XML 23 R13.htm IDEA: XBRL DOCUMENT v3.8.0.1
6. Fair Value
 9 Months Ended
Sep. 30, 2017
Fair Value Disclosures [Abstract]  
6. Fair Value

The Company is required to disclose fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate that value. The assumptions used in the estimation of the fair value of the Company’s financial instruments are detailed below. Where quoted prices are not available, fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather a good faith estimate of the increase or decrease in the value of financial instruments held by the Company since purchase, origination or issuance.

 

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

 

● Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.

● Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

● Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

 

Cash and Cash Equivalents

For cash, due from banks and interest-bearing deposits, the carrying amount is a reasonable estimate of fair value. Cash and cash equivalents are reported in the Level 1 fair value category.

 

Investment Securities Available for Sale

Fair values of investment securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges when available. If quoted prices are not available, fair value is determined using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Fair values for investment securities with quoted market prices are reported in the Level 1 fair value category. Fair value measurements obtained from independent pricing services are reported in the Level 2 fair value category. All other fair value measurements are reported in the Level 3 fair value category.

 

Other Investments

For other investments, the carrying value is a reasonable estimate of fair value. Other investments are reported in the Level 3 fair value category.

 

Mortgage Loans Held for Sale

Mortgage loans held for sale are carried at the lower of aggregate cost or market value. The cost of mortgage loans held for sale approximates the market value. Mortgage loans held for sale are reported in the Level 3 fair value category.

 

 Loans

The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. For variable rate loans, the carrying amount is a reasonable estimate of fair value. Loans are reported in the Level 3 fair value category, as the pricing of loans is more subjective than the pricing of other financial instruments.

 

Cash Surrender Value of Life Insurance

For cash surrender value of life insurance, the carrying value is a reasonable estimate of fair value. Cash surrender value of life insurance is reported in the Level 2 fair value category.

 

Other Real Estate

The fair value of other real estate is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. Other real estate is reported in the Level 3 fair value category.

 

Deposits

The fair value of demand deposits, interest-bearing demand deposits and savings is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. Deposits are reported in the Level 2 fair value category.

 

Securities Sold Under Agreements to Repurchase

For securities sold under agreements to repurchase, the carrying value is a reasonable estimate of fair value. Securities sold under agreements to repurchase are reported in the Level 2 fair value category.

 

Federal Home Loan Bank (“FHLB”) Borrowings

The fair value of FHLB borrowings is estimated based upon discounted future cash flows using a discount rate comparable to the current market rate for such borrowings. FHLB borrowings are reported in the Level 2 fair value category.

 

Junior Subordinated Debentures

Because the Company’s junior subordinated debentures were issued at a floating rate, the carrying amount is a reasonable estimate of fair value. Junior subordinated debentures are reported in the Level 2 fair value category.

 

Commitments to Extend Credit and Standby Letters of Credit

Commitments to extend credit and standby letters of credit are generally short-term and at variable interest rates. Therefore, both the carrying value and estimated fair value associated with these instruments are immaterial.

 

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

 

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include deferred income taxes and premises and equipment. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

 

The table below presents the balance of securities available for sale, which are measured at fair value on a recurring basis by level within the fair value hierarchy, as of September 30, 2017 and December 31, 2016.

 

(Dollars in thousands)                        
    September 30, 2017  
    Fair Value Measurements    

Level 1
Valuation

     Level 2
Valuation		    

Level 3
Valuation

  
Mortgage-backed securities   $ 56,893       -       56,893       -  
U.S. Government                                
sponsored enterprises   $ 40,954       -       40,954       -  
State and political subdivisions   $ 136,109       -       136,109       -  
Corporate bonds   $ 1,530       -       1,530       -  
Trust preferred securities   $ 250       -       -       250  

 

(Dollars in thousands)                        
    December 31, 2016  
    Fair Value Measurements    

Level 1

Valuation

    

Level 2

Valuation

    

Level 3

Valuation

  
Mortgage-backed securities   $ 67,585       -       67,585       -  
U.S. Government                                
sponsored enterprises   $ 38,222       -       38,222       -  
State and political subdivisions   $ 141,856       -       141,856       -  
Corporate bonds   $ 1,533       -       1,533       -  
Trust preferred securities   $ 750       -       -       750  

 

 

The following is an analysis of fair value measurements of investment securities available for sale using Level 3, significant unobservable inputs, for the nine months ended September 30, 2017.

 

(Dollars in thousands)      
    Investment Securities Available for Sale  
    Level 3 Valuation  
Balance, beginning of period   $ 750  
Change in book value     -  
Change in gain/(loss) realized and unrealized     -  
Purchases/(sales and calls)     (500 )
Transfers in and/or (out) of Level 3     -  
Balance, end of period   $ 250  
         
Change in unrealized gain/(loss) for assets still held in Level 3   $ -  

 

The fair value measurements for mortgage loans held for sale, impaired loans and other real estate on a non-recurring basis at September 30, 2017 and December 31, 2016 are presented below. The fair value measurement process uses certified appraisals and other market-based information; however, in many cases, it also requires significant input based on management’s knowledge of, and judgment about, current market conditions, specific issues relating to the collateral and other matters. As a result, all fair value measurements for impaired loans and other real estate are considered Level 3.

 

(Dollars in thousands)                        
    Fair Value Measurements September 30, 2017    

Level 1

Valuation

    

Level 2

Valuation

     Level 3 Valuation  
Mortgage loans held for sale   $ 2,623       -       -       2,623  
Impaired loans   $ 26,453       -       -       26,453  
Other real estate   $ -       -       -       -  

 

(Dollars in thousands)                        
    Fair Value Measurements December 31, 2016    

Level 1

Valuation

    

Level 2

Valuation

     Level 3 Valuation  
Mortgage loans held for sale   $ 5,709       -       -       5,709  
Impaired loans   $ 25,772       -       -       25,772  
Other real estate   $ 283       -       -       283  

 

(Dollars in thousands)                          
    Fair Value September 30, 2017     Fair Value December 31, 2016   Valuation Technique   Significant Unobservable Inputs    

General

Range of Significant Unobservable Input Values

  
Mortgage loans held for sale   $ 2,623       5,709   Rate lock commitment     N/A       N/A  
Impaired loans   $ 26,453       25,772  

Appraised value

and discounted cash flows

   Discounts to reflect current market conditions and ultimate collectability        0 - 25%  
Other real estate   $ -       283   Appraised value   Discounts to reflect current market conditions and estimated costs to sell        0 - 25%  
                                   

 

 

The carrying amount and estimated fair value of financial instruments at September 30, 2017 and December 31, 2016 are as follows:

 

(Dollars in thousands)                              
          Fair Value Measurements at September 30, 2017  
    Carrying Amount     Level 1     Level 2     Level 3     Total  
Assets:                              
Cash and cash equivalents   $ 93,256       93,256       -       -       93,256  
Investment securities available for sale   $ 235,736       -       235,486       250       235,736  
Other investments   $ 2,680       -       -       2,680       2,680  
Mortgage loans held for sale   $ 2,623       -       -       2,623       2,623  
Loans, net   $ 740,593       -       -       745,481       745,481  
Cash surrender value of life insurance   $ 15,452       -       15,452       -       15,452  
                                         
Liabilities:                                        
Deposits   $ 901,639       -       -       890,957       890,957  
Securities sold under agreements                                        
to repurchase   $ 53,307       -       53,307       -       53,307  
FHLB borrowings   $ 20,000       -       19,967       -       19,967  
Junior subordinated debentures   $ 20,619       -       20,619       -       20,619  

 

(Dollars in thousands)                              
          Fair Value Measurements at December 31, 2016  
    Carrying Amount     Level 1     Level 2     Level 3     Total  
Assets:                              
Cash and cash equivalents   $ 70,094       70,094       -       -       70,094  
Investment securities available for sale   $ 249,946       -       249,196       750       249,946  
Other investments   $ 2,635       -       -       2,635       2,635  
Mortgage loans held for sale   $ 5,709       -       -       5,709       5,709  
Loans, net   $ 716,261       -       -       720,675       720,675  
Cash surrender value of life insurance   $ 14,952       -       14,952       -       14,952  
                                         
Liabilities:                                        
Deposits   $ 892,918       -       -       884,510       884,510  
Securities sold under agreements                                        
to repurchase   $ 36,434       -       36,434       -       36,434  
FHLB borrowings   $ 20,000       -       18,864       -       18,864  
Junior subordinated debentures   $ 20,619       -       20,619       -       20,619