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Fair Value Measurements
12 Months Ended
Dec. 31, 2021
Fair Value Disclosures [Abstract]  
Fair Value Measurements

Note 17 – Fair Value Measurements

Determination of Fair Value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the “Fair Value Measurements and Disclosures” topic of FASB ASC 825, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market for the asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Fair Value Hierarchy

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured 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.

Level 1 - Valuation is based on quoted prices in active markets for identical assets and liabilities.

Level 2 - Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

Level 3 - Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

Securities available for sale

Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2).

 

Interest rate swaps

The Company recognizes interest rate swaps at fair value. The Company has contracted with a third-party to provide valuations for interest rate swaps using standard valuation techniques. The Company’s interest rate swaps are classified as Level 2. Additional information on interest rate swaps is presented in Note 23 – Derivative Instruments and Hedging Activities.

The following tables present the balances measured at fair value on a recurring basis:

 

 

 

 

 

 

Fair Value Measurements at December 31, 2021 Using:

 

(Dollars in thousands)

 

 

 

 

Quoted Prices in
Active Markets
for Identical
Assets

 

 

Significant
Other
Observable
Inputs

 

 

Significant
Unobservable
Inputs

 

Description

 

Balance

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

31,581

 

 

$

-

 

 

$

31,581

 

 

$

-

 

Mortgage-backed securities/CMOs

 

 

170,964

 

 

 

-

 

 

 

170,964

 

 

 

-

 

Municipal bonds

 

 

101,272

 

 

 

-

 

 

 

101,272

 

 

 

-

 

Total securities available for sale

 

$

303,817

 

 

$

-

 

 

$

303,817

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

641

 

 

 

 

 

$

641

 

 

 

 

Total liabilities at fair value

 

$

641

 

 

$

-

 

 

$

641

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2020 Using:

 

(Dollars in thousands)

 

 

 

 

Quoted Prices in
Active Markets
for Identical
Assets

 

 

Significant
Other
Observable
Inputs

 

 

Significant
Unobservable
Inputs

 

Description

 

Balance

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

25,305

 

 

$

-

 

 

$

25,305

 

 

$

-

 

Corporate bonds

 

 

78,100

 

 

 

-

 

 

 

78,100

 

 

 

-

 

Mortgage-backed securities/CMOs

 

 

70,681

 

 

 

-

 

 

 

70,681

 

 

 

-

 

Municipal bonds

 

$

174,086

 

 

$

-

 

 

$

174,086

 

 

$

-

 

Total securities available for sale

 

$

348,172

 

 

$

-

 

 

$

348,172

 

 

$

-

 

 

Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or writedowns of individual assets.

The following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a nonrecurring basis in the consolidated financial statements:

Other real estate owned

Other real estate owned is measured at fair value less costs to sell, based on an existing contract (Level 3). OREO is measured at fair value on a nonrecurring basis. Any initial fair value adjustment is charged against the Allowance for Loan Losses. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense on the Consolidated Statements of Income. The Company had OREO of $611 thousand at December 31, 2021 and none as of December 31, 2020.

Impaired loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due. The measurement of loss associated with impaired loans can be based on either (a) the observable market price of the loan or the fair value of the collateral, or (b) using the present value of expected future cash flows discounted at the loan’s effective interest rate, which is not a fair value measurement. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using

observable market data (Level 2). However, if the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3.

Impaired loans that are measured based on expected future cash flows discounted at the loan’s effective interest rate rather than the market rate of interest are not recorded at fair value, and are therefore excluded from fair value disclosure requirements.

The value of business equipment is based upon an outside appraisal if deemed significant (Level 2) or the net book value on the applicable business’ financial statements if not considered significant (Level 3). Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3).

Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses in the Consolidated Statements of Income. The Company had $1.5 million and $1.3 million in impaired loans as of December 31, 2021 and December 31, 2020, respectively. All impaired loans were measured based on expected cash flows discounted at the loan’s effective interest rate, or fair value of collateral, as noted above.

 

The following table presents the Company’s assets that were measured at fair value on a nonrecurring basis as of December 31, 2021. There were no such assets to report as of December 31, 2020.

 

 

 

 

 

 

Fair Value Measurements at December 31, 2021 Using:

 

(Dollars in thousands)

 

 

 

 

Quoted Prices
in Active
Markets for
Identical
Assets

 

 

Significant
Other
Observable
Inputs

 

 

Significant
Unobservable
Inputs

 

Description

 

Balance

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Other Real Estate Owned

 

$

611

 

 

$

 

 

$

 

 

$

611

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the assets measured at fair value on a nonrecurring basis as of December 31, 2021, the following table displays quantitative information about Level 3 Fair Value Measurements:

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Description

 

Fair Value

 

 

Valuation Technique

 

Unobservable Inputs

 

Weighted Average

 

Assets:

 

 

 

 

 

 

 

 

 

 

Other Real Estate Owned

 

$

611

 

 

Bonafide offer

 

Discount applied to bonafide offer *

 

 

6.0

%

* A discount percentage is applied based on estimated costs to sell.

 

 

 

 

 

 

 

 

 

 

 

 

 

ASC 825, “Financial Instruments,” requires disclosures about fair value of financial instruments for interim periods and excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The Company uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

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

 

 

 

 

 

 

Fair Value Measurements at December 31, 2021 Using:

 

(Dollars in thousands)

 

 

 

 

Quoted Prices in
Active Markets for Identical Assets

 

 

Significant
Other
Observable
Inputs

 

 

Significant
Unobservable
Inputs

 

 

 

 

 

 

Carrying value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalent

 

$

508,840

 

 

$

508,840

 

 

$

-

 

 

$

-

 

 

$

508,840

 

Available for sale securities

 

 

303,817

 

 

 

-

 

 

 

303,817

 

 

 

-

 

 

 

303,817

 

Loans, net

 

 

1,055,227

 

 

 

-

 

 

 

-

 

 

 

1,059,650

 

 

 

1,059,650

 

Bank owned life insurance

 

 

31,234

 

 

 

-

 

 

 

31,234

 

 

 

-

 

 

 

31,234

 

Accrued interest receivable

 

 

3,778

 

 

 

-

 

 

 

1,252

 

 

 

2,526

 

 

 

3,778

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits and interest-bearing
   transaction and money market accounts

 

$

1,634,125

 

 

$

-

 

 

$

1,634,125

 

 

$

-

 

 

$

1,634,125

 

Certificates of deposit

 

 

162,045

 

 

 

-

 

 

 

161,850

 

 

 

-

 

 

 

161,850

 

Junior subordinated debt

 

 

3,367

 

 

 

-

 

 

 

3,367

 

 

 

-

 

 

 

3,367

 

Accrued interest payable

 

 

174

 

 

 

-

 

 

 

174

 

 

 

-

 

 

 

174

 

Interest rate swaps

 

 

641

 

 

 

-

 

 

 

641

 

 

 

-

 

 

 

641

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2020 Using:

 

(Dollars in thousands)

 

 

 

 

Quoted Prices in
Active Markets for
Identical Assets

 

 

Significant
Other
Observable
Inputs

 

 

Significant
Unobservable
Inputs

 

 

 

 

 

 

Carrying value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalent

 

$

34,695

 

 

$

34,695

 

 

$

-

 

 

$

-

 

 

$

34,695

 

Available for sale securities

 

 

174,086

 

 

 

-

 

 

 

174,086

 

 

 

-

 

 

 

174,086

 

Loans, net

 

 

603,951

 

 

 

-

 

 

 

-

 

 

 

602,859

 

 

 

602,859

 

Bank owned life insurance

 

 

16,849

 

 

 

-

 

 

 

16,849

 

 

 

-

 

 

 

16,849

 

Accrued interest receivable

 

 

2,904

 

 

 

-

 

 

 

729

 

 

 

2,175

 

 

 

2,904

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits and interest-bearing
   transaction and money market accounts

 

$

631,662

 

 

$

-

 

 

$

631,662

 

 

$

-

 

 

$

631,662

 

Certificates of deposit

 

 

99,102

 

 

 

-

 

 

 

99,580

 

 

 

-

 

 

 

99,580

 

Advances from FHLB

 

 

30,000

 

 

 

-

 

 

 

30,000

 

 

 

-

 

 

 

30,000

 

Accrued interest payable

 

 

159

 

 

 

-

 

 

 

159

 

 

 

-

 

 

 

159

 

 

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change, and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk; however, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and

liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.