Fair Value Measurements

12 Months Ended

Dec. 31, 2019

Fair Value Disclosures [Abstract]

Fair Value Measurements

Note 18.Fair Value Measurements

GAAP requires the Company to record fair value adjustments to certain assets and liabilities. The fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants as of the measurement date.

GAAP requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. 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 recognizes interest rate swaps at fair value. The Company has contracted with a third-party to provide valuations for interest rate swaps using standard valuation techniques.  The Company’s interest rate swaps are classified as Level 2.

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis:

	Fair Value Measurements
(In thousands)	Balance		Level 1		Level 2		Level 3
Assets at December 31, 2019:
Available for sale securities:
Obligations of U.S. Government corporations and agencies	$	63,941	$	-	$	63,941	$	-
Obligations of states and political subdivisions		15,842		-		15,842		-
Total available for sale securities		79,783		-		79,783		-
Mutual funds		403		403		-		-
Total assets at fair value	$	80,186	$	403	$	79,783	$	-
Liabilities at December 31, 2019:
Interest rate swaps	$	140	$	-	$	140	$	-
Total liabilities at fair value	$	140	$	-	$	140	$	-
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	$	-

The Company may be required, from time to time, to measure and recognize certain assets at fair value on a nonrecurring basis in accordance with GAAP. The following describes the valuation techniques and inputs used by the Company in determining the fair value of certain 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 2019 and 2018. 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 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 during the period:

	December 31, 2019
(In thousands)	Balance		Level 1		Level 2		Level 3
Assets:
Mortgage loans held for sale	$	247	$	-	$	247	$	-
Impaired loans, net		1,570		-		-		1,570
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 December 31, 2019 and 2018:

	December 31, 2019
(Dollars in thousands)	Fair Value		Valuation Technique	Unobservable Input	Weighted Average Discount
Impaired loans, net	$	1,570	Appraised values	Age of appraisals, current market conditions, and experience within local market		87	%
Other real estate owned, net		1,356	Appraised values	Age of appraisal, current market conditions and selling costs		18	%
Total	$	2,926

	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, and 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 following tables present the Company’s estimated fair values and related carrying amounts:

	December 31, 2019
(In thousands)	Carrying Amount		Level 1		Level 2		Level 3		Fair Value
Assets
Cash and short-term investments	$	46,341	$	46,341	$	-	$	-	$	46,341
Securities available for sale		79,783		-		79,783		-		79,783
Restricted investments		2,016		-		2,016		-		2,016
Mortgage loans held for sale		247		-		247		-		247
Loans, net		544,999		-		-		541,367		541,367
Accrued interest receivable		1,984		-		1,984		-		1,984
Mutual Funds		403		403		-		-		403
Bank-owned life insurance		13,961		-		13,961		-		13,961
Total financial assets	$	689,734	$	46,744	$	97,991	$	541,367	$	686,102
Liabilities
Deposits	$	622,155	$	-	$	622,295	$	-	$	622,295
FHLB advances		16,695		-		16,724		-		16,724
Junior subordinated debt		4,124		-		4,446		-		4,446
Accrued interest payable		217		-		217		-		217
Interest rate swaps		140		-		140		-		140
Total financial liabilities	$	643,331	$	-	$	643,822	$	-	$	643,822

	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

The Company assumes interest rate risk (the risk that general interest rate levels will change) during its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.