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Fair Value of Financial Instruments
 9 Months Ended
Sep. 30, 2021
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.

 

FASB ASC 825-10-50 “Disclosure about Fair Value of Financial Instruments”, requires the Company to disclose estimated fair values for its financial instruments. The Company’s 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 Available-for-Sale - 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.

 

Securities Sold Under Agreements to Repurchase - 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 Debt - The fair value of junior subordinated debt 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 September 30, 2021 and December 31, 2020 are as follows:

 

   September 30, 2021 
   Carrying   Fair Value 
(Dollars in thousands)  Amount   Total   Level 1   Level 2   Level 3 
Financial Assets:                         
Cash and short term investments  $24,435   $24,435   $24,435   $—   $— 
Investment securities available-for-sale   513,500    513,500    16,970    496,530    — 
Other investments, at cost   1,760    1,760    —    —    1,760 
Loans held-for-sale   6,213    6,213    —    6,213    — 
Net loans receivable   870,495    861,029    —    —    861,029 
Accrued interest receivable   3,748    3,748    3,748    —    — 
Financial liabilities:                         
Non-interest bearing demand  $430,938   $430,938   $—   $430,938   $— 
Interest bearing demand deposits and money market accounts   605,147    605,147    —    605,147    — 
Savings   141,084    141,084    —    141,084    — 
Time deposits   156,399    156,829    —    156,829    — 
Total deposits   1,333,568    1,333,998    —    1,333,998    — 
Securities sold under agreements to repurchase   59,821    59,821    —    59,821    — 
Junior subordinated debt   14,964    14,410    —    14,410    — 
Accrued interest payable   434    434    434    —    — 
   December 31, 2020 
   Carrying   Fair Value 
(Dollars in thousands)  Amount   Total   Level 1   Level 2   Level 3 
Financial Assets:                         
Cash and short term investments  $64,992   $64,992   $64,992   $—   $— 
Investment securities available-for-sale   359,866    359,866    20,564    339,302    — 
Other investments, at cost   2,053    2,053    —    —    2,053 
Loans held for sale   45,020    45,020    —    45,020    — 
Net loans receivable   833,768    829,685    —    —    829,685 
Accrued interest receivable   4,167    4,167    4,167    —    — 
Financial liabilities:                         
Non-interest bearing demand  $385,511   $385,511   $—   $385,511   $— 
Interest bearing demand deposits and money market accounts   520,205    520,205    —    520,205    — 
Savings   123,032    123,032    —    123,032    — 
Time deposits   160,665    161,505    —    61,505    — 
Total deposits   1,189,413    1,190,253    —    1,190,253    — 
Securities sold under agreements to repurchase   40,914    40,914    —    40,914    — 
Junior subordinated debt   14,964    11,748    —    11,748    — 
Accrued interest payable   667    667    667    —    — 

 

The following tables summarize quantitative disclosures about the fair value for each category of assets carried at fair value as of September 30, 2021 and December 31, 2020 that are measured on a recurring basis. There were no liabilities carried at fair value as of September 30, 2021 or December 31, 2020 that are measured on a recurring basis.

 

(Dollars in thousands)

Description  September 30,
2021		   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  $15,383   $—   $15,383   $— 
                     
Government sponsored enterprises   2,500    —    2,500    — 
Mortgage-backed securities   365,955    15,170    350,785    — 
Small Business Administration pools   32,656    —    32,656    — 
State and local government   89,906    1,800    88,106    — 
Corporate and other securities   7,100    —    7,100    — 
Total Available-for-sale securities   513,500    16,970    496,530    — 
Loans held-for-sale   6,213    —    6,213    — 
Total  $519,713   $16,970   $502,743   $— 

(Dollars in thousands)

Description  December 31,
2020		   (Level 1)   (Level 2)   (Level 3) 
Available- for-sale securities                    
US Treasury Securities  $1,502   $—   $1,502   $— 
Government Sponsored Enterprises   1,006    —    1,006    — 
Mortgage-backed securities   229,929    17,029    212,900    — 
Small Business Administration pools   35,498    —    35,498    — 
State and local government   88,603    3,535    85,068    — 
Corporate and other securities   3,328    —    3,328    — 
Total Available-for-sale securities   359,866    20,564    339,302    — 
Loans held for sale   45,020    —    45,020    — 
Total  $404,886   $20,564   $384,322   $— 

 

The following tables summarize quantitative disclosures about the fair value for each category of assets carried at fair value as of September 30, 2021 and December 31, 2020 that are measured on a non-recurring basis. There were no Level 3 financial instruments for the three months ended September 30, 2021 and September 30, 2020 measured on a recurring basis.

 

Fair Value Measurements, Nonrecurring

 

(Dollars in thousands)                
Description  September 30,
2021		   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   207    —    —    207 
Mortgage-commercial   1,604    —    —    1,604 
Consumer:                    
Home equity   20    —    —    20 
Other   —    —    —    — 
Total impaired   1,831    —    —    1,831 
Other real estate owned:                    
Construction   624    —    —    624 
Mortgage-residential   541    —    —    541 
Total other real estate owned   1,165    —    —    1,165 
Total  $2,996   $—   $—   $2,996 
(Dollars in thousands)                
Description  December 31,
2020		   (Level 1)   (Level 2)   (Level 3) 
Impaired loans:                    
Commercial & Industrial  $—   $—   $—   $— 
Real estate:                    
Mortgage-residential   440    —    —    440 
Mortgage-commercial   5,629    —    —    5,629 
Consumer:                    
Home equity   42    —    —    42 
Other   —    —    —    — 
Total impaired   6,111    —    —    6,111 
Other real estate owned:                    
Construction   600    —    —    600 
Mortgage-commercial   594    —    —    594 
Total other real estate owned   1,194    —    —    1,194 
Total  $7,305   $—   $—   $7,305 

 

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 consists 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, among others, geographic sales trends, the value of comparable surrounding properties and the condition of the property. The aggregate amount of impaired loans was $1.8 million and $6.1 million as of September 30, 2021 and December 31, 2020, respectively. 

 

For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of September 30, 2021, and December 31, 2020, the significant unobservable inputs used in the fair value measurements were as follows:

 

Fair Value Measurement Inputs and Valuation Techniques 

 

(Dollars in thousands)  Fair Value as
of September 30,
2021		   Valuation Technique  Significant
Observable
Inputs		  Significant
Unobservable
Inputs
OREO  $1,165   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  $1,831   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,
2020		   Valuation Technique  Significant
Observable
Inputs		  Significant
Unobservable
Inputs
OREO  $1,194   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  $6,111   Appraisal Value  Appraisals and or sales of comparable properties  Appraisals discounted 6% to 16% for sales commissions and other holding cost