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Fair Value of Financial Instruments
 12 Months Ended
Dec. 31, 2016
Fair Value of Financial Instruments [Abstract]  
Fair Value of Financial Instruments

Note 14. Fair Value of Financial Instruments

 

Relevant accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:

 

Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

Level 2: Significant other 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.

 

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at December 31, 2016.

($ in thousands)        
Description of Financial Instruments  Fair Value at
December 31,
2016		   Quoted Prices in
Active Markets
for Identical
Assets (Level 1)		   Significant
Other
Observable
Inputs
(Level 2)		   Significant
Unobservable
Inputs
(Level 3)		 
Recurring                    
Securities available for sale:                    
Government-sponsored enterprise securities  $17,490    —    17,490    — 
Mortgage-backed securities   148,065    —    148,065    — 
Corporate bonds   33,600    —    33,600    — 
Equity securities   174    —    174    — 
Total available for sale securities  $199,329    —    199,329    — 
                     
Nonrecurring                    
     Impaired loans  $12,284    —    —    12,284 
     Foreclosed real estate   9,532    —    —    9,532 

 

 

The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at December 31, 2015.

($ in thousands)        
Description of Financial Instruments  Fair Value at
December 31,
2015		   Quoted Prices in
Active Markets
for Identical
Assets (Level 1)		   Significant
Other
Observable
Inputs
(Level 2)		   Significant
Unobservable
Inputs
(Level 3)		 
Recurring                    
Securities available for sale:                    
Government-sponsored enterprise securities  $18,972    —    18,972    — 
Mortgage-backed securities   121,553    —    121,553    — 
Corporate bonds   24,946    —    24,946    — 
Equity securities   143    —    143    — 
Total available for sale securities  $165,614    —    165,614    — 
                     
Nonrecurring                    
     Impaired loans  $20,645    —    —    20,645 
     Foreclosed real estate   9,994    —    —    9,994 

 

The following is a description of the valuation methodologies used for instruments measured at fair value.

 

Securities Available for Sale — When quoted market prices are available in an active market, the securities are classified as Level 1 in the valuation hierarchy. If quoted market prices are not available, but fair values can be estimated by observing quoted prices of securities with similar characteristics, the securities are classified as Level 2 on the valuation hierarchy. Most of the fair values for the Company’s Level 2 securities are determined by our third-party bond accounting provider using matrix pricing. Matrix pricing 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. For the Company, Level 2 securities include mortgage-backed securities, collateralized mortgage obligations, government-sponsored enterprise securities, and corporate bonds. In cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

The Company reviews the pricing methodologies utilized by the bond accounting provider to ensure the fair value determination is consistent with the applicable accounting guidance and that the investments are properly classified in the fair value hierarchy. Further, the Company validates the fair values for a sample of securities in the portfolio by comparing the fair values provided by the bond accounting provider to prices from other independent sources for the same or similar securities. The Company analyzes unusual or significant variances and conducts additional research with the portfolio manager, if necessary, and takes appropriate action based on its findings.

 

Impaired loans — Fair values for impaired loans in the above table are measured on a non-recurring basis and are based on the underlying collateral values securing the loans, adjusted for estimated selling costs, or the net present value of the cash flows expected to be received for such loans. Collateral may be in the form of real estate or business assets including equipment, inventory and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined using an income or market valuation approach based on an appraisal conducted by an independent, licensed third party appraiser (Level 3). The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable borrower’s financial statements if not considered significant. Likewise, values for inventory and accounts receivable collateral are based on borrower financial statement balances or aging reports on a discounted basis as appropriate (Level 3). Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

 

Foreclosed real estate – Foreclosed real estate, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at the lower of cost or fair value. Fair value is measured on a non-recurring basis and is based upon independent market prices or current appraisals that are generally prepared using an income or market valuation approach and conducted by an independent, licensed third party appraiser, adjusted for estimated selling costs (Level 3). At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses. For any real estate valuations subsequent to foreclosure, any excess of the real estate recorded value over the fair value of the real estate is treated as a foreclosed real estate write-down on the Consolidated Statements of Income.

 

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of December 31, 2016, the significant unobservable inputs used in the fair value measurements were as follows:

 

($ in thousands)       
Description  Fair Value at
December 31,
2016		   Valuation
Technique		  Significant Unobservable
Inputs		  General Range
of Significant
Unobservable
Input Values
Impaired loans  $12,284   Appraised value; PV of expected cash flows  Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell  0-10%
Foreclosed real estate   9,532   Appraised value; List or contract price  Discounts to reflect current market conditions and estimated costs to sell  0-10%
               

 

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of December 31, 2015, the significant unobservable inputs used in the fair value measurements were as follows:

 

($ in thousands)       
Description  Fair Value at
December 31,
2015		   Valuation
Technique		  Significant Unobservable
Inputs		  General Range
of Significant
Unobservable
Input Values
Impaired loans  $20,645   Appraised value; PV of expected cash flows  Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell  0-10%
Foreclosed real estate   9,994   Appraised value; List or contract price  Discounts to reflect current market conditions and estimated costs to sell  0-10%
               

 

Transfers of assets or liabilities between levels within the fair value hierarchy are recognized when an event or change in circumstances occurs. There were no transfers between Level 1 and Level 2 for assets or liabilities measured on a recurring basis during the years ended December 31, 2016 or 2015.

 

For the years ended December 31, 2016 and 2015, the decrease in the fair value of securities available for sale was $1,919,000 and $473,000, respectively, which is included in other comprehensive income (net of tax benefit of $683,000 and $184,000, respectively). Fair value measurement methods at December 31, 2016 and 2015 are consistent with those used in prior reporting periods.

 

As discussed in Note 1(q), the Company is required to disclose estimated fair values for its financial instruments. Fair value estimates as of December 31, 2016 and 2015 and limitations thereon are set forth below for the Company’s financial instruments. See Note 1(q) for a discussion of fair value methods and assumptions, as well as fair value information for off-balance sheet financial instruments.

 

      December 31, 2016   December 31, 2015 

 

($ in thousands)

  Level in
Fair
Value
Hierarchy		  Carrying
Amount		   Estimated
Fair Value		   Carrying
Amount		   Estimated
Fair Value		 
                    
Cash and due from banks, noninterest-bearing  Level 1  $71,645   $71,645    53,285    53,285 
Due from banks, interest-bearing  Level 1   234,348    234,348    213,426    213,426 
Federal funds sold  Level 1   —    —    557    557 
Securities available for sale  Level 2   199,329    199,329    165,614    165,614 
Securities held to maturity  Level 2   129,713    130,195    154,610    157,146 
Presold mortgages in process of settlement  Level 1   2,116    2,116    4,323    4,323 
Total loans, net of allowance  Level 3   2,686,931    2,650,820    2,490,343    2,484,059 
Accrued interest receivable  Level 1   9,286    9,286    9,166    9,166 
FDIC indemnification asset  Level 3   —    —    8,439    8,256 
Bank-owned life insurance  Level 1   74,138    74,138    72,086    72,086 
                        
Deposits  Level 2   2,947,353    2,944,968    2,811,285    2,809,828 
Borrowings  Level 2   271,394    263,255    186,394    178,468 
Accrued interest payable  Level 2   539    539    585    585 

 

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no highly liquid market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

 

Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include net premises and equipment, intangible and other assets such as deferred income taxes, prepaid expense accounts, income taxes currently payable and other various accrued expenses. In addition, the income tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.