Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.20.2
Fair Value Measurements
9 Months Ended
Sep. 30, 2020
Fair Value Disclosures [Abstract]  
Fair Value Measurements

NOTE 15. FAIR VALUE MEASUREMENTS

When determining the fair value measurements for assets and liabilities and the related fair value hierarchy, the Company considers the principal or most advantageous market in which it would transact and the assumptions that market participants would use when pricing the asset or liability. When possible, the Company looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to market observable data for similar assets and liabilities. It is the Company’s policy to maximize the use of observable inputs, minimize the use of unobservable inputs and use unobservable inputs to measure fair value to the extent that observable inputs are not available. The need to use unobservable inputs generally results from the lack of market liquidity, resulting in diminished observability of both actual trades and assumptions that would otherwise be available to value these instruments, or the value of the underlying collateral is not market observable. Although third party price indications may be available for an asset or liability, limited trading activity would make it difficult to support the observability of these quotations.

Financial Instruments Carried at Fair Value on a Recurring Basis

The following is a description of the valuation methodologies used for financial instruments measured at fair value on a recurring basis, as well as the general classification of each instrument under the valuation hierarchy.

Investment Securities—Investment securities available for sale are carried at fair value on a recurring basis. When available, fair value is based on quoted prices for the identical security in an active market and as such, would be classified as Level 1. If quoted market prices are not available, fair values are estimated using quoted prices of securities with similar characteristics, discounted cash flows or matrix pricing models. Investment securities available for sale for which Level 1 valuations are not available are classified as Level 2, and include U.S. Government agencies and sponsored enterprises obligations and agency mortgage-backed securities; state and municipal obligations; asset-backed securities; and corporate debt and other securities. Pricing of these securities is generally spread driven.

Observable inputs that may impact the valuation of these securities include benchmark yield curves, credit spreads, reported trades, dealer quotes, bids, issuer spreads, current rating, historical constant prepayment rates, historical voluntary prepayment rates, structural and waterfall features of individual securities, published collateral data, and for certain securities, historical constant default rates and default severities.

SBA Servicing Asset—The SBA Servicing Asset is carried at fair value on a recurring basis. To determine the fair value of SBA servicing rights, The Company uses market prices for comparable servicing contracts, when available, or alternatively, uses a valuation model that calculates the present value of estimated future net servicing income. In using this valuation method, the Company incorporates assumptions that market participants would use in estimating future net servicing income, which includes estimates of the cost to service, the discount rate, custodial earnings rate, an inflation rate, ancillary income, prepayment speeds, default rates, late fees and losses. The SBA Servicing Asset is classified as Level 3.

The following tables present the assets and liabilities measured at fair value on a recurring basis for the periods presented:

 

 

 

September 30, 2020

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(Dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

5,517

 

 

$

 

 

$

 

 

$

5,517

 

State and municipal obligations

 

 

 

 

 

2,478

 

 

 

 

 

 

2,478

 

Residential mortgage-backed securities

 

 

 

 

 

79,460

 

 

 

 

 

 

79,460

 

Corporate Bonds

 

 

 

 

 

32,359

 

 

 

 

 

 

32,359

 

SBA servicing rights

 

 

 

 

 

 

 

 

3,051

 

 

 

3,051

 

Total

 

$

5,517

 

 

$

114,297

 

 

$

3,051

 

 

$

122,865

 

 

 

 

December 31, 2019

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(Dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

60,371

 

 

$

-

 

 

$

 

 

$

60,371

 

State and municipal obligations

 

 

 

 

 

7,981

 

 

 

 

 

 

7,981

 

Residential mortgage-backed securities

 

 

 

 

 

28,585

 

 

 

 

 

 

28,585

 

SBA servicing rights

 

 

 

 

 

 

 

 

3,355

 

 

 

3,355

 

Total

 

$

60,371

 

 

$

36,566

 

 

$

3,355

 

 

$

100,292

 

 

There were no transfers of financial assets between levels of the fair value hierarchy during the three or nine months ended September 30, 2020.

Financial Instruments Measured at Fair Value on a Non-Recurring Basis

The following is a description of the methodologies used to estimate the fair values of assets and liabilities measured at fair value on a non-recurring basis, and the level within the fair value hierarchy in which those measurements are typically classified.

Impaired loans and other real estate owned (“OREO”)—The carrying amount of collateral dependent impaired loans is typically based on the fair value of the underlying collateral, which may be real estate or other business assets, less estimated costs to sell. The carrying value of OREO is initially measured based on the fair value, less estimated cost to sell, of the real estate acquired in foreclosure and subsequently adjusted to the lower of cost or estimated fair value, less estimated cost to sell. Fair values of real estate collateral are typically based on real estate appraisals which utilize market and income valuation techniques incorporating both observable and unobservable inputs. When current appraisals are not available, the Company may use brokers’ price opinions, home price indices, or other available information about changes in real estate market conditions to adjust the latest appraised value available. These adjustments to appraised values may be subjective and involve significant management judgment. The fair value of collateral consisting of other business assets is generally based on appraisals that use market approaches to valuation, incorporating primarily unobservable inputs. Fair value measurements related to collateral dependent impaired loans and OREO are classified within Level 3 of the fair value hierarchy.

The following tables provide information about certain assets measured at fair value on a non-recurring basis:

 

 

 

Estimated Fair Value

 

 

 

September 30,

2020

 

 

December 31,

2019

 

 

 

(Dollars in thousands)

 

Assets (classified in Level 3):

 

 

 

 

 

 

 

 

Impaired loans

 

$

5,631

 

 

$

3,990

 

Other real estate and repossessed assets

 

 

302

 

 

 

3,653

 

 

Impairment charges resulting from the non-recurring changes in fair value of underlying collateral of impaired loans are included in the provision for loan losses in the consolidated statement of income. Impairment charges resulting from the non-recurring changes in fair value of OREO are included in other real estate and acquired assets resolution expenses in the consolidated statement of income.

The following tables show significant unobservable inputs used in the recurring and non-recurring fair value measurements of Level 3 assets:

 

Level 3 Asset

 

Fair Value

 

 

Valuation Technique

 

Unobservable Inputs

 

Range/Weighted

Average

 

September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Non-recurring:

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

5,631

 

 

Third party appraisals

 

Collateral discounts

 

0.0% - 100.0% (31.6%)

 

Other real estate owned

 

 

302

 

 

Third party appraisals

 

Collateral discounts and estimated cost to sell

 

 

10.0

%

Recurring:

 

 

 

 

 

 

 

 

 

 

 

 

SBA servicing assets

 

 

3,051

 

 

Discounted cash flows

 

Conditional prepayment rate

 

 

12.2

%

 

 

 

 

 

 

 

 

Discount rate

 

 

10.0

%

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Non-recurring:

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

3,990

 

 

Third party appraisals

 

Collateral discounts

 

0.0% - 100.0% (19.2%)

 

Other real estate owned

 

 

3,653

 

 

Third party appraisals

 

Collateral discounts and estimated cost to sell

 

 

10.0

%

Recurring:

 

 

 

 

 

 

 

 

 

 

 

 

SBA servicing assets

 

 

3,355

 

 

Discounted cash flows

 

Conditional prepayment rate

 

 

11.8

%

 

 

 

 

 

 

 

 

Discount rate

 

 

11.5

%

 

The carrying amounts and estimated fair values, as well as the level within the fair value hierarchy, of the Company’s financial instruments are as follows for the periods presented:

 

September 30, 2020

 

Carrying

Value

 

 

Fair

Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(Dollars in thousands)

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

151,084

 

 

$

151,084

 

 

$

151,084

 

 

$

 

 

$

 

Time deposits in other banks

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities

 

 

119,814

 

 

 

119,814

 

 

 

5,517

 

 

 

114,297

 

 

 

 

FHLB and other bank stock

 

 

5,709

 

 

 

5,709

 

 

 

 

 

 

5,709

 

 

 

 

Loans, net

 

 

2,440,146

 

 

 

2,421,367

 

 

 

 

 

 

 

 

 

2,421,367

 

Loans held for sale

 

 

4,287

 

 

 

4,665

 

 

 

 

 

 

4,665

 

 

 

 

Accrued interest receivable

 

 

11,612

 

 

 

11,612

 

 

 

 

 

 

11,612

 

 

 

 

Bank-owned life insurance

 

 

15,878

 

 

 

15,878

 

 

 

 

 

 

15,878

 

 

 

 

SBA servicing rights

 

 

3,051

 

 

 

3,051

 

 

 

 

 

 

 

 

 

3,051

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

2,287,516

 

 

$

2,290,652

 

 

$

 

 

$

2,290,652

 

 

$

 

Accrued interest payable

 

 

1,321

 

 

 

1,321

 

 

 

 

 

 

1,321

 

 

 

 

Short-term borrowings

 

 

10,000

 

 

 

10,092

 

 

 

 

 

 

10,000

 

 

 

 

Long-term borrowings

 

 

267,746

 

 

 

270,209

 

 

 

 

 

 

270,209

 

 

 

 

 

December 31, 2019

 

Carrying

Value

 

 

Fair

Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(Dollars in thousands)

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

325,957

 

 

$

325,957

 

 

$

325,957

 

 

$

 

 

$

 

Time deposits in other banks

 

 

490

 

 

 

490

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities

 

 

96,937

 

 

 

96,937

 

 

 

 

 

 

96,937

 

 

 

 

FHLB and other bank stock

 

 

8,310

 

 

 

8,310

 

 

 

 

 

 

8,310

 

 

 

 

Loans, net

 

 

1,760,445

 

 

 

1,758,511

 

 

 

 

 

 

 

 

 

1,758,511

 

Loans held for sale

 

 

3,989

 

 

 

4,307

 

 

 

 

 

 

4,307

 

 

 

 

Accrued interest receivable

 

 

6,507

 

 

 

6,507

 

 

 

 

 

 

6,507

 

 

 

 

Bank-owned life insurance

 

 

15,610

 

 

 

15,610

 

 

 

 

 

 

15,610

 

 

 

 

SBA servicing rights

 

 

3,355

 

 

 

3,355

 

 

 

 

 

 

 

 

 

3,355

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

1,928,126

 

 

$

1,855,491

 

 

$

 

 

$

1,855,491

 

 

$

 

Accrued interest payable

 

 

1,219

 

 

 

1,219

 

 

 

 

 

 

1,219

 

 

 

 

Short-term borrowings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term borrowings

 

 

105,140

 

 

 

102,488

 

 

 

 

 

 

102,488

 

 

 

 

 

Certain financial instruments are carried at amounts that approximate fair value due to their short-term nature and generally negligible credit risk. Financial instruments for which fair value approximates the carrying amount at September 30, 2020 and December 31, 2019, include cash and cash equivalents, time deposits in other banks and accrued interest receivable and payable.