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Fair Value of Financial Instruments
12 Months Ended
Dec. 31, 2019
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments Fair Value of Financial Instruments
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal and most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: 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: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at December 31, 2019.
($ in thousands)
 
 
 
 
Description of Financial Instruments
 
Fair Value at
December 31,
2019
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Recurring
 
 

 
 

 
 

 
 

Securities available for sale:
 
 

 
 

 
 

 
 

Government-sponsored enterprise securities
 
$
20,009

 

 
20,009

 

Mortgage-backed securities
 
767,285

 

 
767,285

 

Corporate bonds
 
34,651

 

 
34,651

 

Total available for sale securities
 
$
821,945

 

 
821,945

 

 
 
 
 
 
 
 
 
 
Presold mortgages in process of settlement
 
$
19,712

 
19,712

 

 

 
 
 
 
 
 
 
 
 
Nonrecurring
 
 
 
 
 
 
 
 
Impaired loans
 
$
16,215

 

 

 
16,215

Foreclosed real estate
 
1,830

 

 

 
1,830

The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at December 31, 2018.
($ in thousands)
 
 
 
 
Description of Financial Instruments
 
Fair Value at
December 31,
2018
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Recurring
 
 

 
 

 
 

 
 

Securities available for sale:
 
 

 
 

 
 

 
 

Government-sponsored enterprise securities
 
$
82,662

 

 
82,662

 

Mortgage-backed securities
 
385,551

 

 
385,551

 

Corporate bonds
 
33,138

 

 
33,138

 

Total available for sale securities
 
$
501,351

 

 
501,351

 

 
 
 
 
 
 
 
 
 
Presold mortgages in process of settlement
 
$
4,279

 
4,279

 

 

 
 
 
 
 
 
 
 
 
Nonrecurring
 
 
 
 
 
 
 
 
Impaired loans
 
$
13,071

 

 

 
13,071

Foreclosed real estate
 
7,440

 

 

 
7,440


The following is a description of the valuation methodologies used for instruments measured at fair value.
Presold Mortgages in Process of Settlement - The fair value is based on the committed price that an investor has agreed to pay for the loan and is considered a Level 1 input.
Securities Available for Sale — When quoted market prices are available in an active market, the securities are classified as Level 1 in the valuation hierarchy. If quoted market prices are not available, but fair values can be estimated by observing quoted prices of securities with similar characteristics, the securities are classified as Level 2 on the valuation hierarchy. Most of the fair values for the Company’s Level 2 securities are determined by our third-party bond accounting provider using matrix pricing. Matrix pricing is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other
benchmark quoted securities. For the Company, Level 2 securities include mortgage-backed securities, commercial mortgage-backed obligations, government-sponsored enterprise securities, and corporate bonds. In cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.
The Company reviews the pricing methodologies utilized by the bond accounting provider to ensure the fair value determination is consistent with the applicable accounting guidance and that the investments are properly classified in the fair value hierarchy.
Impaired loans — Fair values for impaired loans in the above table are measured on a non-recurring basis and are based on the underlying collateral values securing the loans, adjusted for estimated selling costs, or the net present value of the cash flows expected to be received for such loans. Collateral may be in the form of real estate or business assets including equipment, inventory and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined using an income or market valuation approach based on an appraisal conducted by an independent, licensed third party appraiser (Level 3). The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable borrower’s financial statements if not considered significant. Likewise, values for inventory and accounts receivable collateral are based on borrower financial statement balances or aging reports on a discounted basis as appropriate (Level 3). Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.
Foreclosed real estate – Foreclosed real estate, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at the lower of cost or fair value. Fair value is measured on a non-recurring basis and is based upon independent market prices or current appraisals that are generally prepared using an income or market valuation approach and conducted by an independent, licensed third party appraiser, adjusted for estimated selling costs (Level 3). At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses. For any real estate valuations subsequent to foreclosure, any excess of the real estate recorded value over the fair value of the real estate is treated as a foreclosed real estate write-down on the Consolidated Statements of Income.
For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2019, the significant unobservable inputs used in the fair value measurements were as follows:
($ in thousands)
 
 
 
 
Description
 
Fair Value at
December 31,
2019
 
Valuation
Technique
 
Significant Unobservable
Inputs
 
Range (Weighted Average)
Impaired loans - valued at collateral value
 
$
10,718

 
Appraised value
 
Discounts applied for estimated costs to sell
 
10%
Impaired loans - valued at PV of expected cash flows
 
$
5,497

 
PV of expected cash flows
 
Discount rates used in the calculation of PV of expected cash flows
 
4-11% (6.50%)
Foreclosed real estate
 
1,830

 
Appraised value
 
Discounts for estimated costs to sell
 
10%
For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2018, the significant unobservable inputs used in the fair value measurements were as follows:
($ in thousands)
 
 
 
 
Description
 
Fair Value at
December 31,
2018
 
Valuation
Technique
 
Significant Unobservable
Inputs
 
General Range
of Significant
Unobservable
Input Values
Impaired loans
 
$
13,071

 
Appraised value; PV of expected cash flows
 
Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell
 
0-10%
Foreclosed real estate
 
7,440

 
Appraised value; List or contract price
 
Discounts to reflect current market conditions and estimated costs to sell
 
0-10%

The carrying amounts and estimated fair values of financial instruments not carried at fair value as of December 31, 2019 and 2018 are as follows:
 
 
 
December 31, 2019
 
December 31, 2018
 
($ in thousands)
Level in
Fair Value
Hierarchy
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
Cash and due from banks, noninterest-bearing
Level 1
 
$
64,519

 
64,519

 
56,050

 
56,050

Due from banks, interest-bearing
Level 1
 
166,783

 
166,783

 
406,848

 
406,848

Securities held to maturity
Level 2
 
67,932

 
68,333

 
101,237

 
99,906

Total loans, net of allowance
Level 3
 
4,432,068

 
4,407,610

 
4,228,025

 
4,181,139

Accrued interest receivable
Level 1
 
16,648

 
16,648

 
16,004

 
16,004

Bank-owned life insurance
Level 1
 
104,441

 
104,441

 
101,878

 
101,878

SBA Servicing Asset
Level 3
 
5,383

 
5,649

 
4,419

 
4,617

 
 
 
 
 
 
 
 
 
 
Deposits
Level 2
 
4,931,355

 
4,930,751

 
4,659,339

 
4,653,522

Borrowings
Level 2
 
300,671

 
295,399

 
406,609

 
402,556

Accrued interest payable
Level 2
 
2,154

 
2,154

 
1,976

 
1,976