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FAIR VALUE
 3 Months Ended
Mar. 31, 2019
Fair Value Disclosures [Abstract]  
FAIR VALUE FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are:
Level 1 – quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access at the measurement date.
Level 2 – significant other observable inputs other than Level 1 prices such as prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – at least one significant unobservable input that reflects a company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.
In instances in which multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The Company used the following methods and significant assumptions to estimate fair value for instruments measured on a recurring basis:
Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, securities are classified within Level 2 and fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flow. Level 2 securities include U.S. agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. All of the Company’s securities are classified as available for sale.
The Company had no fair value liabilities measured on a recurring basis at March 31, 2019 and December 31, 2018.
The following table summarizes assets measured at fair value on a recurring basis at March 31, 2019 and December 31, 2018.
(Dollars in Thousands)Level 1Level 2Level 3Total Fair
Value
Measurements
March 31, 2019
AFS Securities:
States and political subdivisions$0 $153,903 $0 $153,903 
GSE residential CMOs0 73,001 0 73,001 
Private label residential CMOs0 17 0 17 
Private label commercial CMOs0 69,858 7,261 77,119 
Asset-backed and other0 186,181 0 186,181 
Totals$0 $482,960 $7,261 $490,221 
December 31, 2018
AFS Securities:
States and political subdivisions$0 $145,004 $0 $145,004 
GSE residential CMOs0 108,064 0 108,064 
Private label residential CMOs0 143 0 143 
Private label commercial CMOs0 67,836 7,209 75,045 
Asset-backed and other0 137,588 0 137,588 
Totals$0 $458,635 $7,209 $465,844 

One private label commercial CMO was measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at March 31, 2019 and December 31, 2018. Fair value for this investment at March 31, 2019 and December 31, 2018 totaled $7,261,000 and $7,209,000. The investment was purchased at $7,213,000, premium amortization expense totaling $22,000 and $0 was included in earnings for the three months ended March 31, 2019 and March 31, 2018, and an unrealized gain of $111,000 and $0 was recognized in other comprehensive income for the three months ended March 31, 2019 and March 31, 2018. The Level 3 valuation is based on a non-executable broker quote, which is considered a significant unobservable input. Such quotes are updated as available and may remain constant for a period of time for certain broker-quoted securities that do not move with the market or that are not interest rate sensitive as a result of their structure or overall attributes.
Certain financial assets are measured at fair value on a nonrecurring basis. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets. The Company used the following methods and significant assumptions to estimate fair value for these financial assets.
Impaired Loans
Loans are designated as impaired when, in the judgment of management and based on current information and events, it is probable that all amounts due, according to the contractual terms of the loan agreement, will not be collected. The measurement of loss associated with impaired loans for all loan classes can be based on either the observable market price of the loan, the fair value of the collateral, or discounted cash flows based on a market rate of interest for performing TDRs. For collateral-dependent loans, fair value is measured based on the value of the collateral securing the loan, less estimated costs to sell. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The value of the real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction, or if management adjusts the appraisal value, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal, if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3). Impaired loans with an allocation to the ALL are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of income. Specific allocations to the ALL or partial charge-offs totaled $915,000 and $928,000 at March 31, 2019 and December 31, 2018.
The following table presents changes in the fair value for impaired loans still held at March 31, considered in the determination of the provision for loan losses, for the three months ended March 31, 2019 and 2018.
Three months ended March 31,
(Dollars in thousands)2019 2018 
Changes in fair value of impaired loans still held$4 $8 
Foreclosed Real Estate
OREO property acquired through foreclosure is initially recorded at the fair value of the property at the transfer date less estimated selling cost. Subsequently, OREO is carried at the lower of its carrying value or the fair value less estimated selling cost. Fair value is usually determined based upon an independent third-party appraisal of the property or occasionally upon a recent sales offer. Specific charges to value OREO at the lower of cost or fair value on properties held at March 31, 2019 and December 31, 2018 both totaled $0. There were no changes in the fair value of OREO for properties, still held at March 31, that were charged to real estate expenses for the three months ended March 31, 2019 and 2018.
The following table summarizes assets measured at fair value on a nonrecurring basis at March 31, 2019 and December 31, 2018.
(Dollars in thousands)Level 1Level 2Level 3Total
Fair Value
Measurements
March 31, 2019
Impaired Loans
Commercial real estate:
Owner occupied$0 $0 $1,049 $1,049 
Multi-family0 0 122 122 
Non-owner occupied residential0 0 264 264 
Commercial and industrial0 0 15 15 
Residential mortgage:
First lien0 0 824 824 
Home equity - lines of credit0 0 344 344 
Installment and other loans0 0 10 10 
Total impaired loans$0 $0 $2,628 $2,628 
December 31, 2018
Impaired Loans
Commercial real estate:
Owner occupied$0 $0 $1,087 $1,087 
Multi-family0 0 131 131 
Non-owner occupied residential0 0 278 278 
Commercial and industrial0 0 25 25 
Residential mortgage:
First lien0 0 1,121 1,121 
Home equity - lines of credit0 0 409 409 
Total impaired loans$0 $0 $3,051 $3,051 
The following table presents additional qualitative information about assets measured on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value.
(Dollars in thousands)Fair Value
Estimate		Valuation
Techniques		Unobservable InputRange
March 31, 2019
Impaired loans$2,628 Appraisal of
collateral		Management adjustments on appraisals for property type and recent activity5% - 75% discount
- Management adjustments for liquidation expenses6% - 20% discount
December 31, 2018
Impaired loans$3,051 Appraisal of
collateral		Management adjustments on appraisals for property type and recent activity5% - 75% discount
- Management adjustments for liquidation expenses6% - 20% discount

Fair values of financial instruments
The following table presents carrying amounts and estimated fair values of the Company’s financial instruments at March 31, 2019 and December 31, 2018:
(Dollars in thousands)Carrying
Amount		Fair ValueLevel 1Level 2Level 3
March 31, 2019
Financial Assets
Cash and due from banks$22,387 $22,387 $22,387 $0 $0 
Interest-bearing deposits with banks54,830 54,830 54,830 0 0 
Restricted investments in bank stocks10,292 n/a n/a n/a n/a 
AFS securities490,221 490,221 0 482,960 7,261 
Loans held for sale4,787 4,906 0 4,906 0 
Loans, net of allowance for loan losses1,251,256 1,258,698 0 0 1,258,698 
Accrued interest receivable6,340 6,340 0 2,812 3,528 
Financial Liabilities
Deposits1,620,696 1,618,521 0 1,618,521 0 
Short-term borrowings9,579 9,579 0 9,579 0 
Long-term debt103,356 103,401 0 103,401 0 
Subordinated notes31,810 33,339 0 33,339 0 
Accrued interest payable1,454 1,454 0 1,454 0 
Off-balance sheet instruments0 0 0 0 0 
December 31, 2018
Financial Assets
Cash and due from banks$26,156 $26,156 $26,156 $0 $0 
Interest-bearing deposits with banks45,664 45,664 45,664 0 0 
Federal Funds Sold16,995 16,995 16,995 0 0 
Restricted investments in bank stocks10,842 n/a n/a n/a n/a 
AFS securities465,844 465,844 0 458,635 7,209 
Loans held for sale3,340 3,413 0 3,413 0 
Loans, net of allowance for loan losses1,233,643 1,229,645 0 0 1,229,645 
Accrued interest receivable5,927 5,927 0 2,853 3,074 
Financial Liabilities
Deposits1,558,756 1,555,912 0 1,555,912 0 
Short-term borrowings64,069 64,069 0 64,069 0 
Long-term debt83,450 82,951 0 82,951 0 
Subordinated notes31,859 31,256 0 31,256 0 
Accrued interest payable1,301 1,301 0 1,301 0 
Off-balance sheet instruments0 0 0 0 0 
The methods utilized to measure the fair value of financial instruments at March 31, 2019 and December 31, 2018 represent an approximation of exit price; however, an actual exit price may differ.