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Fair Value Disclosures and Reporting, the Fair Value Option and Fair Value Measurements | 3 Months Ended
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Mar. 31, 2020
Fair Value Disclosures [Abstract] |
Fair Value | Note 8 – Fair Value Disclosures and Reporting, the Fair Value Option and Fair Value Measurements FASB’s standards on financial instruments, and on fair value measurements and disclosures, require public business entities to disclose in their financial statement footnotes the estimated fair values of financial instruments. In addition to disclosure requirements, FASB’s standard on investments requires that our debt securities that are classified as available for sale and any equity securities which have readily determinable fair values be measured and reported at fair value in our statement of financial position. Certain impaired loans are also reported at fair value, as explained in greater detail below, and foreclosed assets are carried at the lower of cost or fair value. FASB’s standard on financial instruments permits companies to report certain other financial assets and liabilities at fair value, but we have not elected the fair value option for any of those financial instruments. Fair value measurement and disclosure standards also establish a framework for measuring fair values. 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. Further, the standards establish a fair value hierarchy that encourages an entity to maximize the use of observable inputs and limit the use of unobservable inputs when measuring fair values. The standards describe three levels of inputs that may be used to measure fair values:
| · |  | Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity 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 assumptions about the factors that market participants would likely consider in pricing an asset or liability.
Fair value estimates are made at a specific point in time based on relevant market data and information about the financial instruments. Fair value disclosures for deposits include demand deposits, which are by definition equal to the amount payable on demand at the reporting date. Fair value calculations for loans and leases reflect exit pricing, and incorporate our assumptions with regard to the impact of prepayments on future cash flows and credit quality adjustments based on risk characteristics of various financial instruments, among other things. Since the estimates are subjective and involve uncertainties and matters of significant judgment they cannot be determined with precision, and changes in assumptions could significantly alter the fair values presented. Estimated fair values for the Company’s financial instruments are as follows, as of the dates noted: Fair Value of Financial Instruments (dollars in thousands, unaudited)
|  |  | March 31, 2020
|  |  |  |  | Fair Value Measurements
|  | Carrying Amount |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Total
Financial assets: |  |  |  |  |  |
Cash and cash equivalents |  | $ | 106,992 |  | $ | 106,992 |  | $ | — |  | $ | — |  | $ | 106,992
Investment securities available for sale |  |  | 620,154 |  |  | — |  |  | 620,154 |  |  | — |  |  | 620,154
Loans and leases, net held for investment |  |  | 1,787,101 |  |  | — |  |  | — |  |  | 1,834,373 |  |  | 1,834,373
Collateral dependent impaired loans |  |  | 2,212 |  |  | — |  |  | 2,212 |  |  | — |  |  | 2,212
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 2,179,391 |  |  | 704,700 |  |  | 1,474,482 |  |  | — |  |  | 2,179,182
Repurchase agreements |  |  | 29,361 |  |  | — |  |  | 29,361 |  |  | — |  |  | 29,361
Short term borrowings |  |  | 74,100 |  |  | — |  |  | 74,100 |  |  | — |  |  | 74,100
Subordinated debentures |  |  | 34,990 |  |  | — |  |  | 29,911 |  |  | — |  |  | 29,911
|  |  | December 31, 2019
|  |  |  |  | Fair Value Measurements
|  | Carrying Amount |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Total
Financial assets: |  |  |  |  |  |
Cash and cash equivalents |  | $ | 80,077 |  | $ | 80,076 |  | $ | — |  | $ | — |  | $ | 80,076
Investment securities available for sale |  |  | 600,799 |  |  | — |  |  | 600,799 |  |  | — |  |  | 600,799
Loans and leases, net held for investment |  |  | 1,753,846 |  |  | — |  |  | — |  |  | 1,761,461 |  |  | 1,761,461
Collateral dependent impaired loans |  |  | 1,692 |  |  | — |  |  | 1,692 |  |  | — |  |  | 1,692
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 2,168,374 |  |  | 690,950 |  |  | 1,477,497 |  |  | — |  |  | 2,168,447
Repurchase agreements |  |  | 25,711 |  |  | — |  |  | 25,711 |  |  | — |  |  | 25,711
Short term borrowings |  |  | 20,000 |  |  | — |  |  | 20,000 |  |  | — |  |  | 20,000
Subordinated debentures |  |  | 34,945 |  |  | — |  |  | 30,564 |  |  | — |  |  | 30,564
For financial asset categories that were carried on our balance sheet at fair value as of March 31, 2020 and December 31, 2019, the Company used the following methods and significant assumptions:
| · |  | Investment securities: Fair values are determined by obtaining quoted prices on nationally recognized securities exchanges or by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities by relying on their relationship to other benchmark quoted securities.
| · |  | Collateral-dependent impaired loans: Collateral-dependent impaired loans are carried at fair value when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the original loan agreement and the loan has been written down to the fair value of its underlying collateral, net of expected disposition costs where applicable.
| · |  | Foreclosed assets: Repossessed real estate (known as other real estate owned, or “OREO”) and other foreclosed assets are carried at the lower of cost or fair value. Fair value is the appraised value less expected selling costs for OREO and some other assets such as mobile homes; fair values for any other foreclosed assets are represented by estimated sales proceeds as determined using reasonably available sources. Foreclosed assets for which appraisals can be feasibly obtained are periodically measured for impairment using updated appraisals. Fair values for other foreclosed assets are adjusted as necessary, subsequent to a periodic re-evaluation of expected cash flows and the timing of resolution. If impairment is determined to exist, the book value of a foreclosed asset is immediately written down to its estimated impaired value through the income statement, thus the carrying amount is equal to the fair value and there is no valuation allowance.
Assets reported at fair value on a recurring basis are summarized below: Fair Value Measurements – Recurring (dollars in thousands, unaudited)
|  | Fair Value Measurements at March 31, 2020, using |  |  |
|  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Total |  | Realized Gain/(Loss) (Level 3)
Securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government agencies |  | $ | — |  | $ | 11,742 |  | $ | — |  | $ | 11,742 |  | $ | —
Mortgage-backed securities |  |  | — |  |  | 405,246 |  |  | — |  |  | 405,246 |  |  | —
State and political subdivisions |  |  | — |  |  | 203,166 |  |  | — |  |  | 203,166 |  |  | —
Total available-for-sale securities |  | $ | — |  | $ | 620,154 |  | $ | — |  | $ | 620,154 |  | $ | —
|  | Fair Value Measurements at December 31, 2019, using |  |  |
|  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Total |  | Realized Gain/(Loss) (Level 3)
Securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government agencies |  | $ | — |  | $ | 12,145 |  | $ | — |  | $ | 12,145 |  | $ | —
Mortgage-backed securities |  |  | — |  |  | 400,389 |  |  | — |  |  | 400,389 |  |  | —
State and political subdivisions |  |  | — |  |  | 188,265 |  |  | — |  |  | 188,265 |  |  | —
Total available-for-sale securities |  | $ | — |  | $ | 600,799 |  | $ | — |  | $ | 600,799 |  | $ | —
Assets reported at fair value on a nonrecurring basis are summarized below: Fair Value Measurements – Nonrecurring (dollars in thousands, unaudited)
|  | Fair Value Measurements at March 31, 2020, using
|  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Total
Impaired loans |  |  |  |  |  |  |  |  |  |  |  |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential construction |  | $ | — |  | $ | — |  | $ | — |  | $ | —
Other construction/land |  |  | — |  |  | — |  |  | — |  |  | —
1-4 family - closed-end |  |  | — |  |  | — |  |  | — |  |  | —
Equity lines |  |  | — |  |  | — |  |  | — |  |  | —
Multi-family residential |  |  | — |  |  | — |  |  | — |  |  | —
Commercial real estate - owner occupied |  |  | — |  |  | 86 |  |  | — |  |  | 86
Commercial real estate - non-owner occupied |  |  | — |  |  | 2,126 |  |  | — |  |  | 2,126
Farmland |  |  | — |  |  | — |  |  | — |  |  | —
Total real estate |  |  | — |  |  | 2,212 |  |  | — |  |  | 2,212
Agricultural |  |  | — |  |  | — |  |  | — |  |  | —
Commercial and industrial |  |  | — |  |  | — |  |  | — |  |  | —
Consumer loans |  |  | — |  |  | — |  |  | — |  |  | —
Total impaired loans |  | $ | — |  | $ | 2,212 |  | $ | — |  | $ | 2,212
Foreclosed assets |  | $ | — |  | $ | 766 |  | $ | — |  | $ | 766
Total assets measured on a nonrecurring basis |  | $ | — |  | $ | 2,978 |  | $ | — |  | $ | 2,978
|  | Fair Value Measurements at December 31, 2019, using
|  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Total
Impaired loans |  |  |  |  |  |  |  |  |  |  |  |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential construction |  | $ | — |  | $ | — |  | $ | — |  | $ | —
Other construction/land |  |  | — |  |  | — |  |  | — |  |  | —
1-4 family - closed-end |  |  | — |  |  | — |  |  | — |  |  | —
Equity lines |  |  | — |  |  | — |  |  | — |  |  | —
Multi-family residential |  |  | — |  |  | — |  |  | — |  |  | —
Commercial real estate - owner occupied |  |  | — |  |  | 88 |  |  | — |  |  | 88
Commercial real estate - non-owner occupied |  |  | — |  |  | 1,605 |  |  | — |  |  | 1,605
Farmland |  |  | — |  |  | — |  |  | — |  |  | —
Total real estate |  |  | — |  |  | 1,693 |  |  | — |  |  | 1,693
Agricultural |  |  | — |  |  | — |  |  | — |  |  | —
Commercial and industrial |  |  | — |  |  | — |  |  | — |  |  | —
Consumer loans |  |  | — |  |  | — |  |  | — |  |  | -
Total impaired loans |  | $ | — |  | $ | 1,693 |  | $ | — |  | $ | 1,693
Foreclosed assets |  | $ | — |  | $ | 800 |  | $ | — |  | $ | 800
Total assets measured on a nonrecurring basis |  | $ | — |  | $ | 2,493 |  | $ | — |  | $ | 2,493
The table above includes collateral-dependent impaired loan balances for which a specific reserve has been established or on which a write-down has been taken. Information on the Company’s total impaired loan balances and specific loss reserves associated with those balances is included in Note 11 below. The unobservable inputs are based on Management’s best estimates of appropriate discounts in arriving at fair market value. Adjusting any of those inputs could result in a significantly lower or higher fair value measurement. For example, an increase or decrease in actual loss rates would create a directionally opposite change in the fair value of unsecured impaired loans.

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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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