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Fair Value of Financial Instruments | 9 Months Ended
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Sep. 30, 2020
Fair Value Disclosures [Abstract] |
Fair Value of Financial Instruments |
1 6. | FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company follows the provisions of ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The assumptions used in the estimation of the fair value of the Company’s financial instruments are detailed below. The following disclosures should not be considered a representation of the liquidation value of the Company, but rather represent a good-faith estimate of the increase or decrease in value of financial instruments held by the Company since purchase, origination or issuance. Fair Value Hierarchy Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. In determining fair value, the Company uses various methods, including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair value. Assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
| • | Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange or Nasdaq. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
| • | Level 2 — Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.
| • | Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker-traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
The Company rarely transfers assets and liabilities measured at fair value between Level 1 and Level 2 measurements. Trading account assets and securities available-for-sale may be periodically transferred to or from Level 3 valuation based on management’s conclusion regarding the best method of pricing for an individual security. Such transfers are accounted for as if they occurred at the beginning of a reporting period. There were no such transfers during the nine months ended September 30, 2020 or the year ended December 31, 2019. Fair Value Measurements on a Recurring Basis Securities Available-for-Sale Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include exchange-traded equities. Level 2 securities include U.S. Treasury and agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities. Level 2 fair values are obtained from quoted prices of securities with similar characteristics. In certain cases, where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The following table presents assets and liabilities measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019. There were no liabilities measured at fair value on a recurring basis as of December 31, 2019.
|  | Fair Value Measurements as of September 30, 2020 Using |
|  | Totals At September 30, 2020 |  |  | Quoted Prices in Active Markets For Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
|  | (Dollars in Thousands) |
Investment securities, available-for-sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential |  | $ | 30,007 |  |  | $ | — |  |  | $ | 30,007 |  |  | $ | — |
Commercial |  |  | 46,900 |  |  |  | — |  |  |  | 46,900 |  |  |  | — |
Obligations of states and political subdivisions |  |  | 5,909 |  |  |  | — |  |  |  | 5,909 |  |  |  | — |
Corporate notes |  |  | 2,786 |  |  |  | — |  |  |  | 2,786 |  |  |  | — |
U.S. Treasury securities |  |  | 80 |  |  |  | — |  |  |  | 80 |  |  |  | — |
Other liabilities - derivatives |  |  | 2,879 |  |  |  | — |  |  |  | 2,879 |  |  |  | — |
|  | Fair Value Measurements as of December 31, 2019 Using |
|  | Totals At December 31, 2019 |  |  | Quoted Prices in Active Markets For Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
|  | (Dollars in Thousands) |
Investment securities, available-for-sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential |  | $ | 46,345 |  |  | $ | — |  |  | $ | 46,345 |  |  | $ | — |
Commercial |  |  | 43,373 |  |  |  | — |  |  |  | 43,373 |  |  |  | — |
Obligations of states and political subdivisions |  |  | 4,218 |  |  |  | — |  |  |  | 4,218 |  |  |  | — |
U.S. Treasury securities |  |  | 80 |  |  |  | — |  |  |  | 80 |  |  |  | — |
Other assets - derivatives |  |  | 301 |  |  |  | — |  |  |  | 301 |  |  |  | — |
Fair Value Measurements on a Non-recurring Basis Impaired Loans Loans that are considered impaired are loans for which, based on current information and events, it is probable that the Company will be unable to collect all principal and interest payments due under the contractual terms of the loan agreement. Impaired loans can be measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price or the fair value of the collateral less estimated selling cost if the loan is collateral-dependent. For the Company, the fair value of impaired loans is primarily measured based on the value of the collateral securing the loans (typically real estate). The Company determines the fair value of the collateral based on independent appraisals performed by qualified licensed appraisers. The appraisals may include a single valuation approach or a combination of approaches, including comparable sales and income approaches. Appraised values are discounted for estimated costs to sell and may be discounted further based on management’s knowledge of the collateral, changes in market conditions since the most recent appraisal and/or management’s knowledge of the borrower and the borrower’s business. Such discounts by management are subjective and are typically significant unobservable inputs for determining fair value. Impaired loans are evaluated by management for additional impairment at least quarterly and are adjusted accordingly. OREO and Other Assets Held-for-Sale OREO consists of properties obtained through foreclosure or in satisfaction of loans and is recorded at net realizable value, less estimated cost to sell. Estimates of fair value are generally based on third-party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes discounted based on management’s knowledge of the property and/or changes in market conditions from the date of the most recent appraisal. Such discounts are typically significant unobservable inputs for determining fair value. As of September 30, 2020, included within OREO were certain assets that were formerly included as premises and equipment but have been removed from service, and as of the balance sheet date, were designated as assets to be disposed of by sale. These include assets associated with branches of the Bank that have been closed. When an asset is designated as held-for-sale, the Company ceases depreciation of the asset, and the asset is recorded at the lower of its carrying amount or fair value less estimated cost to sell. Estimates of fair value are generally based on third-party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes discounted based on management’s knowledge of the property and/or changes in market conditions from the date of the most recent appraisal. Such discounts are typically unobservable inputs for determining fair value. These assets were included within other assets on the balance sheet as of December 31, 2019. The following table presents the balances of impaired loans, OREO and other assets held-for-sale measured at fair value on a non-recurring basis as of September 30, 2020 and December 31, 2019:
|  | Fair Value Measurements as of September 30, 2020 Using |
|  | Totals At September 30, 2020 |  |  | Quoted Prices in Active Markets For Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
|  | (Dollars in Thousands) |
Impaired loans |  | $ | 29 |  |  | $ | — |  |  | $ | — |  |  | $ | 29 |
OREO and other assets held-for-sale |  |  | 985 |  |  |  | — |  |  |  | — |  |  |  | 985 |
|  | Fair Value Measurements as of December 31, 2019 Using |
|  | Totals At December 31, 2019 |  |  | Quoted Prices in Active Markets For Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
|  | (Dollars in Thousands) |
Impaired loans |  | $ | 29 |  |  | $ | — |  |  | $ | — |  |  | $ | 29 |
OREO and other assets held-for-sale |  |  | 1,276 |  |  |  | — |  |  |  | — |  |  |  | 1,276 |
Non-recurring Fair Value Measurements Using Significant Unobservable Inputs The following table presents information regarding assets and liabilities measured at fair value using significant unobservable inputs (Level 3) as of September 30, 2020. The table includes the valuation techniques and the significant unobservable inputs utilized. The range of each unobservable input and the weighted average within the range utilized as of September 30, 2020 are both included. Following the table is a description of the valuation technique and the sensitivity of the technique to changes in the significant unobservable input.
|  | Level 3 Significant Unobservable Input Assumptions
|  | Fair Value September 30, 2020 |  |  | Valuation Technique |  | Unobservable Input |  | Quantitative Range of Unobservable Inputs (Weighted Average)
|  | (Dollars in Thousands) |  |  |  |  |  |  |  |  |
Non-recurring fair value measurements: |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans |  | $ | 29 |  |  | Multiple data points, including discount to appraised value of collateral based on recent market activity |  | Appraisal comparability adjustment (discount) |  | 9%-10% |  | (9.5%)
OREO and other assets held-for-sale |  | $ | 985 |  |  | Discount to appraised value of property based on recent market activity for sales of similar properties |  | Appraisal comparability adjustment (discount) |  | 9%-10% |  | (9.5%)
Impaired Loans Impaired loans are valued based on multiple data points indicating the fair value for each loan. The primary data point is the appraisal value of the underlying collateral, to which a discount is applied. Management establishes this discount or comparability adjustment based on recent sales of similar property types. As liquidity in the market increases or decreases, the comparability adjustment and the resulting asset valuation are impacted. OREO OREO under a binding contract for sale is valued based on contract price. If no sales contract is pending for a specific property, management establishes a comparability adjustment to the appraised value based on historical activity, considering proceeds for properties sold versus the corresponding appraised value. Increases or decreases in realization for properties sold impact the comparability adjustment for similar assets remaining on the balance sheet. Other Assets Held-for-Sale Assets designated as held-for-sale that are under a binding contract are valued based on the contract price. If no sales contract is pending for a specific property, management establishes a comparability adjustment to the appraised value based on historical activity, considering proceeds for properties sold versus the corresponding appraised value. Increases or decreases in realization for properties sold impact the comparability adjustment for similar assets remaining on the balance sheet. Fair Value of Financial Instruments ASC Topic 825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: Cash, due from banks and federal funds sold – The carrying amount of cash, due from banks and federal funds sold approximates fair value. Federal Home Loan Bank stock – Based on the redemption provision of the FHLB, the stock has no quoted market value and is carried at cost. Investment securities – Fair values of investment securities are based on quoted market prices where available. If quoted market prices are not available, estimated fair values are based on market prices of comparable instruments. Derivative instruments – The fair value of derivative instruments is based on information obtained from a third-party financial institution. This information is periodically evaluated by the Company and, as necessary, corroborated against other third-party information. Accrued interest receivable and payable – The carrying amount of accrued interest approximates fair value. Loans, net – The fair value of loans is estimated on an exit price basis incorporating contractual cash flow, prepayment discount spreads, credit loss and liquidity premiums. Demand and savings deposits – The fair values of demand deposits are equal to the carrying value of such deposits. Demand deposits include non-interest-bearing demand deposits, savings accounts, NOW accounts and money market demand accounts. Time deposits – The fair values of relatively short-term time deposits are equal to their carrying values. Discounted cash flows are used to value long-term time deposits. The discount rate used is based on interest rates currently offered by the Company on comparable deposits as to amount and term. Short-term borrowings – These borrowings may consist of federal funds purchased, securities sold under agreements to repurchase and the floating rate borrowings from the FHLB account. Due to the short-term nature of these borrowings, fair values approximate carrying values. Long-term debt – The fair value of this debt is estimated using discounted cash flows based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements as of the determination date. Off-balance sheet instruments – The carrying amount of commitments to extend credit and standby letters of credit approximates fair value. The carrying amount of the off-balance sheet financial instruments is based on fees currently charged to enter into such agreements. The estimated fair value and related carrying or notional amounts, as well as the level within the fair value hierarchy, of the Company’s financial instruments as of September 30, 2020 and December 31, 2019 were as follows:
|  | September 30, 2020 |
|  | Carrying Amount |  |  | Estimated Fair Value |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
|  | (Dollars in Thousands) |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 65,643 |  |  | $ | 65,643 |  |  | $ | 65,643 |  |  | $ | — |  |  | $ | — |
Investment securities available-for-sale |  |  | 85,682 |  |  |  | 85,682 |  |  |  | — |  |  |  | 85,682 |  |  |  | — |
Investment securities held-to-maturity |  |  | 7,723 |  |  |  | 7,874 |  |  |  | — |  |  |  | 7,874 |  |  |  | — |
Federal funds sold |  |  | 86 |  |  |  | 86 |  |  |  | — |  |  |  | 86 |  |  |  | — |
Federal Home Loan Bank stock |  |  | 1,135 |  |  |  | 1,135 |  |  |  | — |  |  |  | — |  |  |  | 1,135 |
Loans, net of allowance for loan losses |  |  | 627,605 |  |  |  | 631,261 |  |  |  | — |  |  |  | — |  |  |  | 631,261 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 745,336 |  |  |  | 747,120 |  |  |  | — |  |  |  | 747,120 |  |  |  | — |
Short-term borrowings |  |  | 10,045 |  |  |  | 10,045 |  |  |  | — |  |  |  | 10,045 |  |  |  | — |
Other liabilities - derivatives |  |  | 2,879 |  |  |  | 2,879 |  |  |  | — |  |  |  | 2,879 |  |  |  | — |
|  | December 31, 2019 |
|  | Carrying Amount |  |  | Estimated Fair Value |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
|  | (Dollars in Thousands) |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 57,030 |  |  | $ | 57,030 |  |  | $ | 57,030 |  |  | $ | — |  |  | $ | — |
Investment securities available-for-sale |  |  | 94,016 |  |  |  | 94,016 |  |  |  | — |  |  |  | 94,016 |  |  |  | — |
Investment securities held-to-maturity |  |  | 14,340 |  |  |  | 14,306 |  |  |  | — |  |  |  | 14,306 |  |  |  | — |
Federal funds sold |  |  | 10,080 |  |  |  | 10,080 |  |  |  | — |  |  |  | 10,080 |  |  |  | — |
Federal Home Loan Bank stock |  |  | 1,137 |  |  |  | 1,137 |  |  |  | — |  |  |  | — |  |  |  | 1,137 |
Loans, net of allowance for loan losses |  |  | 545,243 |  |  |  | 559,911 |  |  |  | — |  |  |  | — |  |  |  | 559,911 |
Other assets - derivatives |  |  | 301 |  |  |  | 301 |  |  |  | — |  |  |  | 301 |  |  |  | — |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 683,662 |  |  |  | 682,828 |  |  |  | — |  |  |  | 682,828 |  |  |  | — |
Short-term borrowings |  |  | 10,025 |  |  |  | 10,025 |  |  |  | — |  |  |  | 10,025 |  |  |  | — |

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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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