7. Fair Value Measurements and Disclosures

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The Company groups assets and liabilities measured or disclosed at fair value in three levels as required by ASC 820, Fair Value Measurements and Disclosures. Under this guidance, fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the inputs used to develop those assumptions and measure fair value. The hierarchy requires companies to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels used to measure fair value are as follows:

•

Level 1 – Quoted prices in active markets for identical assets or liabilities.

•

Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

•

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

An asset’s or liability’s categorization within the fair value hierarchy is based upon the lowest level that is significant to the fair value measurement. Management reviews and updates the fair value hierarchy classifications of the Company’s assets and liabilities quarterly.

Recurring Basis

Investment Securities Available for Sale

Fair values of investment securities available for sale are primarily measured using information from a third-party pricing service. This pricing service provides pricing information by utilizing pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities bids, offers and other reference data from market research publications. If quoted prices are available in an active market, investment securities are classified as Level 1 measurements. If quoted prices are not available in an active market, fair values are estimated primarily by the use of pricing models. Level 2 investment securities are primarily comprised of mortgage-backed securities issued by government agencies and U.S. government-sponsored enterprises. In certain cases, where there is limited or less transparent information provided by the Company’s third-party pricing service, fair value is estimated by the use of secondary pricing services or through the use of non-binding third-party broker quotes. Investment securities are classified within Level 3 when little or no market activity supports the fair value.

Management primarily identifies investment securities, which may have traded in illiquid or inactive markets, by identifying instances of a significant decrease in the volume and frequency of trades, relative to historical levels, as well as instances of a significant widening of the bid-ask spread in the brokered markets. Investment securities that are deemed to have been trading in illiquid or inactive markets may require the use of significant unobservable inputs. For example, management may use quoted prices for similar investment securities in the absence of a liquid and active market for the investment securities being valued. As of September 30, 2017, management did not make adjustments to prices provided by the third-party pricing service as a result of illiquid or inactive markets.

The following tables present the balances of assets measured for fair value on a recurring basis as of September 30, 2017 and December 31, 2016.


			Fair Value Measurements Using
*(dollars in thousands)*	September 30, 2017		Level 1		Level 2		Level 3
Available for sale securities:
U.S. agency mortgage-backed	$	75,254	$	—	$	75,254	$	—
Collateralized mortgage obligations		99,873		—		99,873		—
Municipal bonds		18,493		—		18,493		—
U.S. government agency		8,576		—		8,576		—

Total	$	202,196	$	—	$	202,196	$	—


			Fair Value Measurements Using
*(dollars in thousands)*	December 31, 2016		Level 1		Level 2		Level 3
Available for sale securities:
U.S. agency mortgage-backed	$	78,931	$	—	$	78,931	$	—
Collateralized mortgage obligations		74,330		—		74,330		—
Municipal bonds		21,428		—		21,428		—
U.S. government agency		9,041		—		9,041		—

Total	$	183,730	$	—	$	183,730	$	—

The Company did not record any liabilities at fair value for which measurement of the fair value was made on a recurring basis.

Nonrecurring Basis

In accordance with the provisions of ASC 310, Receivables, the Company records loans considered impaired at fair value. A loan is considered impaired if it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Fair value is measured at the fair value of the collateral for collateral-dependent loans. For non-collateral-dependent loans, fair value is measured by present valuing expected future cash flows. Impaired loans are classified as Level 3 assets when measured using appraisals from external parties of the collateral less any prior liens and when there is no observable market price. Repossessed assets are initially recorded at fair value less estimated costs to sell. The fair value of repossessed assets is based on property appraisals and an analysis of similar properties available. As such, the Company classifies repossessed assets as Level 3 assets.

The Company has segregated all financial assets that are measured at fair value on a nonrecurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below.


			Fair Value Measurements Using
*(dollars in thousands)*	September 30, 2017		Level 1		Level 2		Level 3
Repossessed assets	$	454	$	—	$	—	$	454
Impaired loans		4,682		—		—		4,682

Total	$	5,136	$	—	$	—	$	5,136


			Fair Value Measurements Using
*(dollars in thousands)*	December 31, 2016		Level 1		Level 2		Level 3
Repossessed assets	$	2,893	$	—	$	—	$	2,893
Impaired loans		4,763		—		—		4,763

Total	$	7,656	$	—	$	—	$	7,656

The following table shows significant observable inputs used in the fair value measurement of Level 3 assets.


*(dollars in thousands)*	Fair Value		Valuation Technique	Unobservable Inputs	Range of Discounts		Weighted Average Discount
As of September 30, 2017
Repossessed assets	$	454	Third party appraisals, sales contracts, broker price opinions	Collateral discounts and estimated costs to sell		6% - 100%		41	%
Impaired loans	$	4,682	Third party appraisals and discounted cash flows	Collateral discounts and discount rates		0% - 100%		20	%

As of December 31, 2016
Repossessed assets	$	2,893	Third party appraisals, sales contracts, Broker price opinions	Collateral discounts and estimated costs to sell		6% - 96%		19	%
Impaired loans	$	4,763	Third party appraisals and discounted cash flows	Collateral discounts and discount rates		0% - 100%		15	%

ASC 820, Fair Value Measurements and Disclosures, requires the disclosure of each class of financial instruments for which it is practicable to estimate. The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. ASC 820 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statements. These estimates are subjective in nature, involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates included herein are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the fair value of assets and liabilities that are not required to be recorded or disclosed at fair value like premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

The carrying value of cash and cash equivalents and interest-bearing deposits in banks approximate their fair value.

The fair value for investment securities is determined from quoted market prices when available. If a quoted market price is not available, fair value is estimated using first party pricing services or quoted market prices of securities with similar characteristics.

The carrying value of mortgage loans held for sale approximates their fair value.

The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturity.

The cash surrender value of bank-owned life insurance (“BOLI”) approximates its fair value.

The fair value of customer deposits, excluding certificates of deposit, is the amount payable on demand. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.

The fair value of short-term FHLB advances is the amount payable at maturity. The fair value of long-term FHLB advances is estimated by discounting the future cash flows using the rates currently offered for advances of similar maturities.

The following table presents estimated fair values of the Company’s financial instruments as of the dates indicated.


			Fair Value Measurements at September 30, 2017
*(dollars in thousands)*	Carrying Amount		Total		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	51,626	$	51,626	$	51,626	$	—	$	—
Interest-bearing deposits in banks		1,191		1,191		1,191		—		—
Investment securities available for sale		202,196		202,196		—		202,196		—
Investment securities held to maturity		13,118		13,246		—		13,246		—
Mortgage loans held for sale		5,617		5,617		—		5,617		—
Loans, net		1,213,969		1,214,156		—		1,209,474		4,682
Cash surrender value of BOLI		20,510		20,510		20,510		—		—

Financial Liabilities
Deposits	$	1,319,713	$	1,319,692	$	—	$	1,319,692	$	—
Short-term FHLB advances		—		—		—		—		—
Long-term FHLB advances		64,804		64,498		—		64,498		—


			Fair Value Measurements at December 31, 2016
*(dollars in thousands)*	Carrying Amount		Total		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	29,315	$	29,315	$	29,315	$	—	$	—
Interest-bearing deposits in banks		1,884		1,884		1,884		—		—
Investment securities available for sale		183,730		183,730		—		183,730		—
Investment securities held to maturity		13,365		13,362		—		13,362		—
Mortgage loans held for sale		4,156		4,156		—		4,156		—
Loans, net		1,215,323		1,205,538		—		1,200,775		4,763
Cash surrender value of BOLI		20,150		20,150		20,150		—		—

Financial Liabilities
Deposits	$	1,248,072	$	1,247,526	$	—	$	1,247,526	$	—
Short-term FHLB advances		40,000		40,000		40,000		—		—
Long-term FHLB advances		78,533		78,039		—		78,039		—