Fair Value Measurements

12 Months Ended

Dec. 31, 2019

Fair Value Disclosures [Abstract]

Fair Value Measurements

9. Fair Value Measurements

The Company follows FASB ASC 820-10, Fair Value Measurements and Disclosures, 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—These instruments 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, distressed debt, 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 December 31, 2019, are as follows:

			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)
(dollars in thousands)
Financial Instruments Measured at Fair Value on a Recurring Basis
Securities AFS
U.S. Treasury	$	—	$	—	$	—	$	—
U.S. Government Agency Sponsored Enterprises		—		—		—		—
SBA Backed Securities		54,211		—		54,211		—
U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities		184,187		—		184,187		—
Privately Issued Residential Mortgage-Backed Securities		396		—		396		—
Obligations Issued by States and Political Subdivisions		18,076		—		4,775		13,301
Other Debt Securities		3,632		—		3,632		—
Total	$	260,502	$	—	$	247,201	$	13,301
Equity Securities	$	1,688	$	343	$	1,345	$	—
Financial Instruments Measured at Fair Value on a Non-recurring Basis
Impaired Loans	$	877	$	—	$	—	$	877

Impaired loan balances in the table above 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 or other type of real estate tax assessment. The types of adjustments that are made to specific provisions relate to impaired loans recognized for 2019 for the estimated credit loss amounted to $79,000.

There were no transfers between level 1, 2 and 3 for the year ended December 31, 2019. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the year ended December 31, 2019.

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) at December 31, 2019. 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(1)	$13,301	Discounted cash flow	Discount rate	1.5%-3.2%(2)
Impaired Loans	877	Appraisal of collateral(3)	Appraisal adjustments(4)	0%-30% discount

(1) Municipal securities generally have maturities of one year or less and, therefore, the amortized cost equates to the fair value.

(2) Weighted averages.

(3)  Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.

(4) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated expenses.

The changes in Level 3 securities for the year ended December 31, 2019 are as shown in the table below:

	Auction Rate Securities		Obligations Issued by States and Political Subdivisions			Total
(dollars in thousands)
Balance at December 31, 2018	$	—	$	88,728		$	88,728
Purchases		—		21,408			21,408
Maturities/redemptions		—		(96,812	)		(96,812	)
Transfer to Level 2		—		—			—
Amortization		—		(23	)		(23	)
Change in fair value		—		—			—
Balance at December 31, 2019	$	—	$	13,301		$	13,301

The amortized cost of Level 3 securities was $13,301,000 with an unrealized loss of $0 at December 31, 2019. The securities in this category are generally municipal securities with no readily determinable fair value or failed auction rate securities. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity.

The results of the fair value hierarchy as of December 31, 2018, are as follows:

	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)
(dollars in thousands)
Financial Instruments Measured at Fair Value on a Recurring Basis Securities AFS
U.S. Treasury	$	1,992	$	—	$	1,992	$	—
U.S. Government Agency Sponsored Enterprises		3,915		—		3,915		—
SBA Backed Securities		70,194		—		70,194		—
U.S. Government Agency and Sponsored Enterprises 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 Impaired Loans	$	251	$	—	$	—	$	251
Other Real Estate Owned	$	2,225	$	—	$	—	$	2,225

Impaired loan balances in the table above 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 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) at December 31, 2018. 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(1)	$	88,728	Discounted cash flow	Discount rate	2.1%-4.1%(2)
Other Real Estate Owned		2,225	Appraisal of collateral(3)	Appraisal adjustments (4)	30% discount
Impaired Loans		251	Appraisal of collateral(3)	Appraisal adjustments (4)	0%-30% discount

(1) Municipal securities generally have maturities of one year or less and, therefore, the amortized cost equates to the fair value.

(2) Weighted averages.

(3) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.

(4) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated expenses.

The changes in Level 3 securities for the year ended December 31, 2018 are as shown in the table below:

	Auction Rate Securities			Obligations Issued by States and Political Subdivisions			Total
(dollars in thousands)
Balance at December 31, 2017	$	4,459		$	78,141		$	82,600
Purchases		—			132,470			132,470
Maturities/redemptions		—			(121,753	)		(121,753	)
Transfer to Level 2		(4,459	)		—			(4,459	)
Amortization		—			(130	)		(130	)
Change in fair value		—			—			—
Balance at December 31, 2018	$	—		$	88,728		$	88,728

The amortized cost of Level 3 securities was $88,728,000 with an unrealized loss of $0 at December 31, 2018. The securities in this category are generally municipal securities with no readily determinable fair value or failed auction rate securities. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity.