Note 15 - Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2018

Notes to Financial Statements

Fair Value Disclosures [Text Block]

15. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company follows the provisions of

ASC Topic

820,

Fair Value Measurements and Disclosures

, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The assumptions used in the estimation of the fair value of the Company’s financial instruments are detailed below. The following disclosures should

not

be considered a surrogate of the liquidation value of the Company, but rather represent a good-faith estimate of the increase or decrease in value of financial instruments held by the Company since purchase, origination or issuance.

Fair Value Hierarchy

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. In determining fair value, the Company uses various methods, including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Assets and liabilities carried at fair value will be classified and disclosed in

one

of the following

three

categories:

● Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange or Nasdaq. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

● Level 2 — Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third -party pricing services for identical or similar assets or liabilities.

● Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker-traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

The Company rarely transfers assets and liabilities measured at fair value between Level

1

and Level

2

measurements. Trading account assets and securities available-for-sale

may

be periodically transferred to or from Level

3

valuation based on management

’s conclusion regarding the best method of pricing for an individual security. Such transfers are accounted for as if they occurred at the beginning of a reporting period. There were

no

such transfers during the

three

months ended

March 31, 2018

or the year ended

December 31, 2017.

Fair Value Measurements on a Recurring Basis

Securities

Available-for-Sale

Where quoted market prices are available in an active market, securities are classified within Level

1

of the valuation hierarchy. Level

1

securities include exchange-traded equities. Level

2

securities include U.S. Treasury and agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities. Level

2

fair values are obtained from quoted prices of securities with similar characteristics. In certain cases, where Level

1

or Level

2

inputs are

not

available, securities are classified within Level

3

of the hierarchy.

Interest Rate Derivative Agreements

Interest rate derivative agreements are used by the Company to mitigate risk

 associated with changes in interest rates. The fair value of these agreements is based on information obtained from

third

-party financial institutions. This information is periodically evaluated by the Company and, as necessary, corroborated against other

third

-party valuations. The Company classifies these derivative assets within Level

2

of the valuation hierarchy.

The following table presents assets measured at fair value on a recurring basis as of

March 31, 2018

and

December 

31,

2017.

There were

no

liabilities measured at fair value on a recurring basis for either period presented.

	Fair Value Measurements as of March 3 1 , 201 8 Using
	Totals At March 3 1 , 2018		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Investment securities, available-for-sale
Mortgage-backed securities:
Residential	$	85,682	$	—	$	85,682	$	—
Commercial		65,994		—		65,994		—
Obligations of states and political subdivisions		4,886		—		4,886		—
U.S. Treasury securities		80		—		80		—
Other assets - derivatives		889		—		889		—

	Fair Value Measurements as of December 31, 2017 Using
	Totals At December 31, 2017		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Investment securities, available-for-sale
Mortgage-backed securities:
Residential	$	82,786	$	—	$	82,786	$	—
Commercial		66,074		—		66,074		—
Obligations of states and political subdivisions		4,931		—		4,931		—
U.S. Treasury securities		80		—		80		—
Other assets - derivatives		443		—		443		—

Fair Value Measurements on a Non-recurring Basis

Impaired Loans

Loans that are considered impaired are loans for which, based on current information and events, it is probable that the Company will be unable to collect all principal and interest payments due under the contractual terms of the loan agreement. Impaired loans can be measured based on the present value of expected payments using the loan

’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral less estimated selling cost if the loan is collateral-dependent. For the Company, the fair value of impaired loans is primarily measured based on the value of the collateral securing the loans (typically real estate). The Company determines the fair value of the collateral based on independent appraisals performed by qualified licensed appraisers. The appraisals

may

include a single valuation approach or a combination of approaches, including comparable sales and income approaches. Appraised values are discounted for estimated costs to sell and

may

be discounted further based on management’s knowledge of the collateral, changes in market conditions since the most recent appraisal and/or management’s knowledge of the borrower and the borrower’s business. Such discounts by management are subjective and are typically significant unobservable inputs for determining fair value. Impaired loans are evaluated by management for additional impairment at least quarterly and are adjusted accordingly.

OREO

OREO consists of properties obtained through foreclosure or in satisfaction of loans and is recorded at net realizable value

, less estimated cost to sell. Estimates of fair value are generally based on

third

-party appraisals of the property and are classified within Level

3

of the fair value hierarchy. The appraisals are sometimes discounted based on management’s knowledge of the property and/or changes in market conditions from the date of the most recent appraisal. Such discounts are typically significant unobservable inputs for determining fair value.

Assets Held for Sale

Included within other assets are certain assets that were formerly included as premises and equipment but have been removed from service, and as of the balance sheet date, were designated as assets to be disposed of by sale. These include assets associated with branches of the Bank that have been closed. When an asset is designated as held for sale, the Company ceases depreciation of the asset, and the asset is recorded at the lower of its carrying amount or fair value less estimated cost to sell. Estimates of fair value are generally based on

third

-party appraisals of the property and are classified within Level

3

of the fair value hierarchy. The appraisals are sometimes discounted based on management’s knowledge of the property and/or changes in market conditions from the date of the most recent appraisal. Such discounts are typically unobservable inputs for determining fair value.

The following table presents the balances of impaired loans, OREO and assets held for sale measured at fair value on a non-recurring basis as of

March 31, 2018

and

December 

31,

2017.

	Fair Value Measurements as of March 3 1 , 2018 Using
	Totals At March 3 1 , 2018		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Impaired loans	$	691	$	—	$	—	$	691
OREO		3,343		—		—		3,343
Assets held for sale		228		—		—		228

	Fair Value Measurements as of December 31, 201 7 Using
	Totals At December 31, 201 7		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Impaired loans	$	694	$	—	$	—	$	694
OREO		3,792		—		—		3,792
Assets held for sale		228		—		—		228

Non-recurring Fair Value Measurements Using Significant Unobservable Inputs

The following table presents information regarding assets and liabilities measured at fair value using significant unobservable inputs (Level

3

) as of

March 31, 2018.

The table includes the valuation techniques and the significant unobservable inputs utilized. The range of each unobservable input and the weighted average within the range utilized as of

March 31, 2018

are both included. Following the table is a description of the valuation technique and the sensitivity of the technique to changes in the significant unobservable input.

	Level 3 Significant Unobservable Input Assumptions
	Fair Value March 3 1 , 2018		Valuation Technique	Unobservable Input	Quantitative Range of Unobservable Inputs (Weighted Average)
	(Dollars in Thousands)
Non-recurring fair value measurements:
Impaired loans	$	691	Multiple data points, including discount to appraised value of collateral based on recent market activity	Appraisal comparability adjustment (discount)	9%	-	10%	(9.5%	)
OREO	$	3,343	Discount to appraised value of property based on recent market activity for sales of similar properties	Appraisal comparability adjustment (discount)	9%	-	10%	(9.5%	)
Assets held for sale	$	228	Discount to appraised value of property based on recent market activity for sales of similar properties	Appraisal comparability adjustment (discount)	9%	-	10%	(9.5%	)

Impaired Loans

Impaired loans are valued based on multiple data points indicating the fair value for each loan. The primary data point is the appraisal value of the underlying collateral, to which a discount is applied. Management establishes this discount or comparability adjustment based on recent sales of similar property types. As liquidity in the market increases or decreases, the comparability adjustment and the resulting asset valuation are impacted.

OREO

OREO under a binding contract for sale is valued based on contract price. If

no

sales contract is pending for a specific property, management establishes a comparability adjustment to the appraised value based on historical activity, considering proceeds for properties sold versus the corresponding appraised value. Increases or decreases in realization for properties sold impact the comparability adjustment for similar assets remaining on the balance sheet.

Assets Held for Sale

Assets designated as held for sale that are under a binding contract are valued based on the contract price. If

no

sales contract is pending for a specific property, management establishes a comparability adjustment to the appraised value based on historical activity, considering proceeds for properties sold versus the corresponding appraised value. Increases or decreases in realization for properties sold impact the comparability adjustment for similar assets remaining on the balance sheet.

Fair Value of Financial Instruments

ASC Topic

825,

Financial

Instruments

, requires disclosure of fair value information about financial instruments, whether or

not

recognized on the face of the balance sheet, for which it is practicable to estimate. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:

Cash, due from banks and federal funds sold:

The carrying amount of cash, due from banks and federal funds sold approximates fair value.

Federal Home Loan Bank stock:

Based on the redemption provision of the FHLB, the stock has

no

quoted market value and is carried at cost.

Investment securities:

Fair values of investment securities are based on quoted market prices where available. If quoted market prices are

not

available, estimated fair values are based on market prices of comparable instruments.

Derivative instruments:

The fair value of derivative instruments is based on information obtained from a

third

-party financial institution. This information is periodically evaluated by the Company and, as necessary, corroborated against other

third

-party information.

Accrued interest receivable and payable:

The carrying amount of accrued interest approximates fair value.

Loans, net:

For variable-rate loans, fair values are based on carrying values. Fixed-rate commercial loans, other installment loans and certain real estate mortgage loans are valued using discounted cash flows. The discount rate used to determine the present value of these loans is based on interest rates charged by the Company on comparable loans as to credit risk and term at the determination date.

Demand and savings deposits:

The fair values of demand deposits are equal to the carrying value of such deposits. Demand deposits include non-interest-bearing demand deposits, savings accounts, NOW accounts and money market demand accounts.

Time deposits:

The fair values of relatively short-term time deposits are equal to their carrying values. Discounted cash flows are used to value long-term time deposits. The discount rate used is based on interest rates currently offered by the Company on comparable deposits as to amount and term.

Short-term borrowings:

These borrowings

may

consist of federal funds purchased, securities sold under agreements to repurchase and the floating rate borrowings from the FHLB account. Due to the short-term nature of these borrowings, fair values approximate carrying values.

Long-term debt:

The fair value of this debt is estimated using discounted cash flows based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements as of

March 31, 2018

and

December 

31,

2017.

Off-balance sheet instruments:

The carrying amount of commitments to extend credit and standby letters of credit approximates fair value. The carrying amount of the off-balance sheet financial instruments is based on fees currently charged to enter into such agreements.

The estimated fair value and related carrying or notional amounts, as well as the level within the fair value hierarchy, of the Company

’s financial instruments as of

March 31, 2018

and

December 31, 2017,

were as follows:

	March 3 1 , 2018
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(Dollars in Thousands)
Assets:
Cash and cash equivalents	$	34,473	$	34,473	$	34,473	$	—	$	—
Investment securities available-for-sale		156,642		156,642		—		156,642		—
Investment securities held-to-maturity		25,300		24,687		—		24,687		—
Federal Home Loan Bank stock		1,413		1,413		—		—		1,413
Loans, net of allowance for loan losses		353,805		346,658		—		—		346,648
Other assets – derivatives		889		889		—		889		—
Liabilities:
Deposits		525,273		522,767		—		522,767		—
Short-term borrowings		10,298		10,298		—		10,298		—
Long-term debt		10,000		9,998		—		9,998		—

	December 31, 2017
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(Dollars in Thousands)
Assets:
Cash and cash equivalents	$	27,124	$	27,124	$	27,124	$	—	$	—
Investment securities available-for-sale		153,871		153,871		—		153,871		—
Investment securities held-to-maturity		26,279		25,949		—		25,949		—
Federal funds sold		15,000		15,000		—		15,000		—
Federal Home Loan Bank stock		1,609		1,609		—		—		1,609
Loans, net of allowance for loan losses		346,121		342,248		—		—		342,248
Other assets – derivatives		443		443		—		443		—
Liabilities:
Deposits		517,079		515,645		—		515,645		—
Short-term borrowings		15,594		15,594		—		15,594		—
Long-term debt		10,000		9,998		—		9,998		—