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Fair Value Accounting | 9 Months Ended
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Sep. 30, 2017
Fair Value Accounting [Abstract] |
Fair Value Accounting | NOTE 7 – Fair Value Accounting FASB ASC 820, “Fair Value Measurement and Disclosures,” defines fair value 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. FASB ASC 820 also 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 standard describes three levels of inputs that may be used to measure fair value: Level 1 – Quoted market price in active markets Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include certain debt and equity securities that are traded in an active exchange market. Level 2 – Significant other observable inputs 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 for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include fixed income securities and mortgage-backed securities that are held in the Company’s available-for-sale portfolio and valued by a third-party pricing service, as well as certain impaired loans. Level 3 – Significant unobservable inputs Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. These methodologies may result in a significant portion of the fair value being derived from unobservable data. Following is a description of valuation methodologies used for assets recorded at fair value. Investment Securities Securities available for sale are valued on a recurring basis at quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange or U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities and debentures issued by government sponsored entities, municipal bonds and corporate debt securities. In certain cases where there is limited activity or less transparency around inputs to valuations, securities are classified as Level 3 within the valuation hierarchy. Securities held to maturity are valued at quoted market prices or dealer quotes similar to securities available for sale. The carrying value of Other Investments, such as FHLB stock, approximates fair value based on their redemption provisions. Mortgage Loans Held for Sale Loans held for sale include mortgage loans which are saleable into the secondary mortgage markets and their fair values are estimated using observable quoted market or contracted prices or market price equivalents, which would be used by other market participants. These saleable loans are considered Level 2. Loans The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan may be considered impaired and an allowance for loan losses may be established. 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 the impairment in accordance with FASB ASC 310, “Receivables.” The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value, and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. In accordance with FASB ASC 820, “Fair Value Measurement and Disclosures,” impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company considers the impaired loan as nonrecurring Level 2. The Company’s current loan and appraisal policies require the Bank to obtain updated appraisals on an “as is” basis at renewal, or in the case of an impaired loan, on an annual basis, either through a new external appraisal or an appraisal evaluation. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company considers the impaired loan as nonrecurring Level 3. The fair value of impaired loans may also be estimated using the present value of expected future cash flows to be realized on the loan, which is also considered a Level 3 valuation. These fair value estimates are subject to fluctuations in assumptions about the amount and timing of expected cash flows as well as the choice of discount rate used in the present value calculation. Other Real Estate Owned (“OREO”) OREO, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at the lower of cost or fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs (Level 2). 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. Gains or losses on sale and generally any subsequent adjustments to the value are recorded as a component of real estate owned activity. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company considers the OREO as nonrecurring Level 3. Derivative Financial Instruments The Company estimates the fair value of IRLCs based on the value of the underlying mortgage loan, quoted MBS prices and an estimate of the probability that the mortgage loan will fund within the terms of the IRLC, net of commission expenses (Level 2). The Company estimates the fair value of forward sales commitments based on quoted MBS prices (Level 2). Assets and Liabilities Recorded at Fair Value on a Recurring Basis The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016.
|  |  |  |  |  |  | September 30, 2017
(dollars in thousands) |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets |  |  |  |  |  |  |  |  |
Securities available for sale |  |  |  |  |  |  |  |  |
US government agencies |  | $ | - |  | 8,710 |  | - |  | 8,710
SBA securities |  |  | - |  | 4,339 |  | - |  | 4,339
State and political subdivisions |  |  | - |  | 20,357 |  | - |  | 20,357
Mortgage-backed securities |  |  | - |  | 45,034 |  | - |  | 45,034
Mortgage loans held for sale |  |  | - |  | 9,124 |  | - |  | 9,124
Interest rate lock commitments |  |  | - |  | 343 |  | - |  | 343
MBS forward sales commitments |  |  | - |  | 46 |  | - |  | 46
Total assets measured at fair value on a recurring basis |  | $ | - |  | 87,953 |  | - |  | 87,953
|  |  |  |  |  |  | December 31, 2016
(dollars in thousands) |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets |  |  |  |  |  |  |  |  |
Securities available for sale: |  |  |  |  |  |  |  |  |
US government agencies |  | $ | - |  | 6,159 |  | - |  | 6,159
SBA securities |  |  | - |  | 1,437 |  | - |  | 1,437
State and political subdivisions |  |  | - |  | 20,474 |  | - |  | 20,474
Mortgage-backed securities |  |  | - |  | 36,410 |  | - |  | 36,410
Mortgage loans held for sale |  |  | - |  | 7,801 |  | - |  | 7,801
Interest rate lock commitments |  |  | - |  | 256 |  | - |  | 256
Total assets measured at fair value on a recurring basis |  | $ | - |  | 72,537 |  | - |  | 72,537
Liabilities |  |  |  |  |  |  |  |  |
MBS forward sales commitments |  | $ | - |  | 3 |  | - |  | 3
Total liabilities measured at fair value on a recurring basis |  | $ | - |  | 3 |  | - |  | 3
The Company has no liabilities carried at fair value or measured at fair value on a recurring basis as of September 30, 2017. Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis The Company is predominantly an asset based lender with real estate serving as collateral on more than 80% of loans as of September 30, 2017. Loans which are deemed to be impaired are valued net of the allowance for loan losses, and other real estate owned is valued at the lower of cost or net realizable value of the underlying real estate collateral. Such market values are generally obtained using independent appraisals, which the Company considers to be level 2 inputs. The tables below present the recorded amount of assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2017 and December 31, 2016.
|  |  |  |  |  |  | As of September 30, 2017
(dollars in thousands) |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets |  |  |  |  |  |  |  |  |
Impaired loans |  | $ | - |  | 2,669 |  | 6,146 |  | 8,815
Other real estate owned |  |  | - |  | 307 |  | 113 |  | 420
Total assets measured at fair value on a nonrecurring basis |  | $ | - |  | 2,976 |  | 6,259 |  | 9,235
|  |  |  |  |  |  | As of December 31, 2016
|  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets |  |  |  |  |  |  |  |  |
Impaired loans |  | $ | - |  | 4,075 |  | 4,438 |  | 8,513
Other real estate owned |  |  | - |  | 526 |  | 113 |  | 639
Total assets measured at fair value on a nonrecurring basis |  | $ | - |  | 4,601 |  | 4,551 |  | 9,152
The Company has no liabilities carried at fair value or measured at fair value on a nonrecurring basis as of September 30, 2017 and December 31, 2016. For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of September 30, 2017, the significant unobservable inputs used in the fair value measurements were as follows:
| Valuation Technique | Significant Unobservable Inputs | Range of Inputs
Impaired loans | Appraised Value/ Discounted Cash Flows | Discounts to appraisals or cash flows for estimated holding and/or selling costs or age of appraisal | 0-25%
Other real estate owned | Appraised Value/ Comparable Sales | Discounts to appraisals for estimated holding or selling costs | 0-25%
Fair Value of Financial Instruments Financial instruments require disclosure of fair value information, whether or not recognized in the consolidated balance sheets, when it is practical to estimate the fair value. A financial instrument is defined as cash, evidence of an ownership interest in an entity or a contractual obligation which requires the exchange of cash. Certain items are specifically excluded from the disclosure requirements, including the Company’s common stock, premises and equipment and other assets and liabilities. The following is a description of valuation methodologies used to estimate fair value for certain other financial instruments. Fair value approximates carrying value for the following financial instruments due to the short-term nature of the instrument: cash and due from banks, federal funds sold, federal funds purchased, and securities sold under agreement to repurchase. Deposits – Fair value for demand deposit accounts and interest-bearing accounts with no fixed maturity date is equal to the carrying value. The fair value of certificate of deposit accounts are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments. FHLB Advances and Other Borrowings – Fair value for FHLB advances and other borrowings are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments. Junior subordinated debentures – Fair value for junior subordinated debentures are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments. The Company has used management’s best estimate of fair value based on the above assumptions. Thus, the fair values presented may not be the amounts that could be realized in an immediate sale or settlement of the instrument. In addition, any income taxes or other expenses, which would be incurred in an actual sale or settlement, are not taken into consideration in the fair value presented. The estimated fair values of the Company’s financial instruments at September 30, 2017 and December 31, 2016 are as follows:
|  |  |  |  |  |  |  |  | September 30, 2017
|  | Carrying |  | Fair |  |  |  |  |  |
(dollars in thousands) |  | Amount |  | Value |  | Level 1 |  | Level 2 |  | Level 3
Financial Assets: |  |  |  |  |  |  |  |  |  |  |
Other investments, at cost |  | $ | 3,064 |  | 3,064 |  | - |  | - |  | 3,064
Loans, net |  |  | 1,312,160 |  | 1,315,125 |  | - |  | 2,669 |  | 1,312,456
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 1,342,577 |  | 1,246,252 |  | - |  | 1,246,252 |  | -
FHLB and other borrowings |  |  | 39,200 |  | 40,452 |  | - |  | 40,452 |  | -
Junior subordinated debentures |  |  | 13,403 |  | 12,595 |  | - |  | 12,595 |  | -
|  |  |  |  |  |  |  |  | December 31, 2016
|  | Carrying |  | Fair |  |  |  |  |  |
|  | Amount |  | Value |  | Level 1 |  | Level 2 |  | Level 3
Financial Assets: |  |  |  |  |  |  |  |  |  |  |
Other investments, at cost |  | $ | 5,742 |  | 5,742 |  | - |  | - |  | 5,742
Loans, net |  |  | 1,148,789 |  | 1,149,527 |  | - |  | 4,075 |  | 1,145,452
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 1,091,151 |  | 1,004,923 |  | - |  | 1,004,923 |  | -
FHLB and other borrowings |  |  | 115,200 |  | 115,825 |  | - |  | 115,825 |  | -
Junior subordinated debentures |  |  | 13,403 |  | 12,026 |  | - |  | 12,026 |  | -

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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 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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