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FAIR VALUE MEASUREMENTS
 9 Months Ended
Sep. 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 September 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

 

(Dollars in thousands)   Quoted Prices in Active Markets for Identical Assets   Significant Other Observable Inputs   Significant Unobservable Inputs   Balance at
    (Level 1)   (Level 2)   (Level 3)   Date Indicated
Equity Securities Held at Fair Value - September 30, 2018                
Equity securities   $ 1,937     $ —       $ 1,000     $ 2,937  
                                 
Investment Securities, Available for                                
Sale – September 30, 2018                                
U.S. Treasury notes and bonds   $ —       $ 1,910     $ —       $ 1,910  
U.S. Government and federal agency     —         33,955       —         33,955  
State and municipal     —         94,170       7,895       102,065  
Mortgage-backed     —         18,822       —         18,822  
Corporate     —         5,566       —         5,566  
Trust preferred securities     —         —         500       500  
Asset backed securities     —         38       —         38  
     Total   $ —       $ 154,461     $ 8,395     $ 162,856  
                                 
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  
Trust preferred securities     —         —         500       500  
Equity securities     1,892       —         1,000       2,892  
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     (347 )     271  
Net purchases, sales, calls, and maturities     (3,656 )     (1,831 )
Net transfers into Level 3     —         —    
Balance, September 30   $ 9,395     $ 13,543  

  

Of the Level 3 assets that were held by the company as available for sale at September 30, 2018, the net unrealized loss as of September 30, 2018 was $16,000, which is recognized in accumulated other comprehensive income in the consolidated balance sheet. A total of $224,000 of Level 3 securities were purchased in the nine months ended September 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                
September 30, 2018   $ 4,927     $ —       $ —       $ 4,927  
December 31, 2017   $ 4,140     $ —       $ —       $ 4,140  
                                 
Other Real Estate                                
September 30, 2018   $ 244     $ —       $ —       $ 244  
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.