Fair Value of Assets and Liabilities

9 Months Ended

Sep. 30, 2019

9.) Fair Value of Assets and Liabilities:

Measurements

The Company groups assets and liabilities recorded at fair value into 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. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with level 1 considered highest and level 3 considered lowest). A brief description of each level follows:

Level 1:

Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level 2:

Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but which trade less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.

Level 3:

Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where inputs into the determination of fair value require significant management judgment or estimation.

The following table presents the assets reported on the consolidated balance sheets, on a recurring basis, at their fair value as of September 30, 2019 and December 31, 2018 by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

	(Amounts in thousands)
			Fair Value Measurements at September 30, 2019 Using
Description	September 30, 2019		Level 1		Level 2		Level 3
ASSETS
U.S. Government agencies and corporations	$	3,349	$	—	$	3,349	$	—
Obligations of states and political subdivisions		69,984		—		69,984		—
U.S. Government-sponsored mortgage-backed securities		46,704		—		46,704		—
U.S. Government-sponsored collateralized mortgage obligations		9,563		—		9,563		—
U.S. Government-guaranteed small business administration pools		6,856		—		6,856		—
Loans held for sale		4,988		4,988		—		—
Interest rate derivatives		1,934		—		1,934		—

LIABILITIES
Interest rate derivatives	$	1,934	$	—	$	1,934	$	—

	(Amounts in thousands)
			Fair Value Measurements at December 31, 2018 Using
Description	December 31, 2018		Level 1		Level 2		Level 3
ASSETS
U.S. Government agencies and corporations	$	9,002	$	—	$	9,002	$	—
Obligations of states and political subdivisions		51,658		—		51,658		—
U.S. Government-sponsored mortgage-backed securities		56,587		—		56,587		—
U.S. Government-sponsored collateralized mortgage obligations		11,976		—		11,976		—
U.S. Government-guaranteed small business administration pools		7,700		—		7,700		—
Loans held for sale		1,040		1,040		—		—
Interest rate derivatives		92		—		92		—

LIABILITIES
Interest rate derivatives	$	92	$	—	$	92	$	—

The following tables present the changes in the Level 3 fair value category for the three and nine months ended September 30, 2019 and 2018. The Company classifies financial instruments in Level 3 of the fair-value hierarchy when there is reliance on at least one significant unobservable input to the valuation model. In addition to these unobservable inputs, the valuation models for Level 3 financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly.

	(Amounts in thousands)
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
	Trust preferred securities		Trust preferred securities		Trust preferred securities		Trust preferred securities
Beginning balance	$	—	$	—	$	—	$	895
Net realized/unrealized losses included in:
Noninterest income		—		—		—		—
Other comprehensive income (loss)		—		—		—		723
Discount accretion (premium amortization)		—		—		—		—
Sales		—		—		—		(1,618	)
Purchases, issuance, and settlements		—		—		—		—
Ending balance	$	—	$	—	$	—	$	—
Losses included in net income for the period relating to assets held at period end	$	—	$	—	$	—	$	—

Financial Instruments

The Company discloses fair value information about financial instruments, whether or not recognized in the Consolidated Balance Sheets, for which it is practicable to estimate the value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other estimation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.

Such techniques and assumptions, as they apply to individual categories of the financial instruments, are as follows:

Investment securities available-for-sale– Fair values of securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities.

Loans held for sale – Loans held for sale consist of residential mortgage loans originated for sale. Loans held for sale are recorded at fair value based on what the secondary markets have offered on best efforts commitments.

Interest rate derivatives – The fair value is based on settlement values adjusted for credit risks associated with the counter parties and the Company and observable market interest rate curves.

In addition, other assets and liabilities of the Company that are not defined as financial instruments are not included in the disclosures, such as property and equipment. Also, non-financial instruments typically not recognized in financial statements nevertheless may have value but are not included in the above disclosures. These include, among other items, the estimated earning power of core deposit accounts, the trained work force, customer goodwill and similar items. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

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

	(Amounts in thousands)
	September 30, 2019
	Carrying Amount		Level 1		Level 2		Level 3		Fair Value
ASSETS:
Cash and cash equivalents	$	20,508	$	20,508	$	—	$	—	$	20,508
Investment securities available-for-sale		136,456		—		136,456		—		136,456
Loans held for sale		4,988		4,988		—		—		4,988
Loans		483,794		—		—		489,799		489,799
Bank-owned life insurance		17,672		17,672		—		—		17,672
Accrued interest receivable		2,228		2,228		—		—		2,228
Interest rate derivatives		1,934		—		1,934		—		1,934

LIABILITIES:
Demand, savings and money market deposits	$	440,104	$	440,104	$	—	$	—	$	440,104
Time deposits		147,024		—		—		148,543		148,543
Securities sold under agreements to repurchase		1,307		1,307		—		—		1,307
Federal Home Loan Bank advances - long term		19,000		—		—		19,028		19,028
Subordinated debt		5,155		—		—		4,668		4,668
Accrued interest payable		624		624		—		—		624
Interest rate derivatives		1,934		—		1,934		—		1,934

	(Amounts in thousands)
	December 31, 2018
	Carrying Amount		Level 1		Level 2		Level 3		Fair Value
ASSETS:
Cash and cash equivalents	$	19,692	$	19,692	$	—	$	—	$	19,692
Investment securities available-for-sale		136,923		—		136,923		—		136,923
Loans held for sale		1,040		1,040		—		—		1,040
Loans		510,194		—		—		513,103		513,103
Bank-owned life insurance		15,711		15,711		—		—		15,711
Accrued interest receivable		2,255		2,255		—		—		2,255
Interest rate derivatives		92		—		92		—		92

LIABILITIES:
Demand, savings and money market deposits	$	483,054	$	483,054	$	—	$	—	$	483,054
Time deposits		121,365		—		—		122,295		122,295
Short term borrowings		2,206		2,206		—		—		2,206
Federal Home Loan Bank advances - short term		12,000		—		—		11,987		11,987
Federal Home Loan Bank advances - long term		16,000		—		—		15,880		15,880
Subordinated debt		5,155		—		—		4,620		4,620
Accrued interest payable		371		371		—		—		371
Interest rate derivatives		92		—		92		—		92

The following table presents quantitative information about the Level 3 significant inputs for assets and liabilities measured at fair value on a recurring and nonrecurring basis at September 30, 2019. There were no such Level 3 measurements at December 31, 2018.

	(Amounts in thousands)
	Fair value at September 30, 2019		Valuation Technique	Significant Unobservable Input	Range of Inputs
Impaired loans	$	405	Appraisal of Collateral	Appraisal Adjustments	(76)%
				Liquidation Expenses	(10)%

- 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.

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