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Fair Value of Assets and liabilities

6 Months Ended

Jun. 30, 2020

(13) FAIR VALUE OF ASSETS AND LIABILITIES

The Company follows the provisions of FASB ASC 820, which defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and enhances disclosure requirements for fair value measurements.

In accordance with FASB ASC 820, the Company has categorized its assets and liabilities measured at fair value, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). Our assessment and classification of an investment within a level can change over time based upon maturity or liquidity of the investment and would be reflected at the beginning of the quarter in which the change occurred.

As required by FASB ASC 820, when the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a level 3 fair value measurement may include inputs that are observable (levels 1 and 2) and unobservable (level 3). Therefore gains and losses for such assets and liabilities categorized within the level 3 table below may include changes in fair value that are attributable to both observable inputs (levels 1 and 2) and unobservable inputs (level 3).

Assets and liabilities measured at fair value, recorded on the consolidated balance sheets, are categorized based on the inputs to the valuation techniques as follows:

Level 1. Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access (examples include active exchange-traded equity securities, exchange-traded derivatives, most US Government and agency securities, and certain other sovereign government obligations).

Level 2. Assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:

Quoted prices for similar assets or liabilities in active markets (for example, restricted stock);

Quoted price for identical or similar assets or liabilities in non-active markets (for example, corporate and municipal bonds, which trade infrequently);

Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); and

Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability (examples include certain residential and commercial mortgage-related assets, including loans, securities, and derivatives).

Level 3. Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the assets or liability (examples include certain private equity investments, and certain residential and commercial mortgage-related assets, including loans, securities, and derivatives).

A review of fair value hierarchy classification is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain assets or liabilities. Reclassifications impacting level 3 of the fair value hierarchy are reported as transfers in/out of the level 3 category as of the beginning of the quarter in which the reclassifications occur.

Equity investments were recorded at cost less impairment plus or minus observable price changes. Commencing with the quarter ended March 31, 2020, the Company elected to measure equity investments at fair value on a non-recurring basis, which have been adjusted for all periods presented.

The following table presents the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019.

June 30, 2020 (Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets
Interest-bearing deposits	$	—	$	2,567	$	—	$	2,567
Available for sale investment securities⁽¹⁾		—		47,495		—		47,495
Total	$	—	$	50,062	$	—	$	50,062

(1)	Total unrealized gain of $1,128, net of tax, was included in accumulated other comprehensive income (loss) for the six months ended June 30, 2020 related to these assets.

December 31, 2019 (Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets
Available for sale investment securities⁽¹⁾	$	—	$	48,998	$	—	$	48,998
Total	$	—	$	48,998	$	—	$	48,998

(1)	Total unrealized gains of $1,081, net of tax, was included in accumulated other comprehensive income (loss) for the year ended December 31, 2019 related to these assets.

The following tables present the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a non-recurring basis as of June 30, 2020 and December 31, 2019.

June 30, 2020 (Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets
Equity investments	$	—	$	—	$	10,389	$	10,389
Impaired loans		—		—		81,925		81,925
Loan collateral in process of foreclosure		—		—		47,375		47,375
Total	$	—	$	—	$	139,689	$	139,689

December 31, 2019 (Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets
Equity investments	$	—	$	—	$	10,079	$	10,079
Impaired loans		—		—		34,915		34,915
Loan collateral in process of foreclosure		—		—		52,711		52,711
Total	$	—	$	—	$	97,705	$	97,705

Significant Unobservable Inputs

ASC Topic 820 requires disclosure of quantitative information about the significant unobservable inputs used in the valuation of assets and liabilities classified as level 3 within the fair value hierarchy. The tables below are not intended to be all-inclusive, but rather to provide information on significant unobservable inputs and valuation techniques used by the Company.

The valuation techniques and significant unobservable inputs used in recurring and non-recurring level 3 fair value measurements of assets and liabilities as of June 30, 2020 and December 31, 2019.

(Dollars in thousands)

Fair Value at 6/30/20

Valuation Techniques

Unobservable Inputs

Range

(Weighted Average)

Equity investments

8,934

Investee financial analysis

Financial condition and operating performance of the borrower ⁽¹⁾

N/A

Collateral support

N/A

1,455

Precedent market transaction

Offering price

$8.73 / share

Impaired loans

44,557

Market approach

Historical and actual loss experience

1.50% - 6.00%

60% of balance

Median transfer price ⁽²⁾

$4.0 - 149.5

Collateral value

N/A

37,368

Discounted cash flow

Discount rate

12.78

Terminal value

119.5

Terms

0-41 months

Monthly payments

$0.6- 5.0

Loan collateral in process of foreclosure

47,375

Market approach

Collateral value ⁽³⁾

N/A

Median transfer price ⁽²⁾

$4.0 - 149.5

(1)

Includes projections based on revenue, EBITDA, leverage and liquidation amounts. These assumptions are based on a variety of factors, including economic conditions, industry and market developments, market valuations of comparable companies, and company-specific developments, including exit strategies and realization opportunities.

(2)

Represents amount net of liquidation costs.

(3)

Relates to the recreation portfolio.

(Dollars in thousands)

Fair Value at 12/31/19

Valuation Techniques

Unobservable Inputs

Range

(Weighted Average)

Equity investments

7,435

Investee financial analysis

Financial condition and operating performance of the borrower

N/A

Collateral support

N/A

1,189

Investee book value adjusted for market appreciation

Financial condition and operating performance of the borrower

N/A

Public company comparables

Business enterprise value

$4,855 - 6,120

Business enterprise value/revenue multiples

1.59 - 5.98x

Discount for lack of marketability

1,455

Precedent market transaction

Offering price

$8.73 / share

- 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.

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