Note 12: Fair Values of Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:

Level 1

Quoted prices in active markets for identical assets or liabilities

Level 2

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3

Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities

Items Measured at Fair Value on a Recurring Basis

Following is a description of the valuation methodologies and inputs used for instruments measured at fair value on a recurring basis and recognized in the accompanying comparative balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Available-for-Sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. The Company uses a third-party provider to provide market prices on its securities. Pooled trust preferred securities prices are evaluated by a third party. Level 1 securities include marketable equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include mortgage-backed, collateralized mortgage obligations, small business administration, marketable equity, municipal, federal agency and certain corporate obligation securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include certain corporate obligation securities.

Third party vendors compile prices from various sources and may apply such techniques as matrix pricing to determine the value of identical or similar investment securities (Level 2). Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather relying on investment securities relationship to other benchmark quoted investment securities. Any investment security not valued based upon the methods above are considered Level 3.

Interest Rate Derivative Agreements

Interest rate swap positions, both assets and liabilities, are valued by a third-party pricing agent using an income approach and utilizing models that use as their basis readily observable market parameters. This valuation process considers various factors including interest rate yield curves, time value and volatility factors.

The following table presents the fair value measurements of assets and liabilities measured on a recurring basis and level within the ASC 820 fair value hierarchy.



			Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
September 30, 2018
Available for sale securities
Mortgage-backed securities	$	98,584	$	-	$	98,584	$	-
Collateralized mortgage obligations		109,282		-		109,282		-
Municipal obligations		146,227		-		146,227		-
Corporate obligations		6,654		-		4,534		2,120
Interest rate swap asset		1,083		-		1,083		-
Interest rate swap liability		1,083		-		1,083		-



			Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
December 31, 2017
Available for sale securities
Mortgage-backed securities	$	67,798	$	-	$	67,798	$	-
Collateralized mortgage obligations		87,250		-		87,250		-
Municipal obligations		110,495		-		110,495		-
Corporate obligations		11,835		-		9,114		2,721
Interest rate swap asset		525		-		525		-
Interest rate swap liability		525		-		525		-

The following is a reconciliation of the beginning and ending balances for the three and nine months ended September 30, 2018 and 2017 of recurring fair value measurements recognized in the accompanying balance sheets using significant unobservable (Level 3) inputs:



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
		2018		2017	2018		2017
Beginning balance	$	2,721	$	2,588	$	2,721	$	2,588
Total realized and unrealized gains (losses)
Included in net income		(44)		-		(44)		-
Included in other comprehensive income (loss)		326		-		326		-
Purchases, issuances and settlements		(883)		-		(883)		-
Ending balance	$	2,120	$	2,588	$	2,120	$	2,588
Total gains for the period included in net income attributable to the change in unrealized gains or losses related to assets still held at the reporting date	$	-	$	-	$	-	$	-

Items Measured at Fair Value on a Non-Recurring Basis

From time to time, certain assets may be recorded at fair value on a non-recurring basis. These non-recurring fair value adjustments typically are a result of the application of lower of cost or fair value accounting or a write-down occurring during the period.

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements:



September 30, 2018	Fair Value		Valuation Technique	Unobservable Inputs	Range
Trust Preferred Securities	$	2,120	Discounted cash flow	Discount rate	8.0	%
				Constant prepayment rate	2.0	%
				Cumulative projected prepayments	40.0	%
				Probability of default	1.7	%
				Projected cures given deferral	0 - 15.0	%
				Loss severity	29.3	%
Impaired loans (collateral dependent)	$	402	Third party valuations	Discount to reflect realizable value	11.6	%



December 31, 2017	Fair Value		Valuation Technique	Unobservable Inputs	Range
Trust Preferred Securities	$	2,721	Discounted cash flow	Discount rate	7.0 - 8.0	%
				Constant prepayment rate	2.0	%
				Cumulative projected prepayments	40.0	%
				Probability of default	1.7 - 2.2	%
				Projected cures given deferral	0 - 15.0	%
				Loss severity	29.3 - 34.9	%

The estimated fair values of the Company’s financial instruments not carried at fair value in the consolidated balance sheets as of the dates noted below are as follows:



					Fair Value Measurements Using
September 30, 2018		Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	31,872	$	31,872	$	31,872	$	-	$	-
Interest-bearing time deposits		4,236		4,236		4,236		-		-
Loans held for sale		7,434		7,483		-		7,483		-
Loans, net		1,461,374		1,435,361		-		-		1,435,361
FHLB stock		12,820		12,820		-		12,820		-
Interest receivable		6,793		6,793		-		6,793		-
Liabilities
Deposits		1,531,198		1,525,024		1,042,110		-		482,914
FHLB advances		261,150		257,563		-		257,563		-
Other borrowings		17,963		17,665		-		17,665		-
Interest payable		906		906		-		906		-



					Fair Value Measurements Using
December 31, 2017		Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	27,341	$	27,341	$	27,341	$	-	$	-
Interest-bearing time deposits		1,853		1,853		1,853		-		-
Loans held for sale		4,577		4,584		-		4,584		-
Loans, net		1,167,758		1,150,005		-		-		1,150,005
FHLB stock		11,183		11,183		-		11,183		-
Interest receivable		5,282		5,282		-		5,282		-
Liabilities
Deposits		1,202,034		1,199,781		830,877		-		368,904
FHLB advances		217,163		215,326		-		215,326		-
Other borrowings		4,232		4,300		-		4,300		-
Interest payable		456		456		-		456		-