Fair Value of Assets and Liabilities

12 Months Ended

Dec. 31, 2019

Determination of Fair Value:

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the “Fair Value Measurements and Disclosures” ASC Topic 820, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

Fair Value Hierarchy:

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 - Valuation is based on quoted prices in active markets for identical assets or liabilities.

Level 2 - Valuation is based on inputs other than quoted prices included within Level I that are observable for the asset or liability, either directly or indirectly.

Level 3 - Valuation is based on unobservable inputs that are supported by little or no market activity. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

The following methodologies were used by the Company in estimating fair value disclosures for financial instruments:

Securities Available-for-Sale: Where quoted prices are available in an active market, management classifies the securities within Level 1 of the valuation hierarchy. If quoted market prices are not available, management estimates fair values using pricing models that use observable inputs or quoted prices at securities with similar characteristics. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, including GSE obligations, corporate bonds, and other securities. Mortgage-backed securities are included in Level 2 if observable inputs are available. In certain cases where there is limited activity or less transparency around inputs to the valuation, management classifies those securities in Level 3.

Restricted Investments: It is not practicable to determine the fair value of restricted investments due the restrictions placed on its transferability and are not readily marketable and are evaluated for impairment based on the ultimate recoverability of the par value.

Loans: Fair value for variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair value for fixed rate loans are estimated using discounted cash flow analyses, using market interest rates for comparable loans. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. These methods are considered Level 3 inputs.

Deposits: The fair values for demand deposits (for example, interest and noninterest checking, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). Fair values for fixed-rate time deposits are estimated using a discounted cash flow calculation that applies market interest rates on comparable instruments to a schedule of aggregated expected monthly maturities on time deposits.

Securities Sold Under Agreement to Repurchase: The carrying value of these liabilities approximates their fair value.

Federal Home Loan Bank ("FHLB") Advances, Subordinated Debt and Other Borrowings: The fair value of the FHLB fixed rate borrowings are estimated using discounted cash flows, based on the current incremental borrowing rates for similar types of borrowing arrangements, and are considered Level 2 inputs. The carrying value of FHLB floating rate borrowings and floating rate other borrowings and subordinated debt approximates their fair value and are considered Level 1 inputs. The fair value of the subordinated debt borrowings are estimated using discounted cash flows and are considered Level 3 inputs

Derivative Financial Instruments - Fair value is estimated using pricing models of derivatives with similar characteristics or discounted cash flow models where future floating cash flows are projected and discounted back; and accordingly, these derivatives are classified within Level 2 of the fair value hierarchy.

Commitments to Extend Credit and Standby Letters of Credit: Because commitments to extend credit and standby letters of credit are made using variable rates and have short maturities, the carrying value and the fair value are immaterial for disclosure.

Measurements of Fair Value:

Assets recorded at fair value on a recurring basis are as follows, in thousands


	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
December 31, 2019
Assets:
Securities available-for-sale:
U.S. Government-sponsored enterprises (GSEs)	$	19,000	$	—	$	19,000	$	—
Municipal securities	64,391		—		64,391		—
Other debt securities	3,470		—		3,470		—
Mortgage-backed securities	91,487		—		91,487		—
Total securities available-for-sale	$	178,348	$	—	$	178,348	$	—

Liabilities:
Derivative financial instruments	$	3,446	$	—	$	3,446	$	—


	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
December 31, 2018
Assets:
Securities available-for-sale:
U.S. Government-sponsored enterprises (GSEs)	$	43,503	$	—	$	43,503	$	—
Municipal securities	55,161		—		55,161		—
Other debt securities	910		—		910		—
Mortgage-backed securities	102,114		—		102,114		—
Total securities available-for-sale	$	201,688	$	—	$	201,688	$	—

Liabilities:
Derivative financial instruments	$	1,174	$	—	$	1,174	$	—

The Company has no assets or liabilities whose fair values are measured on a recurring basis using Level 3 inputs. Additionally, there were no transfers between Level 1 and Level 2 in the fair value hierarchy.

Assets Measured at Fair Value on a Nonrecurring Basis:

The tables below present the recorded amount of assets and liabilities measured at fair value on a nonrecurring basis, (in thousands):


	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
December 31, 2019:
Impaired loans	$	2,185	$	—	$	—	$	2,185
OREO	1,757		—		—		1,757


December 31, 2018:
Impaired loans	$	671	$	—	$	—	$	671
OREO	2,495		—		—		2,495

For Level 3 assets measured at fair value, the significant unobservable inputs used in the fair value measurements are presented below (dollars in thousands):

Fair Value

Valuation

Technique

Significant Other

Unobservable Input

Weighted

Average of Input

December 31, 2019:

Impaired loans

2,185

Appraisal and cashflow

Appraisal and cashflow discounts

OREO

1,757

Appraisal

Appraisal discounts


December 31, 2018:
Impaired loans	$	671	Appraisal	Appraisal discounts	44	%
OREO	2,495		Appraisal	Appraisal discounts	23	%

Impaired Loans: Loans considered impaired under ASC 310-10-35, Receivables, are loans for which, based on current information and events, it is probable that the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans can be measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral less selling costs if the loan is collateral dependent. The fair value of impaired loans were measured based on the value of the collateral securing these loans or the discounted cash flows of the loans, as applicable. Impaired loans are classified within Level 3 of the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory, and/or accounts receivable. The Company determines the value of the collateral based on independent appraisals performed by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraised values are discounted for costs to sell and may be discounted further based on management’s historical knowledge, changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts by management are subjective and are typically significant unobservable inputs for determining fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors discussed above.

OREO: OREO assets, consisting of properties obtained through foreclosure or in satisfaction of loans, are initially recorded at fair value less estimated costs to sell upon transfer of the loans to other real estate. Subsequently, other real estate is carried at the lower of carrying value or fair value less costs to sell. Fair values are generally based on third party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes further discounted based on management’s historical knowledge, and/or changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts are typically significant unobservable inputs for determining fair value. In cases where the carrying amount exceeds the fair value, less estimated costs to sell, a loss is recognized in noninterest expense.

Carrying value and estimated fair value:

The carrying amount and estimated fair value of the Company’s financial instruments at December 31, 2019 and December 31, 2018 are as follows (in thousands):


	December 31, 2019
			Fair Value Measurements Using
	Carrying Amount		Level 1	Level 2	Level 3	Estimated Fair Value
Assets:
Cash and cash equivalents	$	183,971	183,971	—	—	$	183,971
Securities available-for-sale	178,348		—	178,348	—	178,348
Restricted investments	12,913		N/A	N/A	N/A	N/A
Loans, net	1,893,005		—	—	1,879,825	1,879,825

Liabilities:
Noninterest-bearing demand deposits	364,155		—	364,155	—	364,155
Interest-bearing demand deposits	380,234		—	380,234	—	380,234
Money Market and Savings deposits	623,284		—	623,284	—	623,284
Time deposits	679,541		—	681,902	—	681,902
Securities sold under agreements to repurchase	6,184		—	6,184	—	6,184
Federal Home Loan Bank advances and other borrowings	25,439		—	24,845	—	24,845
Subordinated debt	39,261		—	—	35,868	35,868
Derivative financial instruments	3,446		—	3,446	—	3,446


	December 31, 2018
			Fair Value Measurements Using
	Carrying Amount		Level 1	Level 2	Level 3	Estimated Fair Value
Assets:
Cash and cash equivalents	$	115,822	115,822	—	—	$	115,822
Securities available-for-sale	201,688		—	201,688	—	201,688
Restricted investments	11,499		N/A	N/A	N/A	N/A
Loans, net	1,768,964		—	—	1,766,838	1,766,838

Liabilities:
Noninterest-bearing demand deposits	319,861		—	319,861	—	319,861
Interest-bearing demand deposits	311,482		—	311,482	—	311,482
Money Market and Savings deposits	641,945		—	641,945	—	641,945
Time deposits	648,675		—	648,169	—	649,169
Securities sold under agreements to repurchase	11,756		—	11,756	—	11,756
Federal Home Loan Bank advances and other borrowings	11,243		—	11,243	—	11,243
Subordinated debt	39,177		—	—	39,190	39,190
Derivative financial instruments	1,174		—	1,174	—	1,174

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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