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FAIR VALUE OF FINANCIAL INSTRUMENTS | 9 Months Ended
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Sep. 30, 2020
FAIR VALUE OF FINANCIAL INSTRUMENTS [Abstract] |
FAIR VALUE OF FINANCIAL INSTRUMENTS | NOTE 2 – 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 values: 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 company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. The following is a description of the Company’s valuation methodologies used to measure and disclose the fair values of its financial assets and liabilities on a recurring or nonrecurring basis: Securities: The fair values for 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). 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). During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations. Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly 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 independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically 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. In some instances, fair value adjustments can be made based on a quoted price from an observable input, such as a purchase agreement. Such adjustments would be classified as a Level 2 classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly 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 independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. In some instances, fair value adjustments can be made based on a quoted price from an observable input, such as a purchase agreement. Such adjustments would be classified as a Level 2 classification. Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with management’s own assumptions of fair value based on factors that include recent market data or industry-wide statistics. On an as-needed basis, the Company reviews the fair value of collateral, taking into consideration current market data, as well as all selling costs that typically approximate 10%. Interest Rate Swap Agreements: The fair value of interest rate swap agreements is determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash receipts (or payments) are based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves (Level 2). Assets and Liabilities Measured on a Recurring Basis Assets and liabilities measured at fair value on a recurring basis are summarized below:
|  | Fair Value Measurements at September 30, 2020 Using |
|  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Assets: |  |  |  |  |  |  |  |  |
U.S. Government sponsored entity securities |  |  | — |  |  | $ | 15,506 |  |  |  | — |
Agency mortgage-backed securities, residential |  |  | — |  |  |  | 94,843 |  |  |  | — |
Interest rate swap derivatives |  |  | — |  |  |  | 1,096 |  |  |  | — |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap derivatives |  |  | — |  |  |  | (1,096 | ) |  |  | — |
|  | Fair Value Measurements at December 31, 2019 Using |
|  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Assets: |  |  |  |  |  |  |  |  |
U.S. Government sponsored entity securities |  |  | — |  |  | $ | 16,736 |  |  |  | — |
Agency mortgage-backed securities, residential |  |  | — |  |  |  | 88,582 |  |  |  | — |
Interest rate swap derivatives |  |  | — |  |  |  | 465 |  |  |  | — |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap derivatives |  |  | — |  |  |  | (465 | ) |  |  | — |
There were no transfers between Level 1 and Level 2 during 2020 or 2019. Assets and Liabilities Measured on a Nonrecurring Basis Assets and liabilities measured at fair value on a nonrecurring basis at September 30, 2020 and December 31, 2019 are summarized below:
| Fair Value Measurements at September 30, 2020 Using |
| Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |
Assets: |  |  |  |  |  |
Impaired loans: |  |  |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |
Nonowner-occupied |  |  | — |  |  | $ | 199 |  |  |  | — |
| Fair Value Measurements at December 31, 2019 Using |
| Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |
Assets: |  |  |  |  |  |
Impaired loans: |  |  |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |
Nonowner-occupied |  |  | — |  |  |  | — |  |  | $ | 1,644 |
Commercial and Industrial |  |  | — |  |  |  | — |  |  |  | 4,559 |
At September 30, 2020, the recorded investment of impaired loans measured for impairment using the fair value of collateral for collateral-dependent loans totaled $242, with a corresponding valuation allowance of $43, resulting in an increase of $43 in provision expense during the three and nine months ended September 30, 2020, with no corresponding charge-offs recognized. This is compared to no provision expense during the three and nine months ended September 30, 2019. At December 31, 2019, the recorded investment of impaired loans measured for impairment using the fair value of collateral for collateral-dependent loans totaled $7,010, with a corresponding valuation allowance of $807, resulting in an increase of $807 in provision expense during the year ended December 31, 2019, with no corresponding charge-offs recognized. There was no other real estate owned that was measured at fair value less costs to sell at September 30, 2020 and December 31, 2019. There were no corresponding write downs during the three and nine months ended September 30, 2020 and 2019. The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2019:
December 31, 2019 |  | Fair Value |  |  | Valuation Technique(s) |  | Unobservable Input(s) |  | Range |  |  | (Weighted Average) |
Impaired loans: |  |  |  |  |  | 1 |  |  |  |  | 1 |  |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied |  | $ | 1,644 |  |  | Sales approach |  | Adjustment to comparables |  | 0% to 20% |  |  |  | 9.7 | %
Commercial and industrial |  |  | 4,559 |  |  | Sales approach |  | Adjustment to comparables |  | 0% to 61% |  |  |  | 10.3 | %
The carrying amounts and estimated fair values of financial instruments at September 30, 2020 and December 31, 2019 are as follows:
|  | Carrying |  |  | Fair Value Measurements at September 30, 2020 Using |
|  | Value |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Financial Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 83,554 |  |  | $ | 83,554 |  |  | $ | — |  |  | $ | — |  |  | $ | 83,554 |
Certificates of deposit in financial institutions |  |  | 2,745 |  |  |  | — |  |  |  | 2,745 |  |  |  | — |  |  |  | 2,745 |
Securities available for sale |  |  | 110,349 |  |  |  | — |  |  |  | 110,349 |  |  |  | — |  |  |  | 110,349 |
Securities held to maturity |  |  | 11,674 |  |  |  | — |  |  |  | 3,974 |  |  |  | 8,048 |  |  |  | 12,022 |
Loans, net |  |  | 845,308 |  |  |  | — |  |  |  | 199 |  |  |  | 841,318 |  |  |  | 841,517 |
Interest rate swap derivatives |  |  | 1,096 |  |  |  | — |  |  |  | 1,096 |  |  |  | — |  |  |  | 1,096 |
Accrued interest receivable |  |  | 3,779 |  |  |  | — |  |  |  | 370 |  |  |  | 3,409 |  |  |  | 3,779 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 944,984 |  |  |  | 270,086 |  |  |  | 677,187 |  |  |  | — |  |  |  | 947,273 |
Other borrowed funds |  |  | 29,321 |  |  |  | — |  |  |  | 31,610 |  |  |  | — |  |  |  | 31,610 |
Subordinated debentures |  |  | 8,500 |  |  |  | — |  |  |  | 5,556 |  |  |  | — |  |  |  | 5,556 |
Interest rate swap derivatives |  |  | 1,096 |  |  |  | — |  |  |  | 1,096 |  |  |  | — |  |  |  | 1,096 |
Accrued interest payable |  |  | 1,349 |  |  |  | 1 |  |  |  | 1,348 |  |  |  | — |  |  |  | 1,349 |
|  | Carrying |  |  | Fair Value Measurements at December 31, 2019 Using: |
|  | Value |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Financial Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 52,356 |  |  | $ | 52,356 |  |  | $ | — |  |  | $ | — |  |  | $ | 52,356 |
Certificates of deposit in financial institutions |  |  | 2,360 |  |  |  | — |  |  |  | 2,360 |  |  |  | — |  |  |  | 2,360 |
Securities available for sale |  |  | 105,318 |  |  |  | — |  |  |  | 105,318 |  |  |  | — |  |  |  | 105,318 |
Securities held to maturity |  |  | 12,033 |  |  |  | — |  |  |  | 6,446 |  |  |  | 5,958 |  |  |  | 12,404 |
Loans, net |  |  | 766,502 |  |  |  | — |  |  |  | — |  |  |  | 771,285 |  |  |  | 771,285 |
Interest rate swap derivatives |  |  | 465 |  |  |  | — |  |  |  | 465 |  |  |  | — |  |  |  | 465 |
Accrued interest receivable |  |  | 2,564 |  |  |  | — |  |  |  | 315 |  |  |  | 2,249 |  |  |  | 2,564 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 821,471 |  |  |  | 222,607 |  |  |  | 599,937 |  |  |  | — |  |  |  | 822,544 |
Other borrowed funds |  |  | 33,991 |  |  |  | — |  |  |  | 34,345 |  |  |  | — |  |  |  | 34,345 |
Subordinated debentures |  |  | 8,500 |  |  |  | — |  |  |  | 6,275 |  |  |  | — |  |  |  | 6,275 |
Interest rate swap derivatives |  |  | 465 |  |  |  | — |  |  |  | 465 |  |  |  | — |  |  |  | 465 |
Accrued interest payable |  |  | 1,589 |  |  |  | 3 |  |  |  | 1,586 |  |  |  | — |  |  |  | 1,589 |
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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