FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company is required to disclose fair values for its financial instruments. Fair values are made at a specific point in time, based on relevant market information and information about the financial instrument. These fair values do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Also, it is the Company’s general practice and intention to hold most of its financial instruments to maturity and not to engage in trading or sales activities. Because no market exists for a significant portion of the Company’s financial instruments, fair values are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These fair values are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions can significantly affect the fair values.

Fair values have been determined by the Company using historical data and an estimation methodology suitable for each category of financial instruments. The Company’s fair values, methods, and assumptions are set forth below for the Company’s other financial instruments.

As certain assets and liabilities, such as deferred tax assets, premises and equipment, and many other operational elements of the Company, are not considered financial instruments but have value, the fair value of financial instruments would not represent the full market value of the Company.

The fair values of the Company’s financial instruments are as follows at December 31, 2015 and 2014:



					Fair Value Measurements at December 31, 2015
(In Thousands)	Carrying Value		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level I)		Significant Other Observable Inputs (Level II)		Significant Unobservable Inputs (Level III)
Financial assets:
Cash and cash equivalents	$	22,796	$	22,796	$	22,796	$	—	$	—
Investment securities:
Available for sale	176,157		176,157		16,332		159,825		—
Trading	73		73		73
Loans held for sale	757		757		757		—		—
Loans, net	1,033,163		1,045,140		—		—		1,045,140
Bank-owned life insurance	26,667		26,667		26,667		—		—
Accrued interest receivable	3,686		3,686		3,686		—		—

Financial liabilities:
Interest-bearing deposits	$	751,797	$	729,685	$	509,206	$	—	$	220,479
Noninterest-bearing deposits	280,083		280,083		280,083		—		—
Short-term borrowings	46,638		46,638		46,638		—		—
Long-term borrowings	91,025		91,783		—		—		91,783
Accrued interest payable	426		426		426		—		—



					Fair Value Measurements at December 31, 2014
(In Thousands)	Carrying Value		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level I)		Significant Other Observable Inputs (Level II)		Significant Unobservable Inputs (Level III)
Financial assets:
Cash and cash equivalents	$	19,908	$	19,908	$	19,908	$	—	$	—
Investment securities:
Available for sale	232,213		232,213		15,604		216,609		—
Loans held for sale	550		550		550		—		—
Loans, net	905,000		916,597		—		—		916,597
Bank-owned life insurance	25,959		25,959		25,959		—		—
Accrued interest receivable	3,912		3,912		3,912		—		—

Financial liabilities:
Interest-bearing deposits	$	738,041	$	722,724	$	506,875	$	—	$	215,849
Noninterest-bearing deposits	243,378		243,378		243,378		—		—
Short-term borrowings	40,818		40,818		40,818		—		—
Long-term borrowings	71,176		73,084		—		—		73,084
Accrued interest payable	381		381		381		—		—

Cash and Cash Equivalents, Loans Held for Sale, Accrued Interest Receivable, Short-term Borrowings, and Accrued Interest Payable:

The fair value is equal to the carrying value.

Investment Securities:

The fair value of investment securities available for sale is equal to the available quoted market price. If no quoted market price is available, fair value is determined by using the quoted market price for similar securities. Regulatory stocks’ fair value is equal to the carrying value.

Loans:

Fair values are determined for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential real estate, construction real estate, and other consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories.

The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Company’s historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions.

Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discounted rates are judgmentally determined using available market information and specific borrower information.

Bank-Owned Life Insurance:

The fair value is equal to the cash surrender value of the life insurance policies.

Deposits:

The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW, and money market accounts, is equal to the amount payable on demand as of December 31, 2015 and 2014. The fair value of certificates of deposit is based on the discounted value of contractual cash flows.

The fair values above do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market, commonly referred to as the core deposit intangible.

Long Term Borrowings:

The fair value of long term borrowings is based on the discounted value of contractual cash flows.

Commitments to Extend Credit, Standby Letters of Credit, and Financial Guarantees Written:

There is no material difference between the notional amount and the fair value of off-balance sheet items at December 31, 2015 and 2014. The contractual amounts of unfunded commitments and letters of credit are presented in Note 17.