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Fair Value Measurements
 12 Months Ended
Dec. 31, 2018
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, 2018 and December 31, 2017, 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 December 31, 2017 or December 31, 2018. Disclosures concerning assets measured at fair value are as follows:

 

Assets Measured at Fair Value on a Recurring Basis
                     
   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 
Equity Securities Held at Fair Value - December 31, 2018                    
Equity securities  $1,961   $—   $886   $2,847 
                     
Investment Securities, Available for Sale - December 31, 2018                    
U. S. Government and federal agency  $—   $33,529   $—   $33,529 
U. S. Treasury notes and bonds   —    1,947    —    1,947 
State and municipal   —    95,930    7,998    103,928 
Mortgage-backed   —    21,575    —    21,575 
Corporate   —    5,102    —    5,102 
Trust preferred securities   —    —    500    500 
Asset backed securities   —    21    —    21 
Total  $—   $158,104   $8,498   $166,602 
                     
Investment Securities, Available for Sale - December 31, 2017                    
U. S. Government and federal agency  $—   $35,126   $—   $35,126 
U. S. Treasury notes and bonds   —    1,960    —    1,960 
State and municipal   —    88,150    11,898    100,048 
Mortgage-backed   —    9,820    —    9,820 
Corporate   —    5,151    —    5,151 
Equity securities   1,892    —    1,000    2,892 
Trust preferred securities   —    —    500    500 
Asset backed securities   —    94    —    94 
Total  $1,892   $140,301   $13,398   $155,591 

 

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 equity securities, state and municipal securities, and trust preferred 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)        
   2018   2017 
Equity Securities Held at Fair Value          
Balance, January 1  $—   $— 
Reclassification due to implementation of ASU 2016-01   1,000    — 
Total realized and unrealized gains included in noninterest income   (114)   — 
Total unrealized gains/(losses) included in other comprehensive income   —    — 
Net purchases, sales, calls, and maturities   —    — 
Net transfers into Level 3   —    — 
Balance, December 31  $886   $— 
           
Investment Securities, Available for Sale          
Balance, January 1  $13,398   $15,103 
Reclassification due to implementation of ASU 2016-01   (1,000)   — 
Total realized and unrealized gains included in income   —    — 
Total unrealized gains/(losses) included in other comprehensive income   (186)   196 
Net purchases, sales, calls, and maturities   (3,714)   (1,901)
Net transfers into Level 3   —    — 
Balance, December 31  $8,498   $13,398 

 

Of the Level 3 assets that were still held by the Bank at December 31, 2018, the net unrealized loss for the twelve months ended December 31, 2018 was $300,000 compared to a $196,000 unrealized gain as of December 31, 2017, which is recognized in noninterest income or other comprehensive income in the consolidated balance sheets and income statements. Amounts recognized in noninterest income relate to changes in equity securities based on ASU 2016-01, which was implemented by ChoiceOne effective January 1, 2018. A total of $224,000 and $3.2 million of Level 3 securities were purchased in 2018 and 2017, 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

 

       Quoted Prices         
       In Active   Significant     
       Markets for   Other   Significant 
   Balances at   Identical   Observable   Unobservable 
(Dollars in thousands)  Dates   Assets   Inputs   Inputs 
   Indicated   (Level 1)   (Level 2)   (Level 3) 
Impaired Loans                    
December 31, 2018  $4,024   $—   $—   $4,024 
December 31, 2017  $4,140   $—   $—   $4,140 
                     
Other Real Estate                    
December 31, 2018  $102   $—   $—   $102 
December 31, 2017  $106   $—   $—   $106 

 

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.