(13) Fair Value Measurement

The Company uses a fair value hierarchy to measure fair value. This hierarchy describes three levels of inputs that may be used to measure fair value. Level 1: Quoted prices for identical assets in active markets that are identifiable on the measurement date; Level 2: Significant other observable inputs, such as quoted prices for similar assets, quoted prices in markets that are not active and other inputs that are observable or can be corroborated by observable market data; Level 3: Significant unobservable inputs that reflect the Company’s own view about the assumptions that market participants would use in pricing an asset.

Debt securities: The fair values of securities available for sale are determined by 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).

Equity securities: The Company’s equity securities are not actively traded in an open market. The fair values of these equity securities available for sale is determined by using market data inputs for similar securities that are observable (Level 2 inputs).

The fair value of the swap asset/liability: The fair value of the swap asset and liability is based on an external derivative model using data inputs as of the valuation date and classified Level 2. The changes in fair value of these assets/liabilities had no impact on net income or comprehensive income.

Impaired loans: The Company has measured impairment on impaired loans generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management makes estimates about expected costs to sell the property which are also included in the net realizable value. If the fair value of the collateral dependent loan is less than the carrying amount of the loan, a specific reserve for the loan is made in the allowance for loan losses or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included as a Level 3 measurement.

Other real estate owned: OREO is carried at the lower of cost or fair value, which is measured at the date of foreclosure. If the fair value of the collateral exceeds the carrying amount of the loan, no charge-off or adjustment is necessary, the loan is not considered to be carried at fair value, and is therefore not included in the table below. If the fair value of the collateral is less than the carrying amount of the loan, management will charge the loan down to its estimated realizable value. Management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. In these cases, the properties are categorized in the below table as Level 3 measurements since these adjustments are considered to be unobservable inputs. Income and expenses from operations are included in other operating expenses. Further declines in the fair value of the collateral subsequent to foreclosure are included in net gain on sale of other real estate owned.

Assets measured at fair value are summarized below.

	Fair Value Measurements at September 30, 2017 Using:
Assets:	(Level 1)		(Level 2)		(Level 3)
Assets measured at fair value on a recurring basis:
U.S. Treasury securities and obligations of U.S. Government agencies	$	—	$	31,063	$	—
Obligations of states and political subdivisions		—		113,615		—
Mortgage-backed securities in government sponsored entities		—		83,923		—
Equity securities in financial institutions		—		818		—
Swap asset		—		1,706		—
Liabilities measured at fair value on a recurring basis:
Swap liability		—		1,706		—
Assets measured at fair value on a nonrecurring basis:
Impaired loans	$	—	$	—	$	1,639
Other real estate owned		—		—		27

	Fair Value Measurements at December 31, 2016 Using:
Assets:	(Level 1)		(Level 2)		(Level 3)
Assets measured at fair value on a recurring basis:
U.S. Treasury securities and obligations of U.S. Government agencies	$	—	$	37,446	$	—
Obligations of states and political subdivisions		—		94,998		—
Mortgage-backed securities in government sponsored entities		—		62,642		—
Equity securities in financial institutions		—		778		—
Swap asset		—		1,839		—
Liabilities measured at fair value on a recurring basis:
Swap liability		—		1,839		—
Assets measured at fair value on a nonrecurring basis:
Impaired loans	$	—	$	—	$	952
Other real estate owned		—		—		37

The following table presents quantitative information about the Level 3 significant unobservable inputs for assets and liabilities measured at fair value on a nonrecurring basis at September 30, 2017.

	Quantitative Information about Level 3 Fair Value Measurements
September 30, 2017	Fair Value		Valuation Technique	Unobservable Input	Range	Weighted Average
Impaired loans	$	1,639	Appraisal of collateral	Appraisal adjustments	10% - 48%		34%
				Liquidation expense	0% - 10%		4%
				Holding period	0 - 30 months	20 months
Other real estate owned	$	27	Appraisal of collateral	Appraisal adjustments	10% - 30%		10%
				Liquidation expense	0% - 10%		10%

The following table presents quantitative information about the Level 3 significant unobservable inputs for assets and liabilities measured at fair value on a nonrecurring basis at December 31, 2016.

	Quantitative Information about Level 3 Fair Value Measurements
December 31, 2016	Fair Value		Valuation Technique	Unobservable Input	Range	Weighted Average
Impaired loans	$	952	Appraisal of collateral	Appraisal adjustments	10% - 67%		64%
				Liquidation expense	0% - 10%		4%
				Holding period	0 - 30 months	19 months
Other real estate owned	$	37	Appraisal of collateral	Appraisal adjustments	10% - 30%		10%
				Liquidation expense	0% - 10%		10%

The carrying amount and fair values of financial instruments are as follows:

September 30, 2017	Carrying Amount		Total Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from financial institutions	$	33,394	$	33,394	$	33,394	$	—	$	—
Securities available for sale		229,419		229,419		—		229,419		—
Other securities		14,247		14,247		14,247		—		—
Loans, held for sale		4,662		4,662		4,662		—		—
Loans, net of allowance for loan losses		1,129,046		1,130,083		—		—		1,130,083
Bank owned life insurance		24,981		24,981		24,981		—		—
Accrued interest receivable		4,999		4,999		4,999		—		—
Swap asset		1,706		1,706		—		1,706		—
Financial Liabilities:
Nonmaturing deposits		947,262		947,262		947,262		—		—
Time deposits		254,027		254,017		—		—		254,017
Short-term FHLB advances		41,750		41,722		41,722		—		—
Long-term FHLB advances		15,000		14,966		—		—		14,966
Securities sold under agreement to repurchase		15,148		15,148		15,148		—		—
Subordinated debentures		29,427		29,470		—		—		29,470
Accrued interest payable		244		244		244		—		—
Swap liability		1,706		1,706		—		1,706		—

December 31, 2016	Carrying Amount		Total Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from financial institutions	$	36,695	$	36,695	$	36,695	$	—	$	—
Securities available for sale		195,864		195,864		—		195,864		—
Loans, held for sale		2,268		2,268		2,268		—		—
Loans, net of allowance for loan losses		1,042,201		1,047,329		—		—		1,047,329
Other securities		14,055		14,055		14,055		—		—
Bank owned life insurance		24,552		24,552		24,552		—		—
Accrued interest receivable		3,854		3,854		3,854		—		—
Swap asset		1,839		1,839		—		1,839		—
Financial Liabilities:
Nonmaturing deposits		913,677		913,677		913,677		—		—
Time deposits		207,426		207,784		—		—		207,784
Short-term FHLB advances		31,000		31,007		31,007		—		—
Long-term FHLB advances		17,500		17,553		—		—		17,553
Securities sold under agreement to repurchase		28,925		28,925		28,925		—		—
Subordinated debentures		29,427		27,414		—		—		27,414
Accrued interest payable		181		181		181		—		—
Swap liability		1,839		1,839		—		1,839		—

Cash and due from financial institutions: The carrying amounts for cash and due from financial institutions approximate fair value because they have original maturities of less than 90 days and do not present unanticipated credit concerns.

Securities available for sale: The fair value of securities are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For equity securities, management uses market information related to the value of similar institutions to determine the fair value (Level 2 inputs).

Other securities: The carrying value of regulatory stock approximates fair value based on applicable redemption provisions.

Loans, held-for-sale: Loans held for sale are priced individually at market rates on the day that the loan is locked for commitment to an investor. Because the holding period of such loans is typically short, the carrying value generally approximates the fair value at the time the commitment is received. All loans in the held-for-sale account conform to Fannie Mae underwriting guidelines, with specific intent of the loan being purchased by an investor at the predetermined rate structure.

Loans, net of allowance for loan losses: Fair values for loans, other than impaired, are estimated for portfolios of loans with similar financial characteristics. The fair value of performing loans has been estimated by discounting expected future cash flows of the underlying portfolios. The discount rates used in these calculations are generally derived from the treasury yield curve and are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate inherent in the loan. The estimated maturity is based on the Company’s historical experience with repayments for each loan classification. Changes in these significant unobservable inputs used in discounted cash flow analysis, such as the discount rate or prepayment speeds, could lead to changes in the underlying fair value.

Bank owned life insurance: The carrying value of bank owned life insurance approximates the fair value based on applicable redemption provisions.

Accrued interest receivable and payable and securities sold under agreements to repurchase: The carrying amounts for accrued interest receivable, accrued interest payable and securities sold under agreements to repurchase approximate fair value because they are generally received or paid in 90 days or less and do not present unanticipated credit concerns.

Deposits: The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings and NOW accounts, and money market accounts, is equal to the amount payable on demand.

The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the market rates currently offered for deposits of similar remaining maturities.

The deposits’ fair value estimates do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market, commonly referred to as the core deposit intangible.

Federal Home Loan Bank (“FHLB”) advances: Rates available to the Company for borrowed funds with similar terms and remaining maturities are used to estimate the fair value of borrowed funds.

Subordinated debentures: The fair value of subordinated debentures is based on the discounted value of contractual cash flows of the underlying debt agreements. The discount rate is estimated using the current rate for the borrowing from the FHLB with the most similar terms.

Fair value swap asset and liability: The fair value of the swap asset and liability is based on an external derivative model using data inputs as of the valuation date.