XML 30 R19.htm IDEA: XBRL DOCUMENT v3.8.0.1
Fair Value Measurements
 3 Months Ended
Mar. 31, 2018
Fair Value Disclosures [Abstract]  
Fair Value Measurements
(12) Fair Value Measurements

 

Fair value represents the amount expected to be received to sell an asset or paid to transfer a liability in its principal or most advantageous market in an orderly transaction between market participants at the measurement date.

 

Depending on the nature of the asset or liability, the Company uses various valuation methodologies and assumptions to estimate fair value. The measurement of fair value under US GAAP uses a hierarchy intended to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows. As of March 31, 2018 and December 31, 2017, 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. A quoted price in an active market provides the most reliable evidence of fair value and is used to measure fair value whenever available. A contractually binding sales price also provides reliable evidence of fair value.

 

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.

 

In accordance with fair value accounting guidance, the Company measures, records, and reports various types of assets and liabilities at fair value on either a recurring or non-recurring basis in the Consolidated Financial Statements. 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 Assets and Labilities 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)  
March 31, 2018                                
Assets:                                
U.S. Treasury   $ 1,939     $ 1,939       0     $ 0  
U.S. government and federal agency obligations     11,493       0       11,493       0  
Government sponsored enterprises     38,177       0       38,177       0  
Obligations of states and political subdivisions     41,604       0       41,604       0  
Mortgage-backed securities     122,507       0       122,507       0  
Mortgage servicing rights     2,781       0       0       2,781  
Total   $ 218,501     $ 1,939     $ 213,781     $ 2,781  
December 31, 2017                                
Assets:                                
U.S. Treasury   $ 1,967     $ 1,967       0     $ 0  
U.S. government and federal agency obligations     12,073       0       12,073       0  
Government sponsored enterprises     36,897       0       36,897       0  
Obligations of states and political subdivisions     46,656       0       46,656       0  
Mortgage-backed securities     128,949       0       128,949       0  
Mortgage servicing rights     2,713       0       0       2,713  
Total   $ 229,255     $ 1,967     $ 224,575     $ 2,713  
 

 

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

 

    Fair Value Measurements Using  
    Significant Unobservable Inputs  
    (Level 3)  
    Mortgage Servicing Rights  
(in thousands)   Three Months Ended March 31,  
    2018     2017  
Balance at beginning of period   $ 2,713     $ 2,584  
Total gains or losses (realized/unrealized):                
Included in earnings     18       244  
Included in other comprehensive income     0       0  
Purchases     0       0  
Sales     0       0  
Issues     50       49  
Settlements     0       0  
Balance at end of period   $ 2,781     $ 2,877  
 

 

The change in valuation of mortgage servicing rights arising from inputs and assumptions increased $103,000 and $375,000 for the three months ended March 31, 2018 and 2017, respectively.

 

    Quantitative Information about Level 3 Fair Value Measurements      
    Valuation Technique   Unobservable Inputs   Input Value  
            Three Months Ended March 31,  
            2018     2017  
Mortgage servicing rights    Discounted cash flows   Weighted average constant prepayment rate     9.07 %     8.29 %
        Weighted average note rate     3.87 %     3.85 %
        Weighted average discount rate     10.39 %     9.72 %
        Weighted average expected life (in years)     6.20       6.50  
 

 

Valuation methods for Assets and Liabilities 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:

 

Collateral dependent impaired loans

 

While the overall loan portfolio is not carried at fair value, the Company periodically records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral dependent loans when establishing the allowance for loan losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. In determining the value of real estate collateral, the Company relies on external and internal appraisals of property values depending on the size and complexity of the real estate collateral. The Company maintains staff that is trained to perform in-house evaluations and also review third party appraisal reports for reasonableness. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgments based on the experience and expertise of internal specialists. Values of all loan collateral are regularly reviewed by senior loan committee. Because many of these inputs are not observable, the measurements are classified as Level 3. As of March 31, 2018, the Company identified $3.8 million in collateral dependent impaired loans that had specific allowances for losses aggregating $952,000. Related to these loans, there was $57,000 in charge-offs recorded during the three months ended March 31, 2018. As of March 31, 2017, the Company identified $2.5 million in collateral dependent impaired loans that had specific allowances for losses aggregating $677,000. Related to these loans, there was $20,000 in charge-offs recorded during the three months ended March 31, 2017.

 

Other Real Estate and Foreclosed Assets

 

Other real estate owned (OREO) 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. Subsequent to foreclosure, these assets initially are carried at fair value of the collateral less estimated selling costs. Fair value, when recorded, is generally based upon appraisals by approved, independent state certified appraisers. Like impaired loans, appraisals on OREO may be discounted based on the Company’s historical knowledge, changes in market conditions from the time of appraisal or other information available. During the holding period, 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  
          in Active                 Months  
          Markets for     Other     Significant     Ended  
          Identical     Observable     Unobservable     March 31,  
    Total     Assets     Inputs     Inputs     Total Gains  
(in thousands)   Fair Value     (Level 1)     (Level 2)     (Level 3)     (Losses)*  
March 31, 2018                                        
Assets:                                        
Collateral dependent impaired loans:                                                
Commercial, financial, & agricultural   $ 1,369     $ 0     $ 0     $ 1,369     $ 0  
Real estate construction - commercial     0       0       0       0       (27 )
Real estate mortgage - residential     886       0       0       886       0  
Real estate mortgage - commercial     595       0       0       595       (20 )
Consumer     0       0       0       0       (10 )
Total   $ 2,850     $ 0     $ 0     $ 2,850     $ (57 )
Other real estate and foreclosed assets   $ 13,239     $ 0     $ 0     $ 13,239     $ 1  
                                         
March 31, 2017                                        
Assets:                                        
Collateral dependent impaired loans:                                        
Commercial, financial, & agricultural   $ 339     $ 0     $ 0     $ 339     $ (1 )
Real estate mortgage - residential     1,261       0       0       1,261       (3 )
Real estate mortgage - commercial     220       0       0       220       (4 )
Consumer     0       0       0       0       (12 )
Total   $ 1,820     $ 0     $ 0     $ 1,820     $ (20 )
Other real estate and foreclosed assets   $ 13,625     $ 0     $ 0     $ 13,625     $ 15  
 

 

* 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.