Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUE

v3.10.0.1
FAIR VALUE
9 Months Ended
Sep. 30, 2018
FAIR VALUE [Abstract]  
FAIR VALUE
NOTE 5 – FAIR VALUE

ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value include:


Level 1:
Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2:
Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3:
Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Investment Securities: The fair values of investment securities are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs).  The fair values of certain securities held to maturity are determined by computing discounted cash flows using observable and unobservable market inputs (Level 3 inputs).

Loans Held for Sale: The fair value of loans held for sale is based upon binding quotes from third party investors (Level 2 inputs).

Impaired Loans: Loans identified as impaired are measured using one of three methods: the loan's observable market price, the fair value of collateral or the present value of expected future cash flows.  For each period presented, no impaired loans were measured using the loan's observable market price.  If an impaired loan has had a chargeoff or if the fair value of the collateral is less than the recorded investment in the loan, we establish a specific reserve and report the loan as nonrecurring Level 3.  The fair value of collateral of impaired loans is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Other Real Estate Owned: Other real estate owned (OREO) properties are initially recorded at fair value, less estimated costs to sell when acquired, establishing a new cost basis.  Adjustments to OREO are measured at fair value, less costs to sell. Fair values are generally based on third party appraisals or realtor evaluations of the property. These appraisals and evaluations may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.  Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available.  Such adjustments are usually significant and typically result in a Level 3 classification.  In cases where the carrying amount exceeds the fair value, less estimated costs to sell, an impairment loss is recognized through a valuation allowance, and the property is reported as nonrecurring Level 3.

Interest Rate Swaps:   For interest rate swap agreements, we measure fair value utilizing pricing provided by a third-party pricing source that that uses market observable inputs, such as forecasted yield curves, and other unobservable inputs and accordingly, interest rate swap agreements are classified as Level 3.
 
Assets measured at fair value on a recurring basis are summarized below (in thousands):

    
Fair
Value
   
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
   
Significant Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
September 30, 2018
                       
U.S. Treasury and federal agency securities
 
$
91,413
   
$
---
   
$
91,413
   
$
---
 
U.S. Agency MBS and CMOs
   
30,066
     
---
     
30,066
     
---
 
Tax-exempt state and municipal bonds
   
43,823
     
---
     
43,823
     
---
 
Taxable state and municipal bonds
   
45,184
     
---
     
45,184
     
---
 
Corporate bonds and other debt securities
   
8,129
     
---
     
8,129
     
---
 
Other equity securities
   
1,424
     
---
     
1,424
     
---
 
Loans held for sale
   
---
     
---
     
---
     
---
 
Interest rate swaps
   
402
     
---
     
---
     
402
 
Interest rate swaps
   
(402
)
   
---
     
---
     
(402
)
                                 
December 31, 2017
                               
U.S. Treasury and federal agency securities
 
$
101,964
   
$
---
   
$
101,964
   
$
---
 
U.S. Agency MBS and CMOs
   
23,385
     
---
     
23,385
     
---
 
Tax-exempt state and municipal bonds
   
42,057
     
---
     
42,057
     
---
 
Taxable state and municipal bonds
   
43,735
     
---
     
43,735
     
---
 
Corporate bonds and other debt securities
   
8,109
     
---
     
8,109
     
---
 
Other equity securities
   
1,470
     
---
     
1,470
     
---
 
Loans held for sale
   
1,208
     
---
     
1,208
     
---
 
Interest rate swaps
   
197
     
---
     
---
     
197
 
Interest rate swaps
   
(197
)
   
---
     
---
     
(197
)
 
Assets measured at fair value on a non-recurring basis are summarized below (in thousands):


 
Fair
Value
   
Quoted Prices in
Active Markets
 for Identical
Assets
(Level 1)
   
Significant Other
Observable
Inputs
(Level 2)
   
Significant
 Unobservable Inputs
(Level 3)
 
September 30, 2018
                       
Impaired loans
 
$
2,663
   
$
---
   
$
---
   
$
2,663
 
Other real estate owned
   
1,318
     
---
     
---
     
1,318
 
                                 
December 31, 2017
                               
Impaired loans
 
$
2,278
   
$
---
   
$
---
   
$
2,278
 
Other real estate owned
   
3,658
     
---
     
---
     
3,658
 
 
Quantitative information about Level 3 fair value measurements measured on a non-recurring basis was as follows at period end (dollars in thousands):
 


Asset
Fair
Value
   
Valuation
Technique
 
Unobservable
Inputs

Range (%)
September 30, 2018              
Impaired Loans
 
$
2,663

Sales comparison approach
 
Adjustment for differences between comparable sales

1.0 to 15.0
         
Income approach
 
Capitalization rate
  9.5 to 11.0
                 
Other real estate owned
   
1,318
 
Sales comparison approach
 
Adjustment for differences between comparable sales
  3.0 to 20.0
         
Income approach
 
Capitalization rate
  9.5 to 11.0



Asset
Fair
Value

Valuation
Technique

Unobservable
Inputs

Range (%)
December 31, 2017
                   
Impaired Loans
 
$
 2,278
 
Sales comparison approach
 
Adjustment for differences between comparable sales
 
 2.0 to 15.0
         
Income approach
 
Capitalization rate
 
 9.5 to 11.0
                     
Other real estate owned
   
 3,658
 
Sales comparison approach
 
Adjustment for differences between comparable sales
 
 3.0 to 22.0
         
Income approach
 
Capitalization rate
 
 9.5 to 11.0

The carrying amounts and estimated fair values of financial instruments, not previously presented, were as follows at September 30, 2018 and December 31, 2017 (dollars in thousands):


Level in
Fair Value
Hierarchy

September 30, 2018


December 31, 2017

Carrying
Amount
 
Fair
Value
Carrying
Amount
 
Fair
Value
Financial assets
                     
Cash and due from banks
Level 1
 
$
30,837
   
$
30,837
   
$
34,945
   
$
34,945
 
Cash equivalents
Level 2
   
152,339
     
152,339
     
126,522
     
126,522
 
Securities held to maturity
Level 3
   
71,688
     
72,148
     
85,827
     
86,452
 
FHLB stock
     
11,558
 
NA
     
11,558
 
NA
 
Loans, net
Level 2
   
1,325,217
     
1,329,994
     
1,301,431
     
1,296,633
 
Bank owned life insurance
Level 3
   
40,996
     
40,996
     
40,243
     
40,243
 
Accrued interest receivable
Level 2
   
5,524
     
5,524
     
4,680
     
4,680
 
                                   
Financial liabilities
                                 
Deposits
Level 2
   
(1,617,743
)
   
(1,618,253
)
   
(1,579,010
)
   
(1,579,016
)
Other borrowed funds
Level 2
   
(70,000
)
   
(68,548
)
   
(92,118
)
   
(91,313
)
Long-term debt
Level 2
   
(41,238
)
   
(37,087
)
   
(41,238
)
   
(36,546
)
Accrued interest payable
Level 2
   
(769
)
   
(769
)
   
(604
)
   
(604
)
                                   
Off-balance sheet credit-related items
                                 
Loan commitments
     
---
     
---
     
---
     
---
 

The methods and assumptions used to estimate fair value are described as follows.

Carrying amount is the estimated fair value for cash and cash equivalents, bank owned life insurance, accrued interest receivable and payable, demand deposits, short-term borrowings and variable rate loans or deposits that reprice frequently and fully. Security fair values are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities as discussed above. For fixed rate loans, interest-bearing time deposits in other financial institutions, or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk (including consideration of widening credit spreads). Fair value of debt is based on current rates for similar financing. It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability. The fair value of off-balance sheet credit-related items is not significant.

The estimated fair values of financial instruments disclosed above as of September 30, 2018 follow the guidance in ASU 2016-01 which prescribes an "exit price" approach in estimating and disclosing fair value of financial instruments incorporating discounts for credit, liquidity and marketability factors.  The fair values shown as of December 31, 2017 and prior use an "entry price" approach.