XML 25 R15.htm IDEA: XBRL DOCUMENT v3.20.2
Fair Value of Financial Instruments
 6 Months Ended
Jun. 30, 2020
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments

Note 6—Fair Value of Financial Instruments

 

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.

Note 6—Fair Value of Financial Instruments-continued

 

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 value 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.

Note 6—Fair Value of Financial Instruments-continued

 

The carrying amount and estimated fair value by classification level of the Company’s financial instruments as of June 30, 2020 and December 31, 2019 are as follows:

 

                                       
   June 30, 2020 
       Fair Value 
(Dollars in thousands)  Carrying
Amount		   Total   Level 1   Level 2   Level 3 
Financial Assets:                         
Cash and short term investments   $92,996   $92,996   $92,996   $—   $— 
Available-for-sale securities    295,919    295,919    3,106    291,257    1,556 
Other investments, at cost    2,053    2,053    —    —    2,053 
Loans held-for-sale    33,496    33,496    —    33,496    — 
Net loans receivable    808,436    795,991    —    —    795,991 
Accrued interest    4,968    4,968    4,968    —    — 
Financial liabilities:                         
Non-interest bearing demand   $371,585   $371,585   $—   $371,585   $— 
Interest bearing demand deposits and money market accounts    465,440    465,440    —    465,440    — 
Savings    116,353    116,353    —    116,353    — 
Time deposits    165,494    166,568    —    166,568    — 
Total deposits    1,118,872    986,645    —    986,645    — 
Short term borrowings    45,651    45,651    —    45,651    — 
Junior subordinated debentures    14,964    10,816    —    10,816    — 
Accrued interest payable    837    837    837    —    — 

Note 6—Fair Value of Financial Instruments-continued

 

                                       
   December 31, 2019 
       Fair Value 
(Dollars in thousands)  Carrying
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    423,256    423,256    —    423,256    — 
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    —    — 

 

The following tables summarize quantitative disclosures about the fair value for each category of assets carried at fair value as of June 30, 2020 and December 31, 2019 that are measured on a recurring basis. There were no liabilities carried at fair value as of June 30, 2020 or December 31, 2019 that are measured on a recurring basis.

 

(Dollars in thousands)

Description  June 30,
2020		   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  $3,521   $—   $3,521   $— 
Government sponsored enterprises   1,013    —    1,013    — 
Mortgage-backed securities   180,335    1,119    177,660    1,556 
Small Business Administration pools   40,216    —    40,216    — 
State and local government   68,837    —    68,837    — 
Corporate and other securities   1,997    1,987    10    — 
Total   295,919    3,106    291,257    1,556 
Loans held-for-sale   33,496    —    33,496    — 
Total  $329,415   $3,106   $324,753   $1,556 

 

Note 6—Fair Value of Financial Instruments-continued

 

(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 securities   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 

  

The following tables summarize quantitative disclosures about the fair value for each category of assets carried at fair value as of June 30, 2020 and December 31, 2019 that are measured on a non-recurring basis. There were no Level 3 financial instruments for the six months ended June 30, 2020 and June 30, 2019 measured on a recurring basis.

 

(Dollars in thousands)                
Description  June 30,
2020		   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   333    —    —    333 
Mortgage-commercial   3,020    —    —    3,020 
Consumer:                    
Home equity   66    —    —    66 
Other   —    —    —    — 
Total impaired   3,419    —    —    3,419 
Other real estate owned:                    
Construction   826    —    —    826 
Mortgage-commercial   623    —    —    623 
Total other real estate owned   1,449    —    —    1,449 
Total  $4,864   $—   $—   $4,864 

Note 6—Fair Value of Financial Instruments-continued

(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-residential   584    —    —    584 
Total other real estate owned   1,410    —    —    1,410 
Total  $5,401   $—   $—   $5,401 

 

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. With respect to less complex or smaller credits, an internal evaluation may be performed. This internal process consists of evaluating the underlying collateral to independently obtained comparable properties. Generally, the independent and internal evaluations are updated annually. Factors considered in determining the fair value include, among others, geographic sales trends, the value of comparable surrounding properties and the condition of the property. The aggregate amount of impaired loans was $3.4 million and $4.0 million as of June 30, 2020 and December 31, 2019, respectively. 

Note 6—Fair Value of Financial Instruments-continued

For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of June 30, 2020 and December 31, 2019, the significant unobservable inputs used in the fair value measurements were as follows:

(Dollars in thousands)   Fair Value
as of
June 30,
2020		   Valuation Technique   Significant
Observable Inputs		   Significant
Unobservable Inputs
OREO   $    1,449   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   $    3,415   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,
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