FAIR VALUE | 3 Months Ended |
Mar. 31, 2014 |
Fair Value Disclosures [Abstract] | ' |
FAIR VALUE | ' |
NOTE 7 — FAIR VALUE |
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or 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 values: |
Level 1: 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: 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 Company used the following methods and significant assumptions to estimate the fair value of each type of asset and liability: |
Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). |
Derivatives: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). |
Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. |
Foreclosed Assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Foreclosed assets are evaluated on a quarterly basis for additional impairment and adjusted accordingly. |
Loans Held For Sale: Loans held for sale are carried at the lower of cost or fair value, as determined by outstanding commitments, from third party investors (Level 2). |
Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Company has elected the fair value option, are summarized below: |
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| | Fair Value Measurements at | | | | | | | | | |
March 31, 2014 Using: | | | | | | | | |
| | Quoted Prices | | | Significant | | | Significant | | | | | | | | | |
in Active | Other | Unobservable | | | | | | | | |
Markets for | Observable | Inputs | | | | | | | | |
Identical Assets | Inputs | (Level 3) | | | | | | | | |
(Level 1) | (Level 2) | | | | | | | | | |
Financial Assets | | | | | | | | | | | | | | | | | | | | |
Securities available for sale | | | | | | | | | | | | | | | | | | | | |
U.S. government sponsored entities and agencies | | $ | — | | | $ | 15,279 | | | $ | — | | | | | | | | | |
U.S. Treasury securities | | | 5,000 | | | | — | | | | — | | | | | | | | | |
Mortgage-backed securities - residential | | | — | | | | 271,234 | | | | — | | | | | | | | | |
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Total securities available for sale | | $ | 5,000 | | | $ | 286,513 | | | $ | — | | | | | | | | | |
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Mortgage banking derivatives | | $ | — | | | $ | 417 | | | $ | — | | | | | | | | | |
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| | Fair Value Measurements at | | | | | | | | | |
December 31, 2013 Using: | | | | | | | | |
| | Quoted Prices | | | Significant | | | Significant | | | | | | | | | |
in Active | Other | Unobservable | | | | | | | | |
Markets for | Observable | Inputs | | | | | | | | |
Identical Assets | Inputs | (Level 3) | | | | | | | | |
(Level 1) | (Level 2) | | | | | | | | | |
Financial Assets | | | | | | | | | | | | | | | | | | | | |
Securities available for sale | | | | | | | | | | | | | | | | | | | | |
U.S. government sponsored entities and agencies | | $ | — | | | $ | 14,724 | | | $ | — | | | | | | | | | |
Mortgage-backed securities - residential | | | — | | | | 253,791 | | | | — | | | | | | | | | |
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Total securities available for sale | | $ | — | | | $ | 268,515 | | | $ | — | | | | | | | | | |
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Mortgage banking derivatives | | $ | — | | | $ | 464 | | | $ | — | | | | | | | | | |
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There were no transfers between level 1 and 2 during 2014 and 2013. |
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Assets measured at fair value on a non-recurring basis are summarized below: |
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| | Fair Value Measurements at | | | | | | | | | |
March 31, 2014 Using: | | | | | | | | |
| | Quoted Prices | | | Significant | | | Significant | | | | | | | | | |
in Active | Other | Unobservable | | | | | | | | |
Markets for | Observable | Inputs | | | | | | | | |
Identical Assets | Inputs | (Level 3) | | | | | | | | |
(Level 1) | (Level 2) | | | | | | | | | |
Impaired loans with specific allocations | | | | | | | | | | | | | | | | | | | | |
Real estate: | | | | | | | | | | | | | | | | | | | | |
Residential | | $ | — | | | $ | — | | | $ | 1,133 | | | | | | | | | |
Commercial | | | — | | | | — | | | | 920 | | | | | | | | | |
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| | Fair Value Measurements at | | | | | | | | | |
December 31, 2013 Using: | | | | | | | | |
| | Quoted Prices | | | Significant | | | Significant | | | | | | | | | |
in Active | Other | Unobservable | | | | | | | | |
Markets for | Observable | Inputs | | | | | | | | |
Identical Assets | Inputs | (Level 3) | | | | | | | | |
(Level 1) | (Level 2) | | | | | | | | | |
Impaired loans with specific allocations | | | | | | | | | | | | | | | | | | | | |
Real estate: | | | | | | | | | | | | | | | | | | | | |
Residential | | $ | — | | | $ | — | | | $ | 1,133 | | | | | | | | | |
Commercial | | | — | | | | — | | | | 920 | | | | | | | | | |
Impaired loans with specific allocations, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $2,667, with a valuation allowance of $614 at March 31, 2014, resulting in $66 additional provision for loan losses for the three month period ending March 31, 2014. At December 31, 2013 impaired loans had a carrying amount of $2,601, with a valuation allowance of $548. For the three months ended March 31, 2013, no additional provision for loan losses was recorded related to impaired loans recorded at fair value of collateral. |
There were no foreclosed assets as of March 31, 2014. Foreclosed assets measured at fair value less costs to sell, had a net carrying amount of $181 for the year ended December 31, 2013. There were no properties included in this amount that had required write-downs to fair value. Foreclosed assets measured at fair value less costs to sell were written down to fair value resulting in a write-down of $190 for the three month period ending March 31, 2013. |
The following table presents quantitative information about recurring Level 3 fair value measurements at March 31, 2014: |
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| | Fair Value | | | Valuation | | Unobservable | | Range | | | | | | | | | | |
Technique(s) | Input(s) | (Weighted | | | | | | | | | | |
| | Average) | | | | | | | | | | |
Impaired loans: | | | | | | | | | | | | | | | | | | | | |
Residential real estate | | $ | 1,133 | | | Sales comparison | | Adjustment for | | 3%-27%(16%) | | | | | | | | | | |
differences between | | | | | | | | | | |
comparable sales | | | | | | | | | | |
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Commercial real estate | | $ | 920 | | | Sales comparison | | Adjustment for | | 0%-16%(16%) | | | | | | | | | | |
differences between | | | | | | | | | | |
comparable sales | | | | | | | | | | |
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The following table presents quantitative information about recurring Level 3 fair value measurements at December 31, 2013: |
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| | Fair Value | | | Valuation | | Unobservable | | Range | | | | | | | | | | |
Technique(s) | Input(s) | (Weighted | | | | | | | | | | |
| | Average) | | | | | | | | | | |
Impaired loans: | | | | | | | | | | | | | | | | | | | | |
Residential real estate | | $ | 1,133 | | | Sales comparison | | Adjustment for | | 3%-27%(16%) | | | | | | | | | | |
differences between | | | | | | | | | | |
comparable sales | | | | | | | | | | |
| | | | | | | | | | | | | | |
Commercial real estate | | $ | 920 | | | Sales comparison | | Adjustment for | | 0%-16%(16%) | | | | | | | | | | |
differences between | | | | | | | | | | |
comparable sales | | | | | | | | | | |
The carrying amounts and estimated fair values of financial instruments, at March 31, 2014 and December 31, 2013 are as follows: |
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| | Carrying | | | Fair Value Measurements at | |
Amount | March 31, 2014 Using: |
| | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Financial assets | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 30,870 | | | $ | 30,900 | | | $ | — | | | $ | — | | | $ | 30,900 | |
Securities available for sale | | | 291,513 | | | | 5,000 | | | | 286,500 | | | | — | | | | 291,500 | |
Securities held to maturity | | | 60,337 | | | | — | | | | 59,100 | | | | — | | | | 59,100 | |
Loans held for sale | | | 11,232 | | | | — | | | | 11,200 | | | | — | | | | 11,200 | |
Net loans | | | 446,601 | | | | — | | | | — | | | | 445,000 | | | | 445,000 | |
Restricted equity securities | | | 3,032 | | | | n/a | | | | n/a | | | | n/a | | | | n/a | |
Servicing rights, net | | | 2,616 | | | | — | | | | 3,800 | | | | — | | | | 3,800 | |
Accrued interest receivable | | | 2,515 | | | | — | | | | 1,165 | | | | 1,350 | | | | 2,515 | |
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Financial liabilities | | | | | | | | | | | | | | | | | | | | |
Deposits | | $ | 739,634 | | | $ | 538,600 | | | $ | 202,450 | | | $ | — | | | $ | 741,050 | |
Federal funds purchased and repurchase agreements | | | 22,832 | | | | — | | | | 22,830 | | | | — | | | | 22,830 | |
Federal Home Loan Bank advances | | | 33,000 | | | | — | | | | 33,300 | | | | — | | | | 33,300 | |
Accrued interest payable | | | 283 | | | | 17 | | | | 266 | | | | — | | | | 283 | |
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| | Carrying | | | Fair Value Measurements at | |
Amount | December 31, 2013 Using: |
| | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Financial assets | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 18,217 | | | $ | 18,200 | | | $ | — | | | $ | — | | | $ | 18,200 | |
Securities available for sale | | | 268,515 | | | | — | | | | 268,500 | | | | — | | | | 268,500 | |
Securities held to maturity | | | 56,575 | | | | — | | | | 54,000 | | | | — | | | | 54,000 | |
Loans held for sale | | | 10,694 | | | | — | | | | 10,700 | | | | — | | | | 10,700 | |
Net loans | | | 416,404 | | | | — | | | | — | | | | 415,500 | | | | 415,500 | |
Restricted equity securities | | | 3,032 | | | | n/a | | | | n/a | | | | n/a | | | | n/a | |
Mortgage servicing rights | | | 2,640 | | | | — | | | | 3,700 | | | | — | | | | 3,700 | |
Accrued interest receivable | | | 2,396 | | | | — | | | | 1,150 | | | | 1,250 | | | | 2,400 | |
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Financial liabilities | | | | | | | | | | | | | | | | | | | | |
Deposits | | $ | 681,300 | | | $ | 480,000 | | | $ | 202,300 | | | $ | — | | | $ | 682,300 | |
Federal funds purchased and repurchase agreements | | | 24,291 | | | | — | | | | 24,300 | | | | — | | | | 24,300 | |
Federal Home Loan Bank advances | | | 23,000 | | | | — | | | | 23,000 | | | | — | | | | 23,000 | |
Accrued interest payable | | | 222 | | | | 20 | | | | 205 | | | | — | | | | 225 | |
The methods and assumptions not previously described used to estimate fair value are described as follows: |
(a) Cash and Cash Equivalents: The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1. |
(b) Loans: Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price. |
The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification. |
(c) Restricted Equity Securities: It is not practical to determine the fair value of FHLB or Federal Reserve Bank stock due to restrictions placed on its transferability. |
(d) Mortgage Servicing Rights: Fair value of mortgage servicing rights is based on valuation models that calculate the present value of estimated net cash flows based on industry market data. The valuation model incorporates assumptions that market participants would use in estimating future net cash flows resulting in a Level 2 classification. |
(e) Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. The carrying amounts of fixed-term money market accounts approximate their fair values at the reporting date resulting in a Level 1 classification. Fair values for certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification. |
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(f) Federal Funds Purchased and Repurchase Agreements: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification. |
(g) Federal Home Loan Bank Advances: The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification. |
(h) Accrued Interest Receivable/Payable: The carrying amounts of accrued interest approximate fair value resulting in a Level 1 or Level 2 classification based on the asset/liability that they are associated with. |
(i) Off-balance Sheet Instruments: Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material. |