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Fair Value Measurements
9 Months Ended
Sep. 30, 2019
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Note 9. Fair Value Measurements
The Company follows FASB ASC 820-10, Fair Value Measurements and Disclosures and ASU 2016-1, “Financial Instruments-Overall” (Subtopic
825-10)
Recognition and Measurement of Financial Assets and Financial Liabilities
, which among other things, requires enhanced disclosures about assets and liabilities carried at fair value. ASC 820-10 establishes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The three broad levels of the hierarchy are as follows:
Level I – Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The type of financial instruments included in Level I are highly liquid cash instruments with quoted prices such as G-7 government, agency securities, listed equities and money market securities, as well as listed derivative instruments.
Level II – Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these financial instruments include cash instruments for which quoted prices are available but traded less frequently, derivative instruments whose fair value have been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed. Instruments which are generally included in this category are corporate bonds and loans, mortgage whole loans, municipal bonds, and OTC derivatives.
Level III – Instruments that have little to no pricing observability as of the reported date. These financial instruments do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. Instruments that are included in this category generally include certain commercial mortgage loans, certain private equity investments, and distressed debt and non-investment grade residual interests in securitizations, as well as certain highly structured OTC derivative contracts.
The results of the fair value hierarchy as of September 30, 2019, are as follows:
Financial Instruments Measured at Fair Value on a Recurring Basis:
 
   
Securities AFS Fair Value Measurements Using
 
   
Carrying
Value
   
Quoted Prices
In Active
Markets for
Identical
Assets
(Level 1)
   
Significant
Observable
Inputs
(Level 2)
   
Significant
Other
Unobservable
Inputs
(Level 3)
 
   
(in thousands)
 
SBA Backed Securities
  
$
 
58,664
 
  
$
 
—  
 
  
$
58,664
 
  
$
—  
 
U.S. Government Agency and Sponsored Mortgage-Backed Securities
  
 
170,282
 
  
 
—  
 
  
 
170,282
 
  
 
—  
 
Privately Issued Residential Mortgage-
 
Backed Securities
  
 
579
 
  
 
—  
 
  
 
579
 
  
 
—  
 
Obligations Issued by States and Political Subdivisions
  
 
28,576
 
  
 
—  
 
  
 
4,775
 
  
 
23,801
 
Other Debt Securities
  
 
3,638
 
  
 
—  
 
  
 
3,638
 
  
 
—  
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  
$
261,739
 
  
$
—  
 
  
$
237,938
 
  
$
23,801
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Equity Securities
  
$
1,672
 
  
$
324
 
  
$
1,348
 
  
$
—  
 
 
Financial Instruments Measured at Fair Value on a Non-recurring Basis:
 
     
Impaired Loans
  
$
173
 
  
$
—  
 
  
$
—  
 
  
$
173
 
Impaired loan balances represent those collateral dependent loans where management has estimated the credit loss by comparing the loan’s carrying value against the expected realizable fair value of the collateral. Fair value is generally determined through a review process that includes independent appraisals, discounted cash flows, or other external assessments of the underlying collateral, which generally include various Level 3 inputs which are not observable. The Company discounts the fair values, as appropriate, based on management’s observations of the local real estate market for loans in this category.
Appraisals, discounted cash flows and real estate tax assessments are reviewed quarterly. There is no specific policy regarding how frequently appraisals will be updated. Adjustments are made to appraisals and real estate tax assessments based on management’s estimate of changes in real estate values. All impaired loans have been reviewed during the past quarter using either a discounted cash flow analysis, appraisal of collateral or other type of real estate tax assessment. The types of adjustments that are made to specific provisions relate
d
to impaired loans recognized for the three and nine month periods ended September 30, 2019 amounted to $(204,837) and $37,099, respectively.
The following table presents additional information about assets measured at fair value on a recurring and nonrecurring basis for which the Company has utilized Level 3 inputs to determine fair value (dollars in thousands). Management continues to monitor the assumptions used to value the assets listed below.
 
Asset
  
Fair Value
   
Valuation Technique
  
Unobservable Input
  
Unobservable Input
Value or Range
Securities AFS (4)
  
$
23,801
 
  
Discounted cash flow
  
Discount rate
  
1.7%-3.1% (3)
Impaired Loans
  
$
173
 
  
Appraisal of collateral (1)
  
Appraisal adjustments (2)
  
0%-30% discount
 
(1)
Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.
(2)
Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated expenses.
(3)
Weighted averages.
(4)
Municipal securities generally have maturities of one year or less and, therefore, the amortized cost equates to the fair value.
The changes in Level 3 securities for the nine month period ended September 30, 2019 are shown in the table below:
 
   
Obligations
Issued by States
& Political
Subdivisions
 
   
(in thousands)
 
Balance at December 31, 2018
  
$
88,728
 
Purchases
  
 
13,290
 
Maturities and calls
  
 
(78,196
Amortization
  
 
(21
)
   
 
 
 
Balance at September 30, 2019
  
$
23,801
 
   
 
 
 
The amortized cost of Level 3 securities was $23,801,000 at September 30, 2019 with an unrealized loss of $0. The securities in this category are generally municipal securities with no readily determinable fair value. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity.
The fair value of impaired loans decreased by $78,000, for the first nine months of 2019, mainly attributable to one loan that was removed from impaired loans. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the nine month period ended September 30, 2019.
The changes in Level 3 securities for the nine month period ended September 30, 2018, are shown in the table below:
 
   Auction Rate
Securities
   Obligations
Issued by States
& Political
Subdivisions
   Total 
   (in thousands) 
Balance at December 31, 2017
  $4,459   $78,141   $82,600 
Purchases
   —      105,837    105,837 
Maturities and calls
   —      (72,640   (72,640
Transfer to Level 2
   (4,459   —      (4,459
Amortization
   —      (104   (104
Changes in fair value
   —      —      —   
   
 
 
   
 
 
   
 
 
 
Balance at September 30, 2018
  $—     $111,234   $111,234 
   
 
 
   
 
 
   
 
 
 
The amortized cost of Level 3 securities was $111,234,000 at September 30, 2018 with an unrealized loss of $0. The securities in this category are generally municipal securities with no readily determinable fair. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity. There was one transfer of a security from level 3 to level 2 for the nine months ended September 30, 2018 as a result of increased trading activity and quoted market prices. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the nine month period ended September 30, 2018.
The results of the fair value hierarchy as of December 31, 2018, are as follows:
Financial Instruments Measured at Fair Value on a Recurring Basis:
 
   Securities AFS Fair Value Measurements Using 
   Carrying
Value
   Quoted Prices
In Active
Markets for
Identical
Assets
(Level 1)
   Significant
Observable
Inputs
(Level 2)
   Significant
Other
Unobservable
Inputs
(Level 3)
 
   (in thousands) 
U.S. Treasury
  $1,992   $—     $1,992   $—   
U.S. Government Sponsored Enterprises
   3,915    —      3,915    —   
SBA Backed Securities
   70,194    —      70,194    —   
U.S. Government Agency and Sponsored Mortgage-Backed Securities
   162,890    —      162,890    —   
Privately Issued Residential Mortgage-
 
Backed Securities
   672    —      672    —   
Obligations Issued by States and Political Subdivisions
   93,503    —      4,775    88,728 
Other Debt Securities
   3,593         3,593      
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $336,759   $—     $248,031   $88,728 
   
 
 
   
 
 
   
 
 
   
 
 
 
Equity Securities
  $1,596   $293   $1,303   $—   
 
Financial Instruments Measured at Fair Value on a Non-recurring Basis:
 
     
Other Real Estate Owned
  $2,225   $—     $—     $2,225 
Impaired Loans
  $251   $—     $—     $251 
Impaired loan balances represent those collateral dependent loans where management has estimated the credit loss by comparing the loan’s carrying value against the expected realizable fair value of the collateral. Fair value is generally determined through a review process that includes independent appraisals, discounted cash flows, or other external assessments of the underlying collateral, which generally include various Level 3 inputs which are not identifiable. The Company discounts the fair values, as appropriate, based on management’s observations of the local real estate market for loans in this category.
Appraisals, discounted cash flows and real estate tax assessments are reviewed quarterly. There is no specific policy regarding how frequently appraisals will be updated. Adjustments are made to appraisals and real estate tax assessments based on management’s estimate of changes in real estate values. Within the past twelve months there have been no updated appraisals, however, all impaired loans have been reviewed during the past quarter using either a discounted cash flow analysis, appraisal of collateral or other type of real estate tax assessment. The types of adjustments that are made to specific provisions relate to impaired loans recognized for 2018 for the estimated credit loss amounted to $540,000.
There was a transfer of an auction rate security during 2018 from level 3 to level 2. Quoted prices on the auction rate security became available but traded infrequently. There were no other transfers between level 1, 2 and 3 for the year ended December 31, 2018. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the year ended December 31, 2018.
The following table presents additional information about assets measured at fair value on a recurring and nonrecurring basis for which the Company has utilized Level 3 inputs to determine fair value (dollars in thousands). Management continues to monitor the assumptions used to value the assets listed below.
 
Asset
  Fair Value   
Valuation Technique
  
Unobservable Input
  
Unobservable Input
Value or Range
Securities AFS (4)
  $88,728   Discounted cash flow  Discount rate  2.1%-4.1% (3)
Other Real Estate Owned
  $2,225   Appraisal of collateral (1)  Appraisal adjustments (2)  30% discount
Impaired Loans
  $251   Appraisal of collateral (1)  Appraisal adjustments (2)  0%-30% discount
 
(1)
Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.
(2)
Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated expenses.
(3)
Weighted averages.
(4)
Municipal securities generally have maturities of one year or less and, therefore, the amortized cost equates to the fair value.