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Fair Value Measurements

9 Months Ended

Sep. 30, 2022

Fair Value Measurements The FASB defines the fair value of an asset or liability to be the price which a seller would receive in an orderly transaction between market participants (an exit price) and also establishes a fair value hierarchy segregating fair value measurements using three levels of inputs: (Level 1) quoted market prices in active markets for identical assets or liabilities; (Level 2) significant other observable inputs, including quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs such as interest rates and yield curves, volatilities, prepayment speeds, credit risks and default rates which provide a reasonable basis for fair value determination or inputs derived principally from observed market data; and (Level 3) significant unobservable inputs for situations in which there is little, if any, market activity for the asset or liability. Unobservable inputs must reflect reasonable assumptions that market participants would use in pricing the asset or liability, which are developed based on the best information available under the circumstances.

The following tables summarize significant assets and liabilities carried at fair value and placement in the fair value hierarchy at the dates specified:


	September 30, 2022
			Fair Value Measurements Using:
(Dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets measured on a recurring basis:
Debt securities	$	827,215	$	—	$	827,215	$	—
Equity securities	3,815		3,815		—		—
FHLB stock	2,343		—		2,343		—
Interest-rate swaps	836		—		836		—
Assets measured on a non-recurring basis:
Individually evaluated loans (collateral dependent)	1,093		—		—		1,093


Liabilities measured on a recurring basis:
Interest-rate swaps	$	836	$	—	$	836	$	—


	December 31, 2021
			Fair Value Measurements Using:
(Dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets measured on a recurring basis:
Debt securities	$	956,430	$	—	$	956,430	$	—
Equity securities	1,785		1,785		—		—
FHLB stock	2,164		—		2,164		—
Interest-rate swaps	528		—		528		—
Assets measured on a non-recurring basis:
Individually evaluated loans (collateral dependent)	15,210		—		—		15,210


Liabilities measured on a recurring basis:
Interest-rate swaps	$	528	$	—	$	528	$	—

The Company utilizes third-party pricing vendors to provide valuations on its debt securities.

The Company's equity portfolio fair value is measured based on quoted market prices for the shares; therefore, these securities are categorized as Level 1 within the fair value hierarchy.

The Bank is required to purchase FHLB stock at par value in association with advances from the FHLB. The stock is issued, redeemed, repurchased and transferred by the FHLB only at their fixed par value. This stock is classified as a restricted investment and carried at FHLB par value which management believes approximates fair value; therefore, these securities are categorized as Level 2 measures.

The fair values for the interest-rate swap assets and liabilities, which is comprised of back-to-back swaps, represent a FASB Level 2 measurement and are based on settlement values adjusted for credit risks and observable market interest-rate curves. Refer also to Note 8, "Derivatives and Hedging Activities," this Form 10-Q, contained above, for additional information on the Company's interest-rate swaps.

For loans individually assessed and deemed to be collateral dependent management has estimated the value and the probable credit loss by comparing the loan's amortized cost against the expected realizable fair value of the collateral (appraised value, or internal analysis, less estimated cost to sell, adjusted as necessary for changes in relevant valuation factors subsequent to the measurement date). Certain inputs used in these assessments, and possible subsequent adjustments, are not always observable, and therefore, collateral dependent loans carried at realizable fair value are categorized as Level 3 within the fair value hierarchy. A specific reserve is assigned to the collateral dependent loan for the amount of management's estimated probable credit loss. The specific reserve assigned to individually evaluated loans that are collateral dependent amounted to $275 thousand at September 30, 2022, compared to $1.0 million at December 31, 2021.

The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis for which the Company utilized Level 3 inputs (significant unobservable inputs for situations in which there is little, if any, market activity for the asset or liability) to determine fair value as of September 30, 2022 and December 31, 2021:

Fair Value

(Dollars in thousands)

September 30, 2022

December 31, 2021

Valuation Technique

Unobservable Input

Unobservable Input Value or Range

Assets measured on a non-recurring basis:

Individually evaluated loans (collateral dependent)

1,093

15,210

Appraisal of collateral

Appraisal adjustments(1)

15% - 50%

__________________________________________

(1)Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

Estimated Fair Values of Assets and Liabilities

In addition to disclosures regarding the measurement of assets and liabilities carried at fair value on the Consolidated Balance Sheets, the Company is also required to disclose fair value information about financial instruments for which it is practicable to estimate that value, whether or not recognized on the Consolidated Balance Sheets.

Financial instruments for which the fair value is disclosed but not recognized on the Consolidated Balance Sheets are summarized below. The table includes the carrying value, estimated fair value and its placement in the fair value hierarchy as follows:


	September 30, 2022
					Fair Value Measurement
(Dollars in thousands)	Carrying Value		Fair Value		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
Financial assets:

Loans, net	$	3,058,158	$	2,903,850	$	—	$	—	$	2,903,850
Financial liabilities:
CDs	230,039		225,366		—		225,366		—

Borrowed funds	2,934		1,916		—		1,916		—
Subordinated debt	59,102		56,809		—		56,809		—


	December 31, 2021
					Fair Value Measurement
(Dollars in thousands)	Carrying Value		Fair Value		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
Financial assets:

Loans, net	$	2,872,980	$	2,922,947	$	—	$	—	$	2,922,947
Financial liabilities:
CDs	206,449		206,450		—		206,450		—

Borrowed funds	5,479		5,121		—		5,121		—
Subordinated debt	58,979		58,460		—		58,460		—

Excluded from the tables above are certain financial instruments with carrying values that approximated their fair value at the dates indicated, as they were short-term in nature or payable on demand. These include cash and cash equivalents, accrued interest and non-term deposit accounts. The respective carrying values of these instruments would all be classified within Level 1 in the fair value hierarchy.Also excluded from these tables are the fair values of commitments for unused portions of lines of credit and commitments to originate loans that were short-term, at current market rates and estimated to have no significant change in fair value.

- 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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