FAIR VALUE OF FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2017

Fair Value Disclosures [Abstract]

FAIR VALUE OF FINANCIAL INSTRUMENTS

NOTE 10 — FAIR VALUE OF FINANCIAL INSTRUMENTS

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 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 Company used the following methods and significant assumptions to estimate fair value:

Investment 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), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded, values debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to the other benchmark quoted securities (Level 2 inputs). 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 inputs). A third party is engaged to obtain the discounted cash flows and the resulting fair value. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

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 appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans. Such adjustments are typically significant and 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 impairments and adjusted accordingly.

Assets and liabilities measured at fair value on a recurring basis are summarized below (dollars in thousands):

	Fair Value Measurement  At December 31, Using
2017	Quoted Prices  in Active  Markets For  Identical  Assets  (Level 1)			Significant  Other  Observable  Inputs  (Level 2)			Significant  Unobservable  Inputs (Level 3)
Assets:
Residential mortgage-backed securities		$	—		$	24,684		$	—
Residential collateralized mortgage obligation			—			2,706			—
Commercial collateralized mortgage obligations						1,550
Municipal bond			—			1,109			—
CRA Mutual Fund			2,108			—			—

	Fair Value Measurement  At December 31, Using
2016	Quoted Prices  in Active  Markets For  Identical  Assets  (Level 1)			Significant  Other  Observable  Inputs  (Level 2)			Significant  Unobservable  Inputs (Level 3)
Assets:
Residential mortgage-backed securities		$	—		$	29,027		$	—
Residential collateralized mortgage obligation			—			5,103			—
Municipal bond			—			1,136			—
CRA Mutual Fund			2,063			—			—

There were no transfers between Level 1 and Level 2 during 2017 or 2016.

Assets and Liabilities Measured on a Non-Recurring Basis:

There are no loans that are measured at fair value on a non-recurring basis and are impaired at December 31, 2017. Loans that were measured at fair value on a non-recurring basis and were impaired at December 31, 2016, are summarized below (dollars in thousands):

	Fair Value Measurements Using:
	Total at  December 31,  2016			Quoted Prices  in Active  Markets for  Identical  Assets  (Level 1)			Significant  Other  Observable  Inputs  (Level 2)			Significant  Unobservable  Inputs (Level 3)
Impaired loans:
Commercial and industrial loan		$	3,294		$	—		$	—		$	3,294

The following tables presents quantitative information about level 3 fair value measurements for assets measured at fair value on a non-recurring basis at December 31, 2016 (dollars in thousands):

	Fair Value			Valuation Technique	Unobservable Input	Range  (Weighted  Average)
December 31, 2016
Impaired loans – Commercial and industrial loan		$	3,294	Market  approach	Adjustments for  the difference in  comparable sales		10.00%

As of December 31, 2016, impaired loans with allocated allowance for loan losses, which are assets measured at fair value on a non-recurring basis, using the fair value of the collateral (Level 3 inputs), had a carrying amount of  $3.7 million with a valuation allowance of  $366,000, resulting in an increase of provision for loan loss of  $42,000 for the year then ended.

Carrying amount and estimated fair values of financial instruments at December 31, 2017 and 2016 were as follows (dollars in thousands):

	At December 31, 2017
				Fair Value Measurement Using:
	Carrying  Amount			Quoted  Prices in  Active  Markets for  Identical  Assets  (Level 1)			Significant  Other  Observable  Inputs  (Level 2)			Significant  Unobservable  Inputs  (Level 3)			Total Fair  Value
Financial assets:
Cash and due from banks		$	261,231		$	261,231		$	—		$	—		$	261,231
Securities available for sale			32,157			2,108			30,049			—			32,157
Securities held to maturity			5,428			—			5,330			—			5,330
Loans, net			1,405,009			—			—			1,410,860			1,410,860
Other investments
Federal Reserve Bank stock			3,911			N/A			N/A			N/A			N/A
Federal Home Loan Bank stock			2,766			N/A			N/A			N/A			N/A
SBA Loan Fund			5,000			N/A			N/A			N/A			N/A
Certificates of deposit			2,000			2,000			—			—			2,000
Accrued interest receivable			4,421			11			116			4,294			4,421
Financial liabilities:
Deposits without stated maturities		$	1,324,110		$	1,324,110		$	—		$	—			1,324,110
Deposits with stated maturities			80,245			—			80,079			—			80,079
FHLB Advances			42,198			—			42,188			—			42,188
Trust preferred securities payable			20,620			—						19,997			19,997
Subordinated debt, net of issurance cost			24,489			—			25,500			—			25,500
Accrued interest payable			749			27			258			464			749

	At December 31, 2016
				Fair Value Measurement Using:
	Carrying  Amount			Quoted  Prices in  Active  Markets for  Identical  Assets  (Level 1)			Significant  Other  Observable  Inputs  (Level 2)			Significant  Unobservable  Inputs  (Level 3)			Total Fair  Value
Financial assets:
Cash and due from banks		$	82,931		$	82,931		$	—		$	—		$	82,931
Securities available for sale			37,329			2,063			35,266			.			37,329
Securities held to maturity			6,500			—			6,419			—			6,419
Loans, net			1,042,731			—			—			1,059,333			1,059,333
Other investments			12,588			N/A			N/A			N/A			N/A
Accrued interest receivable			2,735			—			157			2,578			2,735
Financial liabilities:
Deposits without stated maturities		$	903,267		$	903,267		$	—		$	—		$	903,267
Deposits with stated maturities			90,513			—			90,559			—			90,559
FHLB Advances			78,418			—			78,872			—			78,872
Trust preferred securities payable			20,620			—			—			19,998			19,998
Accrued interest payable			227			19			62			146			227

The methods and assumptions used to estimate fair value are described as follows:

Cash and Due from Banks:   Carrying amounts of cash approximate fair value, since these instruments are either payable on demand or have short-term maturities and as such are classified as Level 1.

Securities Available for Sale and Held to Maturity:   If available, the estimated fair values are based on independent dealer quotations on nationally recognized securities exchanges and are classified as Level 1. For securities where quoted prices are not available, fair value is based on 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 resulting in a Level 2 classification.

Other Investments:   It is not practicable to determine the fair value of FHLB and FRB stock, and investments in Solomon Hess SBA Loan Fund, due to restrictions placed on transferability.

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 establishing discount factors for these types of loans and resulting in a Level 3 classification. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

Deposits without stated maturities:   The Fair values disclosed for demand deposits (e.g. interest and non-interest checking, savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the recording date (i.e., their carrying amount) resulting in a Level 1 price.

Deposits with stated maturities:   The estimated fair values of certificates of deposit are based on discounted cash flow calculations that use a replacement cost of funds approach to establishing discount rates for certificate of deposit maturities resulting in a Level 2 classification.

FHLB Advances:   Represents FHLB advances for which the estimated fair values are based on discounted cash flow calculations that use a replacement cost of funds approach to establishing discount rates for funding maturities resulting in a Level 2 classification for all other maturity terms.

Trust Preferred Securities Payable:   The estimated fair value is based on estimates using market data for similarly risk weighted items and takes into consideration the features of the debentures, which is an unobservable input resulting in a Level 3 classification.

Subordinated Debt:   The estimated fair value is net of the face value of the notes and amortized issuance cost, which is an observable input resulting in a Level 2 classification.

Accrued Interest Receivable and Payable:   For these short-term instruments, the carrying amount is a reasonable estimate of the fair value resulting in a Level 1, 2 or 3 classification consistent with the underlying asset or liability the interest is associated with.

Off-Balance-Sheet Liabilities:   The fair value of off-balance-sheet commitments to extend credit is estimated using fees currently charged to enter into similar agreements. The fair value is immaterial as of December 31, 2017 and 2016.

Fair value estimates are made at specific points in time and are based on existing on-and off-balance sheet financial instruments. These estimates are subjective in nature and dependent on a number of significant assumptions associated with each financial instrument or group of financial instruments, including estimates of discount rates, risks associated with specific financial instruments, estimates of future cash flows, and relevant available market information. Changes in assumptions could significantly affect the estimates. In addition, fair value estimates do not reflect the value of anticipated future business, premiums or discounts that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument, or the tax consequences of realizing gains or losses on the sale of financial instruments.