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Fair Value Measurements and Disclosure

9 Months Ended

Sep. 30, 2021

Fair Value Disclosures [Abstract]

Fair Value Measurements and Disclosure

Fair Value Measurements and Disclosure

The following summary disclosures are made in accordance with the guidance provided by ASC Topic 825, Fair Value Measurements and Disclosures, which requires the disclosure of fair value information about both on- and off-balance sheet financial instruments where it is practicable to estimate that value.

Generally accepted accounting guidance clarifies the definition of fair value, describes methods used to appropriately measure fair value in accordance with generally accepted accounting principles and expands fair value disclosure requirements. This guidance applies whenever other accounting pronouncements require or permit fair value measurements.

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels (Level 1, Level 2, and Level 3). Level 1 inputs are unadjusted quoted prices in active markets (as defined) for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability, and reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).

The table below is a summary of fair value estimates for financial instruments and the level of the fair value hierarchy within which the fair value measurements are categorized at the periods indicated:

September 30, 2021
(in 000's)			Carrying Amount						Estimated Fair Value						Quoted Prices In Active Markets for Identical Assets Level 1						Significant Other Observable Inputs Level 2						Significant Unobservable Inputs Level 3
Financial Assets:
Investment securities			165,508						165,508						3,776						161,732						—
Loans			799,970						798,407						—						—						798,407
Accrued interest receivable			8,246						8,246						—						8,246						—
Financial Liabilities:
Deposits:
Noninterest-bearing			455,584						455,584						455,584						—						—
NOW and money market			514,878						514,878						514,878						—						—
Savings			110,005						110,005						110,005						—						—
Time deposits			70,248						70,305						—						—						70,305
Total deposits			1,150,715						1,150,772						1,080,467						—						70,305
Junior subordinated debt			11,295						11,295						—						—						11,295

December 31, 2020
(in 000's)			Carrying Amount						Estimated Fair Value						Quoted Prices In Active Markets for Identical Assets Level 1						Significant Other Observable Inputs Level 2						Significant Unobservable Inputs Level 3
Financial Assets:
Investment securities			86,192						86,192						3,851						82,341						—
Loans			645,825						636,470						—						—						636,470
Accrued interest receivable			8,164						8,164						—						8,164						—
Financial Liabilities:
Deposits:
Noninterest-bearing			391,897						430,210						430,210						—						—
NOW and money market			402,566						406,707						406,707						—						—
Savings			96,669						94,467						94,467						—						—
Time deposits			61,519						61,519						—						—						61,519
Total deposits			952,651						992,903						931,384						—						61,519
Junior subordinated debt			10,924						10,924						—						—						10,924

The Company performs fair value measurements on certain assets and liabilities as the result of the application of current accounting guidelines. Some fair value measurements, such as investment securities and junior subordinated debt are performed on a recurring basis, while others, such as impairment of loans, other real estate owned, goodwill and other intangibles, are performed on a nonrecurring basis.

The Company’s Level 1 financial assets consist of money market funds and highly liquid mutual funds for which fair values are based on quoted market prices. The Company’s Level 2 financial assets include highly liquid debt instruments of U.S. government agencies, collateralized mortgage obligations, and debt obligations of states and political subdivisions, whose fair values are obtained from readily-available pricing sources for the identical or similar underlying security that may, or may not, be actively traded. The Company’s Level 3 financial assets include certain instruments where the assumptions may be made by us or third parties about assumptions that market participants would use in pricing the asset or liability. From time to time, the Company recognizes transfers between Level 1, 2, and 3 when a change in circumstances warrants a transfer. There were no transfers between fair value measurements during the nine months ended September 30, 2021.

The following methods and assumptions were used in estimating the fair values of financial instruments measured at fair value on a recurring and non-recurring basis:

Investment Securities – Available for sale and marketable equity securities are valued based upon open-market price quotes obtained from reputable third-party brokers that actively make a market in those securities. Market pricing is based upon specific CUSIP identification for each individual security. To the extent there are observable prices in the market, the mid-point of the bid/ask price is used to determine fair value of individual securities. If that data is not available for the last 30 days, a Level 2-type matrix pricing approach based on comparable securities in the market is utilized. Level 2 pricing may include using a forward spread from the last observable trade or may use a proxy bond like a TBA mortgage to come up with a price for the security being valued. Changes in fair market value are recorded through other comprehensive loss as the securities are available for sale.

Impaired Loans - Fair value measurements for collateral dependent impaired loans are performed pursuant to authoritative accounting guidance and are based upon either collateral values supported by third party appraisals and observed market prices. Collateral dependent loans are measured for impairment using the fair value of the collateral. Changes are recorded directly as an adjustment to current earnings.

Other Real Estate Owned - Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at the lower of carrying amount or fair value, less costs to sell.  Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification.  In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

Junior Subordinated Debt – The fair value of the junior subordinated debt was determined based upon a discounted cash flows model utilizing observable market rates and credit characteristics for similar debt instruments. In its analysis, the Company used characteristics that market participants generally use, and considered factors specific to (a) the liability, (b) the principal (or most advantageous) market for the liability, and (c) market participants with whom the reporting entity would transact in that market. Cash flows are discounted at a rate which incorporates a current market rate for similar-term debt instruments, adjusted for credit and liquidity risks associated with similar junior subordinated debt and circumstances unique to the Company. The Company believes that the subjective nature of these inputs, and credit concerns in the capital markets and inactivity in the trust preferred markets that have limited the observability of the market spreads, require the junior subordinated debt to be classified as a Level 3 fair value.

The following tables summarize the Company’s assets and liabilities that were measured at fair value on a recurring and non-recurring basis as of September 30, 2021 (in 000’s):

Description of Assets			September 30, 2021						Quoted Prices in Active Markets for Identical Assets (Level 1)						Significant Other Observable Inputs (Level 2)						Significant Unobservable Inputs (Level 3)
AFS Securities (2):
U.S. Government agencies			$	36,038					$	—					$	36,038					$	—
U.S. Government collateralized mortgage obligations			65,032						—						65,032						—
Asset-backed securities			4,696						—						4,696						—
Municipal bonds			50,457						—						50,457						—
Corporate bond			5,509						—						5,509						—
Total AFS securities			161,732						—						161,732						—
Marketable equity securities (2)			3,776						3,776						—						—
Total			$	165,508					$	3,776					$	161,732					$	—

Description of Liabilities			September 30, 2021						Quoted Prices in Active Markets for Identical Assets (Level 1)						Significant Other Observable Inputs (Level 2)						Significant Unobservable Inputs (Level 3)
Junior subordinated debt (2)			$	11,295					—						—						$	11,295
Total			$	11,295					—						—						$	11,295

(1)Nonrecurring

(2)Recurring

There were no non-recurring fair value adjustments at September 30, 2021.

The following tables summarize the Company’s assets and liabilities that were measured at fair value on a recurring and non-recurring basis as of December 31, 2020 (in 000’s):

Description of Assets			December 31, 2020						Quoted Prices in Active Markets for Identical Assets (Level 1)						Significant Other Observable Inputs (Level 2)						Significant Unobservable Inputs (Level 3)
AFS Securities (2):
U.S. Government agencies			$	33,710					$	—					$	33,710					$	—
U.S. Government collateralized mortgage obligations			38,445						—						38,445
Asset-backed securities			3,909						—						3,909
Municipal bonds			1,058						—						1,058
Corporate bonds			5,219						—						5,219						—
Total AFS securities			82,341						—						82,341						—
Marketable equity securities (2)			3,851						3,851						—						—
Impaired Loans (1):
RE construction & development			3,364						—						—						3,364
Total impaired loans			3,364						—						—						3,364
Other real estate owned (1)			5,004						—						—						5,004
Total			$	94,560					$	3,851					$	82,341					$	8,368

Description of Liabilities			December 31, 2020						Quoted Prices in Active Markets for Identical Assets (Level 1)						Significant Other Observable Inputs (Level 2)						Significant Unobservable Inputs (Level 3)
Junior subordinated debt (2)			$	10,924					$	—					$	—					$	10,924
Total			$	10,924					$	—					$	—					$	10,924

(1)Nonrecurring

(2)Recurring

The following table presents quantitative information about Level 3 fair value measurements for the Company's assets measured at fair value on a non-recurring basis at December 31, 2020 (in 000's).

December 31, 2020

Financial Instrument

Fair Value

Valuation Technique

Unobservable Input

Adjustment Percentage

Impaired Loans:

RE construction & development

$3,364

Fair Value of Collateral Method for Collateral Dependent Loans

Adjustment for difference between appraised value and net realizable value

7.02%

Other real estate owned

$5,004

Fair Value of Collateral Method for Collateral Dependent Loans

Adjustment for difference between appraised value and net realizable value

13.69%

The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring basis at September 30, 2021 and December 31, 2020:

September 30, 2021

December 31, 2020

Financial Instrument

Valuation Technique

Unobservable Input

Weighted Average

Financial Instrument

Valuation Technique

Unobservable Input

Weighted Average

Junior Subordinated Debt

Discounted cash flow

Market credit risk adjusted spreads

3.84%

Junior Subordinated Debt

Discounted cash flow

Market credit risk adjusted spreads

3.57%

Management believes that the credit risk adjusted spread utilized in the fair value measurement of the junior subordinated debentures carried at fair value is indicative of the nonperformance risk premium a willing market participant would require under current market conditions, that is, the inactive market. Management attributes the change in fair value of the junior subordinated debentures during the period to market changes in the nonperformance expectations and pricing of this type of debt. Generally, an increase in the credit risk adjusted spread and/or a decrease in the three month LIBOR swap curve will result in positive fair value adjustments (and decrease the fair value measurement).  Conversely, a decrease in the credit risk adjusted spread and/or an increase in the three month LIBOR swap curve will result in negative fair value adjustments (and increase the fair value measurement). The decrease in discount rate between the periods ended September 30, 2021 and December 31, 2020 is primarily due to decreases in rates for similar debt instruments.

The following tables provide a reconciliation of assets and liabilities at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three and nine months ended September 30, 2021 and 2020 (in 000’s):

			Three Months Ended September 30, 2021						Three Months Ended September 30, 2020						Nine Months Ended September 30, 2021						Nine Months Ended September 30, 2020
Reconciliation of Liabilities:			Junior Subordinated Debt						Junior Subordinated Debt						Junior Subordinated Debt						Junior Subordinated Debt
Beginning balance			$	11,253					$	9,771					$	10,924					$	10,808
Gross (gain) loss included in earnings			35						18						691						(1,451)
Gross loss (gain) related to changes in instrument specific credit risk			8						326						(317)						779
Change in accrued interest			(1)						(34)						(3)						(55)
Ending balance			$	11,295					$	10,081					$	11,295					$	10,081
The amount of total (gain) loss for the period included in earnings attributable to the change in unrealized gains or losses relating to liabilities still held at the reporting date			$	35					$	18					$	691					$	(1,451)

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No definition available.

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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=123874694&loc=d3e19207-110258

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