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Note 7 - Fair Value Measurements

9 Months Ended

Sep. 30, 2017

Notes to Financial Statements

Fair Value Disclosures [Text Block]

7. Fair Value Measurements

FASB ASC Topic

820

, Fair Value Measurements,

provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level

1

measurements) and the lowest priority to unobservable inputs (Level

3

measurements). The

three

levels of the fair value hierarchy under FASB ASC Topic

820

are described as follows:

	Level 1:	Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets
	Level 2:	Inputs to the valuation methodology include quoted market prices for similar assets or liabilities in active markets; quoted market prices for identical or similar assets or liabilities in markets that are not active; or inputs that are derived principally from or can be corroborated by observable market data by correlation or other means.

Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth on the following page. These valuation methodologies were applied to all of the Company’s financial and nonfinancial assets carried at fair value or the lower of cost or fair value. The table below presents the balances of assets measured at fair value on a recurring and nonrecurring basis as of

September 30, 2017

and

December 31, 2016.

The Company had

no

liabilities measured at fair value as of

September 30, 2017

or

December 31, 2016.

		Carrying Value
(In thousands)		Level 1				Level 2				Level 3				Total
September 30, 2017
Assets Measured on a Recurring Basis
Securities available for sale:
Agency mortgage-backed securities		$	0			$	118,149			$	0			$	118,149
Agency CMO			0				15,194				0				15,194
Agency notes and bonds			0				70,437				0				70,437
Municipal obligations			0				72,946				0				72,946
Mutual funds			211				0				0				211
Total securities available for sale		$	211			$	276,726			$	0			$	276,937
Assets Measured on a Nonrecurring Basis
Impaired loans:
Residential real estate		$	0			$	0			$	2,926			$	2,926
Commercial real estate			0				0				297				297
Commercial business			0				0				55				55
Home equity and second mortgage			0				0				243				243
Other consumer			0				0				0				0
Total impaired loans		$	0			$	0			$	3,521			$	3,521
Loans held for sale		$	0			$	1,000			$	0			$	1,000
Foreclosed real estate:
Residential real estate		$	0			$	0			$	304			$	304
Land			0				0				50				50
Commercial real estate			0				0				3,528				3,528
Total foreclosed real estate		$	0			$	0			$	3,882			$	3,882
December 31, 2016
Assets Measured on a Recurring Basis
Securities available for sale:
Agency mortgage-backed securities		$	0			$	108,237			$	0			$	108,237
Agency CMO			0				16,028				0				16,028
Agency notes and bonds			0				68,662				0				68,662
Municipal obligations			0				62,843				0				62,843
Mutual funds			74				0				0				74
Total securities available for sale		$	74			$	255,770			$	0			$	255,844
Assets Measured on a Nonrecurring Basis
Impaired loans:
Residential real estate		$	0			$	0			$	2,060			$	2,060
Land			0				0				1,217				1,217
Commercial real estate			0				0				100				100
Commercial business			0				0				231				231
Home equity and second mortgage			0				0				14				14
Total impaired loans		$	0			$	0			$	3,622			$	3,622
Loans held for sale		$	0			$	4,507			$	0			$	4,507
Foreclosed real estate:
Residential real estate		$	0			$	0			$	226			$	226
Commercial real estate			0				0				4,448				4,448
Total foreclosed real estate		$	0			$	0			$	4,674			$	4,674

Fair value is based upon quoted market prices, where available. If quoted market prices are

not

available, fair value is based on internally developed models or obtained from

third

parties that primarily use, as inputs, observable market-based parameters or a matrix pricing model that employs the Bond Market Association’s standard calculations for cash flow and price/yield analysis and observable market-based parameters. Valuation adjustments

may

be made to ensure that financial instruments are recorded at fair value, or the lower of cost or fair value. These adjustments

may

include unobservable parameters. Any such valuation adjustments have been applied consistently over time. The Company’s valuation methodologies

may

produce a fair value calculation that

may

not

be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Securities Available for Sale

.

Securities classified as available for sale are reported at fair value on a recurring basis.  These securities are classified as Level

1

of the valuation hierarchy where quoted market prices from reputable

third

-party brokers are available in an active market. If quoted market prices are

not

available, the Company obtains fair value measurements from an independent pricing service.  These securities are reported using Level

2

inputs and the fair value measurements consider observable data that

may

include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors. Changes in fair value of securities available for sale are recorded in other comprehensive income, net of income tax effect.

Impaired Loans

. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. The fair value of impaired loans is classified as Level

3

in the fair value hierarchy.

Impaired loans are carried at the present value of estimated future cash flows using the loan's effective interest rate or the fair value of collateral less estimated costs to sell if the loan is collateral dependent. At

September 30, 2017

and

December 31, 2016,

all impaired loans were considered to be collateral dependent for the purpose of determining fair value. Collateral

may

be real estate and/or business assets, including equipment, inventory and/or accounts receivable. The fair value of the collateral is generally determined based on real estate appraisals or other independent evaluations by qualified professionals, adjusted for estimated costs to sell the property, costs to complete or repair the property and other factors to reflect management’s estimate of the fair value of the collateral given the current market conditions and the condition of the collateral. At

September 30, 2017,

the significant unobservable inputs used in the fair value measurement of impaired loans included a discount from appraised value for estimates of changes in market conditions, the condition of the collateral and estimated costs to sell the collateral ranging from

33%

to

62%,

with a weighted average discount of

50%.

At

December 31, 2016,

the discount from appraised value ranged from

33%

to

65%,

with a weighted average discount of

39%.

The Company recognized provisions for loan losses of

$13,000

and

$106,000

for the

nine

months ended

September 30, 2017

and

2016,

respectively, for impaired loans. The Company recognized provisions for loan losses of

$8,000

for the

three

months ended

September 30, 2017

for impaired loans. The Company did

not

recognize any provisions for loan losses for impaired loans for the

three

months ended

September 30, 2016.

Loans Held for Sale

. Loans held for sale are carried at the lower of cost or market value. The portfolio is comprised of residential real estate loans and fair value is based on specific prices of underlying contracts for sales to investors.  These measurements are classified as Level

2.

Foreclosed Real Estate

. Foreclosed real estate is reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. The fair value of foreclosed real estate is classified as Level

3

in the fair value hierarchy.

Foreclosed real estate is reported at fair value less estimated costs to dispose of the property. The fair values are determined by real estate appraisals which are then discounted to reflect management’s estimate of the fair value of the property given current market conditions and the condition of the collateral. At

September 30, 2017,

the significant unobservable inputs used in the fair value measurement of foreclosed real estate included a discount from appraised value for estimates of changes in market conditions, the condition of the collateral and estimated costs to sell the property ranging from

10%

to

72%,

with a weighted average of

44%.

At

December 31, 2016,

the discount from appraised value ranged from

10%

to

77%,

with a weighted average of

38%.

The Company recognized losses of

$228,000

and

$83,000

to write down foreclosed real estate for the

nine

months ended

September 30, 2017

and

September 30, 2016,

respectively. There were

no

charges to write down foreclosed real estate recognized in income for the

three

month periods ended

September 30, 2017

or

2016.

There have been

no

changes in the valuation techniques and related inputs used for assets measured at fair value on a recurring and nonrecurring basis during the

nine

month periods ended

September 30, 2017

and

2016.

There were

no

transfers into or out of the Company’s Level

3

financial assets for the

nine

month periods ended

September 30, 2017

and

2016.

In addition, there were

no

transfers into or out of Levels

1

and

2

of the fair value hierarchy during the

nine

month periods ended

September 30, 2017

and

2016.

GAAP requires disclosure of the fair value of financial assets and financial liabilities, whether or

not

recognized in the balance sheet. 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. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could

not

be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do

not

represent the underlying value of the Company. The estimated fair values of the Company's financial instruments are as follows:

		Carrying				Fair				Fair Vale Measurements Using
(In thousands)		Value				Value				Level 1				Level 2				Level 3
September 30, 2017
Financial assets:
Cash and cash equivalents		$	24,798			$	24,798			$	24,798			$	0			$	0
Interest-bearing time deposits			10,295				10,302				0				10,302				0
Securities available for sale			276,937				276,937				211				276,726				0
Securities held to maturity			1				1				0				1				0
Loans held for sale			1,000				1,020				0				1,020				0
Loans, net			400,762				400,430				0				0				400,430
FHLB and other stock			1,979				1,979				0				1,979				0
Accrued interest receivable			2,595				2,595				0				2,595				0
Financial liabilities:
Deposits			665,512				664,553				0				0				664,553
Advances from FHLB			4,000				4,000				0				4,000				0
Accrued interest payable			109				109				0				109				0
December 31, 2016:
Financial assets:
Cash and cash equivalents		$	45,835			$	45,835			$	45,835			$	0			$	0
Interest-bearing time deposits			14,735				14,786				0				14,786				0
Securities available for sale			255,844				255,844				74				255,770				0
Securities held to maturity			2				2				0				2				0
Loans held for sale			4,507				4,598				0				4,598				0
Loans, net			381,154				381,459				0				0				381,459
FHLB and other stock			1,650				1,650				0				1,650				0
Accrued interest receivable			2,363				2,363				0				2,363				0
Financial liabilities:
Deposits			664,650				663,806				0				0				663,806
Accrued interest payable			133				133				0				133				0

The carrying amounts in the preceding table are included in the consolidated balances sheets under the applicable captions. The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value:

Cash and Cash Equivalents and Interest-Bearing Time Deposits

For cash and short-term investments, including cash and due from banks, interest-bearing deposits with banks, federal funds sold, and interest-bearing time deposits with other financial institutions, the carrying amount is a reasonable estimate of fair value.

Investment Securities

For marketable equity securities, the fair values are based on quoted market prices. For debt securities, the Company obtains fair value measurements from an independent pricing service and the fair value measurements consider observable data that

may

include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors. For FHLB stock, a restricted equity security, the carrying amount is a reasonable estimate of fair value because it is

not

marketable.

Loans

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 maturities. The carrying amount of accrued interest receivable approximates its fair value. The fair value of loans held for sale is based on specific prices of underlying contracts for sale to investors.

Deposits

The fair value of demand deposits, savings accounts, money market deposit accounts and other transaction accounts is the amount payable on demand at the balance sheet date. 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 carrying amount of accrued interest payable approximates its fair value.

Advances from FHLB

The fair value of advances from FHLB is estimated by discounting the future cash flows using the current rates at which FHLB advances of similar maturities could be obtained.

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- References

No definition available.

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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://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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