Fair Value Disclosures

9 Months Ended

Sep. 30, 2020

Fair Value Disclosures [Abstract]

Fair Value Disclosures

Note 10. Fair Value Disclosures

Determination of Fair Value:

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the “Fair Value Measurements and Disclosures” ASC Topic 820, the fair value of a financial instrument is 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. Fair value is best determined based upon quoted market prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

ASC Topic 820 provides a consistent definition of fair value, which focuses on exit price in an orderly transaction between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact business at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally 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.

Level 1 - Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 - Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on 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 asset or liability.

Level 3 - Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis are as follows (in thousands):

			Quoted Prices in		Significant		Significant
			Active Markets		Other		Other
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
Description	Fair Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2020:
Assets:
Securities available-for-sale:
U.S. Government-sponsored enterprises (GSEs)	$	30,210	$	—	$	30,210	$	—
Municipal securities		90,809		—		90,809		—
Other debt securities		17,502		—		17,502		—
Mortgage-backed securities (GSEs)		76,113		—		76,113		—
Total securities available-for-sale	$	214,634	$	—	$	214,634	$	—
Liabilities:
Derivative financial instruments	$	6,791	$	—	$	6,791	$	—
December 31, 2019:
Assets:
Securities available-for-sale:
U.S. Government-sponsored enterprises (GSEs)	$	19,000	$	—	$	19,000	$	—
Municipal securities		64,391		—		64,391		—
Other debt securities		3,470		—		3,470		—
Mortgage-backed securities (GSEs)		91,487		—		91,487		—
Total securities available-for-sale	$	178,348	$	—	$	178,348	$	—
Liabilities:
Derivative financial instruments	$	3,446		—	$	3,446		—

During the nine month period ending September 30, 2020, there were no transfers between Level 1 and Level 2 in the fair value hierarchy.

Assets Measured at Fair Value on a Nonrecurring Basis:

Under certain circumstances management makes adjustments to fair value for assets and liabilities although they are not measured at fair value on an ongoing basis. The following tables present the financial instruments carried on the consolidated balance sheets by caption and by level in the fair value hierarchy, for which a nonrecurring change in fair value has been recorded (in thousands):

			Quoted Prices in		Significant		Significant
			Active Markets		Other		Other
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2020:
Impaired loans	$	3,817	$	—	$	—	$	3,817
Other real estate owned		3,932		—		—		3,932
December 31, 2019:
Impaired loans	$	2,185	$	—	$	—	$	2,185
Other real estate owned		1,757		—		—		1,757

For Level 3 assets measured at fair value on a non-recurring basis, the significant unobservable inputs used in the fair value measurements are presented below (dollars in thousands):

					Weighted
			Valuation	Significant Other	Average of
	Fair Value		Technique	Unobservable Input	Input
September 30, 2020:
Impaired loans	$	3,817	Appraisal	Appraisal discounts	11	%
Other real estate owned		3,932	Appraisal	Appraisal discounts	23	%
December 31, 2019:
Impaired loans	$	2,185	Appraisal	Appraisal discounts	22	%
Other real estate owned		1,757	Appraisal	Appraisal discounts	29	%

Impaired loans: Loans considered impaired under ASC 310-10-35, Receivables, are loans for which, based on current information and events, it is probable that the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. An impaired loan can be measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral less selling costs if the loan is collateral dependent. The fair value of impaired loans was measured based on the value of the collateral securing these loans or the discounted cash flows of the loans, as applicable. Impaired loans are classified within Level 3 of the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory, and/or accounts receivable. The Company determines the value of the collateral based on independent appraisals performed by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraised values are discounted for costs to sell and may be discounted further based on management’s historical knowledge, changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts by management are subjective and are typically significant unobservable inputs for determining fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors discussed above.

Other real estate owned: Other real estate owned, consisting of properties obtained through foreclosure or in satisfaction of loans, are initially recorded at fair value less estimated costs to sell upon transfer of the loans to other real estate.

Subsequently, other real estate is carried at the lower of carrying value or fair value less costs to sell. Fair values are generally based on third party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes further discounted based on management’s historical knowledge, and/or changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts are typically significant unobservable inputs for determining fair value. In cases where the carrying amount exceeds the fair value, less estimated costs to sell, a loss is recognized in noninterest expense.

Carrying value and estimated fair value:

The carrying amount and estimated fair value of the Company’s financial instruments are as follows (in thousands):

	Fair Value Measurements Using
	Carrying								Estimated
	Amount		Level 1		Level 2		Level 3		Fair Value
September 30, 2020:
Assets:
Cash and cash equivalents	$	541,815	$	541,815	$	—	$	—	$	541,815
Securities available-for-sale		214,634		—		214,634		—		214,634
Other investments		14,829		N/A		N/A		N/A		N/A
Loans and loans held for sale		2,415,349		—		—		2,406,262		2,406,262
Liabilities:
Noninterest-bearing demand deposits		669,733		—		669,733		—		669,733
Interest-bearing demand deposits		534,128		—		534,128		—		534,128
Money market and savings deposits		871,098		—		871,098		—		871,098
Time deposits		577,064		—		581,389		—		581,389
Borrowings		319,391		—		315,340		—		315,340
Subordinated debt		39,325		—		—		33,644		33,644
Derivative financial instruments		6,791		—		6,791		—		6,791
December 31, 2019:
Assets:
Cash and cash equivalents	$	183,971	$	183,971	$	—	$	—	$	183,971
Securities available-for-sale		178,348		—		178,348		—		178,348
Other investments		12,913		N/A		N/A		N/A		N/A
Loans, net and loans held for sale		1,893,005		—		—		1,879,825		1,879,825
Liabilities:
Noninterest-bearing demand deposits		364,155		—		364,155		—		364,155
Interest-bearing demand deposits		380,234		—		380,234		—		380,234
Money market and savings deposits		623,284		—		623,284		—		623,284
Time deposits		679,541		—		681,902		—		681,902
Borrowings		31,623		—		31,029		—		31,029
Subordinated debt		39,261		—		—		35,868		35,868
Derivative financial instruments		3,446		—		3,446		—		3,446

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. 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.