Quarterly report pursuant to Section 13 or 15(d)

Fair Value

v3.10.0.1
Fair Value
9 Months Ended
Sep. 30, 2018
Fair Value Disclosures [Abstract]  
Fair Value Disclosures [Text Block]
Note 13 - Fair Value
 
The Fair Value Measurements Topic establishes a hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Topic describes three levels of inputs that may be used to measure fair value:
 
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 fair values of securities available-for-sale are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges or pricing models utilizing significant observable inputs such as matrix pricing, which 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. Different judgments and assumptions used in pricing could result in different estimates of value. In certain cases where market data is not readily available because of a lack of market activity or little public disclosure, values may be based on unobservable inputs and classified in Level 3 of the fair value hierarchy.
 
At the end of each reporting period, securities held in the investment portfolio are evaluated on an individual security level for other-than-temporary impairment in accordance with the
Investments – Debt and Equity Securities
Topic. Impairment is other-than-temporary if the decline in the fair value is below its amortized cost and it is probable that all amounts due according to the contractual terms of a debt security will not be received. Significant judgments are required in determining impairment, which include making assumptions regarding the estimated prepayments, loss assumptions and the change in interest rates. The Bancorp considers the following factors when determining an other-than-temporary impairment for a security: the length of time and the extent to which the market value has been less than amortized cost; the financial condition and near-term prospects of the issuer; the underlying fundamentals of the relevant market and the outlook for such market for the near future; an assessment of whether the Bancorp (1) has the intent to sell the debt securities or (2) more likely than not will be required to sell the debt securities before their anticipated market recovery. If either of these conditions is met, management will recognize other-than-temporary impairment. If, in management’s judgment, an other-than-temporary impairment exists, the cost basis of the security will be written down for the credit loss, and the unrealized loss will be transferred from accumulated other comprehensive loss as an immediate reduction of current earnings.
 
The Bancorp’s management utilizes a specialist to perform an other-than-temporary impairment analysis for each of its pooled trust preferred securities. The analysis is performed annually during December and utilizes analytical models used to project future cash flows for the pooled trust preferred securities based on current assumptions for prepayments, default and deferral rates, and recoveries. The projected cash flows are then tested for impairment consistent with the
Investments – Other
Topic and the
Investments – Debt and Equity Securities
Topic. The other-than-temporary impairment testing compares the present value of the cash flows from quarter to quarter to determine if there is a “favorable” or “adverse” change. Other-than-temporary impairment is recorded if the projected present value of cash flows is lower than the book value of the security. To perform the annual other-than-temporary impairment analysis, management utilizes current reports issued by the trustee, which contain principal and interest tests, waterfall distributions, note valuations, collection detail and credit ratings for each pooled trust preferred security. In addition, a detailed review of the performing collateral was performed. Based on current market conditions and a review of the trustee reports, management performed an analysis of the pooled trust preferred securities and no additional impairment was taken at December 31, 2017. During the second quarter of 2018, upon management review, the Bancorp decided to review for trust preferred security impairment annually, a change from semi-annual review previously disclosed. A specialist will be used to review all pooled trust preferred securities again at December 31, 2018.
 
The table below shows the credit loss roll forward on a year-to-date basis for the Bancorp’s pooled trust preferred securities that have been classified with other-than-temporary impairment:
 
 
 
Collateralized
 
 
 
debt obligations
 
 
 
other-than-temporary
 
(Dollars in thousands)
 
impairment
 
Ending balance, December 31, 2017
 
$
271
 
Additions not previously recognized
 
 
-
 
Ending balance, September 30, 2018
 
$
271
 
 
At September 30, 2018, trust preferred securities with a cost basis of $3.5 million continue to be in “payment in kind” status. These trust preferred securities classified as “payment in kind” are a result of not receiving the scheduled quarterly interest payments. For these trust preferred securities in “payment in kind” status, management anticipates to receive the unpaid contractual interest payments from the issuer, because of the self-correcting cash flow waterfall provisions within the structure of the securities. When a tranche senior to the Bancorp’s position fails the coverage test, the Bancorp’s interest cash flows are paid to the senior tranche and recorded as a reduction of principal. The coverage test represents an over collateralization target by stating the balance of the performing collateral as a percentage of the balance of the Bancorp’s tranche, plus the balance of all senior tranches. The principal reduction in the senior tranche continues until the appropriate coverage test is passed. As a result of the principal reduction in the senior tranche, more cash is available for future payments to the Bancorp’s tranche. Consistent with the
Investments – Debt and Equity Securities Topic
, management considered the failure of the issuer of the security to make scheduled interest payments in determining whether a credit loss existed. Management will not capitalize the “payment in kind” interest payments to the book value of the securities and will keep these securities in non-accrual status until the quarterly interest payments resume on a consistent basis.
 
Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
There were no transfers to or from Levels 1 and 2 during the nine months ended September 30, 2018. Assets measured at fair value on a recurring basis are summarized below:
 
 
 
 
 
 
Fair Value Measurements at September 30, 2018 Using
 
(Dollars in thousands)
 
Estimated

Fair

Value
 
 
Quoted Prices in

Active Markets

for Identical

Assets

(Level 1)
 
 
Significant Other

Observable

Inputs

(Level 2)
 
 
Significant

Unobservable

Inputs

(Level 3)
 
Available-for-sale debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market fund
 
$
2,018
 
 
$
2,018
 
 
$
-
 
 
$
-
 
U.S. government sponsored entities
 
 
9,768
 
 
 
-
 
 
 
9,768
 
 
 
-
 
Collateralized mortgage obligations and  residential mortgage-backed securities
 
 
132,670
 
 
 
-
 
 
 
132,670
 
 
 
-
 
Municipal securities
 
 
91,416
 
 
 
-
 
 
 
91,416
 
 
 
-
 
Collateralized debt obligations
 
 
2,199
 
 
 
-
 
 
 
-
 
 
 
2,199
 
Total securities available-for-sale
 
$
238,071
 
 
$
2,018
 
 
$
233,854
 
 
$
2,199
 
 
 
 
 
 
 
Fair Value Measurements at December 31, 2017 Using
 
(Dollars in thousands)
 
Estimated

Fair

Value
 
 
Quoted Prices in

Active Markets

for Identical

Assets

(Level 1)
 
 
Significant Other

Observable

Inputs

(Level 2)
 
 
Significant

Unobservable

Inputs

(Level 3)
 
Available-for-sale debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market fund
 
$
476
 
 
$
476
 
 
$
-
 
 
$
-
 
U.S. government sponsored entities
 
 
3,890
 
 
 
-
 
 
 
3,890
 
 
 
-
 
Collateralized mortgage obligations and  residential mortgage-backed securities
 
 
132,938
 
 
 
-
 
 
 
132,938
 
 
 
-
 
Municipal securities
 
 
103,747
 
 
 
-
 
 
 
103,747
 
 
 
-
 
Collateralized debt obligations
 
 
3,439
 
 
 
-
 
 
 
-
 
 
 
3,439
 
Total securities available-for-sale
 
$
244,490
 
 
$
476
 
 
$
240,575
 
 
$
3,439
 
 
A roll forward of available-for-sale securities, which require significant adjustment based on unobservable data, are presented in the following table:
 
(Dollars in thousands)
 
Estimated Fair Value

Measurements Using

Significant Unobservable

Inputs (Level 3)
 
 
 
Available-for-

sale securities
 
Beginning balance, January 1, 2017
 
$
2,409
 
Principal payments
 
 
(154
)
Total unrealized gains, included in other comprehensive income
 
 
1,184
 
Transfers in and/or (out) of Level 3
 
 
-
 
Ending balance, December 31, 2017
 
$
3,439
 
 
 
 
 
 
Beginning balance, January 1, 2018
 
$
3,439
 
Principal payments
 
 
(38
)
Total unrealized gains, included in other comprehensive income
 
 
101
 
Sale out of Level 3
 
 
(1,303
)
Ending balance, September 30, 2018
 
$
2,199
 
 
Assets measured at fair value on a non-recurring basis are summarized below:
 
 
 
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
Fair Value Measurements at September 30, 2018 Using
 
(Dollars in thousands)
 
Estimated

Fair

Value
 
 
Quoted Prices in

Active Markets

for Identical

Assets

(Level 1)
 
 
Significant Other

Observable

Inputs

(Level 2)
 
 
Significant

Unobservable

Inputs

(Level 3)
 
Impaired loans
 
$
6,843
 
 
$
-
 
 
$
-
 
 
$
6,843
 
Foreclosed real estate
 
 
2,125
 
 
 
-
 
 
 
-
 
 
 
2,125
 
 
 
 
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
Fair Value Measurements at December 31, 2017 Using
 
(Dollars in thousands)
 
Estimated

Fair

Value
 
 
Quoted Prices in

Active Markets

for Identical

Assets

(Level 1)
 
 
Significant Other

Observable

Inputs

(Level 2)
 
 
Significant

Unobservable

Inputs

(Level 3)
 
Impaired loans
 
$
1,818
 
 
$
-
 
 
$
-
 
 
$
1,818
 
Foreclosed real estate
 
 
1,699
 
 
 
-
 
 
 
-
 
 
 
1,699
 
 
The fair value of impaired loans with specific allocations of the allowance for loan losses or loans for which charge-offs have been taken is generally based on a present value of cash flows or, for collateral dependent loans, based on recent real estate appraisals. Appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. The recorded investment in impaired loans was approximately $7.2 million and the related specific reserves totaled approximately $376 thousand, resulting in a fair value of impaired loans totaling approximately $6.8 million, at September 30, 2018. The recorded investment of impaired loans was approximately $2.5 million and the related specific reserves totaled approximately $704 thousand, resulting in a fair value of impaired loans totaling approximately $1.8 million, at December 31, 2017. Fair value is determined, where possible, using market prices derived from an appraisal or evaluation, which are considered to be Level 2 inputs. However, certain assumptions and unobservable inputs are often used by the appraiser, therefore, qualifying the assets as Level 3 in the fair value hierarchy. The fair value of foreclosed real estate is similarly determined by using the results of recent real estate appraisals. The numerical range of unobservable inputs for these valuation assumptions is not meaningful to this presentation.
 
The following table shows carrying values and related estimated fair values of financial instruments as of the dates indicated. Estimated fair values are further categorized by the inputs used to measure fair value. Items that are not financial instruments are not included.
 
 
 
September 30, 2018
 
 
Estimated Fair Value Measurements at September 30, 2018 Using
 
(Dollars in thousands)
 
Carrying

Value
 
 
Estimated

Fair Value
 
 
Quoted Prices in

 Active Markets for

Identical Assets

(Level 1)
 
 
Significant

Other Observable

Inputs

(Level 2)
 
 
Significant

Unobservable

Inputs

(Level 3)
 
Financial assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
13,964
 
 
$
13,964
 
 
$
13,964
 
 
$
-
 
 
$
-
 
Certificates of deposit in other financial institutions
 
 
3,754
 
 
 
3,673
 
 
 
-
 
 
 
3,673
 
 
 
-
 
Securities available-for-sale
 
 
238,071
 
 
 
238,071
 
 
 
2,018
 
 
 
233,854
 
 
 
2,199
 
Loans held-for-sale
 
 
4,483
 
 
 
4,566
 
 
 
4,566
 
 
 
-
 
 
 
-
 
Loans receivable, net
 
 
734,483
 
 
 
717,640
 
 
 
-
 
 
 
-
 
 
 
717,640
 
Federal Home Loan Bank stock
 
 
3,236
 
 
 
3,236
 
 
 
-
 
 
 
3,236
 
 
 
-
 
Accrued interest receivable
 
 
3,560
 
 
 
3,560
 
 
 
-
 
 
 
3,560
 
 
 
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest bearing deposits
 
 
134,449
 
 
 
134,449
 
 
 
134,449
 
 
 
-
 
 
 
-
 
Interest bearing deposits
 
 
768,307
 
 
 
765,232
 
 
 
514,311
 
 
 
250,921
 
 
 
-
 
Repurchase agreements
 
 
12,585
 
 
 
12,580
 
 
 
10,823
 
 
 
1,757
 
 
 
-
 
Borrowed funds
 
 
48,314
 
 
 
48,698
 
 
 
13,766
 
 
 
34,932
 
 
 
-
 
Interest rate swap agreements
 
 
111
 
 
 
111
 
 
 
-
 
 
 
111
 
 
 
-
 
Accrued interest payable
 
 
110
 
 
 
110
 
 
 
-
 
 
 
110
 
 
 
-
 
 
 
 
December 31, 2017
 
 
Estimated Fair Value Measurements at December 31, 2017 Using
 
(Dollars in thousands)
 
Carrying

Value
 
 
Estimated

Fair Value
 
 
Quoted Prices in

 Active Markets for

Identical Assets

(Level 1)
 
 
Significant

Other Observable

Inputs

(Level 2)
 
 
Significant

Unobservable

Inputs

(Level 3)
 
Financial assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
11,025
 
 
$
11,025
 
 
$
11,025
 
 
$
-
 
 
$
-
 
Certificates of deposit in other financial institutions
 
 
1,676
 
 
 
1,640
 
 
 
-
 
 
 
1,640
 
 
 
-
 
Securities available-for-sale
 
 
244,490
 
 
 
244,490
 
 
 
476
 
 
 
240,575
 
 
 
3,439
 
Loans held-for-sale
 
 
1,592
 
 
 
1,625
 
 
 
1,625
 
 
 
-
 
 
 
-
 
Loans receivable, net
 
 
612,729
 
 
 
608,506
 
 
 
-
 
 
 
-
 
 
 
608,506
 
Federal Home Loan Bank stock
 
 
3,000
 
 
 
3,000
 
 
 
-
 
 
 
3,000
 
 
 
-
 
Accrued interest receivable
 
 
3,262
 
 
 
3,262
 
 
 
-
 
 
 
3,262
 
 
 
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest bearing deposits
 
 
120,556
 
 
 
120,556
 
 
 
120,556
 
 
 
-
 
 
 
-
 
Interest bearing deposits
 
 
672,448
 
 
 
670,967
 
 
 
488,528
 
 
 
182,439
 
 
 
-
 
Repurchase agreements
 
 
11,300
 
 
 
11,292
 
 
 
9,545
 
 
 
1,747
 
 
 
-
 
Borrowed funds
 
 
20,881
 
 
 
20,818
 
 
 
600
 
 
 
20,218
 
 
 
-
 
Accrued interest payable
 
 
42
 
 
 
42
 
 
 
-
 
 
 
42
 
 
 
-
 
 
The following methods were used to estimate the fair value of financial instruments presented in the preceding table for the period ended September 30, 2018:
 
Cash and cash equivalents carrying amounts approximate fair value. Certificates of deposit in other financial institutions carrying amounts approximate fair value (Level 2).The fair values of securities available-for-sale are obtained from broker pricing (Level 2), with the exception of collateralized debt obligations, which are valued by a third-party specialist (Level 3). Loans held-for-sale comprise residential mortgages and are priced based on values established by the secondary mortgage markets (Level 1). The estimated fair value for net loans receivable is based on an exit price basis incorporating discounts for credit, liquidity, and marketability factors (Level 3). This is not comparable with the fair values disclosed for December 31, 2017, which were based on estimates of the rate the Bancorp would charge for similar such loans, applied for the time period until estimated repayment, in addition to appraisals which may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Federal Home Loan Bank stock is estimated at book value due to restrictions that limit the sale or transfer of the security. Fair value of accrued interest receivable and payable approximates book value, as the carrying values are determined using the observable interest rate, balance, and last payment date.
 
Non-interest and interest bearing deposits, which include checking, savings, and money market deposits, are estimated to have fair values based on the amount payable as of the reporting date (Level 1). The fair value of fixed-maturity certificates of deposit (included in interest bearing deposits) are based on estimates of the rate the Bancorp would pay on similar deposits, applied for the time period until maturity (Level 2). Estimated fair values for short-term repurchase agreements, which represent sweeps from demand deposits to accounts secured by pledged securities, are estimated based on the amount payable as of the reporting date (Level 1). Longer-term repurchase agreements, with contractual maturity dates of quarter or more, are based on estimates of the rate the Bancorp would pay on similar deposits, applied for the time period until maturity (Level 2). Short-term borrowings are generally only held overnight, therefore, their carrying amount is a reasonable estimate of fair value (Level 1). The fair value of FHLB Advances (included in borrowed funds) are estimated by discounting the future cash flows using quoted rates from the FHLB for similar advances with similar maturities (Level 2). The estimated fair value of other financial instruments, and off-balance sheet loan commitments, approximate cost and are not considered significant to this presentation.
 
The following methods were used to estimate the fair value of financial instruments presented in the preceding table for the period ended December 31, 2017:
 
Cash and cash equivalent carrying amounts approximate fair value. Certificates of deposit in other financial institutions carrying amounts approximate fair value (Level 2). The fair values of securities available-for-sale are obtained from broker pricing (Level 2), with the exception of collateralized debt obligations, which are valued by a third-party specialist (Level 3). Loans held-for-sale comprise residential mortgages and are priced based on values established by the secondary mortgage markets (Level 1). The estimated fair value for net loans receivable is based on estimates of the rate the Bancorp would charge for similar such loans, applied for the time period until estimated repayment, in addition to appraisals which may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach (Level 3). Federal Home Loan Bank stock is estimated at book value due to restrictions that limit the sale or transfer of the security. Fair values of accrued interest receivable and payable approximate book value, as the carrying values are determined using the observable interest rate, balance, and last payment date.
 
Non-interest and interest bearing deposits, which include checking, savings, and money market deposits, are estimated to have fair values based on the amount payable as of the reporting date (Level 1). The fair value of fixed-maturity certificates of deposit (included in interest bearing deposits) are based on estimates of the rate the Bancorp would pay on similar deposits, applied for the time period until maturity (Level 2). Estimated fair values for short-term repurchase agreements, which represent sweeps from demand deposits to accounts secured by pledged securities, are estimated based on the amount payable as of the reporting date (Level 1). Longer-term repurchase agreements, with contractual maturity dates of three months or more, are based on estimates of the rate the Bancorp would pay on similar deposits, applied for the time period until maturity (Level 2). Short-term borrowings are generally only held overnight, therefore, their carrying amount is a reasonable estimate of fair value (Level 1). The fair value of FHLB Advances are estimated by discounting the future cash flows using quoted rates from the FHLB for similar advances with similar maturities (Level 2). The estimated fair value of other financial instruments, and off-balance sheet loan commitments, approximate cost and are not considered significant to this presentation.