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Disclosures About Fair Value of Assets and Liabilities
 12 Months Ended
Dec. 31, 2017
Disclosures About Fair Value of Assets and Liabilities [Abstract]  
Disclosures About Fair Value of Assets and Liabilities

Note 19: Disclosures About Fair Value of Assets and Liabilities

 

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 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 prices in active markets for identical assets or liabilities

 

Level 2: 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 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

 

Following is a description of the valuation methodologies, inputs used for assets measured at fair value on a recurring basis, recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

 

Available for Sale Securities

 

The fair value of available-for-sale securities are determined by various valuation methodologies. Level 1 securities include money market mutual funds. Level 1 inputs include quoted prices in an active market. Level 2 securities include U.S. government agencies, mortgage-backed securities and obligations of political and state subdivisions. Level 2 inputs do not include quoted prices for individual securities in active markets; however, they do include inputs that are either directly or indirectly observable for the individual security being valued. Such observable inputs include interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, credit risks and default rates. Also included are inputs derived principally from or corroborated by observable market data by correlation or other means.

 

Interest Rate Contracts

 

The fair values of interest rate contracts are based upon the estimated amount the Company would receive or pay to terminate the contracts or agreements, taking into account underlying interest rates, creditworthiness of underlying customers for credit derivatives and, when appropriate, the creditworthiness of the counterparties.

 

The following table presents the fair value measurements of securities measured at fair value on a recurring basis and the level within ASC 820 fair value hierarchy in which the fair value measurements fell at December 31, 2017 and 2016:

 

Fair Value Measurements Using:

 

($ in thousands)   Fair Values at                    
Available for Sale Securities:   12/31/2017     (Level 1)     (Level 2)     (Level 3)  
                         
U.S. Treasury and Government Agencies   $ 12,708     $    -     $ 12,708     $    -  
Mortgage-backed securities     56,762       -       56,762       -  
State and political subdivisions     13,250       -       13,250       -  
Equity securities     70       -       70       -  
Interest rate contracts - assets     698       -       698       -  
Interest rate contracts - liabilities     (698 )     -       (698 )     -  

 

Fair Value Measurements Using:

 

($ in thousands)   Fair Values at                    
Available-for-Sale Securities:   12/31/2016     (Level 1)     (Level 2)     (Level 3)  
                         
U.S. Treasury and Government Agencies   $ 13,358     $    -     $ 13,358     $    -  
Mortgage-backed securities     61,603       -       61,603       -  
State and political subdivisions     15,097       -       15,097       -  
Equity securities     70       -       70       -  
Interest rate contracts - assets     623       -       623       -  
Interest rate contracts - liabilities     (623 )     -       (623 )     -  

 

Level 1 - Quoted Prices in Active Markets for Identical Assets

 

Level 2 - Significant Other Observable Inputs

 

Level 3 - Significant Unobservable Inputs

 

The following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

 

Collateral-dependent Impaired Loans, Net of ALLL

 

Loans for which it is probable the Company will not collect all principal and interest due according to contractual terms are measured for impairment. The estimated fair value of collateral-dependent impaired loans is based on the appraised value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy. This method requires obtaining independent appraisals of the collateral, which are reviewed for accuracy and consistency by Credit Administration. These appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by applying a discount factor to the value based on the Company’s loan review policy. All impaired loans held by the Company were collateral dependent at December 31, 2017 and 2016.

 

Mortgage Servicing Rights

 

Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models associated with the servicing rights and discounting the cash flows using discount market rates, prepayment speeds and default rates. The servicing portfolio has been valued using all relevant positive and negative cash flows including servicing fees, miscellaneous income and float; marginal costs of servicing; the cost of carry of advances; and foreclosure losses; and applying certain prevailing assumptions used in the marketplace. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy. These mortgage servicing rights are tested for impairment on a quarterly basis.

 

The following table presents the fair value measurements of assets measured at fair value on a non-recurring basis and the level within the fair value hierarchy in which the fair value measurements fell at December 31, 2017 and 2016:

 

($ in thousands)   Fair Values at                    
Description   12/31/2017     (Level 1)     (Level 2)     (Level 3)  
                         
Impaired loans   $ 982     $ -     $ -     $ 982  
Mortgage Servicing Rights     1,490       -       -       1,490  

 

($ in thousands)   Fair Values at                    
Description   12/31/2016     (Level 1)     (Level 2)     (Level 3)  
Impaired loans   $ 786     $ -     $ -     $ 786  
Mortgage Servicing Rights     1,993       -       -       1,993  

 

Level 1 - Quoted Prices in Active Markets for Identical Assets

 

Level 2 - Significant Other Observable Inputs

 

Level 3 - Significant Unobservable Inputs

 

Unobservable (Level 3) Inputs

 

The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at December 31, 2017 and 2016:

 

    Fair Value at     Valuation       Range (Weighted  
($’s in thousands)   12/31/2017     Technique   Unobservable Inputs   Average)  
                     
Collateral-dependent impaired loans   $ 982     Market comparable properties Discounted cash flow  

Comparability adjustments (%) 

 

     Not available  
Mortgage servicing rights     1,490       Discount Rate     9.65 %
                Constant prepayment rate     7.51 %
                P&I earnings credit     1.56 %
                T&I earnings credit     2.13 %
                Inflation for cost of servicing     1.50 %

 

    Fair Value at     Valuation       Range (Weighted  
($’s in thousands)   12/31/2016     Technique   Unobservable Inputs   Average)  
                     
Collateral-dependent impaired loans   $ 786     Market comparable properties Discounted cash flow  

Comparability adjustments (%) 

 

     Not available  
Mortgage servicing rights     1,993       Discount Rate     9.65 %
                Constant prepayment rate     7.61 %
                P&I earnings credit     0.76 %
                T&I earnings credit     1.60 %
                Inflation for cost of servicing     1.50 %

 

The mortgage servicing rights portfolio is measured for fair value by an independent third party. The valuation of the portfolio hinges on a number of quantitative factors. These factors include, but are not limited to, a discount rate applied to the cash flows, and an assumption of future principal prepayments. The prepayment assumptions are based upon the historical performance of the Company’s portfolio as well as market metrics. With the increasing interest rates during 2017, the mortgage servicing rights have increased substantially in value. The servicing rights have had a decline in prepayments and the .10 percent decrease in the constant prepayment rate reflects the change in market rates. Absent the change in the discount rate, there were no other changes in the inputs or methodologies used to determine fair value at December 31, 2017, as compared to December 31, 2016.

 

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value.

 

Cash and Due From Banks, Federal Reserve and Federal Home Loan Bank Stock and Interest Receivable and Payable

 

Fair value is determined to be the carrying amount for these items (which include cash on hand, due from banks, and federal funds sold) because they represent cash or mature in 90 days or less, and do not represent unanticipated credit concerns.

 

Loans Held for Sale

 

The fair value of loans held for sale is based upon quoted market prices, where available, or is determined by discounting estimated cash flows using interest rates approximating the Company’s current origination rates for similar loans and adjusted to reflect the inherent credit risk.

 

Loans

 

The estimated fair value for loans receivable, net, is based on estimates of the rate State Bank would charge for similar loans at December 31, 2017 and 2016, applied for the time period until the loans are assumed to re-price or be paid.

 

Mortgage Servicing Rights

 

Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models associated with the servicing rights and discounting the cash flows using discount market rates, prepayment speeds and default rates. The servicing portfolio has been valued using all relevant positive and negative cash flows including servicing fees, miscellaneous income and float; marginal costs of servicing; the cost of carry of advances; and foreclosure losses; and applying certain prevailing assumptions used in the marketplace. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy. These mortgage servicing rights are tested for impairment on a quarterly basis.

 

Deposits, Repurchase Agreements & FHLB Advances

 

Deposits include demand deposits, savings accounts and certain money market deposits. The carrying amount approximates the fair value. The estimated fair value for fixed-maturity time deposits, as well as borrowings, is based on estimates of the rate State Bank could pay on similar instruments with similar terms and maturities at December 31, 2017 and 2016.

 

Loan Commitments

 

The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The estimated fair values for other financial instruments and off-balance-sheet loan commitments approximate cost at December 31, 2017 and 2016 and are not considered significant to this presentation.

 

Trust Preferred Securities

 

The fair value for Trust Preferred Securities is estimated by discounting the cash flows using an appropriate discount rate.

 

The following table presents estimated fair values of the Company’s financial instruments. The fair values of certain instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for these financial instruments, and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate.

 

December 31, 2017   Carrying     Fair Value Measurements Using  
($ in thousands)   Amount     (Level 1)     (Level 2)     (Level 3)  
                         
Financial assets                        
Cash and due from banks   $ 26,616     $ 26,616     $ -     $ -  
Loans held for sale     3,940       -       4,041       -  
Loans, net of allowance for loan losses     688,685       -       -       686,940  
Federal Reserve and FHLB Bank stock, at cost     3,748       -       3,748       -  
Interest receivable     1,825       -       1,825       -  
Mortgage servicing rights     9,907       -       -       11,338  
                                 
Financial liabilities                                
Deposits   $ 729,600     $ 511,782     $ 220,823     $ -  
Repurchase agreements     15,082       -       15,082       -  
FHLB advances     18,500       -       18,385       -  
Trust preferred securities     10,310       -       9,673       -  
Interest payable     592       -       592       -  

 

December 31, 2016   Carrying     Fair Value Measurements Using  
($ in thousands)   Amount     (Level 1)     (Level 2)     (Level 3)  
                         
Financial assets                        
Cash and due from banks   $ 17,012     $ 17,012     $ -     $ -  
Loans held for sale     4,434       -       4,503       -  
Loans, net of allowance for loan losses     636,708       -       -       636,909  
Federal Reserve and FHLB Bank stock, at cost     3,748       -       3,748       -  
Interest receivable     1,512       -       1,512       -  
Mortgage servicing rights     8,422       -       -       9,656  
                                 
Financial liabilities                                
Deposits   $ 673,073     $ 475,357     $ 200,050     $ -  
Repurchase agreements     10,532       -       10,532       -  
FHLB advances     26,500       -       26,477       -  
Trust preferred securities     10,310       -       7,422       -  
Interest payable     408       -       408       -