XML 20 R18.htm IDEA: XBRL DOCUMENT

Fair Value Measurement

9 Months Ended

Sep. 30, 2019

Note 9. Fair Value Measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined using quoted market prices. However, in many instances, quoted market prices are not available. In such instances, fair values are determined using appropriate valuation techniques. Various assumptions and observable inputs must be relied upon in applying these techniques. Accordingly, categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. As such, the fair value estimates may not be realized in an immediate transfer of the respective asset or liability.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. 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 factors 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.

Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels. These levels are:

•

Level 1:Inputs are defined as quoted prices (unadjusted) in active markets for identical assets or liabilities.

•

Level 2:Inputs are defined as inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

•

Level 3:Inputs are defined as unobservable inputs for the asset or liability.

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the consolidated financial statements:

Securities available for sale: Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data (Level 2). If the inputs used to provide the evaluation for certain securities are unobservable and/or there is little, if any, market activity, then the security would fall to the lowest level of the hierarchy (Level 3). The Company’s investment portfolio is primarily valued using fair value measurements that are considered to be Level 2. The Company has contracted with an independent pricing service that uses Interactive Data Corporation (“IDC”) as the primary source for valuation. IDC utilizes evaluated pricing models that vary by asset class and include available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.

Interest rate swaps: The Company utilizes interest rate swap agreements as part of the management of interest rate risk to modify the repricing characteristics of certain portions of the Company’s interest-bearing assets and liabilities. The Company has contracted with a third-party to provide valuations for interest rate swaps using standard valuation techniques and therefore classifies such valuation as Level 2. The Company has considered counterparty credit risk in the valuation of its interest rate swap assets and has considered its own credit risk in the valuation of its interest rate swap liabilities.

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018 by levels within the valuation hierarchy:

	Fair Value Measurements
(In thousands)	Balance		Level 1		Level 2		Level 3
Assets at September 30, 2019:
Available for sale securities:
Obligations of U.S. Government corporations and agencies	$	58,247	$	-	$	58,247	$	-
Obligations of states and political subdivisions		14,310		-		14,310		-
Total available for sale securities		72,557		-		72,557		-
Mutual funds		403		403		-		-
Total assets at fair value	$	72,960	$	403	$	72,557	$	-
Liabilities at September 30, 2019:
Interest rate swaps	$	316	$	-	$	316	$	-
Total liabilities at fair value	$	316	$	-	$	316	$	-

Assets at December 31, 2018:
Available for sale securities:
Obligations of U.S. Government corporations and agencies	$	56,409	$	-	$	56,409	$	-
Obligations of states and political subdivisions		14,580		-		14,580		-
Corporate bonds		895		-		895		-
Total available for sale securities		71,884		-		71,884		-
Mutual funds		382		382		-		-
Interest rate swaps		367		-		367		-
Total assets at fair value	$	72,633	$	382	$	72,251	$	-
Liabilities at December 31, 2018:
Interest rate swaps	$	38	$	-	$	38	$	-
Total liabilities at fair value	$	38	$	-	$	38	$	-

Certain assets are measured at fair value on a nonrecurring basis. The assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances such as when there is evidence of impairment. The following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a nonrecurring basis in the consolidated financial statements:

Mortgage Loans Held for Sale: Mortgage loans held for sale are carried at lower of cost or market value. These loans currently consist of 1-4 family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). No nonrecurring fair value adjustments were recorded on mortgage loans held for sale during the three and nine months ended September 30, 2019. Net gains and losses on the sale of loans are recorded as a component of noninterest income on the consolidated statements of operations.

Impaired Loans: A loan is designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loans or the fair value of the collateral securing the loans, or the present value of the cash flows. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Company’s collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal of one year or less, conducted by an independent, licensed appraiser using observable market data (Level 2). However, if the collateral is in the process of construction or if an appraisal of the real estate property is more than one year old and not solely based on observable market comparables or management determines the fair value of the collateral is further impaired below the appraised value, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal of one year or less, if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3). Any fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of operations.

Other Real Estate Owned (“OREO”): OREO is measured at fair value less estimated selling costs. Fair value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral. The Company considers OREO as Level 3.

The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis at September 30, 2019 and December 31, 2018.

	September 30, 2019
(In thousands)	Balance		Level 1		Level 2		Level 3
Assets:
Mortgage loans held for sale	$	1,500	$	-	$	1,500	$	-
Impaired loans, net		2,231		-		-		2,231
Other real estate owned, net		1,356		-		-		1,356

	December 31, 2018
(In thousands)	Balance		Level 1		Level 2		Level 3
Assets:
Impaired loans, net	$	2,438	$	-	$	-	$	2,438
Other real estate owned, net		1,356		-		-		1,356

The following table displays quantitative information about Level 3 fair value measurements at September 30, 2019 and December 31, 2018.

	September 30, 2019
(Dollars in thousands)	Fair Value		Valuation Technique	Unobservable Input	Weighted Average Discount
Impaired loans, net	$	2,231	Appraised values	Age of appraisal, current market conditions, experience within local market		83	%
Other real estate owned, net		1,356	Appraised values	Age of appraisal, current market conditions and selling costs		17	%
Total	$	3,587

	December 31, 2018
(Dollars in thousands)	Fair Value		Valuation Technique	Unobservable Input	Weighted Average Discount
Impaired loans, net	$	2,438	Appraised values	Age of appraisal, current market conditions, experience within local market		86	%
Other real estate owned, net		1,356	Appraised values	Age of appraisal, current market conditions and selling costs		18	%
Total	$	3,794

Accounting Standards Codification (“ASC”) 825, “Financial Instruments”, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. Additionally, the Company uses the exit price notion, rather than the entry price notion, in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

The estimated fair values and related carrying amounts of the Company’s financial instruments are as follows:

	September 30, 2019
(In thousands)	Carrying Amount		Level 1		Level 2		Level 3		Fair Value
Assets
Cash and short-term investments	$	60,564	$	60,564	$	-	$	-	$	60,564
Securities available for sale		72,557		-		72,557		-		72,557
Restricted investments		2,571		-		2,571		-		2,571
Mortgage loans held for sale		1,500		-		1,500		-		1,500
Loans, net		539,832		-		-		537,655		537,655
Accrued interest receivable		1,929		-		1,929		-		1,929
Mutual funds		403		403		-		-		403
Bank-owned life insurance		13,870		-		13,870		-		13,870
Total financial assets	$	693,226	$	60,967	$	92,427	$	537,655	$	691,049

Liabilities
Deposits	$	614,000	$	-	$	614,170	$	-	$	614,170
FHLB advances		29,717		-		30,039		-		30,039
Junior subordinated debt		4,124		-		4,691		-		4,691
Accrued interest payable		554		-		554		-		554
Interest rate swaps		316		-		316		-		316
Total financial liabilities	$	648,711	$	-	$	649,770	$	-	$	649,770

	December 31, 2018
(In thousands)	Carrying Amount		Level 1		Level 2		Level 3		Fair Value
Assets
Cash and short-term investments	$	67,110	$	67,110	$	-	$	-	$	67,110
Securities available for sale		71,884		-		71,884		-		71,884
Restricted investments		2,240		-		2,240		-		2,240
Loans, net		544,188		-		-		537,072		537,072
Accrued interest receivable		1,942		-		1,942		-		1,942
Mutual funds		382		382		-		-		382
Interest rate swaps		367		-		367		-		367
Bank-owned life insurance		13,595		-		13,595		-		13,595
Total financial assets	$	701,708	$	67,492	$	90,028	$	537,072	$	694,592

Liabilities
Deposits	$	635,638	$	-	$	634,917	$	-	$	634,917
FHLB advances		23,780		-		23,633		-		23,633
Junior subordinated debt		4,124		-		4,414		-		4,414
Accrued interest payable		300		-		300		-		300
Interest rate swaps		38		-		38		-		38
Total financial liabilities	$	663,880	$	-	$	663,302	$	-	$	663,302

- 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 + Details