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Note 7 - Fair Value Measurements | 3 Months Ended
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Mar. 31, 2018
Notes to Financial Statements |
Fair Value Disclosures [Text Block] | Note 7 : Fair Value Measurements 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. Accounting guidance for fair value excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. The Company records fair value adjustments to certain assets and liabilities and determines fair value disclosures utilizing a definition of fair value of assets and liabilities that states that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Additional considerations are involved to determine the fair value of financial assets in markets that are not active. The Company uses a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy based on these two types of inputs are as follows:
| Level 1 – |  | Valuation is based on quoted prices in active markets for identical assets and liabilities.
| Level 2 – |  | Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
| Level 3 – |  | Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.
The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements: Securities Available for Sale Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1 ). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2 ). The carrying value of restricted Federal Reserve Bank and Federal Home Loan Bank stock approximates fair value based upon the redemption provisions of each entity and is therefore excluded from the following table. The following tables present the balances of financial assets measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017.
|  |  |  |  |  | Fair Value Measurements at March 31, 2018 Using
Description |  | Balance as of March 31, 2018 |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3)
U.S. Government agencies and corporations |  | $ | 314,889 |  |  | $ | --- |  |  | $ | 314,889 |  |  | $ | ---
States and political subdivisions |  |  | 15,778 |  |  |  | --- |  |  |  | 15,778 |  |  |  | ---
Mortgage-backed securities |  |  | 608 |  |  |  | --- |  |  |  | 608 |  |  |  | ---
Corporate debt securities |  |  | 5,936 |  |  |  | --- |  |  |  | 5,936 |  |  |  | ---
Total securities available for sale |  | $ | 337,211 |  |  | $ | --- |  |  | $ | 337,211 |  |  | $ | ---
|  |  |  |  |  | Fair Value Measurements at December 31, 2017 Using
Description |  | Balance as of December 31, 2017 |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3)
U.S. Government agencies and corporations |  | $ | 307,719 |  |  | $ | --- |  |  | $ | 307,719 |  |  | $ | ---
States and political subdivisions |  |  | 16,834 |  |  |  | --- |  |  |  | 16,834 |  |  |  | ---
Mortgage-backed securities |  |  | 659 |  |  |  | --- |  |  |  | 659 |  |  |  | ---
Corporate debt securities |  |  | 6,175 |  |  |  | --- |  |  |  | 6,175 |  |  |  | ---
Total securities available for sale |  | $ | 331,387 |  |  | $ | --- |  |  | $ | 331,387 |  |  | $ | ---
Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets. The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements. Loans Held for Sale Loans held for sale are carried at the lower of cost or market value. These loans currently consist of one -to- four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2 ). As such, the Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale at March 31, 2018 or December 31, 2017. Impaired Loans Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. Troubled debt restructurings are impaired loans. Impaired loans are measured at fair value on a nonrecurring basis. If an individually-evaluated impaired loan’s balance exceeds fair value, the amount is allocated to the allowance for loan losses. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income. The fair value of an impaired loan and measurement of associated loss is based on one of three methods: the observable market price of the loan, the present value of projected cash flows, or the fair value of the collateral. The observable market price of a loan is categorized as a Level 1 input. The present value of projected cash flows method results in a Level 3 categorization because the calculation relies on the Company’s judgment to determine projected cash flows, which are then discounted at the current rate of the loan, or the rate prior to modification if the loan is a troubled debt restructure. Loans measured using the fair value of collateral method may be categorized in Level 2 or Level 3. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. Most collateral is real estate. The Company bases collateral method fair valuation upon the “as-is” value of independent appraisals or evaluations. Valuations for impaired loans with outstanding principal balances of $250 or more are based on a current appraisal. Appraisals are also used to value impaired loans with principal balances of $100 or greater and secured by one piece of collateral. Collateral-method impaired loans with principal balances below $100, or if secured by multiple pieces of collateral, below $250, are valued using an evaluation. The value of real estate collateral is determined by a current (less than 12 months of age) appraisal or internal evaluation utilizing an income or market valuation approach. Appraisals conducted by an independent, licensed appraiser outside of the Company using observable market data is categorized as Level 2. If a current appraisal cannot be obtained prior to a reporting date and an existing appraisal is discounted to obtain an estimated value, or if declines in value are identified after the date of the appraisal, or if an appraisal is discounted for estimated selling costs, the valuation of real estate collateral is categorized as Level 3. Valuations derived from internal evaluations are categorized as Level 3. The value of business equipment is based upon an outside appraisal (Level 2 ) if deemed significant, or the net book value on the applicable business’ financial statements (Level 3 ) if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3 ). The following table summarizes the Company’s impaired loans that were measured at fair value on a nonrecurring basis at March 31, 2018 and at December 31, 2017.
|  |  |  |  |  |  | Carrying Value
Date | Description |  | Balance |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3)
| Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
March 31, 2018 | Impaired loans net of valuation allowance |  | $ | 1,279 |  |  | $ | --- |  |  | $ | --- |  |  | $ | 1,279
December 31, 2017 | Impaired loans net of valuation allowance |  |  | 1,303 |  |  |  | --- |  |  |  | --- |  |  |  | 1,303
The following tables present information about Level 3 Fair Value Measurements for March 31, 2018 and December 31, 2017.
Impaired Loans |  | Valuation Technique |  | Unobservable Input |  | Range (Weighted Average)
March 31, 2018 |  | Present value of cash flows |  | Discount rate |  |  | 5.50% | – | 13.25% | (5.92%)
December 31, 2017 |  | Present value of cash flows |  | Discount rate |  |  | 5.50% | – | 13.25% | (5.92%)
Other Real Estate Owned Certain assets such as other real estate owned (OREO) are measured at fair value less cost to sell. Valuation of other real estate owned is determined using current appraisals from independent parties, a level two input. If current appraisals cannot be obtained prior to reporting dates, or if declines in value are identified after a recent appraisal is received, appraisal values are discounted, resulting in Level 3 estimates. If the Company markets the property with a realtor, estimated selling costs reduce the fair value, resulting in a valuation based on Level 3 inputs. The following table summarizes the Company’s other real estate owned that was measured at fair value on a nonrecurring basis.
|  |  |  |  |  |  | Carrying Value
Date | Description |  | Balance |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3)
| Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
March 31, 2018 | Other real estate owned net of valuation allowance |  | $ | 2,741 |  |  |  |  |  |  |  |  |  |  | $ | 2,741
December 31, 2017 | Other real estate owned net of valuation allowance |  |  | 2,817 |  |  |  | --- |  |  |  | --- |  |  |  | 2,817
The following tables present information about Level 3 Fair Value Measurements for March 31, 2018 and December 31, 2017.
March 31, 2018 |  | Valuation Technique |  | Unobservable Input |  | Range (Weighted Average)
Other real estate owned |  | Discounted appraised value |  | Selling cost |  |  | 5.00% | – | 6.01% | (5.14%)
Other real estate owned |  | Discounted appraised value |  | Discount for lack of marketability and age of appraisal |  |  | 1.68% | – | 86.03% | (13.35%)
December 31, 2017 |  | Valuation Technique |  | Unobservable Input |  | Range (Weighted Average)
Other real estate owned |  | Discounted appraised value |  | Selling cost |  |  | 2.00% | – | 6.01% | (4.72%)
Other real estate owned |  | Discounted appraised value |  | Discount for lack of marketability and age of appraisal |  |  | 1.68% | – | 68.33% | (11.07%)
The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of March 31, 2018 and December 31, 2017. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For non-marketable equity securities such as Federal Home Loan Bank and Federal Reserve Bank stock, the carrying amount is a reasonable estimate of fair value as these securities can only be redeemed or sold at their par value and only to the respective issuing government-supported institution or to another member institution. For financial liabilities such as noninterest-bearing demand, interest-bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity. Fair values for March 31, 2018 are estimated under the exit price notion in accordance with the prospective adoption of ASU 2016 - 01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” Fair values for December 31, 2017 are estimated under the guidance in effect for that period, which did not require use of the exit price notion.
|  | March 31, 2018
|  | Carrying Amount |  |  | Quoted Prices in Active Markets for Identical Assets Level 1 |  |  | Significant Other Observable Inputs Level 2 |  |  | Significant Unobservable Inputs Level 3
Financial Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 10,598 |  |  | $ | 10,598 |  |  | $ | --- |  |  | $ | ---
Interest-bearing deposits |  |  | 76,571 |  |  |  | 76,571 |  |  |  | --- |  |  |  | ---
Securities |  |  | 460,116 |  |  |  | --- |  |  |  | 461,760 |  |  |  | ---
Restricted securities |  |  | 1,221 |  |  |  | --- |  |  |  | 1,221 |  |  |  | ---
Loans, net |  |  | 651,272 |  |  |  | --- |  |  |  | --- |  |  |  | 648,273
Accrued interest receivable |  |  | 5,360 |  |  |  | --- |  |  |  | 5,360 |  |  |  | ---
Bank-owned life insurance |  |  | 33,984 |  |  |  | --- |  |  |  | 33,984 |  |  |  | ---
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | $ | 1,072,940 |  |  | $ | --- |  |  | $ | 961,305 |  |  | $ | 111,627
Accrued interest payable |  |  | 55 |  |  |  | --- |  |  |  | 55 |  |  |  | ---
The following table presents the Company’s financial instruments as of December 31, 2017.
|  | December 31, 201 7
|  | Carrying Amount |  |  | Quoted Prices in Active Markets for Identical Assets Level 1 |  |  | Significant Other Observable Inputs Level 2 |  |  | Significant Unobservable Inputs Level 3
Financial Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 12,926 |  |  | $ | 12,926 |  |  | $ | --- |  |  | $ | ---
Interest-bearing deposits |  |  | 51,233 |  |  |  | 51,233 |  |  |  | --- |  |  |  | ---
Securities |  |  | 458,551 |  |  |  | --- |  |  |  | 461,500 |  |  |  | ---
Restricted securities |  |  | 1,200 |  |  |  | --- |  |  |  | 1,200 |  |  |  | ---
Loans held for sale |  |  | 260 |  |  |  | --- |  |  |  | 260 |  |  |  | ---
Loans, net |  |  | 660,144 |  |  |  | --- |  |  |  | --- |  |  |  | 656,399
Accrued interest receivable |  |  | 5,297 |  |  |  | --- |  |  |  | 5,297 |  |  |  | ---
Bank-owned life insurance |  |  | 33,756 |  |  |  | --- |  |  |  | 33,756 |  |  |  | ---
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | $ | 1,059,734 |  |  | $ | --- |  |  | $ | 944,850 |  |  | $ | 113,053
Accrued interest payable |  |  | 62 |  |  |  | --- |  |  |  | 62 |  |  |  | ---

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- 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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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