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Fair Value of Financial Instruments and Fair Value Measurements
 9 Months Ended
Sep. 30, 2018
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments and Fair Value Measurements

8. Fair Value of Financial Instruments and Fair Value Measurements

 

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

 

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

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

 

Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

Fair value estimates of the Company’s financial instruments as of September 30, 2018 and December 31, 2017, are set forth below:

 

(Dollars in thousands)   As of September 30, 2018  
    Carrying     Fair Value  
    amount     Level 1     Level 2     Level 3     Total  
Financial assets:                                        
Cash and cash equivalents   $ 16,286     $ 16,286     $ -     $ -     $ 16,286  
Investment securities available-for-sale     376,039       1,943       374,096       -       376,039  
Bank stocks, at cost     5,025        n/a        n/a        n/a        n/a  
Loans, net     475,497       -       -       481,975       481,975  
Loans held for sale     7,728       -       7,728       -       7,728  
Derivative financial instruments     680       -       680       -       680  
Accrued interest receivable     4,768       10       1,973       2,785       4,768  
                                         
Financial liabilities:                                        
Non-maturity deposits   $ (620,869 )   $ (620,869 )   $ -     $ -     $ (620,869 )
Time deposits     (146,407 )     -       (143,979 )     -       (143,979 )
FHLB borrowings     (60,300 )     -       (60,304 )     -       (60,304 )
Subordinated debentures     (21,634 )     -       (19,541 )     -       (19,541 )
Other borrowings     (13,793 )     -       (13,793 )     -       (13,793 )
Accrued interest payable     (402 )     -       (402 )     -       (402 )

 

    As of December 31, 2017  
    Carrying     Fair Value  
    amount     Level 1     Level 2     Level 3     Total  
Financial assets:                                        
Cash and cash equivalents   $ 16,584     $ 16,584     $ -     $ -     $ 16,584  
Investment securities available-for-sale     387,983       1,998       385,985       -       387,983  
Bank stocks, at cost     5,423        n/a        n/a        n/a        n/a  
Loans, net     433,743       -       -       436,910       436,910  
Loans held for sale     6,535       -       6,535       -       6,535  
Derivative financial instruments     395       -       395       -       395  
Accrued interest receivable     4,409       20       2,234       2,155       4,409  
                                         
Financial liabilities:                                        
Non-maturity deposits   $ (642,281 )   $ (642,281 )   $ -     $ -     $ (642,281 )
Time deposits     (123,277 )     -       (121,298 )     -       (121,298 )
FHLB borrowings     (31,600 )     -       (31,706 )     -       (31,706 )
Subordinated debentures     (21,484 )     -       (19,134 )     -       (19,134 )
Other borrowings     (13,509 )     -       (13,509 )     -       (13,509 )
Accrued interest payable     (274 )     -       (274 )     -       (274 )

 

Off-Balance-Sheet Financial Instruments

 

The fair value of letters of credit and commitments to extend credit is based on the fees currently charged to enter into similar agreements. The aggregate amount of these fees is not material.

 

Transfers

 

The Company did not transfer any assets or liabilities among levels during the nine months ended September 30, 2018 or during the year ended December 31, 2017.

 

Valuation Methods for Instruments Measured at Fair Value on a Recurring Basis

 

The following tables represent the Company’s financial instruments that are measured at fair value on a recurring basis at September 30, 2018 and December 31, 2017 allocated to the appropriate fair value hierarchy:

 

(Dollars in thousands)                        
          As of September 30, 2018  
          Fair value hierarchy  
    Total     Level 1     Level 2     Level 3  
Assets:                                
Available-for-sale investment securities:                                
U. S. treasury securities   $ 1,943     $ 1,943     $ -     $   -  
U. S. federal agency obligations     15,089       -       15,089       -  
Municipal obligations, tax exempt     157,257       -       157,257       -  
Municipal obligations, taxable     52,991       -       52,991       -  
Agency mortgage-backed securities     140,979       -       140,979       -  
Certificates of deposit     7,780       -       7,780       -  
Loans held for sale     7,728       -       7,728       -  
Derivative financial instruments     680       -       680       -  

 

          As of December 31, 2017  
          Fair value hierarchy  
    Total     Level 1     Level 2     Level 3  
Assets:                                
Available-for-sale investment securities:                                
U. S. treasury securities   $ 1,990     $ 1,990     $ -     $    -  
U. S. federal agency obligations     16,492       -       16,492       -  
Municipal obligations, tax exempt     184,738       -       184,738       -  
Municipal obligations, taxable     57,976       -       57,976       -  
Agency mortgage-backed securities     117,555          -       117,555       -  
Certificates of deposit     9,224       -       9,224       -  
Common stocks     8       8       -       -  
Loans held for sale     6,535       -       6,535       -  
Derivative financial instruments     395       -       395       -  

 

Changes in the fair value of available-for-sale securities are included in other comprehensive income to the extent the changes are not considered other-than-temporary impairments. Other-than-temporary impairment tests are performed on a quarterly basis and any decline in the fair value of an individual security below its cost that is deemed to be other-than-temporary results in a write-down of that security’s cost basis.

 

The aggregate fair value, contractual balance (including accrued interest), and gain on loans held for sale were as follows:

 

    As of     As of  
    September 30,     December 31,  
(Dollars in thousands)   2018     2017  
Aggregate fair value   $ 7,728     $ 6,535  
Contractual balance     7,633       6,420  
Gain   $ 95     $ 115  

 

The total amount of gains from changes in fair value of loans held for sale included in earnings were as follows:

 

    Three months ended     Nine months ended  
    September 30,     September 30,  
(Dollars in thousands)   2018     2017     2018     2017  
Interest income   $ 100     $ 73     $ 246     $ 197  
Change in fair value     (185 )     (86 )     (20 )     83  
Total change in fair value   $ (85 )   $ (13 )   $ 226     $ 280  

 

Valuation Methods for Instruments Measured at Fair Value on a Non-recurring Basis

 

The Company does not value its loan portfolio at fair value. Collateral-dependent impaired loans are generally carried at the lower of cost or fair value of the collateral, less estimated selling costs. Collateral values are determined based on appraisals performed by qualified licensed appraisers hired by the Company and then further adjusted if warranted based on relevant facts and circumstances. The appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales and income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Impaired loans are reviewed and evaluated at least quarterly for additional impairment and adjusted accordingly, based on the same factors identified above. The carrying value of the Company’s impaired loans was $9.1 million and $9.8 million, with an allocated allowance of $870,000 and $642,000, at September 30, 2018 and December 31, 2017, respectively.

 

Real estate owned includes assets acquired through, or in lieu of, foreclosure and land previously acquired for expansion. Real estate owned is initially recorded at the fair value of the collateral less estimated selling costs. Subsequent valuations are updated periodically and are based upon independent appraisals, third party price opinions or internal pricing models. The appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales and income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Real estate owned is reviewed and evaluated at least annually for additional impairment and adjusted accordingly, based on the same factors identified above.

 

The following tables represent the Company’s financial instruments that are measured at fair value on a non-recurring basis as of September 30, 2018 and December 31, 2017 allocated to the appropriate fair value hierarchy:

 

(Dollars in thousands)      
          As of September 30, 2018     Total  
          Fair value hierarchy     (losses)/  
    Total     Level 1     Level 2     Level 3     gains  
Assets:                                        
Impaired loans:                                        
One-to-four family residential real estate   $ 133     $ -     $      -     $ 133     $ (120 )
Commercial real estate     23       -       -       23       (278 )
Commercial     1,345             -       -       1,345       3  
Real estate owned:                                        
One-to-four family residential real estate     51       -       -       51       (12 )

 

          As of December 31, 2017     Total  
          Fair value hierarchy           (losses)/  
    Total     Level 1     Level 2     Level 3     gains  
Assets:                                        
Impaired loans:                                        
One-to-four family residential real estate   $ 171     $ -     $       -     $ 171     $ (73 )
Construction and land     1,499       -       -       1,499       (102 )
Commercial real estate     33       -       -       33       12  
Commercial     1,600       -       -       1,600       (304 )
Agriculture     264           -       -       264       65  
Real estate owned:                                        
One-to-four family residential real estate     325       -       -       325       (68 )
Commercial real estate     85       -       -       85       (50 )

 

The following table presents quantitative information about Level 3 fair value measurements for impaired loans measured at fair value on a non-recurring basis as of September 30, 2018 and December 31, 2017.

 

(Dollars in thousands)                    
    Fair value     Valuation technique   Unobservable inputs   Range  
As of September 30, 2018                        
Impaired loans:                        
One-to-four family residential real estate   $ 133     Sales comparison   Adjustment to appraised value     0%-20 %
Commercial real estate     23     Sales comparison   Adjustment to appraised value     0 %
Commercial     1,345     Sales comparison   Adjustment to comparable sales     15%-90 %
Real estate owned:                        
One-to-four family residential real estate     51     Sales comparison   Adjustment to appraised value     6%-10 %
                         
As of December 31, 2017                        
Impaired loans:                        
One-to-four family residential real estate   $ 171     Sales comparison   Adjustment to appraised value     16%-50 %
Construction and land     1,499     Sales comparison   Adjustment to appraised value     0%-25 %
Commercial real estate     33     Sales comparison   Adjustment to appraised value     0%-91 %
Commercial     1,600     Sales comparison   Adjustment to comparable sales     15%-50 %
Agriculture     264     Sales comparison   Adjustment to appraised value     0%-50 %
Real estate owned:                        
One-to-four family residential real estate     325     Sales comparison   Adjustment to appraised value     10 %
Commercial real estate     85     Sales comparison   Adjustment to appraised value     10 %