Fair Value Measurements

9 Months Ended

Sep. 30, 2020

Fair Value Disclosures [Abstract]

Fair Value Measurements

Note 8. Fair Value Measurements

The Company follows FASB ASC 820-10, Fair Value Measurements and Disclosures and ASU 2016-1, “Financial Instruments-Overall” (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities, which among other things, requires enhanced disclosures about assets and liabilities carried at fair value. ASC 820-10 establishes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The three broad levels of the hierarchy are as follows:

Level I – Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The type of financial instruments included in Level I are highly liquid cash instruments with quoted prices such as G-7 government, agency securities, listed equities and money market securities, as well as listed derivative instruments.

Level II – Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these financial instruments include cash instruments for which quoted prices are available but traded less frequently, derivative instruments whose fair value have been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed. Instruments which are generally included in this category are corporate bonds and loans, mortgage whole loans, municipal bonds, and OTC derivatives.

Level III – Instruments that have little to no pricing observability as of the reported date. These financial instruments do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. Instruments that are included in this category generally include municipal securities with no observable fair value with an average life of one year or less. The securities are carried at cost which approximates fair value. A periodic review of underlying financial statements and credit ratings is performed to assess the appropriateness of these valuations.

The results of the fair value hierarchy as of September 30, 2020, are as follows:

	Fair Value Measurements Using
	Carrying Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
	(in thousands)
Financial Instruments Measured at Fair Value on a Recurring Basis
Securities AFS
SBA Backed Securities	$	45,865	$	—	$	45,865	$	—
U.S. Government Agency and Sponsored Mortgage-Backed Securities		189,904		—		189,904		—
Privately Issued Residential Mortgage- Backed Securities		341		—		341		—
Obligations Issued by States and Political Subdivisions		48,815		—		—		48,815
Other Debt Securities		6,707		—		6,707		—
Total	$	291,632	$	—	$	242,817	$	48,815
Equity Securities	$	1,645	$	276	$	1,369	$	—
Financial Instruments Measured at Fair Value on a Non-recurring Basis
Impaired Loans	$	828	$	—	$	—	$	828

Impaired loan balances represent those collateral dependent loans where management has estimated the credit loss by comparing the loan’s carrying value against the expected realizable fair value of the collateral. Fair value is generally determined through a review process that includes independent appraisals, discounted cash flows, or other external assessments of the underlying collateral, which generally include various Level 3 inputs which are not observable. The Company discounts the fair values, as appropriate, based on management’s observations of the local real estate market for loans in this category.

Appraisals, discounted cash flows and real estate tax assessments are reviewed quarterly. There is no specific policy regarding how frequently appraisals will be updated. Adjustments are made to appraisals and real estate tax assessments based on management’s estimate of changes in real estate values. All impaired loans have been reviewed during the past quarter using either a discounted cash flow analysis, appraisal of collateral or other type of real estate tax assessment. The types of adjustments that are made to specific provisions (credits) related to impaired loans recognized for the three and nine month periods ended September 30, 2020 amounted to $0 and ($9,000), respectively.

There were no transfers between level 1, 2 and 3 for the nine months ended September 30, 2020. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the nine months ended September 30, 2020.

The following table presents additional information about assets measured at fair value on a recurring and nonrecurring basis for which the Company has utilized Level 3 inputs to determine fair value (dollars in thousands). Management continues to monitor the

assumptions used to value the assets listed below.

Asset	Fair Value		Valuation Technique	Unobservable Input	Unobservable Input Value or Range
Securities AFS	$	48,815	Discounted cash flow	Discount rate	0%-1% (3)
Impaired Loans	$	828	Appraisal of collateral (1)	Appraisal adjustments (2)	0%

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.

(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated expenses.

(3) Weighted averages.

The changes in Level 3 securities for the nine month period ended September 30, 2020 are shown in the table below:

	Obligations Issued by States & Political Subdivisions
Balance at December 31, 2019	$	13,301
Purchases		53,903
Maturities and calls		(18,357	)
Amortization		(32	)
Balance at September 30, 2020	$	48,815

The amortized cost of Level 3 securities was $48,815,000 at September 30, 2020 with an unrealized loss of $0. The securities in this category are generally municipal securities with no readily determinable fair value. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity.

The fair value of impaired loans decreased by $49,000, for the first nine months of 2020, mainly attributable to one loan that was paid down.

The changes in Level 3 securities for the nine month period ended September 30, 2019, are shown in the table below:

	Obligations Issued by States & Political Subdivisions
Balance at December 31, 2018	$	88,728
Purchases		13,290
Maturities and calls		(78,196	)
Amortization		(21	)
Changes in fair value		—
Balance at September 30, 2019	$	23,801

The amortized cost of Level 3 securities was $23,801,000 at September 30, 2019 with an unrealized loss of $0. The securities in this category are generally municipal securities with no readily determinable fair value. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity.

The fair value of impaired loans decreased by $78,000, for the first nine months of 2019, mainly attributable to one loan that was removed from impaired loans. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the nine month period ended September 30, 2019.

The results of the fair value hierarchy as of December 31, 2019, are as follows:

	Securities AFS Fair Value Measurements Using
	Carrying Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
	(in thousands)
Financial Instruments Measured at Fair Value on a Recurring Basis:
SBA Backed Securities	$	54,211	$	—	$	54,211	$	—
U.S. Government Agency and Sponsored Mortgage-Backed Securities		184,187		—		184,187		—
Privately Issued Residential Mortgage- Backed Securities		396		—		396		—
Obligations Issued by States and Political Subdivisions		18,076		—		4,775		13,301
Other Debt Securities		3,632				3,632		—
Total	$	260,502	$	—	$	247,201	$	13,301
Financial Instruments Measured at Fair Value on a Recurring Basis Equity Securities	$	1,688	$	343	$	1,345	$	—
Financial Instruments Measured at Fair Value on a Non-recurring Basis Impaired Loans	$	877	$	—	$	—	$	877

Impaired loan balances in the table above represent those collateral dependent loans where management has estimated the credit loss by comparing the loan’s carrying value against the expected realizable fair value of the collateral. Fair value is generally determined through a review process that includes independent appraisals, discounted cash flows, or other external assessments of the underlying collateral, which generally include various Level 3 inputs which are not identifiable. The Company discounts the fair values, as appropriate, based on management’s observations of the local real estate market for loans in this category.

Appraisals, discounted cash flows and real estate tax assessments are reviewed quarterly. There is no specific policy regarding how frequently appraisals will be updated. Adjustments are made to appraisals and real estate tax assessments based on management’s estimate of changes in real estate values. Within the past twelve months there have been no updated appraisals, however, all impaired loans have been reviewed during the past quarter using either a discounted cash flow analysis or other type of real estate tax assessment. The types of adjustments that are made to specific provisions relate to impaired loans recognized for 2019 for the estimated credit loss amounted to $79,000.

There were no transfers between level 1, 2 and 3 for the year ended December 31, 2019. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the year ended December 31, 2019.

The following table presents additional information about assets measured at fair value on a recurring and nonrecurring basis for which the Company has utilized Level 3 inputs to determine fair value (dollars in thousands). Management continues to monitor the assumptions used to value the assets listed below.

Asset	Fair Value		Valuation Technique	Unobservable Input	Unobservable Input Value or Range
Securities AFS	$	13,301	Discounted cash flow	Discount rate	1.5%-3.2% (3)
Impaired Loans	$	877	Appraisal of collateral (1)	Appraisal adjustments (2)	0%-30% discount

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.

(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated expenses.

(3) Weighted averages.