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Fair Value Measurements
 12 Months Ended
Dec. 31, 2014
Fair Value Disclosures [Abstract]  
Fair Value Measurements

Note 18 – Fair Value Measurements

 

The following tables present information about the Bank’s assets and liabilities measured at fair value on a recurring basis at December 31, 2014 and December 31, 2013, and the valuation techniques used by the Bank to determine those fair values.

 

In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Bank has the ability to access.

 

Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

 

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.

 

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Bank’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

 

Assets Measured at Fair Value on a Recurring Basis

 

There were no liabilities measured at fair value as of December 31, 2014 or December 31, 2013. Disclosures concerning assets measured at fair value are as follows:

 

   Quoted Prices         
   In Active  Significant      
   Markets for  Other  Significant   
   Identical  Observable  Unobservable   
(Dollars in thousands)  Assets  Inputs  Inputs  Balance at
   (Level 1)  (Level 2)  (Level 3)  Date Indicated
Investment Securities, Available for            
Sale - December 31, 2014            
U. S. Government and federal agency  $—   $44,503   $—   $44,503 
U. S. Treasury notes and bonds   —    8,058    —    8,058 
State and municipal   —    60,091    9,744    69,835 
Mortgage-backed   —    8,942    —    8,942 
Corporate   —    7,140    398    7,538 
Foreign debt   —    994    —    994 
Equity securities   775    —    1,500    2,275 
Asset backed securities   —    376    —    376 
     Total  $775   $130,104  $11,642   $142,521 
             
Investment Securities, Available for            
Sale - December 31, 2013            
U. S. Government and federal agency  $—   $43,722   $—   $43,722 
U. S. Treasury notes and bonds   —    7,224    —    7,224 
State and municipal   —    55,234    9,541    64,775 
Mortgage-backed   —    8,470    —    8,470 
Corporate   —    8,417    398    8,815 
Foreign debt   —    990    —    990 
Equity securities   214    —    1,389    1,603 
Asset backed securities   —    483    —    483 
     Total  $214   $124,540  $11,328   $136,082 

 

Securities classified as available for sale are generally reported at fair value utilizing Level 2 inputs. ChoiceOne’s external investment advisor obtained fair value measurements from an independent pricing service that uses 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 value measurements considered observable data that may include dealer quotes, market spreads, cash flows and the bonds’ terms and conditions, among other things. Securities classified in Level 2 included U.S. Government and federal agency securities, U.S. Treasury notes and bonds, state and municipal securities, mortgage-backed securities, corporate bonds, foreign debt, and asset backed securities. The Company classified certain state and municipal securities corporate bonds, and equity securities as Level 3. Based on the lack of observable market data, estimated fair values were based on the observable data available and reasonable unobservable market data.

 

Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis

 

(Dollars in thousands)     
  2014    2013  
Investment Securities, Available for Sale     
Balance, January 1 $11,328   $2,599 
Total realized and unrealized gains included in income  (11)   — 
Total unrealized gains/(losses) included in other comprehensive income  14   125 
Net purchases, sales, calls, and maturities  237   3,890 
Net transfers into Level 3  74    4,714 
Balance, December 31 $11,642   $11,328 

 

Of the Level 3 assets that were still held by the Bank at December 31, 2014, the net unrealized loss for the twelve months ended December 31, 2014 was $9,000 and a gain of $4,000 for the twelve months ended December 31, 2013, which is recognized in other comprehensive income in the consolidated balance sheets. A total of $3.5 million and $2.5 million of Level 3 securities were purchased in 2014 and 2013, respectively.

 

Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 assets and liabilities. As a result, the unrealized gains and losses for these assets and liabilities presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs.

 

Available for sale investment securities categorized as Level 3 assets consist of bonds issued by local municipalities and a trust-preferred security. The Bank estimates the fair value of these assets based on the present value of expected future cash flows using management’s best estimate of key assumptions, including forecasted interest yield and payment rates, credit quality and a discount rate commensurate with the current market and other risks involved.

 

The Bank also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets are not normally measured at fair value, but can be subject to fair value adjustments in certain circumstances, such as impairment. Disclosures concerning assets measured at fair value on a non-recurring basis are as follows:

 

Assets Measured at Fair Value on a Non-recurring Basis

 

(Dollars in thousands)  Balances at Dates Indicated  Quoted Prices In Active Markets for Identical Assets
(Level 1)		  Significant Other Observable Inputs
(Level 2)		  Significant Unobservable Inputs
(Level 3)
             
Impaired Loans                    
December 31, 2014  $6,885   $—     $—     $6,885 
December 31, 2013  $8,287   $—     $—     $8,287 
                     
Other Real Estate                    
December 31, 2014  $150   $—     $—     $150 
December 31, 2013  $508   $—     $—     $508 

  

Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. The Bank estimates the fair value of the loans based on the present value of expected future cash flows using management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals). The changes in fair value consisted of charge-downs of impaired loans that were posted to the allowance for loan losses and write-downs of other real estate owned that were posted to a valuation account. The fair value of other real estate owned was based on appraisals or other reviews of property values, adjusted for estimated costs to sell.