Note 5 - Fair Value Measurements and Fair Values of Financial Instruments

6 Months Ended

Jun. 30, 2015

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

5. FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS

The Corporation measures certain assets at fair value. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. FASB ASC topic 820, “Fair Value Measurements and Disclosures” establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs used in determining valuations into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

Level 1 – Fair value is based on unadjusted quoted prices in active markets that are accessible to the Corporation for identical assets. These generally provide the most reliable evidence and are used to measure fair value whenever available.

Level 2 – Fair value is based on significant inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets, quoted market prices in markets that are not active for identical or similar assets and other observable inputs.

Level 3 – Fair value is based on significant unobservable inputs. Examples of valuation methodologies that would result in Level 3 classification include option pricing models, discounted cash flows and other similar techniques.

The Corporation monitors and evaluates available data relating to fair value measurements on an ongoing basis and recognizes transfers among the levels of the fair value hierarchy as of the date of an event or change in circumstances that affects the valuation method chosen. Examples of such changes may include the market for a particular asset becoming active or inactive, changes in the availability of quoted prices, or changes in the availability of other market data.

At June 30, 2015 and December 31, 2014, assets measured at fair value and the valuation methods used are as follows:

		June 30, 2015
	Quoted Prices	Other
	in Active	Observable	Unobservable		Total
	Markets	Inputs	Inputs		Fair
(In Thousands)	(Level 1)	(Level 2)	(Level 3)		Value
Recurring fair value measurements
AVAILABLE-FOR-SALE SECURITIES:
Obligations of U.S. Government agencies	$0	$26,871	$0		$26,871
Obligations of states and political subdivisions:
Tax-exempt	0	119,749	0		119,749
Taxable	0	35,135	0		35,135
Mortgage-backed securities	0	76,790	0		76,790
Collateralized mortgage obligations, Issued by U.S. Government agencies	0	230,794	0		230,794
Collateralized debt obligations	0	34	0		34
Total debt securities	0	489,373	0		489,373
Marketable equity securities	7,738	0	0		7,738
Total available-for-sale securities	7,738	489,373	0		497,111
Servicing rights	0	0	1,209		1,209
Total recurring fair value measurements	$7,738	$489,373	$1,209		$498,320
Nonrecurring fair value measurements
Impaired loans with a valuation allowance	$0	$0	$3,880		$3,880
Valuation allowance	0	0	(600	)	(600	)
Impaired loans, net	0	0	3,280		3,280
Foreclosed assets held for sale	0	0	1,223		1,223
Total nonrecurring fair value measurements	$0	$0	$4,503		$4,503

		December 31, 2014
	Quoted Prices	Other
	in Active	Observable	Unobservable		Total
	Markets	Inputs	Inputs		Fair
(In Thousands)	(Level 1)	(Level 2)	(Level 3)		Value
Recurring fair value measurements
AVAILABLE-FOR-SALE SECURITIES:
Obligations of U.S. Government agencies	$0	$26,676	$0		$26,676
Obligations of states and political subdivisions:
Tax-exempt	0	124,839	0		124,839
Taxable	0	33,878	0		33,878
Mortgage-backed securities	0	83,903	0		83,903
Collateralized mortgage obligations, Issued by U.S. Government agencies	0	238,823	0		238,823
Collateralized debt obligations	0	34	0		34
Total debt securities	0	508,153	0		508,153
Marketable equity securities	8,654	0	0		8,654
Total available-for-sale securities	8,654	508,153	0		516,807
Servicing rights	0	0	1,281		1,281
Total recurring fair value measurements	$8,654	$508,153	$1,281		$518,088
Nonrecurring fair value measurements
Impaired loans with a valuation allowance	$0	$0	$3,241		$3,241
Valuation allowance	0	0	(769	)	(769	)
Impaired loans, net	0	0	2,472		2,472
Foreclosed assets held for sale	0	0	1,189		1,189
Total nonrecurring fair value measurements	$0	$0	$3,661		$3,661

Management’s evaluation and selection of valuation techniques and the unobservable inputs used in determining the fair values of assets valued using Level 3 methodologies include sensitive assumptions. Other market participants might use substantially different assumptions, which could result in calculations of fair values that would be substantially different than the amount calculated by management.

At June 30, 2015 and December 31, 2014, quantitative information regarding significant techniques and inputs used for assets measured on a recurring basis using unobservable inputs (Level 3 methodologies) are as follows:

	Fair Value at
	6/30/15	Valuation	Unobservable			Method or Value As of
Asset	(In Thousands)	Technique	Input(s)			6/30/15
Servicing rights	$1,209	Discounted cash flow	Discount rate	10.00	%	Rate used through modeling period
			Loan prepayment speeds	173.00	%	Weighted-average PSA
			Servicing fees	0.25	%	of loan balances
				4.00	%	of payments are late
				5.00	%	late fees assessed
				$1.94		Miscellaneous fees per account per month
			Servicing costs	$6.00		Monthly servicing cost per account
				$24.00		Additional monthly servicing cost per loan on loans more than 30 days delinquent
				1.50	%	of loans more than 30 days delinquent
				3.00	%	annual increase in servicing costs

	Fair Value at
	12/31/14	Valuation	Unobservable			Method or Value As of
Asset	(In Thousands)	Technique	Input(s)			12/31/14
Servicing rights	$1,281	Discounted cash flow	Discount rate	12.00	%	Rate used through modeling period
			Loan prepayment speeds	156.00	%	Weighted-average PSA
			Servicing fees	0.25	%	of loan balances
				4.00	%	of payments are late
				5.00	%	late fees assessed
				$1.94		Miscellaneous fees per account per month
			Servicing costs	$6.00		Monthly servicing cost per account
				$24.00		Additional monthly servicing cost per loan on loans more than 30 days delinquent
				1.50	%	of loans more than 30 days delinquent
				3.00	%	annual increase in servicing costs

The fair value of servicing rights is affected by expected future interest rates. Increases (decreases) in future expected interest rates tend to increase (decrease) the fair value of the Corporation’s servicing rights because of changes in expected prepayment behavior by the borrowers on the underlying loans.

Following is a reconciliation of activity for Level 3 assets measured at fair value on a recurring basis:

(In Thousands)	Three Months Ended				Six Months Ended
	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
Servicing rights balance, beginning of period	$1,195		$1,268		$1,281		$1,123
Issuances of servicing rights	47		66		78		106
Unrealized losses included in earnings	(33	)	(53	)	(150	)	52
Servicing rights balance, end of period	$1,209		$1,281		$1,209		$1,281

Loans are classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Foreclosed assets held for sale consist of real estate acquired by foreclosure. For impaired commercial loans secured by real estate and foreclosed assets held for sale, estimated fair values are determined primarily using values from third-party appraisals. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

At June 30, 2015 and December 31, 2014, quantitative information regarding significant techniques and inputs used for nonrecurring fair value measurements using unobservable inputs (Level 3 methodologies) are as follows:

(In Thousands, Except						Value at
Percentages)		Valuation				6/30/15
	Balance at	Allowance at	Fair Value at	Valuation	Unobservable	(Weighted
Asset	6/30/15	6/30/15	6/30/15	Technique	Inputs	Average)
Impaired loans:
Residential mortgage loans - first liens	$1,104	$136	$968	Sales comparison	Discount to appraised value	34	%
Commercial:
Commercial loans secured by real estate	322	80	242	Sales comparison	Discount to appraised value	40	%
Commercial and industrial	75	75	0	Sales comparison	Discount to appraised value	45	%
Commercial construction and land	1,815	211	1,604	Sales comparison	Discount to appraised value	30	%
Loans secured by farmland	564	98	466	Sales comparison	Discount to appraised value	40	%
Total impaired loans	$3,880	$600	$3,280
Foreclosed assets held for sale - real estate:
Residential (1-4 family)	$487	$0	$487	Sales comparison	Discount to appraised value	27	%
Land	736	0	736	Sales comparison	Discount to appraised value	26	%
Total foreclosed assets held for sale	$1,223	$0	$1,223

(In Thousands, Except						Value at
Percentages)		Valuation				12/31/14
	Balance at	Allowance at	Fair Value at	Valuation	Unobservable	(Weighted
Asset	12/31/14	12/31/14	12/31/14	Technique	Inputs	Average)
Impaired loans:
Residential mortgage loans - first liens	$715	$358	$357	Sales comparison	Discount to appraised value	36	%
Commercial:
Commercial loans secured by real estate	16	16	0	Sales comparison	Discount to appraised value	42	%
Commercial and industrial	150	82	68	Sales comparison	Discount to appraised value	21	%
Commercial construction and land	1,815	211	1,604	Sales comparison	Discount to appraised value	30	%
Loans secured by farmland	545	102	443	Sales comparison	Discount to appraised value	40	%
Total impaired loans	$3,241	$769	$2,472
Foreclosed assets held for sale - real estate:
Residential (1-4 family)	$306	$0	$306	Sales comparison	Discount to appraised value	42	%
Commercial property	159	0	159	Sales comparison	Discount to appraised value	23	%
Land	724	0	724	Sales comparison	Discount to appraised value	29	%
Total foreclosed assets held for sale	$1,189	$0	$1,189

Certain of the Corporation’s financial instruments are not measured at fair value in the consolidated financial statements. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from disclosure requirements. Therefore, the aggregate fair value amounts presented may not represent the underlying fair value of the Corporation.

The Corporation used the following methods and assumptions in estimating fair value disclosures for financial instruments:

CASH AND CASH EQUIVALENTS - The carrying amounts of cash and short-term instruments approximate fair values.

CERTIFICATES OF DEPOSIT - Fair values for certificates of deposit, included in cash and due from banks in the consolidated balance sheet, are based on quoted market prices for certificates of similar remaining maturities.

SECURITIES - Fair values for securities, excluding restricted equity securities, are based on quoted market prices or other methods as described above. The carrying value of restricted equity securities approximates fair value based on applicable redemption provisions.

LOANS HELD FOR SALE - Fair values of loans held for sale are determined based on applicable sale prices available under the Federal Home Loan Banks’ MPF Xtra and MPF Original programs.

LOANS - Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage 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 contractual cash flows, adjusted for estimated prepayments based on historical experience, using estimated market discount rates that reflect the credit and interest rate risk inherent in the loans. Fair value of nonperforming loans is based on recent appraisals or estimates prepared by the Corporation’s lending officers.

SERVICING RIGHTS - The fair value of servicing rights, included in other assets in the consolidated balance sheet, is determined through a discounted cash flow valuation. Significant inputs include expected net servicing income, the discount rate and the expected prepayment speeds of the underlying loans.

DEPOSITS - The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, money market and interest checking accounts, is (by definition) equal to the amount payable on demand at June 30, 2015 and December 31, 2014. The fair value of time deposits, such as certificates of deposit and Individual Retirement Accounts, is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates of deposits 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.

BORROWED FUNDS - The fair value of borrowings is estimated using discounted cash flow analyses based on rates currently available to the Corporation for similar types of borrowing arrangements.

ACCRUED INTEREST - The carrying amounts of accrued interest receivable and payable approximate fair values.

OFF-BALANCE SHEET COMMITMENTS - The Corporation has commitments to extend credit and has issued standby letters of credit. Standby letters of credit are conditional guarantees of performance by a customer to a third party. Estimates of the fair value of these off-balance sheet items were not made because of the short-term nature of these arrangements and the credit standing of the counterparties.

The estimated fair values, and related carrying amounts, of the Corporation’s financial instruments are as follows:

(In Thousands)	Valuation	June 30, 2015		December 31, 2014
	Method(s)	Carrying	Fair	Carrying	Fair
	Used	Amount	Value	Amount	Value
Financial assets:
Cash and cash equivalents	Level 1	$30,977	$30,977	$31,619	$31,619
Certificates of deposit	Level 2	4,428	4,443	4,428	4,443
Available-for-sale securities	See Above	497,111	497,111	516,807	516,807
Restricted equity securities (included in Other Assets)	Level 2	2,502	2,502	1,584	1,584
Loans held for sale	Level 2	192	192	0	0
Loans, net	Level 3	656,518	653,715	623,209	629,267
Accrued interest receivable	Level 2	3,875	3,875	3,908	3,908
Servicing rights	Level 3	1,209	1,209	1,281	1,281
Financial liabilities:
Deposits with no stated maturity	Level 2	738,317	738,317	729,052	729,052
Time deposits	Level 2	240,132	241,030	238,937	239,712
Short-term borrowings	Level 2	19,806	19,753	5,537	5,473
Long-term borrowings	Level 2	62,916	68,017	73,060	78,866
Accrued interest payable	Level 2	89	89	104	104