Note 8. Fair Value Measurements

The Company follows FASB ASC 820-10, Fair Value Measurements and Disclosures, (formerly SFAS 157, “Fair Value Measurements,”) which among other things, requires enhanced disclosures about assets and liabilities carried at fair value. ASC 820-10 establishes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The three broad levels of the hierarchy are as follows:

Level I – Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The type of financial instruments included in Level I are highly liquid cash instruments with quoted prices such as G-7 government, agency securities, listed equities and money market securities, as well as listed derivative instruments.

Level II – Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these financial instruments include cash instruments for which quoted prices are available but traded less frequently, derivative instruments whose fair value have been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed. Instruments which are generally included in this category are corporate bonds and loans, mortgage whole loans and municipal bonds.

Level III – Instruments that have little to no pricing observability as of the reported date. These financial instruments 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. Instruments that are included in this category generally include certain commercial mortgage loans, certain private equity investments, and distressed debt and non-investment grade residual interests in securitizations.

The results of the fair value hierarchy as of September 30, 2016, are as follows:

Financial Instruments Measured at Fair Value on a Recurring Basis:

Securities AFS Fair Value Measurements Using

Carrying
Value

Quoted Prices
In Active
Markets for
Identical
Assets
(Level 1)

Significant
Observable
Inputs
(Level 2)

Significant
Other
Unobservable
Inputs
(Level 3)

(in thousands)

U.S. Treasury

2,000

—

2,000

—

U.S. Government Sponsored Enterprises

15,009

—

15,009

—

SBA Backed Securities

58,345

—

58,345

—

U.S. Government Agency and Sponsored Mortgage Backed Securities

264,454

—

264,454

—

Privately Issued Residential Mortgage Backed Securities

1,177

—

1,177

—

Obligations Issued by States and Political Subdivisions

179,911

—

179,911

Other Debt Securities

4,961

—

4,961

—

Equity Securities

275

—

Total

526,132

275

345,946

179,911

Financial Instruments Measured at Fair Value on a Non-recurring Basis:

Impaired Loans

251

—

251

Impaired loan balances represent those collateral dependent loans where management has estimated the credit loss by comparing the loan’s carrying value against the expected realizable fair value of the collateral. Fair value is generally determined through a review process that includes independent appraisals, discounted cash flows, or other external assessments of the underlying collateral, which generally include various Level 3 inputs which are not observable. The Company discounts the fair values, as appropriate, based on management’s observations of the local real estate market for loans in this category.

Appraisals, discounted cash flows and real estate tax assessments are reviewed quarterly. There is no specific policy regarding how frequently appraisals will be updated. Adjustments are made to appraisals and real estate tax assessments based on management’s estimate of changes in real estate values. Within the past twelve months there have been no updated appraisals, however, all impaired loans have been reviewed during the past quarter using either a discounted cash flow analysis, appraisal of collateral or other type of real estate tax assessment. The types of adjustments that are made to specific provisions (credits) relate to impaired loans recognized for the three and nine month periods ended September 30, 2016 amounted to ($7,000) and ($143,000), respectively.

There were no transfers between level 1, 2 and 3 for the nine months ended September 30, 2016. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the nine month period ended September 30, 2016.

The following table presents additional information about assets measured at fair value on a recurring and nonrecurring basis for which the Company has utilized Level 3 inputs to determine fair value (dollars in thousands). Management continues to monitor the assumptions used to value the assets listed below.


Asset	Fair Value		Valuation Technique	Unobservable Input	Unobservable Input Value or Range
Securities AFS (4)	$	179,911	Discounted cash flow	Discount rate	0%-1% (3)
Impaired Loans	$	251	Appraisal of collateral (1)	Appraisal adjustments (2)	0%-30% discount

(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 and estimated expenses.

(3)	Weighted averages.

(4)	Municipal securities generally have maturities of one year or less and, therefore, the amortized cost equates to the fair value. There was one auction rate security whose fair value is based on the evaluation of the underlying issuer, prevailing interest rates and market liquidity.

The changes in Level 3 securities for the nine month period ended September 30, 2016 are shown in the table below:


	Auction Rate Securities		Obligations Issued by States & Political Subdivisions			Equity Securities			Total
	(in thousands)
Balance at December 31, 2015	$	3,820	$	153,140		$	37		$	156,997
Purchases		—		181,752			—			181,752
Maturities and calls		—		(159,116	)		(37	)		(159,153	)
Amortization		—		(163	)		—			(163	)
Changes in fair value		478		—			—			478

Balance at September 30, 2016	$	4,298	$	175,613		$	—		$	179,911

The amortized cost of Level 3 securities was $180,315,000 at September 30, 2016 with an unrealized loss of $404,000. The securities in this category are generally municipal securities with no readily determinable fair value or failed auction rate securities. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity.

The changes in Level 3 securities for the nine month period ended September 30, 2015, are shown in the table below:


	Auction Rate Securities		Obligations Issued by States & Political Subdivisions			Equity Securities			Total
	(in thousands)
Balance at December 31, 2014	$	3,820	$	92,964		$	102		$	96,886
Purchases		—		166,339			—			166,339
Maturities and calls		—		(115,989	)		(65	)		(116,054	)
Amortization		—		(35	)		—			(35	)
Changes in fair value		—		—			—			—

Balance at September 30, 2015	$	3,820	$	143,279		$	37		$	147,136

The amortized cost of Level 3 securities was $148,012,000 at September 30, 2015 with an unrealized loss of $876,000. The securities in this category are generally equity investments, municipal securities with no readily determinable fair value or failed auction rate securities. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity.

The results of the fair value hierarchy as of December 31, 2015, are as follows:

Financial Instruments Measured at Fair Value on a Recurring Basis:


	Securities AFS Fair Value Measurements Using
	Carrying Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
	(in thousands)
U.S. Treasury	$	1,989	$	—	$	1,989	$	—
U.S. Government Sponsored Enterprises		—		—		—		—
SBA Backed Securities		5,989		—		5,989		—
U.S. Government Agency and Sponsored Mortgage Backed Securities		233,526		—		233,526		—
Privately Issued Residential Mortgage Backed Securities		1,434		—		1,434		—
Obligations Issued by States and Political Subdivisions		156,960		—		—		156,960
Other Debt Securities		4,473		—		4,473		—
Equity Securities		252		215		—		37

Total	$	404,623	$	215	$	247,411	$	156,997

Financial Instruments Measured at Fair Value on a Non-recurring Basis:
Impaired Loans	$	1,056	$	—	$	—	$	1,056

Impaired loan balances represent those collateral dependent loans where management has estimated the credit loss by comparing the loan’s carrying value against the expected realizable fair value of the collateral. Fair value is generally determined through a review process that includes independent appraisals, discounted cash flows, or other external assessments of the underlying collateral, which generally include various Level 3 inputs which are not identifiable. The Company discounts the fair values, as appropriate, based on management’s observations of the local real estate market for loans in this category.

Appraisals, discounted cash flows and real estate tax assessments are reviewed quarterly. There is no specific policy regarding how frequently appraisals will be updated. Adjustments are made to appraisals and real estate tax assessments based on management’s estimate of changes in real estate values. Within the past twelve months there have been no updated appraisals, however, all impaired loans have been reviewed during the past quarter using either a discounted cash flow analysis, appraisal of collateral or other type of real estate tax assessment. The types of adjustments that are made to specific provisions (credits) relate to impaired loans recognized for 2015 for the estimated credit loss amounted to ($165,000).

There were no transfers between level 1, 2 and 3 for the year ended December 31, 2015. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the year ended December 31, 2015.


Asset	Fair Value		Valuation Technique	Unobservable Input	Unobservable Input Value or Range
Securities AFS (4)	$	156,997	Discounted cash flow	Discount rate	0%-1% (3)
Impaired Loans	$	1,056	Appraisal of collateral (1)	Appraisal adjustments (2)	0%-30% discount

(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 and estimated expenses.

(3)	Weighted averages

(4)	Municipal securities generally have maturities of one year or less and, therefore, the amortized cost equates to the fair value. There was one auction rate security whose fair value is based on the evaluation of the underlying issuer, prevailing interest rates and market liquidity.