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Fair Value Measurements
 9 Months Ended
Sep. 30, 2017
Fair Value Disclosures [Abstract]  
Fair Value Measurements
(12) Fair Value Measurements

 

The Company uses fair value measurements to record fair value adjustments to certain financial and nonfinancial assets and liabilities. The FASB ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for the measurement of fair value, and enhances disclosures about fair value measurements. The standard applies whenever other standards require (permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, FASB clarified the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, the standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. As of September 30, 2017 and December 31, 2016, respectively, there were no transfers into or out of Levels 1-3.

 

The fair value hierarchy is as follows:

 

Level 1 – Inputs are unadjusted quoted prices for identical assets or liabilities in active markets.

 

Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, such as interest rates and yield curves that are observable at commonly quoted intervals.

 

Level 3 – Inputs are unobservable inputs for the asset or liability and significant to the fair value. These may be internally developed using the Company’s best information and assumptions that a market participant would consider.

 

ASC Topic 820 also provides guidance on determining fair value when the volume and level of activity for the asset or liability have significantly decreased and on identifying circumstances when a transaction may not be considered orderly.

 

The Company is required to disclose assets and liabilities measured at fair value on a recurring basis separate from those measured at fair value on a nonrecurring basis. Nonfinancial assets measured at fair value on a nonrecurring basis would include foreclosed real estate, long-lived assets, and core deposit intangible assets, which are reviewed when circumstances or other events indicate that impairment may have occurred. 

 

Valuation Methods for Instruments Measured at Fair Value on a Recurring Basis

 

Following is a description of the Company’s valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis:

 

Available-for-Sale Securities

 

The fair value measurements of the Company’s investment securities are determined by a third party pricing service which considers observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. The fair value measurements are subject to independent verification to another pricing source by management each quarter for reasonableness. Securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs.

  

Mortgage Servicing Rights

 

The fair value of mortgage servicing rights is based on the discounted value of estimated future cash flows utilizing contractual cash flows, servicing rate, constant prepayment rate, servicing cost, and discount rate factors. Accordingly, the fair value is estimated based on a valuation model that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost to service, float earnings rates, and other ancillary income, including late fees. The valuation models estimate the present value of estimated future net servicing income. The Company classifies its servicing rights as Level 3.

 

          Fair Value Measurements  
          Quoted Prices              
          in Active              
          Markets for     Other     Significant  
          Identical     Observable     Unobservable  
          Assets     Inputs     Inputs  
(in thousands)   Fair Value     (Level 1)     (Level 2)     (Level 3)  
September 30, 2017                                
Assets:                                
U.S. government and federal agency obligations   $ 12,473     $ 0     $ 12,473     $ 0  
Government sponsored enterprises     32,619       0       32,619       0  
Obligations of states and political subdivisions     47,726       0       47,726       0  
Mortgage-backed securities     119,832       0       119,832       0  
Mortgage servicing rights     2,688       0       0       2,688  
Total   $ 215,338     $ 0     $ 212,650     $ 2,688  
                                 
December 31, 2016                                
Assets:                                
U.S. government and federal agency obligations   $ 13,364     $ 0     $ 13,364     $ 0  
Government sponsored enterprises     32,459       0       32,459       0  
Obligations of states and political subdivisions     42,032       0       42,032       0  
Mortgage-backed securities     126,657       0       126,657       0  
Mortgage servicing rights     2,584       0       0       2,584  
Total   $ 217,096     $ 0     $ 214,512     $ 2,584  

 

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:

  

    Fair Value Measurements Using     Fair Value Measurements Using  
    Significant Unobservable Inputs     Significant Unobservable Inputs  
    (Level 3)     (Level 3)  
    Mortgage Servicing Rights     Mortgage Servicing Rights  
(in thousands)   Three Months Ended September 30,     Nine Months Ended September 30,  
    2017     2016     2017     2016  
Balance at beginning of period   $ 2,766     $ 2,511     $ 2,584     $ 2,847  
Total gains or losses (realized/unrealized):                                
Included in earnings     (139 )     (237 )     (72 )     (690 )
Included in other comprehensive income     0       0       0       0  
Purchases     0       0       0       0  
Sales     0       0       0       0  
Issues     61       96       176       213  
Settlements     0       0       0       0  
Balance at end of period   $ 2,688     $ 2,370     $ 2,688     $ 2,370  

 

The change in valuation of mortgage servicing rights arising from inputs and assumptions decreased $30,000 and increased $289,000 for the three and nine months ended September 30, 2017, respectively, compared to decreases of $52,000 and $197,000 for the three and nine months ended September 30, 2016, respectively.

 

    Quantitative Information about Level 3 Fair Value Measurements  
    Valuation Technique   Unobservable Inputs   Input Value  
            Nine Months Ended September 30,  
            2017     2016  
Mortgage servicing rights    Discounted cash flows   Weighted average constant prepayment rate     10.11 %     13.20 %
        Weighted average note rate     3.86 %     3.88 %
        Weighted average discount rate     9.78 %     9.20 %
        Weighted average expected life (in years)     5.80       4.80  

 

Valuation methods for instruments measured at fair value on a nonrecurring basis

 

Following is a description of the Company’s valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis:

 

Impaired Loans

 

The Company does not record loans at fair value on a recurring basis other than loans that are considered impaired. The net carrying value of impaired loans is generally based on fair values of the underlying collateral obtained through independent appraisals or internal evaluations, or by discounting the total expected future cash flows. Once the fair value of the collateral has been determined and any impairment amount calculated, a specific reserve allocation is made. Because many of these inputs are not observable, the measurements are classified as Level 3. As of September 30, 2017, the Company identified $8.0 million in impaired loans that had specific allowances for losses aggregating $1.7 million. Related to these loans, there was $64,000 and $147,000 in charge-offs recorded during the three and nine months ended September 30, 2017, respectively. As of September 30, 2016, the Company identified $7.1 million in impaired loans that had specific allowances for losses aggregating $1.3 million. Related to these loans, there was $153,000 and $920,000 in charge-offs recorded during the three and nine months ended September 30, 2016, respectively.

 

Other Real Estate and Foreclosed Assets

 

Other real estate and foreclosed assets consisted of loan collateral that has been repossessed through foreclosure. This collateral is comprised of commercial and residential real estate and other non-real estate property, including autos, manufactured homes, and construction equipment. Other real estate assets are recorded as held for sale initially at the lower of the loan balance or fair value of the collateral less estimated selling costs. The Company relies on external appraisals and assessment of property values by internal staff. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgment based on experience and expertise of internal specialists. Subsequent to foreclosure, valuations are updated periodically, and the assets may be written down to reflect a new cost basis. Because many of these inputs are not observable, the measurements are classified as Level 3.

  

Fair Value Measurements Using  
          Quoted Prices                 Three     Nine  
          in Active                 Months     Months  
          Markets for     Other     Significant     Ended     Ended  
          Identical     Observable     Unobservable     September 30,     September 30,  
    Total     Assets     Inputs     Inputs     Total Gains     Total Gains  
(in thousands)   Fair Value     (Level 1)     (Level 2)     (Level 3)     (Losses)*     (Losses)*  
September 30, 2017                                                
Assets:                                                
Impaired loans:                                                
Commercial, financial, & agricultural   $ 1,151     $ 0     $ 0     $ 1,151     $ 0     $ (1 )
Real estate mortgage - residential     3,621       0       0       3,621       (57 )     (122 )
Real estate mortgage - commercial     1,399       0       0       1,399       0       (4 )
Consumer     145       0       0       145       (7 )     (20 )
Total   $ 6,316     $ 0     $ 0     $ 6,316     $ (64 )   $ (147 )
Other real estate and                                                
foreclosed assets   $ 13,177     $ 0     $ 0     $ 13,177     $ (26 )   $ (206 )
                                                 
September 30, 2016                                                
Assets:                                                
Impaired loans:                                                
Commercial, financial, & agricultural   $ 392     $ 0     $ 0     $ 392     $ 0     $ (359 )
Real estate construction - commercial     43       0       0       43       0       0  
Real estate mortgage - residential     3,464       0       0       3,464       (80 )     (295 )
Real estate mortgage - commercial     1,806       0       0       1,806       (71 )     (248 )
Consumer     103       0       0       103       (2 )     (18 )
Total   $ 5,808     $ 0     $ 0     $ 5,808     $ (153 )   $ (920 )
Other real estate and                                                
foreclosed assets   $ 14,438     $ 0     $ 0     $ 14,438     $ 21     $ 70  

 

* Total gains (losses) reported for other real estate and foreclosed assets includes charge-offs, valuation write downs, and net losses taken during the periods reported.