XML 32 R21.htm IDEA: XBRL DOCUMENT v3.10.0.1
Fair Value
 9 Months Ended
Sep. 30, 2018
Fair Value [Abstract]  
Fair Value

Note 13 – Fair Value

 

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 September 30, 2018.

 

($ in thousands)        
Description of Financial Instruments  Fair Value at
September
30, 2018		   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  $43,422    —    43,422    — 
        Mortgage-backed securities   276,474    —    276,474    — 
        Corporate bonds   33,172    —    33,172    — 
          Total available for sale securities  $353,068    —    353,068    — 
                     
Nonrecurring                    
     Impaired loans  $13,820    —    —    13,820 
     Foreclosed real estate   6,140    —    —    6,140 

 

The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at December 31, 2017.

 

($ in thousands)        
Description of Financial Instruments  Fair Value at
December 31,
2017		   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  $13,867    —    13,867    — 
Mortgage-backed securities   295,213    —    295,213    — 
Corporate bonds   34,190    —    34,190    — 
Total available for sale securities  $343,270    —    343,270    — 
                     
Nonrecurring                    
     Impaired loans  $14,086    —    —    14,086 
     Foreclosed real estate   12,571    —    —    12,571 

 

 

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 September 30, 2018, the significant unobservable inputs used in the fair value measurements were as follows:

 

($ in thousands)       
Description  Fair Value at
September
30, 2018		   Valuation
Technique		  Significant Unobservable
Inputs		  General Range
of Significant
Unobservable
Input Values
Impaired loans  $13,820   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   6,140   Appraised value; List or contract price  Discounts to reflect current market conditions, abbreviated holding period 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, 2017, the significant unobservable inputs used in the fair value measurements were as follows:

 

($ in thousands)       
Description  Fair Value at
December 31,
2017		   Valuation
Technique		  Significant Unobservable
Inputs		  General Range
of Significant
Unobservable
Input Values
Impaired loans  $14,086   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   12,571   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 nine months ended September 30, 2018 or 2017.

 

For the nine months ended September 30, 2018 and 2017, the increase (decrease) in the fair value of securities available for sale was ($10,229,000) and $3,288,000, respectively, which is included in other comprehensive income (net of tax benefit (expense) of $2,390,000 and ($1,213,000), respectively). Fair value measurement methods at September 30, 2018 and 2017 are consistent with those used in prior reporting periods.

 

The carrying amounts and estimated fair values of financial instruments at September 30, 2018 and December 31, 2017 are as follows:

 

      September 30, 2018   December 31, 2017 

 

($ 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  $50,209    50,209    114,301    114,301 
Due from banks, interest-bearing  Level 1   460,520    460,520    375,189    375,189 
Securities available for sale  Level 2   353,068    353,068    343,270    343,270 
Securities held to maturity  Level 2   104,819    103,360    118,503    118,998 
Presold mortgages in process of settlement  Level 1   6,111    6,111    12,459    12,459 
Total loans, net of allowance  Level 3   4,170,082    4,126,000    4,019,071    4,010,551 
Accrued interest receivable  Level 1   14,982    14,982    14,094    14,094 
Bank-owned life insurance  Level 1   101,055    101,055    99,162    99,162 
                        
Deposits  Level 2   4,528,373    4,522,134    4,406,955    4,401,757 
Borrowings  Level 2   406,593    398,109    407,543    397,903 
Accrued interest payable  Level 2   1,916    1,916    1,235    1,235 

 

Fair value methods and assumptions are set forth below for the Company’s financial instruments.

 

Cash and Amounts Due from Banks, Presold Mortgages in Process of Settlement, Accrued Interest Receivable, and Accrued Interest Payable - The carrying amounts approximate their fair value because of the short maturity of these financial instruments.

 

Available for Sale and Held to Maturity Securities - Fair values are provided by a third-party and are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or matrix pricing.

 

Loans - For nonimpaired loans, fair values are determined assuming the sale of the notes to a third-party financial investor. Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, financial and agricultural, real estate construction, real estate mortgages and installment loans to individuals. Each loan category is further segmented into fixed and variable interest rate terms. The fair value for each category is determined by discounting scheduled future cash flows using current interest rates with a liquidity discount offered on loans with similar risk characteristics, and includes the Company’s estimate of future credit losses expected to be incurred over the life of the loan. Fair values for impaired loans are primarily based on estimated proceeds expected upon liquidation of the collateral or the present value of expected cash flows.

 

Bank-Owned Life Insurance – The carrying value of life insurance approximates fair value because this investment is carried at cash surrender value, as determined by the issuer.

 

Deposits - The fair value of deposits with no stated maturity, such as noninterest-bearing checking accounts, savings accounts, interest-bearing checking accounts, and money market accounts, is equal to the amount payable on demand as of the valuation date. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered in the marketplace for deposits of similar remaining maturities.

 

Borrowings - The fair value of borrowings is based on the discounted value of the contractual cash flows. The discount rate is estimated using the rates currently offered by the Company’s lenders for debt of similar maturities.

 

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.