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FAIR VALUE MEASUREMENTS
 6 Months Ended
Jun. 30, 2018
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASUREMENTS

NOTE 6 – FAIR VALUE MEASUREMENTS

 

The following tables present information about assets and liabilities measured at fair value on a recurring basis and the valuation techniques used 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, 2018 or December 31, 2017. 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
Equity Securities Held at Fair Value - June 30, 2018            
Equity securities  $1,838   $—     $1,500   $3,338 
                     
Investment Securities, Available for                    
Sale – June 30, 2018                    
U.S. Treasury notes and bonds  $—     $1,919   $—     $1,919 
U.S. Government and federal agency   —      33,128    —      33,128 
State and municipal   —      92,266    11,339    103,605 
Mortgage-backed   —      17,912    —      17,912 
Corporate   —      5,067    —      5,067 
Asset backed securities   —      56    —      56 
     Total  $—     $150,348   $11,339   $161,687 
                     
Investment Securities, Available for                    
Sale - December 31, 2017                    
U.S. Treasury notes and bonds  $—     $1,960   $—     $1,960 
U.S. Government and federal agency   —      35,126    —      35,126 
State and municipal   —      88,150    11,898    100,048 
Mortgage-backed   —      9,820    —      9,820 
Corporate   —      5,151    —      5,151 
Equity securities   1,892    —      1,500    3,392 
Asset backed securities   —      94    —      94 
     Total  $1,892   $140,301   $13,398   $155,591 

 

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

 

(Dollars in thousands)      
   2018  2017
Investment Securities      
Balance, January 1  $13,398   $15,103 
Total realized and unrealized gains included in income   —      —   
Total unrealized gains (losses) included in other comprehensive income   (246)   162 
Net purchases, sales, calls, and maturities   (313)   (407)
Net transfers into Level 3   —      —   
Balance, June 30  $12,839   $14,858 

 

Of the Level 3 assets that were held by the company as available for sale at June 30, 2018, the net unrealized gain as of June 30, 2018 was $84,000, which is recognized in accumulated other comprehensive income in the consolidated balance sheet. A total of $231,000 of Level 3 securities were purchased in the six months ended June 30, 2018.

 

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.

Securities categorized as Level 3 assets primarily consist of bonds issued by local municipalities and equity securities of community banks. The company 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 company 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, 2018  $4,278   $—     $—     $4,278 
December 31, 2017  $4,140   $—     $—     $4,140 
                     
Other Real Estate                    
June 30, 2018  $179   $—     $—     $179 
December 31, 2017  $106   $—     $—     $106 

  

Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. The company 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.