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FAIR VALUE MEASUREMENT
 12 Months Ended
Dec. 31, 2019
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASUREMENT

Note 6—FAIR VALUE MEASUREMENT

The Company adopted FASB ASC Fair Value Measurement Topic 820, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 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. 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 l Quoted prices in active markets for identical assets or liabilities.

  Level 2 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 3 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.

 

FASB ASC 825-10-50 “Disclosure about Fair Value of Financial Instruments”, requires the Company to disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below.

Cash and short term investments—The carrying amount of these financial instruments (cash and due from banks, interest-bearing bank balances, federal funds sold and securities purchased under agreements to resell) approximates fair value. All mature within 90 days and do not present unanticipated credit concerns and are classified as Level 1.

Investment Securities—Measurement is on a recurring basis based upon quoted market prices, if available. If quoted market prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for prepayment assumptions, projected credit losses, and liquidity. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, or by dealers or brokers in active over-the-counter markets. Level 2 securities include mortgage-backed securities issued both by government sponsored enterprises and private label mortgage-backed securities. Generally, these fair values are priced from established pricing models. Level 3 securities include corporate debt obligations and asset–backed securities that are less liquid or for which there is an inactive market.

Loans Held for Sale—The Company originates fixed rate residential loans on a servicing released basis in the secondary market. Loans closed but not yet settled with an investor, are carried in the Company’s loans held for sale portfolio. These loans are fixed rate residential loans that have been originated in the Company’s name and have closed. Virtually all of these loans have commitments to be purchased by investors at a locked in price with the investors on the same day that the loan was locked in with the Company’s customers. Therefore, these loans present very little market risk for the Company and are classified as Level 2. The carrying amount of these loans approximates fair value.

Loans— The valuation of loans receivable is estimated using the exit price notion which incorporates factors, such as enhanced credit risk, illiquidity risk and market factors that sometimes exist in exit prices in dislocated markets. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the following categories: variable rate loans, impaired loans and all other loans. The results are then adjusted to account for credit risk as described above.

Other Real Estate Owned (“OREO”)—OREO is carried at the lower of carrying value or fair value on a non-recurring basis. Fair value is based upon independent appraisals or management’s estimation of the collateral and is considered a Level 3 measurement.

Accrued Interest Receivable—The fair value approximates the carrying value and is classified as Level 1.

Deposits—The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposits is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturities. Deposits are classified as Level 2.

Federal Home Loan Bank Advances—Fair value is estimated based on discounted cash flows using current market rates for borrowings with similar terms and are classified as Level 2.

Short Term Borrowings—The carrying value of short term borrowings (securities sold under agreements to repurchase and demand notes to the Treasury) approximates fair value. These are classified as Level 2.

Junior Subordinated Debentures—The fair values of junior subordinated debentures is estimated by using discounted cash flow analyses based on incremental borrowing rates for similar types of instruments. These are classified as Level 2.

Accrued Interest Payable—The fair value approximates the carrying value and is classified as Level 1.

Commitments to Extend Credit—The fair value of these commitments is immaterial because their underlying interest rates approximate market.

The carrying amount and estimated fair value by classification Level of the Company’s financial instruments as of December 31, 2019 and December 31, 2018 are as follows:

    December 31, 2019  
    Carrying   Fair Value  
(Dollars in thousands)   Amount   Total   Level 1   Level 2   Level 3  
Financial Assets:                                
Cash and short term investments   $ 47,692   $ 47,692   $ 47,692   $ —   $ —  
Available-for-sale securities     286,800     286,800     23,632     261,361     1,807  
Other investments, at cost     1,992     1,992     —     —     1,992  
Loans held for sale     11,155     11,155     —     11,155     —  
Net loans receivable     730,401     728,745     —     —     728,745  
Accrued interest     3,481     3,481     3,481     —     —  
Financial liabilities:                                
Non-interest bearing demand   $ 289,829   $ 289,829   $ —   $ 289,829   $ —  
Interest bearing demand deposits and money market accounts     423,257     423,257     —     423,257     —  
Savings     104,456     104,456     —     104,456     —  
Time deposits     170,660     171,558     —     171,558     —  
Total deposits     988,201     989,099     —     989,099     —  
Federal Home Loan Bank Advances     211     211     —     211     —  
Short term borrowings     33,296     33,296     —     33,296     —  
Junior subordinated debentures     14,964     13,161     —     13,161     —  
Accrued interest payable     1,033     1,033     1,033     —     —  
    December 31, 2018  
    Carrying   Fair Value  
(Dollars in thousands)   Amount   Total   Level 1   Level 2   Level 3  
Financial Assets:                                
Cash and short term investments   $ 32,268   $ 32,268   $ 32,268   $ —   $ —  
Held-to-maturity securities     16,174     16,184     —     16,184     —  
Available-for-sale securities     237,893     237,893     1,642     235,560     691  
Other investments, at cost     1,955     1,955     —     —     1,955  
Loans held for sale     3,223     3,223     —     3,223     —  
Net loans receivable     712,199     697,432     —     693,065     4,367  
Accrued interest     3,579     3,579     3,579     —     —  
Financial liabilities:                                
Non-interest bearing demand   $ 244,686   $ 244,686   $ —   $ 244,686   $ —  
NOW and money market accounts     393,473     393,473     —     393,473     —  
Savings     108,368     108,368     —     108,368     —  
Time deposits     178,996     177,797     —     177,797     —  
Total deposits     925,523     924,324     —     924,324     —  
Federal Home Loan Bank Advances     231     231     —     231     —  
Short term borrowings     28,022     28,022     —     28,022     —  
Junior subordinated debentures     14,964     14,178     —     12,791     —  
Accrued interest payable     861     861     861     —     —  

 

The following table summarizes quantitative disclosures about the fair value for each category of assets carried at fair value as of December 31, 2019 and December 31, 2018 that are measured on a recurring basis. There were no liabilities carried at fair value as of December 31, 2019 or December 31, 2018 that are measured on a recurring basis.

(Dollars in thousands)

Description   December 31,
2019		     Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)		     Significant
Other
Observable
Inputs
(Level 2)		     Significant
Unobservable
Inputs
(Level 3)		  
Available- for-sale securities                                
US Treasury Securities   $ 7,203     $ —     $ 7,203     $ —  
Government Sponsored Enterprises     1,001       —       1,001       —  
Mortgage-backed securities     183,586       18,435       163,344       1,807  
Small Business Administration pools     45,343       —       45,343       —  
State and local government     49,648       5,188       44,460       —  
Corporate and other securities     19       9       10       —  
      286,800       23,632       261,361       1,807  
Loans held for sale     11,155       —       11,155       —  
Total   $ 297,955     $ 23,632     $ 272,516     $ 1,807  

(Dollars in thousands)

Description   December 31,
2018		     Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)		     Significant
Other
Observable
Inputs
(Level 2)		     Significant
Unobservable
Inputs
(Level 3)		  
Available-for-sale securities                                
US Treasury Securities   $ 15,457     $ —     $ 15,457     $ —  
Government sponsored enterprises     1,100       —       1,100       —  
Mortgage-backed securities     115,475       —       114,784       691  
Small Business Administration pools     55,336       1,633       53,703       —  
State and local government     50,506       —       50,506       —  
Corporate and other securities     19       9       10       —  
      237,893       1,642       235,560       691  
Loans held for sale     3,223       —       3,223       —  
Total   $ 241,116     $ 1,642     $ 238,783     $ 691  

The following tables summarize quantitative disclosures about the fair value for each category of assets carried at fair value as of December 31, 2019 and December 31, 2018 that are measured on a non-recurring basis. There were no liabilities carried at fair value and measured on a non-recurring basis at December 31, 2019 and 2018.

(Dollars in thousands)                        
Description   December 31,
2019		     Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)		     Significant
Other
Observable
Inputs
(Level 2)		     Significant
Unobservable
Inputs
(Level 3)		  
Impaired loans:                                
Commercial & Industrial   $ 400     $ —     $ —     $ 400  
Real estate:                                
Mortgage-residential     392       —       —       392  
Mortgage-commercial     3,129       —       —       3,129  
Consumer:                                
Home equity     70       —       —       70  
Other     —       —       —       —  
Total impaired     3,991       —       —       3,991  
Other real estate owned:                                
Construction     826       —       —       826  
Mortgage-commercial     584       —       —       584  
Total other real estate owned     1,410       —       —       1,410  
Total   $ 5,401     $ —     $ —     $ 5,401  
                                 

 

(Dollars in thousands)                        
Description   December 31,
2018		     Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)		     Significant
Other
Observable
Inputs
(Level 2)		     Significant
Unobservable
Inputs
(Level 3)		  
Impaired loans:                                
Commercial & Industrial   $ —     $ —     $ —     $ —  
Real estate:                                
Mortgage-residential     322       —       —       322  
Mortgage-commercial     4,016       —       —       4,016  
Consumer:                                
Home equity     29       —       —       29  
Other     —       —       —       —  
Total impaired     4,367       —       —       4,367  
Other real estate owned:                                
Construction     828       —       —       828  
Mortgage-commercial     632       —       —       632  
Total other real estate owned   $ 1,460     $ —     $ —     $ 1,460  
Total   $ 6,057     $ —     $ —     $ 6,057  

The Company has a large percentage of loans with real estate serving as collateral. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair value of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be Level 3 inputs. Third party appraisals are generally obtained when a loan is identified as being impaired or at the time it is transferred to OREO. This internal process would consist of evaluating the underlying collateral to independently obtained comparable properties. With respect to less complex or smaller credits, an internal evaluation may be performed. Generally, the independent and internal evaluations are updated annually. Factors considered in determining the fair value include geographic sales trends, the value of comparable surrounding properties as well as the condition of the property. The aggregate amount of impaired loans was $4.0 million and $4.4 million for the year ended December 31, 2019 and year ended December 31, 2018, respectively.

For Level 3 assets and liabilities measured at fair value on a non-recurring or non-recurring basis as of December 31, 2019 and December 31, 2018, the significant unobservable inputs used in the fair value measurements were as follows:

(Dollars in thousands)   Fair Value as
of December 31,
2019		   Valuation Technique   Significant
Observable
Inputs		   Significant
Unobservable
Inputs		  
OREO   $ 1,410   Appraisal Value/Comparison Sales/Other estimates   Appraisals and or sales of comparable properties   Appraisals discounted 6% to 16% for sales commissions and other holding cost  
Impaired loans   $ 3,991   Appraisal Value   Appraisals and or sales of comparable properties   Appraisals discounted 6% to 16% for sales commissions and other holding cost  
                     
(Dollars in thousands)   Fair Value as
of December 31,
2018		   Valuation Technique   Significant
Observable
Inputs		   Significant
Unobservable
Inputs		  
OREO   $ 1,460   Appraisal Value/Comparison Sales/Other estimates   Appraisals and or sales of comparable properties   Appraisals discounted 6% to 16% for sales commissions and other holding cost  
Impaired loans   $ 4,367   Appraisal Value   Appraisals and or sales of comparable properties   Appraisals discounted 6% to 16% for sales commissions and other holding cost