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Fair Values of Assets and Liabilities
6 Months Ended
Jun. 30, 2020
Fair Values of Assets and Liabilities [Abstract]  
Fair Values of Assets and Liabilities

Note 8. Fair Values of Assets and Liabilities

FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an 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. FASB ASC 820 requires that

valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs and also establishes a fair value hierarchy that prioritizes the valuation inputs into three broad levels. The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3Valuation is determined using model-based techniques with significant assumptions not observable in the market. These unobservable assumptions reflect the Companys own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of third party pricing services, option pricing models, discounted cash flow models and similar techniques.

FASB ASC 825, Financial Instruments, allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Company has not made any material FASB ASC 825 elections as of June 30, 2020.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The Company utilizes fair value measurements to record adjustments to certain assets to determine fair value disclosures. Securities available for sale and the cash flow hedge are recorded at fair value on a recurring basis. The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis (dollars in thousands):

June 30, 2020

    

Total

    

Level 1

    

Level 2

    

Level 3

Investment securities available for sale

 

  

 

  

 

  

 

  

U.S. Treasury securities

$

21,749

$

21,749

$

$

U.S. Government agencies

 

20,281

 

 

20,281

 

State, county and municipal

 

109,669

 

1,622

 

108,047

 

Mortgage backed securities

 

32,243

 

 

32,243

 

Asset backed securities

 

23,150

 

 

23,150

 

Corporate bonds

 

19,775

 

5,558

 

14,217

 

Total investment securities available for sale

 

226,867

 

28,929

 

197,938

 

Total assets at fair value

$

226,867

$

28,929

$

197,938

$

Cash flow hedge liability

$

730

 

$

730

 

Total liabilities at fair value

$

730

$

$

730

$

December 31, 2019

    

Total

    

Level 1

    

Level 2

    

Level 3

Investment securities available for sale

U.S. Government agencies

$

21,936

$

$

21,936

$

State, county and municipal

 

98,592

 

10,072

 

88,520

 

Mortgage backed securities

 

48,740

 

1,181

 

47,559

 

Asset backed securities

 

11,604

 

 

11,604

 

Corporate bonds

 

6,097

 

 

6,097

 

Total investment securities available for sale

 

186,969

 

11,253

 

175,716

 

Total assets at fair value

$

186,969

$

11,253

$

175,716

$

Cash flow hedge liability

44

 

$

44

 

Total liabilities at fair value

$

44

$

$

44

$

Investment securities available for sale

Investment securities available for sale are recorded at fair value each reporting period. Fair value measurement is based upon quoted prices, if available (Level 1). If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions (Level 2).

The Company utilizes a third party vendor to provide fair value data for purposes of determining the fair value of its available for sale securities portfolio. The third party vendor uses reputable pricing companies for security market data. The third party vendor has controls in place for month-to-month market checks and zero pricing, and a Statement on Standards for Attestation Engagements No. 18 report is obtained from the third party vendor on an annual basis. The Company makes no adjustments to the pricing service data received for its securities available for sale.

Cash flow hedge

The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Company is also required to measure and recognize certain other financial assets at fair value on a nonrecurring basis on the consolidated balance sheet. The following tables present assets measured at fair value on a nonrecurring basis as of June 30, 2020 and December 31, 2019 (dollars in thousands):

June 30, 2020

    

Total

    

Level 1

    

Level 2

    

Level 3

Impaired loans

$

3,795

$

$

$

3,795

Loans held for sale

396

 

 

396

 

Bank premises and equipment held for sale

 

1,589

 

 

 

1,589

Other real estate owned

 

4,486

 

 

 

4,486

Total assets at fair value

$

10,266

$

$

396

$

9,870

Total liabilities at fair value

$

$

$

$

December 31, 2019

    

Total

    

Level 1

    

Level 2

    

Level 3

Impaired loans

$

3,020

$

$

$

3,020

Loans held for sale

501

501

 

Bank premises and equipment held for sale

1,589

 

1,589

Other real estate owned

 

4,527

 

 

 

4,527

Total assets at fair value

$

9,637

$

$

501

$

9,136

Total liabilities at fair value

$

$

$

$

Impaired loans

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures the impairment in accordance with FASB ASC 310, Receivables. The fair value of impaired loans is estimated using one of several methods, including collateral value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. At June 30, 2020 and December 31, 2019, a majority of total impaired loans were evaluated based on the fair value of the collateral. The Company frequently obtains appraisals prepared by external professional appraisers for classified loans greater than $250,000 when the most recent appraisal is greater than 18 months old and deemed to be stale or invalid. The Company may also utilize internally prepared estimates that generally result from current market data and actual sales data related to the Company’s collateral. The Company makes adjustments for selling costs estimated at 10%, market deterioration, and any known liens against the collateral.  Therefore, the Company records impaired loans as nonrecurring Level 3.  For the period ended June 30, 2020 and December 31, 2019, weighted average adjustments, calculated based on relative fair value, related to impaired loans were 25.3% and 12.8%, respectively.

Impaired loans can also be evaluated for impairment using the present value of expected future cash flows discounted at the loan’s effective interest rate. The measurement of impaired loans using future cash flows discounted at the loan’s effective interest rate rather than the market rate of interest is not a fair value measurement and is therefore excluded from fair value disclosure requirements. Reviews of classified loans are performed by management on a quarterly basis.

Loans held for sale

The carrying amounts of loans held for sale approximate fair value (Level 2).

Bank premises and equipment held for sale

The fair value of bank premises and equipment held for sale was determined using the adjusted appraisal methodology described in the other real estate owned (OREO) asset section below.

Other real estate owned

OREO assets are adjusted to fair value less estimated disposal costs upon transfer of the related loans to OREO, establishing a new cost basis. Initial fair value is based on appraised values of the collateral less estimated disposal costs. Subsequent to the transfer, valuations are periodically performed by management based on updated appraisals, general market conditions, recent sales of similar properties, length of time the properties have been held, and the Company’s ability and intent with regard to continued ownership of the properties. The assets are carried at the lower of carrying value or fair value less estimated disposal costs. The Company may incur additional write-downs of OREO assets to fair value less estimated costs to sell if valuations indicate a further deterioration in market conditions. As such, the Company records OREO as a nonrecurring fair value measurement classified as Level 3.

Fair Value of Financial Instruments

FASB ASC 825, Financial Instruments, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring or nonrecurring basis. FASB 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, in accordance with FASB ASU 2016-01, the Company uses the exit price notion, rather than the entry price notion, in calculating fair values of financial instruments not measured at fair value on a recurring basis.

The following reflects the fair value of financial instruments, whether or not recognized on the consolidated balance sheet, at fair value measures by level of valuation assumptions used for those assets. These tables exclude financial instruments for which the carrying value approximates fair value (dollars in thousands):

June 30, 2020

    

    

Estimated Fair

    

    

    

Carrying Value

Value

Level 1

Level 2

Level 3

Financial assets:

Securities held to maturity

$

24,169

$

25,282

$

$

25,282

$

Loans, net of allowance

 

1,153,072

 

1,164,016

 

 

 

1,164,016

PCI loans, net of allowance

 

29,351

 

36,997

 

 

 

36,997

Financial liabilities:

 

 

  

 

  

 

 

  

Interest bearing deposits

 

1,084,869

 

1,089,775

 

 

1,089,775

 

Borrowings

 

72,291

 

73,462

 

 

73,462

 

December 31, 2019

    

    

Estimated Fair

    

    

    

Carrying Value

Value

Level 1

Level 2

Level 3

Financial assets:

Securities held to maturity

$

35,733

$

36,633

$

$

36,633

$

Loans, net of allowance

 

1,049,894

 

1,041,671

 

 

 

1,041,671

PCI loans, net of allowance

 

32,372

 

38,982

 

 

 

38,982

Financial liabilities:

 

 

  

 

  

 

 

  

Interest bearing deposits

 

984,864

 

985,853

 

 

985,853

 

Borrowings

 

72,624

 

72,457

 

 

72,457