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FAIR VALUE MEASUREMENTS
 9 Months Ended
Sep. 30, 2019
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, 2019 or December 31, 2018. 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 Date 
   (Level 1)   (Level 2)   (Level 3)   Indicated 
Equity Securities Held at Fair Value - September 30, 2019                    
Equity securities  $1,499   $—   $1,000   $2,499 
                     
Investment Securities, Available for Sale – September 30, 2019                    
U.S. Treasury notes and bonds  $—   $2,012   $—   $2,012 
U.S. Government and federal agency   —    23,049    —    23,049 
State and municipal   —    90,975    9,777    100,752 
Mortgage-backed   —    25,286    —    25,286 
Corporate   —    2,679    —    2,679 
Foreign debt   —    500    —    500 
Trust preferred securities   —    —    500    500 
     Total  $—   $144,501   $10,277   $154,778 
                     
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. Treasury notes and bonds  $—   $1,947   $—   $1,947 
U.S. Government and federal agency   —    33,529    —    33,529 
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 

 

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

 

   Nine months ended 
(Dollars in thousands)  September 30, 
   2019   2018 
Equity Securities Held at Fair Value          
Balance, January 1  $886   $— 
Reclassification due to implementation of ASU 2016-01   —    1,000 
Total realized and unrealized gains included in noninterest income   114    — 
Net purchases, sales, calls, and maturities   —    — 
Net transfers into Level 3   —    — 
Balance, September 30  $1,000   $1,000 
           
Investment Securities, Available for Sale          
Balance, January 1  $8,498   $13,398 
Reclassification due to implementation of ASU 2016-01   —    (1,000)
Total unrealized gains (losses) included in other comprehensive income   350    (347)
Net purchases, sales, calls, and maturities   1,429    (3,656)
Net transfers into Level 3   —    — 
Balance, September 30  $10,277   $8,395 

 

Of the available for sale Level 3 assets that were held by ChoiceOne at September 30, 2019, the net unrealized gain as of September 30, 2019 was $495,000, which was recognized in accumulated other comprehensive income in the consolidated balance sheet. Of the equity securities classified as Level 3 assets that were held by ChoiceOne at September 30, 2019, the fair value was consistent with par as of September 30, 2019. ChoiceOne purchased two bonds from municipalities in our market area at a purchase price of $2.1 million that are considered Level 3 securities in the nine months ended September 30, 2019.

 

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. ChoiceOne 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.

 

ChoiceOne 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)  Balance at Dates   Quoted Prices
in Active
Markets for
Identical Assets		   Significant
Other
Observable
Inputs		   Significant
Unobservable
Inputs		 
   Indicated   (Level 1)   (Level 2)   (Level 3) 
Impaired Loans                    
September 30, 2019  $5,665   $—   $—   $5,665 
December 31, 2018  $4,024   $—   $—   $4,024 
                     
Other Real Estate                    
September 30, 2019  $284   $—   $—   $284 
December 31, 2018  $102   $—   $—   $102 

  

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