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FAIR VALUE MEASUREMENTS
 6 Months Ended
Jun. 30, 2016
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASUREMENTS

NOTE 6 – FAIR VALUE MEASUREMENTS

 

The following tables present information about the Bank’s assets and liabilities measured at fair value on a recurring basis 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.

 

There were no liabilities measured at fair value as of June 30, 2016 or December 31, 2015. Disclosures concerning assets measured at fair value are as follows:

 

Assets Measured at Fair Value on a Recurring Basis

 

   Quoted Prices   Significant         
   in Active   Other   Significant     
   Markets for Identical   Observable   Unobservable     
(Dollars in thousands)  Assets   Inputs   Inputs   Balance at 
   (Level 1)   (Level 2)   (Level 3)   Date Indicated 
Investment Securities, Available for Sale – June 30, 2016                
U.S. Treasury notes and bonds  $—   $2,120   $—   $2,120 
U.S. Government and federal agency   —    66,315    —    66,315 
State and municipal   —    76,756    10,100    86,856 
Mortgage-backed   —    7,804    —    7,804 
Corporate   —    7,578    399    7,977 
Foreign debt   —    1,002    —    1,002 
Equity securities   1,378    —    1,500    2,878 
Asset backed securities   —    220    —    220 
     Total  $1,378   $161,795   $11,999   $175,172 
                     
Investment Securities, Available for Sale - December 31, 2015                    
U.S. Treasury notes and bonds  $—   $6,100   $—   $6,100 
U.S. Government and federal agency   —    57,207    —    57,207 
State and municipal   —    67,852    9,902    77,754 
Mortgage-backed   —    6,970    —    6,970 
Corporate   —    7,990    397    8,387 
Foreign debt   —    995    —    995 
Equity securities   953    —    1,500    2,453 
Asset backed securities   —    270    —    270 
     Total  $953   $147,384   $11,799   $160,136 

  

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

 

(Dollars in thousands)        
   2016   2015 
Investment Securities, Available for Sale          
Balance, January 1  $11,799   $11,642 
Total realized and unrealized gains included in income   —    — 
Total unrealized (gains) losses included in other comprehensive income   (187)   772 
Net purchases, sales, calls, and maturities   387    (368)
Net transfers into Level 3   —    — 
Balance, June 30  $11,999   $12,046 

  

Of the Level 3 assets that were held by the Bank at June 30, 2016, the net unrealized gain for the six months ended June 30, 2016 was $187,000, which is recognized in other comprehensive income in the consolidated balance sheet. $750,000 of Level 3 securities were purchased during the first half of 2016 and $182,000 of Level 3 securities matured or were called in the same period. There were no sales or purchases of Level 3 securities during the first and second quarters of 2015.

 

Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 investment securities 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 primarily consist of bonds issued by local municipalities. The Bank estimates the fair value of these bonds 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

 

      Quoted Prices  Significant   
      in Active  Other  Significant  
      Markets for Identical  Observable  Unobservable  
(Dollars in thousands)  Balance at  Assets  Inputs  Inputs  
   Dates Indicated  (Level 1)  (Level 2)  (Level 3)  
Impaired Loans                    
June 30, 2016  $6,033   $—   $—   $6,033 
December 31, 2015  $5,585   $—   $—   $5,585 
                     
Other Real Estate                    
June 30, 2016  $13   $—   $—   $13 
December 31, 2015  $31   $—   $—   $31 

 

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 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 that were posted to a valuation account.