Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2020

Fair Value Disclosures [Abstract]

Fair Value of Financial Instruments

Note 14. Fair Value of Financial Instruments

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (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. There are three levels of inputs that may be used to measure fair values:

Level 1—Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2—Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3—Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate fair value:

Securities Available for Sale: The fair values of investment securities are determined by matrix pricing, which is a mathematical technique used to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2). Management obtains the fair values of investment securities on a monthly basis from a third-party pricing service.

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s judgment, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Appraisals for collateral-dependent impaired loans are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the credit department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.

Assets and liabilities measured at fair value on a recurring basis at December 31, 2020 and December 31, 2019 are summarized below:

			Fair Value Measuring Using
			Quoted		Significant Other		Significant
			Prices in		Observable		Unobservable
	Total		Active Markets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
As of December 31, 2020:
U.S. Government sponsored agency securities	$	1,005	$	—	$	1,005	$	—
Mortgage-backed securities - residential		19,704		—		19,704		—
Collateralized mortgage obligations		71,082		—		71,082		—
Other investments:
Mutual fund - CRA qualified		3,773		3,773		—		—
As of December 31, 2019:
U.S. Government sponsored agency securities	$	5,001	$	—	$	5,001	$	—
Mortgage-backed securities - residential		15,641		—		15,641		—
Collateralized mortgage obligations		35,907		—		35,907		—
Other investments:
Mutual fund - CRA qualified		3,628		3,628		—		—

There were no transfers of assets or liabilities between the Level 1 and Level 2 classifications during 2020 or 2019. There were no assets or liabilities measured at fair value on a non-recurring basis at December 31, 2020 or 2019.

Financial Instruments: The carrying amounts and estimated fair values of financial instruments not carried at fair value, at December 31, 2020 are as follows:

	Carrying Amount		Level 1		Level 2		Level 3		Value
	(Dollars in thousands)
As of December 31, 2020:
Financial Assets:
Cash and cash equivalents	$	106,405	$	106,405	$	—	$	—	$	106,405
Loans held for sale		26,659		—		26,659		—		26,659
Loans receivable, net		1,084,384		—		—		1,109,217		1,109,217
Accrued interest receivable, net		3,985		7		249		3,729		3,985
Other investments:
FHLB and PCBB stock		6,233	N/A		N/A		N/A		N/A
Financial Liabilities:
Deposit	$	1,200,090	$	—	$	1,200,789	$	—	$	1,200,789
'FHLB Advances		5,000		—		5,000		—		5,000
Accrued interest payable		1,021		—		1,021		—		1,021

The carrying amounts and estimated fair values of financial instruments not carried at fair value at December 31, 2019 are as follows:

	Carrying Amount		Level 1		Level 2		Level 3		Value
	(Dollars in thousands)
As of December 31, 2019:
Financial Assets:
Cash and cash equivalents	$	86,036	$	86,036	$	—	$	—	$	86,036
Loans held for sale		2,100		—		2,100		—		2,100
Loans receivable, net		980,088		—		—		1,009,490		1,009,490
Accrued interest receivable, net		3,166		41		243		2,882		3,166
Other investments:
FHLB and PCBB stock		5,548	N/A		N/A		N/A		N/A
Financial Liabilities:
Deposit	$	1,020,711	$	—	$	1,021,571	$	—	$	1,021,571
Accrued interest payable		2,686		—		2,686		—		2,686

The methods and assumptions, not previously presented, used to estimate fair value are described as follows:

(a) Cash and Cash equivalents

The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

(b) Loans Held for Sale

The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

(c) Loans Receivable, Net

Fair values of loans, excluding loans held for sale, are based on the exit price notion set forth by ASU 2016-01 effective January 1, 2018 and estimated using discounted cash flow analyses. The estimation of fair values of loans results in a Level 3 classification as it requires various assumptions and considerable judgement to incorporate factors relevant when selling loans to market participants, such as funding costs, return requirements of likely buyers and performance expectations of the loans given the current market environment and quality of loans.

(d) Other Investments

Fair value of CRA qualified mutual fund is readily determinable using quoted prices and is classified as Level 1.  It is not practical to determine the fair value of FHLB and PCBB stock due to restrictions placed on their transferability.

(e) Deposits

The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 2 classification. The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date resulting in a Level 2 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

(f) Federal Home Loan Bank Advances

The fair values of Federal Home Loan Bank Advances are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements, resulting in a Level 2 classification.

(g) Accrued Interest Receivable/Payable

The carrying amounts of accrued interest approximate fair value and are classified within the same fair value hierarchy level as the related asset or liability.

(h) Off-balance Sheet Instruments

Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.