NOTE 7 – Fair Value Accounting

FASB ASC 820, “Fair Value Measurement and Disclosures,” defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an 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. FASB ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 – Quoted market price in active markets
Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include certain debt and equity securities that are traded in an active exchange market.

Level 2 – Significant other observable inputs
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 for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include fixed income securities and mortgage-backed securities that are held in the Company’s available-for-sale portfolio and valued by a third-party pricing service, as well as certain impaired loans.

Level 3 – Significant unobservable inputs
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. 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 the determination of fair value requires significant management judgment or estimation. These methodologies may result in a significant portion of the fair value being derived from unobservable data.

The methods of determining the fair value of assets and liabilities presented in this note are consistent with our methodologies disclosed in Note 13 of the Company’s 2018 Annual Report on Form 10-K. The Company’s loan portfolio is initially fair valued using a segmented approach, using the eight categories as disclosed in Note 4 – Loans and Allowance for Loan Losses. Loans are considered a Level 3 classification.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018.


	September 30, 2019
(dollars in thousands)	Level 1		Level 2	Level 3	Total
Assets
Securities available for sale
US government agencies	$	-	13,765	-	13,765
SBA securities		-	3,804	-	3,804
State and political subdivisions		-	9,240	-	9,240
Asset-backed securities		-	12,273	-	12,273
Mortgage-backed securities		-	50,345	-	50,345
Mortgage loans held for sale		-	40,630	-	40,630
Mortgage loan interest rate lock commitments		-	682	-	682
Total assets measured at fair value on a recurring basis	$	-	130,739	-	130,739

Liabilities
MBS forward sales commitments	$	-	71	-	71
Total liabilities measured at fair value on a recurring basis	$	-	71	-	71

	December 31, 2018
(dollars in thousands)	Level 1		Level 2	Level 3	Total
Assets
Securities available for sale:
US government agencies	$	-	8,782	-	8,782
SBA securities		-	3,525	-	3,525
State and political subdivisions		-	8,356	-	8,356
Asset-backed securities		-	9,558	-	9,558
Mortgage-backed securities		-	44,684	-	44,684
Mortgage loans held for sale		-	9,241	-	9,241
Mortgage loan interest rate lock commitments		-	345	-	345
Total assets measured at fair value on a recurring basis	$	-	84,491	-	84,491

Liabilities
MBS forward sales commitments	$	-	121	-	121
Total liabilities measured at fair value on a recurring basis	$	-	121	-	121

Assets and Liabilities Recorded 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 as of September 30, 2019 and December 31, 2018.


	As of September 30, 2019
(dollars in thousands)	Level 1		Level 2	Level 3	Total
Assets
Impaired loans	$	-	4,357	6,948	11,305
Total assets measured at fair value on a nonrecurring basis	$	-	4,357	6,948	11,305


	As of December 31, 2018
(dollars in thousands)	Level 1		Level 2	Level 3	Total
Assets
Impaired loans	$	-	2,190	8,368	10,558
Total assets measured at fair value on a nonrecurring basis	$	-	2,190	8,368	10,558

The Company had no liabilities carried at fair value or measured at fair value on a nonrecurring basis.

Fair Value of Financial Instruments
Financial instruments require disclosure of fair value information, whether or not recognized in the consolidated balance sheets, when it is practical to estimate the fair value. A financial instrument is defined as cash, evidence of an ownership interest in an entity or a contractual obligation which requires the exchange of cash. Certain items are specifically excluded from the disclosure requirements, including the Company’s common stock, premises and equipment and other assets and liabilities.

The estimated fair values of the Company’s financial instruments at September 30, 2019 and December 31, 2018 are as follows:


	September 30, 2019
	Carrying		Fair
(dollars in thousands)	Amount		Value	Level 1	Level 2	Level 3
Financial Assets:
Other investments, at cost	$	3,307	3,307	-	-	3,307
Loans¹		1,809,760	1,787,368	-	-	1,787,368
Financial Liabilities:
Deposits		1,899,295	1,809,500	-	1,809,500	-
FHLB and other borrowings		25,000	26,166	-	26,166	-
Junior subordinated debentures		35,887	33,567	-	33,567	-

	December 31, 2018
	Carrying		Fair
(dollars in thousands)	Amount		Value	Level 1	Level 2	Level 3
Financial Assets:
Other investments, at cost	$	4,121	4,121	-	-	4,121
Loans¹		1,648,998	1,618,618	-	-	1,618,618
Financial Liabilities:
Deposits		1,648,136	1,515,123	-	1,515,123	-
FHLB and other borrowings		50,000	50,147	-	50,147	-
Junior subordinated debentures		13,403	14,807	-	14,807	-

¹	Carrying amount is net of the allowance for loan losses and previously presented impaired loans.