NOTE 16 - FAIR VALUE MEASUREMENTS

The Company determines fair value based on the requirements established in Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements, which provides a framework for measuring fair value in accordance with U.S. GAAP and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 defines fair value as the exit price, or the price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions. ASU 2016-01, Financial Instruments - Overall (Subtopic 825‑10), Recognition and Measurement of Financial Assets and Financial Liabilities, requires us to use the exit price notion when measuring the fair value of instruments for disclosure purposes.

The following definitions describe the levels of inputs that may be used to measure fair value:

Level 1 - Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 - Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following methods were used to estimate the fair value of certain assets and liabilities on a recurring and nonrecurring basis.

Securities Available-for-Sale - The fair value of securities available-for-sale are recorded on a recurring basis. The fair value of investments and mortgage-backed securities are provided by a third-party pricing service. These valuations are based on market data using pricing models that vary by asset class and incorporate available current trade, bid and other market information, and for structured securities, cash flow, and loan performance data. The pricing processes utilize benchmark curves, benchmarking of similar securities, sector groupings, and matrix pricing. Option adjusted spread models are also used to assess the impact of changes in interest rates and to develop prepayment scenarios (Level 2). Certain other corporate securities and municipal bonds are generally measured at fair value based on discounted cash flow models (Level 3). Transfers between the fair value hierarchy are determined through the third-party service provider which, from time to time will transfer between levels based on market conditions per the related security. All models and processes used take into account market convention.

Mortgage Loans Held for Sale - The fair value of loans held for sale reflects the value of commitments with investors and/or the relative price as delivered into a To-Be-Announced (“TBA”) mortgage-backed security (Level 2).

Derivative Instruments - The fair value of the interest rate lock commitments and forward sales commitments are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions based on historical information, where appropriate. TBA mortgage-backed securities are fair valued on similar contracts in active markets (Level 2) while locks and forwards with customers and investors are fair valued using similar contracts in the market and changes in the market interest rates (Level 2 and 3).

Impaired Loans - Fair value adjustments to impaired collateral dependent loans are recorded to reflect partial write-downs based on the current appraised value of the collateral or internally developed models, which contain management’s assumptions. Management will utilize discounted cashflow impairment for TDRs when the change in terms results in a discount to the overall cashflows to be received (Level 3).

Other Real Estate Owned - Fair value adjustments to OREO are recorded at the lower of carrying amount of the loan or fair value of the collateral less selling costs. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell (Level 3).

Servicing Rights - The fair value of mortgage servicing rights are estimated using net present value of expected cash flows using a third party model that incorporates assumptions used in the industry to value such rights, adjusted for factors such as weighted average prepayments speeds based on historical information where appropriate (Level 3).

The following table presents assets and liabilities measured at fair value on a recurring basis at the dates indicated:


	At December 31, 2019
Financial Assets	Level 1		Level 2		Level 3		Total
Securities available-for-sale
U.S. agency securities	$	—	$	9,066	$	—	$	9,066
Corporate securities		—		9,546		1,024		10,570
Municipal bonds		—		20,982		138		21,120
Mortgage-backed securities		—		62,850		—		62,850
U.S. Small Business Administration securities		—		22,451		—		22,451
Mortgage loans held for sale, at fair value		—		69,699		—		69,699
Derivatives
Interest rate lock commitments with customers		—		—		557		557
Total assets measured at fair value	$	—	$	194,594	$	1,719	$	196,313
Financial Liabilities
Derivatives
Individual forward sale commitments with investors	$	—	$	(8)	$	(195)	$	(203)
Total liabilities measured at fair value	$	—	$	(8)	$	(195)	$	(203)


	At December 31, 2018
Financial Assets	Level 1		Level 2		Level 3		Total
Securities available-for-sale
U.S. agency securities	$	—	$	15,887	$	—	$	15,887
Corporate securities		—		6,865		—		6,865
Municipal bonds		—		14,194		—		14,194
Mortgage-backed securities		—		44,836		—		44,836
U.S. Small Business Administration securities		—		15,423		—		15,423
Mortgage loans held for sale, at fair value		—		51,195		—		51,195
Derivatives
Interest rate lock commitments with customers		—		—		503		503
Total assets measured at fair value	$	—	$	148,400	$	503	$	148,903
Financial Liabilities
Derivatives
Individual forward sale commitments with investors	$	—	$	(540)	$	(34)	$	(574)
Total liabilities measured at fair value	$	—	$	(540)	$	(34)	$	(574)

During the year ended December 31, 2019, $1.0 million of corporate securities and $138,000 of municipal bonds available for sale were transferred from Level 2 to Level 3. The transfers were due to a lack of observable inputs and trade activity for those securities. There were no transfers between levels during the year ended December 31, 2018.

The following table presents impaired loans, OREO, and servicing rights measured at fair value on a nonrecurring basis for which a nonrecurring change in fair value has been recorded during the reporting periods indicated. The amounts disclosed below represent the fair values at the time the nonrecurring fair value measurements were evaluated.


	December 31, 2019
	Level 1		Level 2		Level 3		Total
Impaired loans	$	—	$	—	$	3,128	$	3,128
OREO		—		—		168		168
Servicing rights		—		—		13,255		13,255


	December 31, 2018
	Level 1		Level 2		Level 3		Total
Impaired loans	$	—	$	—	$	3,894	$	3,894
OREO		—		—		689		689
Servicing rights		—		—		14,593		14,593

Quantitative Information about Level 3 Fair Value Measurements - Shown in the table below is the fair value of financial instruments measured under a Level 3 unobservable input on a recurring and nonrecurring basis at December 31, 2019 and 2018:


Level 3		Significant		Weighted Average
Fair Value	Valuation	Unobservable		December 31,		December 31,
Instruments	Techniques	Inputs	Range	2019		2018
RECURRING
Interest rate lock commitments with customers	Quoted market prices	Pull-through expectations	80% - 99%	94.5	%	95.2	%
Individual forward sale commitments with investors	Quoted market prices	Pull-through expectations	80% - 99%	94.5	%	95.2	%
Corporate securities	Discounted cash flows	Discount rate	2.1%	2.1	%	—
Municipal bonds	Discounted cash flows	Discount rate	3.0% - 3.7%	3.4	%	—
NONRECURRING
Impaired loans	Fair value of underlying collateral	Discount applied to the obtained appraisal	0% - 50%	10.0	%	10.0	%
OREO	Fair value of collateral	Discount applied to the obtained appraisal	0% - 75%	10.0	%	10.0	%
Servicing rights	Industry sources	Pre-payment speeds	0% - 50%	17.1	%	9.4	%

An increase in the pull-through rate utilized in the fair value measurement of the interest rate lock commitments with customers and forward sale commitments with investors will result in positive fair value adjustments (and an increase in the fair value measurement). Conversely, a decrease in the pull-through rate will result in a negative fair value adjustment (and a decrease in the fair value measurement).

The following table provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the years ended December 31, 2019 and 2018.


											Net change in fair
											value for gains/
											(losses) relating to
			Purchases								items held at end of
	Beginning		and			Sales and	Transfers		Ending		year included in
	Balance		Issuances			Settlements	In		Balance		income
2019
Interest rate lock commitments with customers	$	503	$	11,063	$	(11,009)	$	—	$	557	$	54
Individual forward sale commitments with investors		(34)		(1,444)		1,283		—		(195)		(161)
Securities available-for-sale, at fair value		—		—		—		1,162		1,162		—
2018
Interest rate lock commitments with customers	$	726	$	9,722	$	(9,945)	$	—	$	503	$	(223)
Individual forward sale commitments with investors		51		850		(935)		—		(34)		(85)

Gains (losses) on interest rate lock commitments carried at fair value are recorded in other noninterest income. Gains (losses) on forward sale commitments with investors carried at fair value are recorded within other noninterest income.

The following table provides estimated fair values of the Company’s financial instruments at December 31, 2019 and 2018, whether or not recognized at fair value in the Consolidated Balance Sheets:


	December 31,				December 31,
	2019				2018
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial Assets
Level 1 inputs:
Cash and cash equivalents	$	45,778	$	45,778	$	32,779	$	32,779
Certificates of deposit at other financial institutions		20,902		20,902		22,074		22,074
Level 2 inputs:
Securities available-for-sale, at fair value		124,895		124,895		97,205		97,205
Loans held for sale, at fair value		69,699		69,699		51,195		51,195
FHLB stock, at cost		8,045		8,045		9,887		9,887
Accrued interest receivable		5,908		5,908		5,761		5,761
Level 3 inputs:
Securities available-for-sale, at fair value		1,162		1,162		—		—
Loans receivable, gross		1,351,893		1,377,408		1,326,238		1,320,341
Servicing rights, held at lower of cost or fair value		11,560		13,255		10,429		14,593
Fair value interest rate locks with customers		557		557		503		503
Financial Liabilities
Level 2 inputs:
Deposits		1,392,408		1,385,658		1,274,219		1,261,096
Borrowings		84,864		85,268		137,149		136,873
Subordinated note		9,885		10,599		9,865		10,242
Accrued interest payable		273		273		344		344
Paired off commitments with investors		71		71		64		64
Individual forward sale commitments with investors		8		8		540		540
Level 3 inputs:
Individual forward sale commitments with investors		195		195		34		34