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Disclosures about Fair Value Measurements and Financial Instruments

9 Months Ended

Sep. 30, 2018

Fair Value, Measurement Inputs, Disclosure [Text Block]

19.

Disclosures about Fair Value Measurements and Financial Instruments

The following disclosures establish a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The three broad levels defined within this hierarchy are as follows:

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.

Assets and Liability Measured and Recorded on a Recurring Basis

Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quoted market spreads, cash flows, the US Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

The fair values of the fair value swaps used for interest rate risk management represents the amount the Company would have expected to receive or pay to terminate such agreements.

The following tables present the assets and liability measured and recorded on the Consolidated Balance Sheets on a reoccurring basis at their fair value as of September 30, 2018 and December 31, 2017, by level within the fair value hierarchy (in thousands).

	Fair Value Measurements at September 30, 2018
	Total			(Level 1)		(Level 2)			(Level 3)
US Agency securities	$	6,423		$	—	$	6,423		$	—
US Agency mortgage-backed securities		84,999			—		84,999			—
Municipal securities		10,766			—		10,766			—
Corporate bonds		36,565			—		36,565			—
Fair value swap asset		812			—		812			—
Fair value swap liability		(812	)		—		(812	)		—

	Fair Value Measurements at December 31, 2017
	Total			(Level 1)		(Level 2)			(Level 3)
US Agency securities	$	6,572		$	—	$	6,572		$	—
US Agency mortgage-backed securities		79,746			—		79,746			—
Municipal securities		7,036			—		7,036			—
Corporate bonds		35,784			—		35,784			—
Fair value swap asset		92			—		92			—
Fair value swap liability		(92	)		—		(92	)		—

Assets Measured and Recorded on a Non-recurring Basis

Loans considered impaired are loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. As detailed in the allowance for loan loss footnote, impaired loans are reported at fair value of the underlying collateral if the repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on observable market data which at times are discounted. At September 30, 2018, impaired loans with a carrying value of $11,000 had no specific valuation allowance resulting in a net fair value of $11,000. At December 31, 2017, impaired loans with a carrying value of $1.8 million were reduced by a specific valuation allowance totaling $909,000 resulting in a net fair value of $851,000.

Other real estate owned is measured at fair value based on appraisals, less estimated costs to sell. Valuations are periodically performed by management. Income and expenses from operations and changes in valuation allowance are included in the net expenses from OREO.

Assets measured and recorded at fair value on a non-recurring basis are summarized below (in thousands, except range data):

	Fair Value Measurements at September 30, 2018
	Total		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	11	$	—	$	—	$	11
Other real estate owned		163		—		—		163

	Fair Value Measurements at December 31, 2017
	Total		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	851	$	—	$	—	$	851
Other real estate owned		18		—		—		18

Quantitative Information About Level 3 Fair Value Measurements

September 30, 2018

Fair Value

Estimate

Valuation

Techniques

Unobservable

Input

Range

(Wgtd Avg)

Impaired loans

Appraisal of

collateral

(1),(3)

Appraisal adjustments

(2)

(

Other real estate owned

163

Appraisal of

collateral

(1),(3)

Appraisal adjustments

(2)

Liquidation expenses

0% to 32% (

21% to 195% (

Quantitative Information About Level 3 Fair Value Measurements

December 31, 2017

Fair Value

Estimate

Valuation

Techniques

Unobservable

Input

Range

(Wgtd Avg)

Impaired loans

851

Appraisal of

collateral

(1),(3)

Appraisal adjustments

(2)

21% to 75% (

Other real estate owned

Appraisal of

collateral

(1),(3)

Appraisal adjustments

(2)

Liquidation expenses

16% to 64% (

2% to 206% (

(1)

Fair Value is generally determined through independent appraisals of the underlying collateral, which generally include various level 3 inputs which are not identifiable.

(2)

Appraisals may be adjusted by management for qualitative factors such as economic conditions.

(3)

Includes qualitative adjustments by management and estimated liquidation expenses.

FAIR VALUE OF FINANCIAL INSTRUMENTS

For the Company, as for most financial institutions, approximately 90% of its assets and liabilities are considered financial instruments. Many of the Company’s financial instruments, however, lack an available trading market characterized by a willing buyer and willing seller engaging in an exchange transaction. Therefore, significant estimates and present value calculations were used by the Company for the purpose of this disclosure.

Fair values have been determined by the Company using independent third party valuations that use the best available data (Level 2) and an estimation methodology (Level 3) the Company believes is suitable for each category of financial instruments. Management believes that cash, cash equivalents, bank owned life insurance, regulatory stock, accrued interest receivable and payable, short term borrowings, and loans and deposits with floating interest rates have estimated fair values which approximate the recorded book balances.

The estimation methodologies used, the estimated fair values based on US GAAP measurements, and recorded book balances at September 30, 2018 and December 31, 2017, for financial instruments not recorded at fair value on a reoccurring basis were as follows (in thousands):

	September 30, 2018
	Carrying Value		Fair Value		(Level 1)		(Level 2)		(Level 3)
FINANCIAL ASSETS:
Cash and cash equivalents	$	31,234	$	31,234	$	31,234	$	—	$	—
Investment securities – HTM		38,673		37,345		—		34,510		2,835
Regulatory stock		7,135		7,135		7,135		—		—
Loans held for sale		1,041		1,075		1,075		—		—
Loans, net of allowance for loan loss and unearned income		873,894		852,664		—		—		852,664
Accrued interest income receivable		4,007		4,007		4,007		—		—
Bank owned life insurance		38,260		38,260		38,260		—		—
FINANCIAL LIABILITIES:
Deposits with no stated maturities	$	672,792	$	672,792	$	672,792	$	—	$	—
Deposits with stated maturities		271,421		270,767		—		—		270,767
Short-term borrowings		61,254		61,254		61,254		—		—
All other borrowings		62,962		65,026		—		—		65,026
Accrued interest payable		2,120		2,120		2,120		—		—

	December 31, 2017
	Carrying Value		Fair Value		(Level 1)		(Level 2)		(Level 3)
FINANCIAL ASSETS:
Cash and cash equivalents	$	34,188	$	34,188	$	34,188	$	—	$	—
Investment securities – HTM		38,752		38,811		—		35,859		2,952
Regulatory stock		6,800		6,800		6,800		—		—
Loans held for sale		3,125		3,173		3,173		—		—
Loans, net of allowance for loan loss and unearned income		879,419		873,784		—		—		873,784
Accrued interest income receivable		3,603		3,603		3,603		—		—
Bank owned life insurance		37,860		37,860		37,860		—		—
FINANCIAL LIABILITIES:
Deposits with no stated maturities	$	688,648	$	688,648	$	688,648	$	—	$	—
Deposits with stated maturities		259,297		260,153		—		—		260,153
Short-term borrowings		49,084		49,084		49,084		—		—
All other borrowings		66,617		69,684		—		—		69,684
Accrued interest payable		1,754		1,754		1,754		—		—

Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values. The Company’s remaining assets and liabilities which are not considered financial instruments have not been valued differently than has been customary under historical cost accounting.