(13) Fair Value Measurement

The Company uses a fair value hierarchy to measure fair value. This hierarchy describes three levels of inputs that may be used to measure fair value. Level 1: Quoted prices for identical assets in active markets that are identifiable on the measurement date; Level 2: Significant other observable inputs, such as quoted prices for similar assets, quoted prices in markets that are not active and other inputs that are observable or can be corroborated by observable market data; Level 3: Significant unobservable inputs that reflect the Company’s own view about the assumptions that market participants would use in pricing an asset.

Debt securities: The fair values of securities available for sale are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

Equity securities: The Company’s equity securities are not actively traded in an open market. The fair values of these equity securities available for sale is determined by using market data inputs for similar securities that are observable (Level 2 inputs).

Swap asset/liability: The fair value of the swap asset and liability is based on an external derivative model using data inputs as of the valuation date and classified Level 2.

Impaired loans: The Company has measured impairment on impaired loans generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management makes estimates about expected costs to sell the property which are also included in the net realizable value. If the fair value of the collateral dependent loan is less than the carrying amount of the loan, a specific reserve for the loan is made in the allowance for loan losses or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included in the table above as a Level 3 measurement.

Other real estate owned: OREO is carried at the lower of cost or fair value, which is measured at the date of foreclosure. If the fair value of the collateral exceeds the carrying amount of the loan, no charge-off or adjustment is necessary, the loan is not considered to be carried at fair value, and is therefore not included in the table below. If the fair value of the collateral is less than the carrying amount of the loan, management will charge the loan down to its estimated realizable value. Management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. In these cases, the properties are categorized in the below table as Level 3 measurements since these adjustments are considered to be unobservable inputs. Income and expenses from operations are included in other operating expenses. Further declines in the fair value of the collateral subsequent to foreclosure are included in net gain on sale of other real estate owned.

Assets measured at fair value are summarized below.


	Fair Value Measurements at September 30, 2016 Using:
	(Level 1)		(Level 2)		(Level 3)
Assets:

Assets measured at fair value on a recurring basis:

U.S. Treasury securities and obligations of U.S. Government agencies	$	—	$	38,049	$	—
Obligations of states and political subdivisions		—		96,227		—
Mortgage-backed securities in government sponsored entities		—		65,977		—
Equity securities in financial institutions		—		714		—
Swap asset		—		3,705		—

Liabilities:

Swap liability		—		3,705		—

Assets measured at fair value on a nonrecurring basis:

Impaired loans	$	—	$	—	$	319
Other real estate owned		—		—		62


	Fair Value Measurements at December 31, 2015 Using:
	(Level 1)		(Level 2)		(Level 3)
Assets:

Assets measured at fair value on a recurring basis:

U.S. Treasury securities and obligations of U.S. Government agencies	$	—	$	40,937	$	—
Obligations of states and political subdivisions		—		92,152		—
Mortgage-backed securities in government sponsored entities		—		62,573		—
Equity securities in financial institutions		—		587		—
Swap asset		—		1,962		—

Liabilities:

Swap liability		—		1,962		—

Assets measured at fair value on a nonrecurring basis:

Impaired loans	$	—	$	—	$	759
Other real estate owned		—		—		109

The following table presents quantitative information about the Level 3 significant unobservable inputs for assets and liabilities measured at fair value on a nonrecurring basis at September 30, 2016.


	Quantitative Information about Level 3 Fair Value Measurements
September 30, 2016	Fair Value		Valuation Technique		Unobservable Input	Range	Weighted Average

Impaired loans	$	319		Appraisal of collateral	Appraisal adjustments	10% - 30%	10%
					Liquidation expense	0% - 10%	10%
					Holding period	0 - 30 months	18 months

Other real estate owned	$	62		Appraisal of collateral	Appraisal adjustments	10% - 30%	10%

					Liquidation expense	0% - 10%	10%

The following table presents quantitative information about the Level 3 significant unobservable inputs for assets and liabilities measured at fair value on a nonrecurring basis at December 31, 2015.


	Quantitative Information about Level 3 Fair Value Measurements
December 31, 2015	Fair Value		Valuation Technique		Unobservable Input	Range	Weighted Average

Impaired loans	$	759		Appraisal of collateral	Appraisal adjustments	10% - 30%	10%
					Liquidation expense	0% - 10%	10%
					Holding period	0 -30 months	17 months

Other real estate owned	$	109		Appraisal of collateral	Appraisal adjustments	10% - 30%	10%

					Liquidation expense	0% - 10%	10%

The carrying amount and fair values of financial instruments are as follows:


September 30, 2016	Carrying Amount		Total Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from financial institutions	$	33,229	$	33,229	$	33,229	$	—	$	—
Securities available for sale		200,967		200,967		—		200,967		—
Loans, held for sale		2,827		2,827		2,827		—		—
Loans, net of allowance for loan losses		1,033,516		1,037,955		—		—		1,037,955
Other securities		13,926		13,926		13,926		—		—
Bank owned life insurance		24,404		24,404		24,404		—		—
Accrued interest receivable		4,547		4,547		4,547		—		—
Swap asset		3,705		3,705		—		3,705		—

Financial Liabilities:
Nonmaturing deposits		915,360		915,360		915,360		—		—
Time deposits		218,793		219,345		—		—		219,345
Short-term FHLB advances		17,500		17,394		17,394		—		—
Long-term FHLB advances		17,500		17,710		—		—		17,710
Securities sold under agreement to repurchase		21,713		21,713		21,713		—		—
Subordinated debentures		29,427		30,367		—		—		30,367
Accrued interest payable		137		137		137		—		—
Swap liability		3,705		3,705		—		3,705		—


December 31, 2015	Carrying Amount		Total Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from financial institutions	$	35,561	$	35,561	$	35,561	$	—	$	—
Securities available for sale		196,249		196,249		—		196,249		—
Loans, held for sale		2,698		2,698		2,698		—		—
Loans, net of allowance for loan losses		987,166		986,848		—		—		986,848
Other securities		13,452		13,452		13,452		—		—
Bank owned life insurance		20,104		20,104		20,104		—		—
Accrued interest receivable		3,902		3,902		3,902		—		—
Swap asset		1,962		1,962		—		1,962		—

Financial Liabilities:
Nonmaturing deposits		840,984		840,984		840,984		—		—
Time deposits		211,049		212,006		—		—		212,006
Short-term FHLB advances		53,700		52,906		52,906		—		—
Long-term FHLB advances		17,500		17,687		—		—		17,687
Securities sold under agreement to repurchase		25,040		25,040		25,040		—		—
Subordinated debentures		29,427		25,572		—		—		25,572
Accrued interest payable		120		120		120		—		—
Swap liability		1,962		1,962		—		1,962		—

Cash and due from financial institutions: The carrying amounts for cash and due from financial institutions approximate fair value because they have original maturities of less than 90 days and do not present unanticipated credit concerns.

Securities available for sale: The fair value of securities are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For equity securities, management uses market information related to the value of similar institutions to determine the fair value (Level 2 inputs).

Other securities: The carrying value of regulatory stock approximates fair value based on applicable redemption provisions.

Loans, held-for-sale: Loans held for sale are priced individually at market rates on the day that the loan is locked for commitment to an investor. Because the holding period of such loans is typically short, the carrying value generally approximates the fair value at the time the commitment is received. All loans in the held-for-sale account conform to Fannie Mae underwriting guidelines, with specific intent of the loan being purchased by an investor at the predetermined rate structure.

Loans, net of allowance for loan losses: Fair values for loans, other than impaired, are estimated for portfolios of loans with similar financial characteristics. The fair value of performing loans has been estimated by discounting expected future cash flows of the underlying portfolios. The discount rates used in these calculations are generally derived from the treasury yield curve and are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate inherent in the loan. The estimated maturity is based on the Company’s historical experience with repayments for each loan classification. Changes in these significant unobservable inputs used in discounted cash flow analysis, such as the discount rate or prepayment speeds, could lead to changes in the underlying fair value.

Bank owned life insurance: The carrying value of bank owned life insurance approximates the fair value based on applicable redemption provisions.

Accrued interest receivable and payable and securities sold under agreements to repurchase: The carrying amounts for accrued interest receivable, accrued interest payable and securities sold under agreements to repurchase approximate fair value because they are generally received or paid in 90 days or less and do not present unanticipated credit concerns.

Deposits: The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings and NOW accounts, and money market accounts, is equal to the amount payable on demand.

The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the current market rates currently offered for deposits of similar remaining maturities.

The deposits’ fair value estimates do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market, commonly referred to as the core deposit intangible.

Federal Home Loan Bank (“FHLB”) advances: Rates available to the Company for borrowed funds with similar terms and remaining maturities are used to estimate the fair value of borrowed funds.

Subordinated debentures: The fair value of subordinated debentures is based on the discounted value of contractual cash flows of the underlying debt agreements. The discount rate is estimated using the current rate for the borrowing from the FHLB with the most similar terms.

Fair value swap asset and liability: The fair value of the swap asset and liability is based on an external derivative model using data inputs as of the valuation date.