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Fair Value Measurements | 9 Months Ended
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Sep. 30, 2019
Fair Value Measurements |
Fair Value Measurements | Note 13 – Fair Value Measurements Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy established by the Company also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels of inputs that may be used to measure fair value are: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date. Level 2: Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect a company’s own view about the assumptions that market participants would use in pricing an asset or liability. The majority of securities available-for-sale are valued by external pricing services or dealer market participants and are classified in Level 2 of the fair value hierarchy. Both market and income valuation approaches are utilized. Quarterly, the Company evaluates the methodologies used by the external pricing services or dealer market participants to develop the fair values to determine whether the results of the valuations are representative of an exit price in the Company’s principal markets and an appropriate representation of fair value. The Company uses the following methods and significant assumptions to estimate fair value:
| · |  | Government-sponsored agency debt securities are primarily priced using available market information through processes such as benchmark spreads, market valuations of like securities, like securities groupings and matrix pricing.
| · |  | Other government-sponsored agency securities, MBS and some of the actively traded real estate mortgage investment conduits and collateralized mortgage obligations are priced using available market information including benchmark yields, prepayment speeds, spreads, volatility of similar securities and trade date.
| · |  | State and political subdivisions are largely grouped by characteristics (e.g., geographical data and source of revenue in trade dissemination systems). Because some securities are not traded daily and due to other grouping limitations, active market quotes are often obtained using benchmarking for like securities.
| · |  | Auction rate securities are priced using market spreads, cash flows, prepayment speeds, and loss analytics. Therefore, the valuations of auction rate asset-backed securities are considered Level 2 valuations.
| · |  | Asset-backed collateralized loan obligations were priced using data from a pricing matrix supported by our bond accounting service provider and are therefore considered Level 2 valuations.
| · |  | Annually every security holding is priced by a pricing service independent of the regular and recurring pricing services used. The independent service provides a measurement to indicate if the price assigned by the regular service is within or outside of a reasonable range. Management reviews this report and applies judgment in adjusting calculations at year end related to securities pricing.
| · |  | Residential mortgage loans available for sale in the secondary market are carried at fair market value. The fair value of loans held-for-sale is determined using quoted secondary market prices.
| · |  | Lending related commitments to fund certain residential mortgage loans, e.g., residential mortgage loans with locked interest rates to be sold in the secondary market and forward commitments for the future delivery of mortgage loans to third party investors, as well as forward commitments for future delivery of MBS are considered derivatives. Fair values are estimated based on observable changes in mortgage interest rates including prices for MBS from the date of the commitment and do not typically involve significant judgments by management.
| · |  | The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income to derive the resultant value. The Company is able to compare the valuation model inputs, such as the discount rate, prepayment speeds, weighted average delinquency and foreclosure/bankruptcy rates to widely available published industry data for reasonableness.
| · |  | Interest rate swap positions, both assets and liabilities, are based on valuation pricing models using an income approach reflecting readily observable market parameters such as interest rate yield curves.
| · |  | The fair value of impaired loans with specific allocations of the allowance for loan and lease losses is essentially based on recent real estate appraisals or the fair value of the collateralized asset. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are made in the appraisal process by the appraisers to reflect differences between the available comparable sales and income data. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.
| · |  | Nonrecurring adjustments to certain commercial and residential real estate properties classified as OREO are measured at fair value, less costs to sell. Fair values are based on third party appraisals of the property, resulting in a Level 3 classification, or an executed pending sales contract. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.
Assets and Liabilities Measured at Fair Value on a Recurring Basis: The tables below present the balance of assets and liabilities at September 30, 2019, and December 31, 2018, respectively, measured by the Company at fair value on a recurring basis:
|  | September 30, 2019
|  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Securities available-for-sale |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury |  | $ | 4,038 |  | $ | - |  | $ | - |  | $ | 4,038
U.S. government agencies |  |  | - |  |  | 9,143 |  |  | - |  |  | 9,143
U.S. government agencies mortgage-backed |  |  | - |  |  | 16,940 |  |  | - |  |  | 16,940
States and political subdivisions |  |  | - |  |  | 232,854 |  |  | 5,873 |  |  | 238,727
Collateralized mortgage obligations |  |  | - |  |  | 64,121 |  |  | - |  |  | 64,121
Asset-backed securities |  |  | - |  |  | 83,182 |  |  | - |  |  | 83,182
Collateralized loan obligations |  |  | - |  |  | 72,271 |  |  | - |  |  | 72,271
Loans held-for-sale |  |  | - |  |  | 5,592 |  |  | - |  |  | 5,592
Mortgage servicing rights |  |  | - |  |  | - |  |  | 5,361 |  |  | 5,361
Interest rate swap agreements |  |  | - |  |  | 3,756 |  |  | - |  |  | 3,756
Mortgage banking derivatives |  |  | - |  |  | 453 |  |  | - |  |  | 453
Total |  | $ | 4,038 |  | $ | 488,312 |  | $ | 11,234 |  | $ | 503,584
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap agreements, including risk participation agreements |  | $ | - |  | $ | 8,532 |  | $ | - |  | $ | 8,532
Total |  | $ | - |  | $ | 8,532 |  | $ | - |  | $ | 8,532
|  | December 31, 2018
|  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Securities available-for-sale |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury |  | $ | 3,923 |  | $ | - |  | $ | - |  | $ | 3,923
U.S. government agencies |  |  | - |  |  | 10,951 |  |  | - |  |  | 10,951
U.S. government agencies mortgage-backed |  |  | - |  |  | 14,075 |  |  | - |  |  | 14,075
States and political subdivisions |  |  | - |  |  | 265,902 |  |  | 8,165 |  |  | 274,067
Corporate bonds |  |  | - |  |  | - |  |  | - |  |  | -
Collateralized mortgage obligations |  |  | - |  |  | 64,429 |  |  | - |  |  | 64,429
Asset-backed securities |  |  | - |  |  | 109,514 |  |  | - |  |  | 109,514
Collateralized loan obligations |  |  | - |  |  | 64,289 |  |  | - |  |  | 64,289
Loans held-for-sale |  |  | - |  |  | 2,984 |  |  | - |  |  | 2,984
Mortgage servicing rights |  |  | - |  |  | - |  |  | 7,357 |  |  | 7,357
Interest rate swap agreements |  |  | - |  |  | 672 |  |  | - |  |  | 672
Mortgage banking derivatives |  |  | - |  |  | 159 |  |  | - |  |  | 159
Total |  | $ | 3,923 |  | $ | 532,975 |  | $ | 15,522 |  | $ | 552,420
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap agreements, including risk participation agreements |  | $ | - |  | $ | 756 |  | $ | - |  | $ | 756
Total |  | $ | - |  | $ | 756 |  | $ | - |  | $ | 756
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are as follows:
|  | Nine Months Ended September 30, 2019
|  | Securities available-for-sale |  |  |
|  | Collateralized |  | States and |  | Mortgage
|  | Mortgage |  | Political |  | Servicing
|  | Obligation |  | Subdivisions |  | Rights
Beginning balance January 1, 2019 |  | $ | - |  | $ | 8,165 |  | $ | 7,357
Transfers into Level 3 |  |  | - |  |  | - |  |  | -
Transfers out of Level 3 |  |  | - |  |  | - |  |  | -
Total gains or losses |  |  |  |  |  |  |  |  |
Included in earnings |  |  | - |  |  | (25) |  |  | (2,384)
Included in other comprehensive income |  |  | - |  |  | 898 |  |  | -
Purchases, issuances, sales, and settlements |  |  |  |  |  |  |  |  |
Purchases |  |  | - |  |  | 17,643 |  |  | -
Issuances |  |  | - |  |  | - |  |  | 906
Settlements |  |  | - |  |  | (20,808) |  |  | (518)
Ending balance September 30, 2019 |  | $ | - |  | $ | 5,873 |  | $ | 5,361
|  | Nine Months Ended September 30, 2018
|  | Securities available-for-sale |  |  |
|  | Collateralized |  | States and |  | Mortgage
|  | Mortgage |  | Political |  | Servicing
|  | Obligation |  | Subdivisions |  | Rights
Beginning balance January 1, 2018 |  | $ | 2,268 |  | $ | 14,261 |  | $ | 6,944
Transfers into Level 3 |  |  | - |  |  | - |  |  | -
Transfers out of Level 3 |  |  | - |  |  | - |  |  | -
Total gains or losses |  |  |  |  |  |  |  |  |
Included in earnings |  |  | 32 |  |  | - |  |  | 636
Included in other comprehensive income |  |  | 34 |  |  | (805) |  |  | -
Purchases, issuances, sales, and settlements |  |  |  |  |  |  |  |  |
Purchases |  |  | - |  |  | 20,421 |  |  | -
Issuances |  |  | - |  |  | - |  |  | 997
Settlements |  |  | (770) |  |  | (24,366) |  |  | (446)
Ending balance September 30, 2018 |  | $ | 1,564 |  | $ | 9,511 |  | $ | 8,131
The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of September 30, 2019:
|  |  |  |  |  |  |  |  |  |  | Weighted
Measured at fair value |  |  |  |  |  |  | Unobservable |  |  |  | Average
on a recurring basis: |  | Fair Value |  | Valuation Methodology |  | Inputs |  | Range of Input |  | of Inputs
Mortgage servicing rights |  | $ | 5,361 |  | Discounted Cash Flow |  | Discount Rate |  | 10.0% - 17.0% |  | 10.1 | %
|  |  |  |  |  |  | Prepayment Speed |  | 7.0 - 69.0% |  | 16.6 | %
The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of December 31, 2018:
|  |  |  |  |  |  |  |  |  |  | Weighted
Measured at fair value |  |  |  |  |  |  | Unobservable |  |  |  | Average
on a recurring basis: |  | Fair Value |  | Valuation Methodology |  | Inputs |  | Range of Input |  | of Inputs
Mortgage servicing rights |  | $ | 7,357 |  | Discounted Cash Flow |  | Discount Rate |  | 10.0 - 229.7% |  | 10.2 | %
|  |  |  |  |  |  | Prepayment Speed |  | 7.0 - 68.9% |  | 9.6 | %
In addition to the above, Level 3 fair value measurement included $5.9 million for state and political subdivisions representing various local municipality securities at September 30, 2019. This was classified as securities available-for-sale, and was valued using a discount based on market spreads of similar assets, but the liquidity premium was an unobservable input. The state and political subdivisions securities balance in Level 3 fair value at September 30, 2018, was $9.5 million and collateralized mortgage obligation balance in Level 3 was $1.6 million. Both of these were classified as securities available-for-sale, and were valued using a discount based on market spreads of similar assets, but the liquidity premium was an unobservable input. Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis: The Company may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis in accordance with GAAP. These assets consist of impaired loans and OREO. For assets measured at fair value on a nonrecurring basis at September 30, 2019, and December 31, 2018, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:
|  | September 30, 2019
|  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Impaired loans 1 |  | $ | - |  | $ | - |  | $ | 5,502 |  | $ | 5,502
Other real estate owned, net 2 |  |  | - |  |  | - |  |  | 4,682 |  |  | 4,682
Total |  | $ | - |  | $ | - |  | $ | 10,184 |  | $ | 10,184
1 Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans; had a carrying amount of $5.8 million and a valuation allowance of $274,000 resulting in a decrease of specific allocations within the allowance for loan and lease losses of $78,000 for the nine months ended September 30, 2019. 2 OREO is measured at fair value, less costs to sell, and had a net carrying amount of $4.7 million, which is made up of the outstanding balance of $13.1 million, net of a valuation allowance of $8.1 million and a participation of $937,000 at September 30, 2019.
|  | December 31, 2018
|  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Impaired loans 1 |  | $ | - |  | $ | - |  | $ | 12,163 |  | $ | 12,163
Other real estate owned, net 2 |  |  | - |  |  | - |  |  | 7,175 |  |  | 7,175
Total |  | $ | - |  | $ | - |  | $ | 19,338 |  | $ | 19,338
1 Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans; had a carrying amount of $12.5 million and a valuation allowance of $352,000, resulting in an increase of specific allocations within the allowance for loan and lease losses of $208,000 for the year December 31, 2018. 2 OREO is measured at fair value, less costs to sell, and had a net carrying amount of $7.2 million, which is made up of the outstanding balance of $16.0 million, net of a valuation allowance of $8.0 million and a participation of $900,000, at December 31, 2018. The Company has estimated the fair values of these assets based primarily on Level 3 inputs. OREO and impaired loans are generally valued using the fair value of collateral provided by third party appraisals. These valuations include assumptions related to cash flow projections, discount rates, and recent comparable sales. The numerical ranges of unobservable inputs for these valuation assumptions are not meaningful.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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