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Fair Value Disclosures | 9 Months Ended
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Sep. 30, 2015
Fair Value Disclosures [Abstract] |
Fair Value Disclosures [Text Block] | Note 6. Fair Value Disclosures Fair Value Measurements: SmartFinancial uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the “Fair Value Measurements and Disclosures” ASC Topic 820, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. ASC Topic 820 provides a consistent definition of fair value, which focuses on exit price in an orderly transaction between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions. ASC Topic 820 also establishes a three-tier 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, as follows: Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that SmartFinancial has the ability to access. Level 2 - Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets, 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 assumptions about the assumptions that market participants would use in pricing an asset or liability. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following methods and assumptions were used by SmartFinancial in estimating fair value disclosures for financial instruments. Cash and cash equivalents: The carrying amounts of cash and cash equivalents approximate fair values based on the short-term nature of the assets. Cash and cash equivalents are classified as Level 1 of the fair value hierarchy. Securities: Fair values are estimated using pricing models and discounted cash flows that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, and credit spreads. Securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs. The carrying value of restricted investments approximates fair value based on the redemption provisions of the restrictive entities. Restricted investments are classified as Level 3 of the fair value hierarchy. Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for fixed-rate loans are estimated using discounted cash flow analysis, using market interest rates for comparable loans. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC Topic 310, “Accounting by Creditors for Impairment of a Loan.” Deposits: The fair value of deposits with no stated maturity, such as noninterest-bearing and interest-bearing demand deposits, savings deposits, and money market accounts, is equal to the amount payable on demand at the reporting date. The carrying amounts of variable-rate, fixed-term certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates on comparable instruments to a schedule of aggregated expected monthly maturities on time deposits. Generally, Level 3 inputs are utilized in this estimate. Federal funds purchased and securities sold under agreements to repurchase: The carrying amount of these liabilities approximates their estimated fair value. These liabilities are included in Level 3 of the fair value hierarchy. Federal Home Loan Bank advances and other borrowings: The fair value of these fixed rate advances is estimated based on discounted contractual cash flows using current incremental borrowing rates for similar type borrowing arrangements. These liabilities are included in Level 3 of the fair value hierarchy. Accrued interest: The carrying amounts of accrued interest approximate fair value. Accrued interest is included in Level 3 of the fair value hierarchy. Commitments to extend credit, letters of credit and lines of credit: The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. Assets and liabilities recorded at fair value on a recurring basis are as follows.
|  |  |  |  | Quoted Prices in |  | Significant |  | Significant |
|  |  |  |  | Active Markets |  | Other |  | Other |
|  | Balance as of |  | for Identical |  | Observable |  | Unobservable |
|  | September 30, |  | Assets |  | Inputs |  | Inputs |
|  | 2015 |  | (Level 1) |  | (Level 2) |  | (Level 3) |
Debt securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Government-sponsored enterprises (GSEs) |  | $ | 20,823,281 |  | $ | - |  | $ | 20,823,281 |  | $ | - |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |
GSE residential |  |  | 114,914,255 |  |  | - |  |  | 114,914,255 |  |  | - |
Government National Mortgage Association guaranteed |  |  | 9,603,565 |  |  | - |  |  | 9,603,565 |  |  | - |
Municipal securities |  |  | 6,808,566 |  |  | - |  |  | 6,808,566 |  |  | - |
Total securities available-for-sale |  | $ | 152,149,667 |  | $ | - |  | $ | 152,149,667 |  | $ | - |
|  |  |  |  | Quoted Prices in |  | Significant |  | Significant |
|  |  |  |  | Active Markets |  | Other |  | Other |
|  | Balance as of |  | for Identical |  | Observable |  | Unobservable |
|  | December 31, |  | Assets |  | Inputs |  | Inputs |
|  | 2014 |  | (Level 1) |  | (Level 2) |  | (Level 3) |
Debt securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Government-sponsored enterprises (GSEs) |  | $ | 21,106,648 |  | $ | - |  | $ | 21,106,648 |  | $ | - |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |
GSE residential |  |  | 69,852,924 |  |  | - |  |  | 69,852,924 |  |  | - |
Government National Mortgage Association guaranteed |  |  | 5,885,704 |  |  | - |  |  | 5,885,704 |  |  | - |
Municipal securities |  |  | 2,031,222 |  |  | - |  |  | 2,031,222 |  |  | - |
Total securities available-for-sale |  | $ | 98,876,498 |  | $ | - |  | $ | 98,876,498 |  | $ | - |
SmartFinancial has no assets or liabilities whose fair values are measured on a recurring basis using Level 3 inputs. Additionally, there were no transfers between Level 1 and Level 2 in the fair value hierarchy.
Certain assets and liabilities are measured at fair value on a nonrecurring basis, which means the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The tables below present information about assets and liabilities on the balance sheet at September 30, 2015 and December 31, 2014 which are measured at fair value on a nonrecurring basis.
|  |  |  |  | Quoted Prices in |  | Significant |  | Significant |
|  |  |  |  | Active Markets |  | Other |  | Other |
|  | Balance as of |  | for Identical |  | Observable |  | Unobservable |
|  | September 30, |  | Assets |  | Inputs |  | Inputs |
|  | 2015 |  | (Level 1) |  | (Level 2) |  | (Level 3) |
Impaired loans |  | $ | 160,000 |  | $ | - |  | $ | - |  | $ | 160,000 |
Foreclosed assets |  |  | 9,646,549 |  |  | - |  |  | - |  |  | 9,646,549 |
|  |  |  |  | Quoted Prices in |  | Significant |  | Significant |
|  |  |  |  | Active Markets |  | Other |  | Other |
|  | Balance as of |  | for Identical |  | Observable |  | Unobservable |
|  | December 31, |  | Assets |  | Inputs |  | Inputs |
|  | 2014 |  | (Level 1) |  | (Level 2) |  | (Level 3) |
Impaired loans |  | $ | 1,631,000 |  | $ | - |  | $ | - |  | $ | 1,631,000 |
Foreclosed assets |  |  | 4,982,913 |  |  | - |  |  | - |  |  | 4,982,913 |
Loans considered impaired under ASC 310-10-35, “Receivables”, are loans for which, based on current information and events, it is probable that SmartFinancial will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans can be measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral less selling costs if the loan is collateral dependent. The fair value of impaired loans were primarily measured based on the value of the collateral securing these loans. Impaired loans are classified within Level 3 of the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory, and/or accounts receivable. The Company determines the value of the collateral based on independent appraisals performed by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraised values are discounted for costs to sell and may be discounted further based on management’s historical knowledge, changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts by management are subjective and are typically significant unobservable inputs for determining fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors discussed above. Foreclosed assets, consisting of properties obtained through foreclosure or in satisfaction of loans, are initially recorded at fair value less estimated costs to sell upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value less costs to sell. Fair values are generally based on third party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes further discounted based on management’s historical knowledge, and/or changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts are typically significant unobservable inputs for determining fair value. In cases where the carrying amount exceeds the fair value, less estimated costs to sell, a loss is recognized. For Level 3 assets measured at fair value on a non-recurring basis as of September 30, 2015, the significant unobservable inputs used in the fair value measurements are presented below.
|  | Balance as of September 30, 2015 |  | Valuation Technique |  | Significant Other Unobservable Input |  | Weighted Average of Input |
Impaired loans |  | $ | 160,000 |  | Appraisal |  | Appraisal Discounts |  |  | 6.0 | %
Foreclosed assets |  |  | 9,646,549 |  | Appraisal |  | Appraisal Discounts |  |  | 30.1 | %
The carrying amount and estimated fair value of SmartFinancial’s financial instruments at September 30, 2015 and December 31, 2014 are as follows (in thousands):
|  | September 30, 2015 |  | December 31, 2014 |
|  | Carrying |  | Estimated |  | Carrying |  | Estimated |
|  | Amount |  | Fair Value |  | Amount |  | Fair Value |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 89,936 |  | $ | 89,936 |  | $ | 46,739 |  | $ | 46,739 |
Securities available for sale |  |  | 152,150 |  |  | 152,150 |  |  | 98,876 |  |  | 98,876 |
Restricted investments |  |  | 4,451 |  |  | 4,451 |  |  | 2,090 |  |  | 2,090 |
Loans, net |  |  | 706,611 |  |  | 706,084 |  |  | 359,253 |  |  | 360,210 |
Accrued interest receivable |  |  | 2,227 |  |  | 2,227 |  |  | 1,221 |  |  | 1,221 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |
Noninterest-bearing demand deposits |  |  | 123,551 |  |  | 123,551 |  |  | 53,640 |  |  | 53,640 |
Interest-bearing demand deposits |  |  | 313,523 |  |  | 313,523 |  |  | 179,836 |  |  | 179,836 |
Savings deposits |  |  | 61,967 |  |  | 61,967 |  |  | 42,369 |  |  | 42,369 |
Time deposits |  |  | 347,951 |  |  | 349,922 |  |  | 178,963 |  |  | 179,876 |
Federal funds purchased and securities sold under agreements to repurchase |  |  | 18,442 |  |  | 18,442 |  |  | 21,758 |  |  | 21,758 |
Federal Home Loan Bank advances and other borrowings |  |  | 39,278 |  |  | 39,278 |  |  | - |  |  | - |
Accrued interest payable |  |  | 299 |  |  | 299 |  |  | 130 |  |  | 130 |
Unrecognized financial instruments (net of contract amount): |  |  |  |  |  |  |  |  |  |  |  |  |
Commitments to extend credit |  |  | - |  |  | - |  |  | - |  |  | - |
Letters of credit |  |  | - |  |  | - |  |  | - |  |  | - |
Lines of credit |  |  | - |  |  | - |  |  | - |  |  | - |

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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/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=36462937&loc=d3e19207-110258 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13537-108611 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13504-108611 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13433-108611 + Details
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