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Fair value
3 Months Ended
Mar. 31, 2019
Fair Value Disclosures [Abstract]  
Fair Value
Note 12 — Fair value
 
The Company determines the fair value of its financial instruments based on the requirements established in ASC 820:
Fair Value Measurements,
which provides a framework for measuring fair value under GAAP and requires an entity to maximize the use of observable inputs when measuring fair value. ASC 820 defines fair value as the exit price, the price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions.
 
ASC 820 establishes a hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair values hierarchy is as follows:
 
Level 1 Inputs
— Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
 
Level 2 Inputs
— Significant other 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.
 
Level 3 Inputs
— Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
 
The Company used the following methods to determine the fair value of each type of financial instrument:
 
Securities
: Fair values for securities available-for-sale are obtained from an independent pricing service. The prices are not adjusted. The independent pricing service uses industry-standard models to price U.S. Government agency obligations and mortgage backed securities that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Securities of obligations of state and political subdivisions are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating. Substantially all assumptions used by the independent pricing service are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace (Levels 1 and 2). If the inputs used to provide the evaluation for certain securities are unobservable and/or there is little, if any, market activity, then the security would fall to the lowest level of the hierarchy (Level 3).
 
Impaired loans
: The fair values of impaired loans are measured for impairment using the fair value of the collateral for collateral-dependent loans on a nonrecurring basis. Collateral may be in the form of real estate or business assets including equipment, inventory and accounts receivable. The vast majority of the Company’s collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the property is more than two years old, then a Level 3 valuation is considered to measure the fair value. The value of business equipment is based upon an outside appraisal if deemed significant using observable market data. Likewise, values for inventory and account receivables collateral are based on financial statement balances or aging reports (Level 3). Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Operations.
 
Other Real Estate Owned:
OREO assets are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. Subsequently, OREO assets are carried at lower of cost or fair value less estimated costs to sell. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.
 
Assets held for sale
: Assets held for sale were transferred from premises and equipment at the lower of cost less accumulated depreciation or fair value at the date of transfer. The Company periodically evaluates the value of assets held for sale and records an impairment charge for any subsequent declines in fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the assets held for sale as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the asset held for sale as nonrecurring Level 3.
 
Assets and liabilities measured at fair value under Topic 820 on a recurring and non-recurring basis are summarized below for the indicated dates (dollars in thousands):
 
 
 
Fair Value Measurement
 
 
 
at March 31, 2019 Using
 
 
 
 
 
 
Quoted Prices
 
 
 
 
 
 
 
 
 
 
 
 
in Active
 
 
Other
 
 
Significant
 
 
 
 
 
 
Markets for
 
 
Observable
 
 
Unobservable
 
 
 
Carrying
 
 
Identical Assets
 
 
Inputs
 
 
Inputs
 
 
 
Value
 
 
(Level 1)
 
 
(Level 2)
 
 
(Level 3)
 
Financial Assets - Recurring
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
US Government Agencies
 
$
15,260
 
 
$
1,545
 
 
$
13,715
 
 
$
-
 
Mortgage-backed securities
 
 
22,080
 
 
 
2,587
 
 
 
19,493
 
 
 
-
 
Subordinated debt
 
 
4,495
 
 
 
-
 
 
 
3,995
 
 
 
500
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Assets - Non-Recurring
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans
 
 
1,759
 
 
 
-
 
 
 
-
 
 
 
1,759
 
Assets held for sale
 
 
537
 
 
 
-
 
 
 
-
 
 
 
537
 
Other real estate owned
 
 
526
 
 
 
-
 
 
 
-
 
 
 
526
 
 
 
 
Fair Value Measurement
 
 
 
at December 31, 2018 Using
 
 
 
 
 
 
Quoted Prices
 
 
 
 
 
 
 
 
 
 
 
 
in Active
 
 
Other
 
 
Significant
 
 
 
 
 
 
Markets for
 
 
Observable
 
 
Unobservable
 
 
 
Carrying
 
 
Identical Assets
 
 
Inputs
 
 
Inputs
 
 
 
Value
 
 
(Level 1)
 
 
(Level 2)
 
 
(Level 3)
 
Financial Assets - Recurring
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
US Government Agencies
 
$
13,851
 
 
$
-
 
 
$
13,851
 
 
$
-
 
Mortgage-backed securities
 
 
26,450
 
 
 
-
 
 
 
26,450
 
 
 
-
 
Subordinated debt
 
 
3,952
 
 
 
-
 
 
 
3,452
 
 
 
500
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Assets - Non-Recurring
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans
 
 
1,869
 
 
 
-
 
 
 
-
 
 
 
1,869
 
Assets held for sale
 
 
554
 
 
 
-
 
 
 
-
 
 
 
554
 
Other real estate owned
 
 
526
 
 
 
-
 
 
 
-
 
 
 
526
 
 
The following table presents qualitative information about Level 3 fair value measurements for financial instruments measured at fair value at March 31, 2019 and December 31, 2018 (dollars in thousands):
 
 
 
March 31, 2019
 
 
 
 
 
 
 
 
 
 
Range
 
 
 
Fair Value
 
 
Valuation
 
Unobservable
 
(Weighted
 
 
 
Estimate
 
 
Techniques
 
Input
 
Average)
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans - real estate secured
 
$
1,759
 
 
Appraisal (1) or Internal Valuation (2)
 
Selling costs
 
 
6
%-10% (
7%
)
 
 
 
 
 
 
 
 
 
Discount for lack of marketability and age of appraisal
 
 
6%-30% (
10%
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets held for sale
 
$
537
 
 
Appraisal (1) or Internal Valuation (2)
 
Selling costs
 
 
6%-10% (
7%
)
 
 
 
 
 
 
 
 
 
Discount for lack of marketability and age of appraisal
 
 
6%-30% (
15%
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other real estate owned
 
$
526
 
 
Appraisal (1) or Internal Valuation (2)
 
Selling costs
 
 
6%-10% (
7%
)
 
 
   
 
(1)
Fair Value is generally determined through independent appraisals of the underlying collateral, which typically includes various level 3 inputs that are not identifiable
(2)
Internal valuations may be conducted to determine Fair Value for assets with nominal carrying balances
  
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
Range
 
 
 
Fair Value
 
 
Valuation
 
Unobservable
 
(Weighted
 
 
 
Estimate
 
 
Techniques
 
Input
 
Average)
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans - real estate secured
 
$
1,869
 
 
Appraisal (1) or Internal Valuation (2)
 
Selling costs
 
 
6%-10% (
7%
)
 
 
 
 
 
 
 
 
 
Discount for lack of marketability and age of appraisal
 
 
6%-30% (
10%
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets held for sale
 
$
554
 
 
Appraisal (1) or Internal Valuation (2)
 
Selling costs
 
 
6%-10% (
7%
)
 
 
 
 
 
 
 
 
 
Discount for lack of marketability and age of appraisal
 
 
6%-30% (
15%
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other real estate owned
 
$
526
 
 
Appraisal (1) or Internal Valuation (2)
 
Selling costs
 
 
6%-10% (
7%
)
 
 
   
 
(1)
Fair Value is generally determined through independent appraisals of the underlying collateral, which typically includes various level 3 inputs that are not identifiable
(2)
Internal valuations may be conducted to determine Fair Value for assets with nominal carrying balances
 
FASB ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. Additionally, in accordance with ASU 2016-01, which the Company adopted on January 1, 2018 on a prospective basis, the Company uses the exit price notion, rather than the entry price notion, in calculating the fair values of financial instruments not measured at fair value on a recurring basis.
 
The following tables reflect the carrying amounts and estimated fair values of the Company’s financial instruments whether or not recognized on the Consolidated Balance Sheets at fair value.
 
 
 
 
 
March 31,
 
 
December 31,
 
 
 
 
 
2019
 
 
2018
 
 
 
Level in Fair
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Value
 
Carrying
 
 
Estimated
 
 
Carrying
 
 
Estimated
 
 
 
Hierarchy
 
Value
 
 
Fair Value
 
 
Value
 
 
Fair Value
 
 
 
(In thousands)
Financial assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
Level 1
 
$
15,178
 
 
$
15,178
 
 
$
12,717
 
 
$
12,717
 
Cash equivalents
 
Level 2
 
 
10,728
 
 
 
10,728
 
 
 
6,826
 
 
 
6,826
 
Investment securities available for sale
 
Level 1
 
 
4,132
 
 
 
4,132
 
 
 
-
 
 
 
-
 
Investment securities available for sale
 
Level 2
 
 
37,203
 
 
 
37,203
 
 
 
43,753
 
 
 
43,753
 
Investment securities available for sale
 
Level 3
 
 
500
 
 
 
500
 
 
 
500
 
 
 
500
 
Federal Home Loan Bank stock
 
Level 2
 
 
1,354
 
 
 
1,354
 
 
 
1,320
 
 
 
1,320
 
Loans held for sale
 
Level 2
 
 
5,218
 
 
 
5,218
 
 
 
6,128
 
 
 
6,128
 
Loans
 
Level 3
 
 
416,051
 
 
 
410,738
 
 
 
412,562
 
 
 
409,939
 
Impaired loans
 
Level 3
 
 
1,759
 
 
 
1,759
 
 
 
1,869
 
 
 
1,869
 
Assets held for sale
 
Level 3
 
 
537
 
 
 
537
 
 
 
554
 
 
 
554
 
Other real estate owned
 
Level 3
 
 
526
 
 
 
526
 
 
 
526
 
 
 
526
 
Bank owned life insurance
 
Level 3
 
 
7,478
 
 
 
7,478
 
 
 
7,441
 
 
 
7,441
 
Accrued interest receivable
 
Level 2
 
 
2,729
 
 
 
2,729
 
 
 
2,662
 
 
 
2,662
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
Level 2
 
 
443,400
 
 
 
443,528
 
 
 
439,047
 
 
 
439,125
 
FHLB borrowings
 
Level 2
 
 
21,000
 
 
 
21,183
 
 
 
21,000
 
 
 
21,093
 
Trust preferred securities
 
Level 2
 
 
8,764
 
 
 
9,534
 
 
 
8,764
 
 
 
8,852
 
Other borrowings
 
Level 2
 
 
5,571
 
 
 
5,571
 
 
 
5,563
 
 
 
5,563
 
Accrued interest payable
 
Level 2
 
 
241
 
 
 
241
 
 
 
221
 
 
 
221