an internal assessment of fair value based upon market data is used or management determines the fair value of the underlying collateral is further impaired below the appraised value, the Company records the impaired loan as nonrecurring Level 3.

Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate, based on secondary market prices. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.

Servicing assets are evaluated for impairment based upon the fair value. Fair value is determined based upon discounted cash flows using market-based assumptions.

The following table provides fair value information for assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013:


	September 30, 2014
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3

Securities available for sale:
US Treasury	$	21,134	$	21,134	$	—	$	—
US Government Agencies		40,325		—		40,325		—
GSE - Mortgage-backed securities and CMO’s		37,287		—		37,287		—
State and political subdivisions		12,165		—		12,165		—
Corporate bonds		3,013		—		3,013		—


Total assets at fair value	$	113,924	$	21,134	$	92,790	$	—


Total liabilities at fair value	$	—	$	—	$	—	$	—


	December 31, 2013
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3

Securities available for sale:
US Treasury	$	21,286	$	21,286	$	—	$	—
US Gov’t		34,300		—		34,300		—
Mortgage-backed securities and CMO’s		37,006		—		37,006		—
State and political subdivisions		7,688		—		7,688		—


Total assets at fair value	$	100,280	$	21,286	$	78,994	$	—


Total liabilities at fair value	$	—	$	—	$	—	$	—

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value less cost of sell at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of September 30, 2014 and December 31, 2013:


	September 30, 2014
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3

Impaired loans	$	1,631	$	—	$	—	$	1,631
Loans held for sale		1,402		—		1,402		—
Other real estate owned		3,753		—		—		3,753

Total assets at fair value	$	6,786	$	—	$	1,402	$	5,384


Total liabilities at fair value	$	—	$	—	$	—	$	—


	December 31, 2013
	(dollars in thousands)
	Total		Level 1		Level 2		Level 3

Impaired loans	$	5,903	$	—	$	—	$	5,903
Loans held for sale		1,139		—		1,139		—
Other real estate owned		3,533		—		—		3,533


Total assets at fair value	$	10,575	$	—	$	1,139	$	9,436


Total liabilities at fair value	$	—	$	—	$	—	$	—

Quantitative Information about Level 3 Fair Value Measurements


September 30, 2014	Valuation Technique	Unobservable Input	Range
Nonrecurring measurements:

Impaired loans	Discounted expected cash flows	Expected loss rates	0 – 25%

OREO	Discounted appraisals	Collateral discounts and estimated costs to sell	0 – 10%


December 31, 2013	Valuation Technique	Unobservable Input	Range
Nonrecurring measurements:

Impaired loans	Discounted appraisals	Collateral discounts and estimated costs to sell	0 – 10%

OREO	Discounted appraisals	Collateral discounts and estimated costs to sell	0 – 10%

At September 30, 1014, impaired loans were being evaluated with discounted expected cash flows and discounted appraisals were not being used.