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6. Fair Value | 3 Months Ended
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Mar. 31, 2020
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 methods of determining the fair value of assets and liabilities presented in this note are consistent with methodologies disclosed in Note 16 of the Company’s 2019 Form 10-K, except for the valuation of loans which was impacted by the adoption of ASU No. 2016-01. 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 In accordance with ASU No. 2016-01, the fair value of loans, excluding previously presented impaired loans measured at fair value on a non-recurring basis, is estimated using discounted cash flow analyses. The discount rates used to determine fair value use interest rate spreads that reflect factors such as liquidity, credit, and nonperformance risk of the loans. 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 3 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. 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 3 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 March 31, 2020 and December 31, 2019.
(Dollars in thousands) |  |  |  |  |  |  |  |
|  | March 31, 2020
|  | Fair Value Measurements |  | Level 1 Valuation |  | Level 2 Valuation |  | Level 3 Valuation
Mortgage-backed securities |  | $ | 84,076 |  |  |  | — |  |  |  | 84,076 |  |  |  | — |
U.S. Government |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
sponsored enterprises |  | $ | 26,908 |  |  |  | — |  |  |  | 26,908 |  |  |  | — |
State and political subdivisions |  | $ | 90,280 |  |  |  | — |  |  |  | 90,280 |  |  |  | — |
Trust preferred securities |  | $ | 250 |  |  |  | — |  |  |  | — |  |  |  | 250 |
|  | December 31, 2019
|  | Fair Value Measurements |  | Level 1 Valuation |  | Level 2 Valuation |  | Level 3 Valuation
Mortgage-backed securities |  | $ | 78,956 |  |  |  | — |  |  |  | 78,956 |  |  |  | — |
U.S. Government |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
sponsored enterprises |  | $ | 28,397 |  |  |  | — |  |  |  | 28,397 |  |  |  | — |
State and political subdivisions |  | $ | 88,143 |  |  |  | — |  |  |  | 88,143 |  |  |  | — |
Trust preferred securities |  | $ | 250 |  |  |  | — |  |  |  | — |  |  |  | 250 |
The following is an analysis of fair value measurements of investment securities available for sale using Level 3, significant unobservable inputs, for the three months ended March 31, 2020.
(Dollars in thousands) |  |
|  | Investment Securities Available for Sale
|  | Level 3 Valuation
Balance, beginning of period |  | $ | 250 |
Change in book value |  |  | — |
Change in gain/(loss) realized and unrealized |  |  | — |
Purchases/(sales and calls) |  |  | — |
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 March 31, 2020 and December 31, 2019 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 March 31, 2020 |  | Level 1 Valuation |  | Level 2 Valuation |  | Level 3 Valuation
Mortgage loans held for sale |  | $ | 6,149 |  |  |  | — |  |  |  | — |  |  |  | 6,149 |
Impaired loans |  | $ | 21,730 |  |  |  | — |  |  |  | — |  |  |  | 21,730 |
Other real estate |  | $ | — |  |  |  | — |  |  |  | — |  |  |  | — |
(Dollars in thousands) |  |  |  |  |  |  |  |
|  | Fair Value Measurements December 31, 2019 |  | Level 1 Valuation |  | Level 2 Valuation |  | Level 3 Valuation
Mortgage loans held for sale |  | $ | 4,417 |  |  |  | — |  |  |  | — |  |  |  | 4,417 |
Impaired loans |  | $ | 20,347 |  |  |  | — |  |  |  | — |  |  |  | 20,347 |
Other real estate |  | $ | — |  |  |  | — |  |  |  | — |  |  |  | — |
(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |
|  | Fair Value September 30, 2019 |  |  | Fair Value December 31, 2018 |  | Valuation Technique |  | Significant Unobservable Inputs |  |  | General Range of Significant Unobservable Input Values |
Mortgage loans held for sale |  | $ | 6,149 |  |  |  | 4,417 |  | Rate lock commitment |  | N/A |  |  |  |  | N/A |
Impaired loans |  | $ | 21,730 |  |  |  | 20,347 |  | Appraised value and discounted cash flows |  | Discounts to reflect current market conditions and ultimate collectability |  |  |  |  | 0 - 25% |
Other real estate |  | $ | — |  |  |  | — |  | 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 March 31, 2020 and December 31, 2019 are as follows:
(Dollars in thousands) |  |  |  |  |  |  |  |  |  |
|  |  |  | Fair Value Measurements at March 31, 2020
|  | Carrying Amount |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets: |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 103,519 |  |  |  | 103,519 |  |  |  | — |  |  |  | — |  |  |  | 103,519 |
Investment securities available for sale |  | $ | 201,514 |  |  |  | — |  |  |  | 201,264 |  |  |  | 250 |  |  |  | 201,514 |
Other investments |  | $ | 7,229 |  |  |  | — |  |  |  | — |  |  |  | 7,229 |  |  |  | 7,229 |
Mortgage loans held for sale |  | $ | 6,149 |  |  |  | — |  |  |  | — |  |  |  | 6,149 |  |  |  | 6,149 |
Loans, net |  | $ | 872,452 |  |  |  | — |  |  |  | — |  |  |  | 846,684 |  |  |  | 846,684 |
Cash surrender value of life insurance |  | $ | 16,414 |  |  |  | — |  |  |  | 16,414 |  |  |  | — |  |  |  | 16,414 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | $ | 983,958 |  |  |  | — |  |  |  | — |  |  |  | 989,131 |  |  |  | 989,131 |
Securities sold under agreements |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
to repurchase |  | $ | 28,535 |  |  |  | — |  |  |  | 28,535 |  |  |  | — |  |  |  | 28,535 |
FHLB borrowings |  | $ | 70,000 |  |  |  | — |  |  |  | — |  |  |  | 69,929 |  |  |  | 69,929 |
Junior subordinated debentures |  | $ | 15,464 |  |  |  | — |  |  |  | 15,464 |  |  |  | — |  |  |  | 15,464 |
(Dollars in thousands) |  |  |  |  |  |  |  |  |  |
|  |  |  | Fair Value Measurements at December 31, 2019
|  | Carrying Amount |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets: |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 52,387 |  |  |  | 52,387 |  |  |  | — |  |  |  | — |  |  |  | 52,387 |
Investment securities available for sale |  | $ | 195,746 |  |  |  | — |  |  |  | 195,496 |  |  |  | 250 |  |  |  | 195,746 |
Other investments |  | $ | 4,231 |  |  |  | — |  |  |  | — |  |  |  | 4,231 |  |  |  | 4,231 |
Mortgage loans held for sale |  | $ | 4,417 |  |  |  | — |  |  |  | — |  |  |  | 4,417 |  |  |  | 4,417 |
Loans, net |  | $ | 843,194 |  |  |  | — |  |  |  | — |  |  |  | 819,397 |  |  |  | 819,397 |
Cash surrender value of life insurance |  | $ | 16,319 |  |  |  | — |  |  |  | 16,319 |  |  |  | — |  |  |  | 16,319 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | $ | 966,517 |  |  |  | — |  |  |  | — |  |  |  | 955,766 |  |  |  | 955,766 |
Securities sold under agreements |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
to repurchase |  | $ | 24,221 |  |  |  | — |  |  |  | 24,221 |  |  |  | — |  |  |  | 24,221 |
Junior subordinated debentures |  | $ | 15,619 |  |  |  | — |  |  |  | 15,619 |  |  |  | — |  |  |  | 15,619 |

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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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