Fair Value Accounting

6 Months Ended

Jun. 30, 2020

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 14 of the Company’s 2019 Annual Report on Form 10-K. The Company’s loan portfolio is initially fair valued using a segmented approach, using the eight categories of loans 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 June 30, 2020 and December 31, 2019.


	June 30, 2020
(dollars in thousands)	Level 1		Level 2	Level 3	Total
Assets
Securities available for sale
US government agencies	$	-	498	-	498
SBA securities		-	494	-	494
State and political subdivisions		-	10,946	-	10,946
Asset-backed securities		-	12,059	-	12,059
Mortgage-backed securities		-	47,000	-	47,000
Mortgage loans held for sale		-	44,169	-	44,169
Mortgage loan interest rate lock commitments		-	2,373	-	2,373
Total assets measured at fair value on a recurring basis	$	-	117,539	-	117,539

Liabilities
MBS forward sales commitments	$	-	589	-	589
Total liabilities measured at fair value on a recurring basis	$	-	589	-	589


	December 31, 2019
(dollars in thousands)	Level 1		Level 2	Level 3	Total
Assets
Securities available for sale:
US government agencies	$	-	499	-	499
SBA securities		-	531	-	531
State and political subdivisions		-	4,184	-	4,184
Asset-backed securities		-	13,167	-	13,167
Mortgage-backed securities		-	49,313	-	49,313
Mortgage loans held for sale		-	27,046	-	27,046
Mortgage loan interest rate lock commitments		-	344	-	344
Total assets measured at fair value on a recurring basis	$	-	95,084	-	95,084

Liabilities
MBS forward sales commitments	$	-	39	-	39
Total liabilities measured at fair value on a recurring basis	$	-	39	-	39

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 June 30, 2020 and December 31, 2019.


	As of June 30, 2020
(dollars in thousands)	Level 1		Level 2	Level 3	Total
Assets
Impaired loans	$	-	9,570	4,773	14,343
Total assets measured at fair value on a nonrecurring basis	$	-	9,570	4,773	14,343


	As of December 31, 2019
(dollars in thousands)	Level 1		Level 2	Level 3	Total
Assets
Impaired loans	$	-	5,634	4,941	10,575
Total assets measured at fair value on a nonrecurring basis	$	-	5,634	4,941	10,575

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 June 30, 2020 and December 31, 2019 are as follows:


	June 30, 2020
	Carrying		Fair
(dollars in thousands)	Amount		Value	Level 1	Level 2	Level 3
Financial Assets:
Other investments, at cost	$	2,610	2,610	-	-	2,610
Loans¹		1,988,857	1,952,870	-	-	1,952,870
Financial Liabilities:
Deposits		2,188,643	2,107,097	-	2,107,097	-
Subordinated debentures		35,944	29,971	-	29,971	-


	December 31, 2019
	Carrying		Fair
(dollars in thousands)	Amount		Value	Level 1	Level 2	Level 3
Financial Assets:
Other investments, at cost	$	6,948	6,948	-	-	6,948
Loans¹		1,914,870	1,900,216	-	-	1,900,216
Financial Liabilities:
Deposits		1,876,124	1,772,121	-	1,772,121	-
FHLB and other borrowings		110,000	109,737	-	109,737	-
Subordinated debentures		35,890	33,250	-	33,250	-


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

- 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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