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Fair Value of Financial Instruments
3 Months Ended
Mar. 31, 2016
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments
Fair Value of Financial Instruments
 
The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including both those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis and a non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value, and for estimating the fair value of financial assets and financial liabilities not recorded at fair value, are discussed below.

In accordance with accounting guidance, the Company groups its financial assets and financial liabilities measured 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. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows:

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

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 instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, prepayment speeds, volatilities, etc.) or model-based valuation techniques where all significant assumptions are observable, either directly or indirectly, in the market.

Level 3 - Valuation is generated from model-based techniques where one or more significant inputs are not observable, either directly or indirectly, in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques may include use of matrix pricing, discounted cash flow models, and similar techniques.
 
Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments, and other factors. 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 fair values presented. Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at March 31, 2016, December 31, 2015 and March 31, 2015.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Management maximizes the use of observable inputs and attempts to minimize the use of unobservable inputs when determining fair value measurements. The following is a description of both the general and specific valuation methodologies used for certain instruments measured at fair value, as well as the general classification of these instruments pursuant to the valuation hierarchy.

Cash and due from banks – The carrying amounts of cash and short-term instruments approximate fair value due to the liquidity of these instruments.

Securities Available for Sale – AFS securities are generally valued based upon quotes obtained from an independent third-party pricing service, which uses evaluated pricing applications and model processes. Observable market inputs, such as, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data are considered as part of the evaluation. The inputs are related directly to the security being evaluated, or indirectly to a similarly situated security. Market assumptions and market data are utilized in the valuation models. The Company reviews the market prices provided by the third-party pricing service for reasonableness based on the Company’s understanding of the market place and credit issues related to the securities. The Company has not made any adjustments to the market quotes provided by them and, accordingly, the Company categorized its investment portfolio within Level 2 of the fair value hierarchy.

FHLB, FRB, Other Stock – The carrying value approximates the fair value based upon the redemption provisions of the stock.
 
Loans Held for Investment— The fair value of loans, other than loans on nonaccrual status, was estimated by discounting the remaining contractual cash flows using the estimated current rate at which similar loans would be made to borrowers with similar credit risk characteristics and for the same remaining maturities, reduced by deferred net loan origination fees and the allocable portion of the allowance for loan losses. Accordingly, in determining the estimated current rate for discounting purposes, no adjustment has been made for any change in borrowers’ credit risks since the origination of such loans. Rather, the allocable portion of the allowance for loan losses is considered to provide for such changes in estimating fair value. As a result, this fair value is not necessarily the value which would be derived using an exit price. These loans are included within Level 3 of the fair value hierarchy.
 
Impaired loans and OREO Impaired loans and OREO assets are recorded at the fair value less estimated costs to sell at the time of foreclosure. The fair value of impaired loans and OREO assets are generally based on recent real estate appraisals adjusted for estimated selling costs. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.
 
Deposit Accounts and Short-term Borrowings — The amounts payable to depositors for demand, savings, and money market accounts, and short-term borrowings are considered to approximate fair value. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities using a discounted cash flow calculation. Interest-bearing deposits and borrowings are included within Level 2 of the fair value hierarchy.
 
Term FHLB Advances and Other Long-term Borrowings— The fair value of long term borrowings is determined using rates currently available for similar borrowings with similar credit risk and for the remaining maturities and are classified as Level 2.
 
Subordinated Debentures – The fair value of subordinated debentures is estimated by discounting the balance by the current three-month LIBOR rate plus the current market spread. The fair value is determined based on the maturity date as the Company does not currently have intentions to call the debenture and is classified as Level 2.

Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. 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 any of these estimates.
 
The fair value estimates presented herein are based on pertinent information available to management as of the periods indicated.
 
 
 
At March 31, 2016
 
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Estimated
Fair Value
 
 
(in thousands)
Assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents and interest bearing deposits with financial institutions
 
$
193,514

 
$
193,514

 
$

 
$

 
$
193,514

Investments held to maturity
 
9,590

 

 
9,590

 

 
9,590

Investment securities available for sale
 
269,711

 

 
269,711

 

 
269,711

FHLB, FRB, and other stock
 
25,853

 

 
25,853

 

 
25,853

Loans held for sale
 
7,281

 

 
8,082

 

 
 
Loans held for investment
 
2,832,977

 

 

 
2,849,797

 
2,849,797

Accrued interest receivable
 
11,862

 
11,862

 

 

 
11,862

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 

Deposit accounts
 
2,906,264

 
2,335,497

 
585,822

 

 
2,921,319

FHLB advances
 
80,000

 

 
80,033

 

 
80,033

Other borrowings
 
44,956

 

 
45,764

 

 
45,764

Subordinated debentures
 
70,310

 

 
68,093

 

 
68,093

Accrued interest payable
 
232

 
232

 

 

 
232




 
 
At December 31, 2015
 
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Estimated
Fair Value
 
 
(in thousands)
Assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
78,417

 
$
78,417

 
$

 
$

 
$
78,417

Investment securities available for sale
 
280,273

 

 
280,273

 

 
280,273

FHLB, FRB, and other stock
 
22,292

 


 
22,292

 

 
22,292

Loans held for sale
 
8,565

 

 
9,507

 

 
9,507

Loans held for investment
 
2,236,998

 

 

 
2,244,936

 
2,244,936

Accrued interest receivable
 
9,315

 
9,315

 

 

 
9,315

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 

Deposit accounts
 
2,195,123

 
1,674,148

 
521,291

 

 
2,195,439

FHLB advances
 
148,000

 

 
148,036

 

 
148,036

Other borrowings
 
48,125

 

 
49,156

 

 
49,156

Subordinated debentures
 
70,310

 

 
68,675

 

 
68,675

Accrued interest payable
 
206

 
206

 

 

 
206




 
 
At March 31, 2015
 
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Estimated
Fair Value
 
 
(in thousands)
Assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
178,371

 
$
178,371

 
$

 
$

 
$
178,371

Investment securities available for sale
 
280,461

 

 
280,461

 

 
280,461

FHLB, FRB, and other stock
 
30,586

 
30,586

 

 

 
30,586

Loans held for investment
 
2,117,741

 

 

 
2,205,161

 
2,205,161

Accrued interest receivable
 
8,769

 
8,769

 

 

 
8,769

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 

Deposit accounts
 
2,043,166

 
1,576,056

 
479,204

 

 
2,055,260

FHLB advances
 
300,000

 
300,031

 

 

 
300,031

Other borrowings
 
43,434

 

 
45,084

 

 
45,084

Subordinated debentures
 
70,310

 

 
69,501

 

 
69,501

Accrued interest payable
 
177

 
177

 

 

 
177



A loan is considered impaired when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Impairment is measured based on the fair value of the underlying collateral or the discounted expected future cash flows. The Company measures impairment on all non-accrual loans for which it has reduced the principal balance to the value of the underlying collateral less the anticipated selling cost. As such, the Company records impaired loans as Level 3. At March 31, 2016, substantially all the Company’s impaired loans were evaluated based on the fair value of their underlying collateral based upon the most recent appraisal available to management.
 
The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
 
The following fair value hierarchy table presents information about the Company’s financial instruments measured at fair value on a recurring basis at the dates indicated:
 
 
 
March 31, 2016
 
 
Fair Value Measurement Using
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Securities at
Fair Value
 
 
(in thousands)
Available for sale:
 
 
 
 
 
 
 
 
Municipal bonds
 
$

 
$
125,882

 
$

 
$
125,882

Collateralized mortgage obligation
 
$

 
$
23,866

 
$

 
$
23,866

Mortgage-backed securities
 

 
119,963

 

 
119,963

Total securities available for sale
 
$

 
$
269,711

 
$

 
$
269,711


 
 
March 31, 2015
 
 
Fair Value Measurement Using
 
 

 
 
Level 1
 
Level 2
 
Level 3
 
Securities at
Fair Value
 
 
(in thousands)
Available for sale:
 
 

 
 

 
 

 
 

Municipal bonds
 
$

 
$
105,523

 
$

 
105,523

Collateralized mortgage obligation
 
$

 
$
11,288

 
$

 
11,288

Mortgage-backed securities
 

 
163,650

 

 
163,650

Total securities available for sale
 
$

 
$
280,461

 
$

 
$
280,461



The fair value of impaired loans was determined using Level 3 assumptions, and represents impaired loan balances for which a specific reserve has been established or on which a write down has been taken. Generally, the Company obtains third party appraisals (or property evaluations) and/or collateral audits in conjunction with internal analysis based on historical experience on its impaired loans and other real estate owned to determine fair value. In determining the net realizable value of the underlying collateral for impaired loans, the Company will then discount the valuation to cover both market price fluctuations and selling costs the Company expected would be incurred in the event of foreclosure. In addition to the discounts taken, the Company’s calculation of net realizable value considered any other senior liens in place on the underlying collateral.
 
The following table provides a summary of the financial instruments the Company measures at fair value on a non-recurring basis as of the periods indicated:

 
March 31, 2016
 
Fair Value Measurement Using
 
 
 
Level 1
 
Level 2
 
Level 3
 
Assets at
Fair Value
 
(in thousands)
Assets
 
 
 
 
 
 
 
Collateral dependent impaired loans
$

 
$

 
$
1,593

 
$
1,593

Other real estate owned

 

 
1,161

 
1,161

Total assets
$

 
$

 
$
2,754

 
$
2,754


 
March 31, 2015
 
Fair Value Measurement Using
 
 

 
Level 1
 
Level 2
 
Level 3
 
Assets at
Fair Value
 
(in thousands)
Assets
 

 
 

 
 

 
 

Collateral dependent impaired loans
$

 
$

 
$
2,742

 
$
2,742

Other real estate owned

 

 
997

 
997

Total assets
$

 
$

 
$
3,739

 
$
3,739



The following table presents quantitative information about Level 3 of fair value measurements for financial instruments measured at fair value on a non-recurring basis for the periods indicated:

 
March 31, 2016
 
 
 
 
 
Range
 
Fair Value
 
Valuation Techniques
 
Rate
 
 Maturity (years)
 
Unobservable Inputs
Collateral dependent impaired loans:
 
 
 
 
 
 
 
 
 
Business loans:
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
306

 
Collateral valuation
 
6.25 - 7.50%
 
2 - 6 
 
0 - 10% 
Franchise
169

 
Collateral valuation
 
5.70 - 6.70%
 
8
 
0 - 10% 
Commercial owner occupied
507

 
Collateral valuation
 
6.75 - 7.75%
 
1 - 10 
 
0 - 10%
SBA
69

 
Collateral valuation
 
0.06
 
15
 
0 - 10%
Real estate loans:
 

 
 
 
 
 
 
 
 
Commercial non-owner occupied

 
Collateral valuation
 
7.00%
 
11
 
0 - 15%
One-to-four family
523

 
Collateral valuation
 
7.00 - 15.00%
 
4 - 14 
 
0 - 10%
Land
19

 
Collateral valuation
 
13.00%
 
15
 
0 - 10%
Total collateral dependent impaired loans
$
1,593

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other real estate owned
 

 
 
 
 
 
 
 
 
Land
$
1,161

 
Collateral valuation
 
—%
 
0
 
0 - 10% 
Total other real estate owned
$
1,161

 
 
 
 
 
 
 
 

 
 
March 31, 2015
 
 

 
 
 
Range
 
Fair Value
 
Valuation Techniques
 
Rate
 
  Maturity (years)
 
Unobservable Inputs
Collateral dependent impaired loans:
 
 
 
 
 
 
 
 
 
Business loans:
 

 
 
 
 
 
 
 
 
Franchise
$
1,853

 
Collateral valuation
 
6.70%
 
8
 
0 - 10% 
Commercial owner occupied
379

 
Collateral valuation
 
6.75%
 
7
 
0 - 10%
Real estate loans:
 

 
 
 
 
 
 
 
 
Commercial non-owner occupied
458

 
Collateral valuation
 
7.00%
 
12
 
0 - 15%
One-to-four family
52

 
Collateral valuation
 
8.00% - 15.00%
 
5 - 16
 
0 - 10%
Total collateral dependent impaired loans
$
2,742

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other real estate owned
 

 
 
 
 
 
 
 
 
Land
$
711

 
Collateral valuation
 
—%
 
0
 
0-10%
One-to-four family
$
286

 
Collateral valuation
 
—%
 
0
 
0-10%
Total other real estate owned
$
997