Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.8.0.1
Fair Value Measurements
3 Months Ended
Mar. 31, 2018
Fair Value Disclosures [Abstract]  
Fair Value Measurements

NOTE 12. 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 table presents the assets and liabilities measured at fair value on a recurring basis:

 

 

 

March 31, 2018

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(Dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

 

 

$

1,907

 

 

$

 

 

$

1,907

 

Residential mortgage-backed securities

 

 

 

 

 

28,366

 

 

 

 

 

 

28,366

 

Corporate bonds and other debt securities

 

 

 

 

 

5,529

 

 

 

 

 

 

5,529

 

SBA servicing rights

 

 

 

 

 

 

 

 

3,512

 

 

 

3,512

 

Total

 

$

 

 

$

35,802

 

 

$

3,512

 

 

$

39,314

 

 

 

 

December 31, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(Dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

 

 

$

1,949

 

 

$

 

 

$

1,949

 

Residential mortgage-backed securities

 

 

 

 

 

29,629

 

 

 

 

 

 

29,629

 

Corporate bonds and other debt securities

 

 

 

 

 

5,665

 

 

 

 

 

 

5,665

 

SBA servicing rights

 

 

 

 

 

 

 

 

3,411

 

 

 

3,411

 

Total

 

$

 

 

$

37,243

 

 

$

3,411

 

 

$

40,654

 

 

There were no transfers of financial assets between levels of the fair value hierarchy during the three months ended March 31, 2018.

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

 

 

 

March 31,

2018

 

 

December 31,

2017

 

 

 

(Dollars in thousands)

 

Assets (classified in Level 3):

 

 

 

 

 

 

 

 

Impaired loans

 

$

2,791

 

 

$

2,553

 

Other real estate and repossessed assets

 

 

268

 

 

 

21

 

 

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

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Non-recurring:

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

2,791

 

 

Third party appraisals

 

Collateral discounts

 

0.0% - 100.0% (4.9

%)

Other real estate owned

 

 

268

 

 

Third party appraisals

 

Collateral discounts and estimated cost to sell

 

 

10.0

%

SBA servicing assets

 

 

3,512

 

 

Discounted cash flows

 

Conditional prepayment rate

 

 

7.0

%

 

 

 

 

 

 

 

 

Discount rate

 

 

14.1

%

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Non-recurring:

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

2,553

 

 

Third party appraisals

 

Collateral discounts

 

0.0% - 100.0% (11.6

%)

Other real estate owned

 

 

21

 

 

Third party appraisals

 

Collateral discounts and estimated cost to sell

 

 

10.0

%

SBA servicing assets

 

 

3,411

 

 

Discounted cash flows

 

Conditional prepayment rate

 

 

6.7

%

 

 

 

 

 

 

 

 

Discount rate

 

 

14.1

%

 

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:

 

March 31, 2018

 

Carrying

Value

 

 

Fair

Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(Dollars in thousands)

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

52,295

 

 

$

52,295

 

 

$

52,295

 

 

$

 

 

$

 

Time deposits in other banks

 

 

245

 

 

 

245

 

 

 

245

 

 

 

 

 

 

 

Available for sale securities

 

 

35,802

 

 

 

35,802

 

 

 

 

 

 

35,802

 

 

 

 

FHLB and other bank stock

 

 

4,802

 

 

 

4,802

 

 

 

 

 

 

4,802

 

 

 

 

Loans, net

 

 

876,374

 

 

 

869,122

 

 

 

 

 

 

 

 

 

869,122

 

Loans held for sale

 

 

4,530

 

 

 

4,902

 

 

 

 

 

 

4,902

 

 

 

 

Accrued interest receivable

 

 

3,115

 

 

 

3,115

 

 

 

 

 

 

3,115

 

 

 

 

Bank-owned life insurance

 

 

480

 

 

 

480

 

 

 

 

 

 

480

 

 

 

 

SBA servicing rights

 

 

3,512

 

 

 

3,512

 

 

 

 

 

 

 

 

 

3,512

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

840,963

 

 

$

839,512

 

 

$

 

 

$

839,512

 

 

$

 

Accrued interest payable

 

 

424

 

 

 

424

 

 

 

 

 

 

424

 

 

 

 

Short-term borrowings

 

 

15,000

 

 

 

15,000

 

 

 

 

 

 

15,000

 

 

 

 

Long-term borrowings

 

 

75,203

 

 

 

73,536

 

 

 

 

 

 

73,536

 

 

 

 

 

December 31, 2017

 

Carrying

Value

 

 

Fair

Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(Dollars in thousands)

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

57,949

 

 

$

57,949

 

 

$

57,949

 

 

$

 

 

$

 

Time deposits in other banks

 

 

245

 

 

 

245

 

 

 

245

 

 

 

 

 

 

 

Available for sale securities

 

 

37,243

 

 

 

37,243

 

 

 

 

 

 

37,243

 

 

 

 

FHLB and other bank stock

 

 

4,812

 

 

 

4,812

 

 

 

 

 

 

4,812

 

 

 

 

Loans, net

 

 

863,467

 

 

 

870,749

 

 

 

 

 

 

 

 

 

870,749

 

Loans held for sale

 

 

3,814

 

 

 

4,188

 

 

 

 

 

 

4,188

 

 

 

 

Accrued interest receivable

 

 

3,466

 

 

 

3,466

 

 

 

 

 

 

3,466

 

 

 

 

Bank-owned life insurance

 

 

479

 

 

 

479

 

 

 

 

 

 

479

 

 

 

 

SBA servicing rights

 

 

3,411

 

 

 

3,411

 

 

 

 

 

 

 

 

 

3,411

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

835,368

 

 

$

840,645

 

 

$

 

 

$

840,645

 

 

$

 

Accrued interest payable

 

 

407

 

 

 

407

 

 

 

 

 

 

407

 

 

 

 

Short-term borrowings

 

 

15,000

 

 

 

15,000

 

 

 

 

 

 

15,000

 

 

 

 

Long-term borrowings

 

 

76,411

 

 

 

67,310

 

 

 

 

 

 

67,310

 

 

 

 

 

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 March 31, 2018 and December 31, 2017, include cash and cash equivalents, time deposits in other banks and accrued interest receivable and payable.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments.

FHLB and Other Bank Stock:

FHLB and other bank stock can be liquidated only by redemption by the issuer, as there is no market for these securities. These securities are carried at par, which has historically represented the redemption price and is therefore considered to approximate fair value.

Loans:

Fair values for loans are based on a discounted cash flow methodology that considers various factors, including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan, whether or not the loan was amortizing and current discount rates. A basis point adjustment for the liquidity premium curve was added to the discounted cash flow methodology to obtain the estimated exit price of the portfolio.  Loans are grouped together according to similar characteristics and are treated in the aggregate when applying various valuation techniques. The discount rates used for loans are based on current market rates for new originations of comparable credit risk and include adjustments for liquidity concerns. The allowance for loan and lease losses is considered a reasonable estimate of the required adjustment to fair value to reflect the impact of credit risk. This estimate is intended to represent an exit value as defined in ASC 820.

Loans Held for Sale:

SBA loans held for sale are carried at the lower of cost or fair value. The fair values of SBA loans held for sale is determined, when possible, using quoted secondary-market prices and are classified within Level 2 of the fair value hierarchy. If no such quoted prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for the specific attributes of that loan.  

Bank-owned Life Insurance:

The Company holds life insurance policies on certain officers. The carrying value of these policies approximates fair value as it is based on the cash surrender value adjusted for other charges or amounts due that are probable at settlement.

Deposits:

The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using discounted cash flow analysis and using the rates currently offered for deposits of similar remaining maturities.

Short-term and Long-term Borrowings:

The fair value of advances from the FHLB and other borrowings are estimated by discounting the future cash flows using the current rate at which similar borrowings with similar remaining maturities could be obtained.