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Note 4 - Fair Value Disclosure Measurements

9 Months Ended

Sep. 30, 2017

Notes to Financial Statements

Fair Value Disclosures [Text Block]

NOTE

4

- FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. GAAP established a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following levels:

Level I: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II: Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair valued using other financial instruments, the parameters of which can be directly observed.

Level III: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two -way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

The following tables present the assets measur

ed on a recurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

						September 30, 2017
(Dollar amounts in thousands)		Level I				Level II				Level III				Total
Assets measured on a recurring basis:
U.S. government agency securities		$	-			$	9,094			$	-			$	9,094
Obligations of states and political subdivisions			-				72,094				-				72,094
Mortgage-backed securities in government-sponsored entities			-				16,579				-				16,579
Total debt securities			-				97,767				-				97,767
Equity securities in financial institutions			-				567				-				567
Total		$	-			$	98,334			$	-			$	98,334

						December 31, 2016
(Dollar amounts in thousands)		Level I				Level II				Level III				Total
Assets measured on a recurring basis:
U.S. government agency securities		$	-			$	10,236			$	-			$	10,236
Obligations of states and political subdivisions			-				81,223				-				81,223
Mortgage-backed securities in government-sponsored entities			-				20,069				-				20,069
Private-label mortgage-backed securities			-				1,709				-				1,709
Total debt securities			-				113,237				-				113,237
Equity securities in financial institutions			-				1,139				-				1,139
Total		$	-			$	114,376			$	-			$	114,376

The Company obtains fair values from an independent pricing service which represent either quoted market prices for the identical securities (Level I inputs) or fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level II).

The Company uses prices compiled by

third

party vendors.

Impaired Loans

– The Company has measured impairment on collateral-dependent 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 in the following table as a Level III measurement. If the fair value of the collateral exceeds the carrying amount of the loan, then the loan is

not

included in the following table as it is

not

currently being carried at its fair value. The fair values in the following table exclude estimated selling costs of

$437,000

at

September 30, 2017.

Other Real Estate Owned (OREO)

– 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 following table. 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. The fair value of OREO is based on the appraised value of the property, which is generally unadjusted by management and is based on comparable sales for similar properties in the same geographic region as the subject property, and is included in the following table as a Level II measurement. 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. In these cases, the loans are categorized in the following table as Level III measurement since these adjustments are considered to be unobservable inputs. Income and expenses from operations and further declines in the fair value of the collateral subsequent to foreclosure are included in net expenses from OREO.

The following tables present the assets measured on a nonrecurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Collateral

-dependent impaired loans are carried at fair value if they have been charged down to fair value or if a specific valuation allowance has been established. A new cost basis is established at the time a property is initially recorded in OREO. OREO properties are carried at fair value if a devaluation has been taken to the property’s value subsequent to the initial measurement.

						September 30, 2017
(Dollar amounts in thousands)		Level I				Level II				Level III				Total
Assets measured on a nonrecurring basis:
Impaired loans		$	-			$	-			$	1,620			$	1,620
Other real estate owned			-				-				81				81

						December 31, 2016
(Dollar amounts in thousands)		Level I				Level II				Level III				Total
Assets measured on a nonrecurring basis:
Impaired loans		$	-			$	-			$	6,498			$	6,498
Other real estate owned			-				-				511				511

The following table

s present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company uses Level III inputs to determine fair value:

Quantitative Information about Level III Fair Value Measurements

(Dollar amounts in thousands)

Fair Value Estimate

Valuation Techniques

Unobservable Input

Range (Weighted Average)

September 30, 2017

Impaired loans

$

1,620

Appraisal of collateral (1)

Appraisal adjustments (2)

3.3%

to

8.3% (5.3%)

Other real estate owned

$

81

Appraisal of collateral (1)

Appraisal adjustments (2)

0.0%

to

10.0%

Quantitative Information about Level III Fair Value Measurements

(Dollar amounts in thousands)

Fair Value Estimate

Valuation Techniques

Unobservable Input

Range (Weighted Average)

December 31, 2016

Impaired loans

$

1,570

Appraisal of collateral (1)

Appraisal adjustments (2)

0.0%

to

59.7% (28.2%)

Other real estate owned

$

511

Appraisal of collateral (1)

Appraisal adjustments (2)

0%

to

10.0%

(1 ) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level III inputs which are not identifiable, less any associated allowance.

(2 ) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

The estimated fair value of the Company

’s financial instruments is as follows:

		September 30, 2017
		Carrying																Total
		Value				Level I				Level II				Level III				Fair Value
		(Dollar amounts in thousands)
Financial assets:
Cash and cash equivalents		$	48,931			$	48,931			$	-			$	-			$	48,931
Investment securities
Available for sale			98,334				-				98,334				-				98,334
Loans held for sale			5,930				4,995				935				-				5,930
Net loans			871,689				-				-				879,206				879,206
Bank-owned life insurance			15,542				15,542				-				-				15,542
Federal Home Loan Bank stock			3,589				3,589				-				-				3,589
Accrued interest receivable			3,177				3,177				-				-				3,177
Financial liabilities:
Deposits		$	897,655			$	646,206			$	-			$	252,112			$	898,318
Short-term borrowings			20,274				20,274				-				-				20,274
Other borrowings			39,273				-				-				39,306				39,306
Accrued interest payable			566				566				-				-				566

		December 31, 2016
		Carrying																Total
		Value				Level I				Level II				Level III				Fair Value
		(Dollar amounts in thousands)
Financial assets:
Cash and cash equivalents		$	32,495			$	32,495			$	-			$	-			$	32,495
Investment securities
Available for sale			114,376				-				114,376				-				114,376
Loans held for sale			634				-				634				-				634
Net loans			602,542				-				-				604,447				604,447
Bank-owned life insurance			13,540				13,540				-				-				13,540
Restricted stock			2,204				2,204				-				-				2,204
Accrued interest receivable			2,426				2,426				-				-				2,426
Financial liabilities:
Deposits		$	629,934			$	440,500			$	-			$	189,871			$	630,371
Short-term borrowings			68,359				68,359				-				-				68,359
Other borrowings			9,437				-				-				9,512				9,512
Accrued interest payable			395				395				-				-				395

Financial instruments are defined as cash, evidence of ownership interest in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a

second

entity on potentially favorable or unfavorable terms.

Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties other than in a forced liquidation sale. If a quoted market price is available for a financial instrument, the estimated fair value would be calculated based upon the market price per trading unit of the instrument.

If

no

readily available market exists, the fair value estimates for financial instruments should be based upon management

’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses, and other factors as determined through various option pricing formulas or simulation modeling. Since many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting estimated fair values

may

not

be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in assumptions on which the estimated fair values are based

may

have a significant impact on the resulting estimated fair values.

As certain assets such as deferred tax assets and premises and equipment are

not

considered financial instruments, the estimated fair value of financial instruments would

not

represent the full value of the Company.

The Company employed simulation modeling in determining the estimated fair value of financial instruments for which quoted market prices were

not

available based upon the following assumptions:

Cash and Cash Equivalents, Federal Home Loan Bank Stock, Accrued Interest Receivable, Accrued Interest Payable, and Short-Term Borrowings

The fair value is equal to the current carrying value.

Bank-Owned Life Insurance

The fair value is equal to the cash surrender value of the life insurance policies

.

Investment Securities Available for Sale

The fair value of investment securities is equal to the available quoted market price.

  If

no

quoted market price is available, fair value is estimated using the quoted market price for similar securities. 

Loans Held for Sale

Loans held for

sale are carried at lower of cost or fair value. The fair value of loans held for sale is based on secondary market pricing on portfolios with similar characteristics. The changes in fair value of the assets are largely driven by changes in interest rates subsequent to loan funding and changes in the fair value of servicing associated with the mortgage loan held for sale. Within this total are student loans held for sale for which the fair value is based on readily determinable market prices, which is a level I Price.

Net

Loans

The fair value is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality. Where quoted market prices were available, primarily for certain residential mortgage loans, such market rates were

used as estimates for fair value.

Deposits and Other Borrow

ings

The fair values of certificates of deposit and other borrow

ings are based on the discounted value of contractual cash flows. The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities. Demand, savings, and money market deposits are valued at the amount payable on demand as of period end.

Commitments to Extend Credit

These financial instruments are generally

not

subject to sale, and estimated fair values are

not

readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment or letter of credit, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, are

not

considered material for disclosure.

X

- References

No definition available.

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X

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 820
-URI http://asc.fasb.org/topic&trid=2155941

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