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Fair Value
12 Months Ended
Dec. 31, 2023
Fair Value Disclosures [Abstract]  
Fair Value

NOTE 22 – FAIR VALUE

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 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 reporting entity’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:

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded and values debt securities by relying on quoted prices for the specific securities and the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). See below for additional discussion of Level 3 valuation methodologies and significant inputs. The fair values of all securities are determined from third party pricing services without adjustment.

Derivatives-Interest Rate Swaps: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). The Company’s derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. The fair values of all interest rate swaps are determined from third party pricing services without adjustment.

 

Individually Evaluated Loans: The fair value of individually evaluated loans, formerly "impaired" under incurred loss methodology, with specific allocations of the ACL is generally based on recent 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 for similar loans and collateral underlying such loans. Such adjustments result in a Level 3 classification of the inputs for determining fair value. 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 historical knowledge, 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. Individually evaluated loans are evaluated on at least a quarterly basis for additional impairment and adjusted in accordance with the loan policy.

 

Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach with data from comparable properties. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Appraisals may be adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and/or management’s expertise and knowledge of the collateral. Such adjustments result in a Level 3 classification of the inputs for determining fair value. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly. The Company had no other real estate owned carried at fair value at December 31, 2023 or 2022.

Loans Held For Sale: Loans held for sale are carried at either fair value, if elected, or the lower of cost or fair value on a pool-level basis. Origination fees and costs for loans held for sale recorded at lower of cost or market are capitalized in the basis of the loan and are included in the calculation of realized gains and losses upon sale. Origination fees and costs are recognized in earnings at the time of origination for loans held for sale that are recorded at fair value. Fair value is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors (Level 2).

Derivatives-Mortgage Loan Interest Rate Lock Commitments: Interest rate lock commitments that relate to the origination of mortgage loans that will be held for sale are recorded at fair value, determined as the amount that would be required to settle each derivative instrument at the balance sheet date. The fair value of the interest rate lock commitment is derived from the fair value of related mortgage loans, which is based on observable market data and includes the expected net future cash flows related to servicing of the loans. In estimating the fair value of an interest rate lock commitment, the Company assigns a probability to the interest rate lock commitment based on an expectation that it will be exercised and the loan will be funded (a “pull through” rate). The expected pull through rates are applied to the fair value of the unclosed mortgage pipeline, resulting in a Level 3 fair value classification. The pull through rate is a statistical analysis of our actual rate lock fallout history to determine the sensitivity of the residential mortgage loan pipeline compared to interest rate changes and other deterministic values. New market prices are applied based on updated loan characteristics and new fallout ratios (i.e., the inverse of the pull through rate) are applied accordingly. Significant increases (decreases) in the pull through rate in isolation result in a significantly higher (lower) fair value measurement. Changes to the fair value of interest rate lock commitments are recognized based on interest rate changes, changes in the probability that the commitment will be exercised, and the passage of time.

Derivatives-Mortgage-Backed Securities Forward Sales Commitments: The Company utilizes mortgage-backed securities forward sales commitments to hedge mortgage loan interest rate lock commitments. Mortgage-backed securities forward sales commitments are recorded at fair value based on quoted prices for similar assets in an active market with inputs that are observable, resulting in a Level 2 fair value classification.

.

Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):

 

 

 

Fair value measurements at December 31, 2023

 

 

 

 

 

 

Quoted prices

 

 

 

 

 

 

 

 

 

 

 

 

in active

 

 

Significant

 

 

 

 

 

 

 

 

 

markets for

 

 

other

 

 

Significant

 

 

 

 

 

 

identical

 

 

observable

 

 

unobservable

 

 

 

Carrying

 

 

assets

 

 

inputs

 

 

inputs

 

 

 

Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

U. S. government agency securities

 

$

11,604

 

 

$

 

 

$

11,604

 

 

$

 

State and municipal securities

 

 

68,052

 

 

 

 

 

 

68,052

 

 

 

 

Mortgage-backed securities

 

 

220,065

 

 

 

 

 

 

220,065

 

 

 

 

Asset-backed securities

 

 

3,146

 

 

 

 

 

 

3,146

 

 

 

 

Other debt securities

 

 

56,453

 

 

 

 

 

 

56,453

 

 

 

 

Loans held for sale

 

 

10,287

 

 

 

 

 

 

10,287

 

 

 

 

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps - customer related

 

 

1,560

 

 

 

 

 

 

1,560

 

 

 

 

Mortgage loan interest rate lock commitments

 

 

285

 

 

 

 

 

 

 

 

 

285

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps - customer related

 

 

1,560

 

 

 

 

 

 

1,560

 

 

 

 

 

 

 

Fair value measurements at December 31, 2022

 

 

 

 

 

 

Quoted prices

 

 

 

 

 

 

 

 

 

 

 

 

in active

 

 

Significant

 

 

 

 

 

 

 

 

 

markets for

 

 

other

 

 

Significant

 

 

 

 

 

 

identical

 

 

observable

 

 

unobservable

 

 

 

Carrying

 

 

assets

 

 

inputs

 

 

inputs

 

 

 

Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

U. S. government agency securities

 

$

12,902

 

 

$

 

 

$

12,902

 

 

$

 

State and municipal securities

 

 

68,312

 

 

 

 

 

 

68,312

 

 

 

 

Mortgage-backed securities

 

 

244,828

 

 

 

 

 

 

244,828

 

 

 

 

Asset-backed securities

 

 

3,270

 

 

 

 

 

 

3,270

 

 

 

 

Other debt securities

 

 

67,104

 

 

 

 

 

 

67,104

 

 

 

 

Loans held for sale

 

 

12,636

 

 

 

 

 

 

12,636

 

 

 

 

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps - customer related

 

 

2,343

 

 

 

 

 

 

2,343

 

 

 

 

Mortgage loan interest rate lock commitments

 

 

6

 

 

 

 

 

 

 

 

 

6

 

Mortgage-backed securities forward sales commitments

 

 

27

 

 

 

 

 

 

27

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps - customer related

 

 

2,343

 

 

 

 

 

 

2,343

 

 

 

 

 

 

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2023 and 2022 (dollars in thousands):

 

 

 

Mortgage Loan Interest Rate

 

 

 

Lock Commitments

 

 

 

2023

 

 

2022

 

 

 

 

 

 

 

 

Balance of recurring Level 3 assets at January 1st

 

$

6

 

 

$

696

 

Total gains or losses for the period:

 

 

 

 

 

 

Included in mortgage banking income

 

 

279

 

 

 

(690

)

Balance of recurring Level 3 assets at December 31st

 

$

285

 

 

$

6

 

 

The following table presents quantitative information about recurring Level 3 fair value measurements at December 31, 2023 and 2022 (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

Range

 

 

Fair

 

 

Valuation

 

 

 

(Weighted-

December 31, 2023

 

Value

 

 

Technique(s)

 

Unobservable Input(s)

 

Average)

Assets:

 

 

 

 

 

 

 

 

 

Non-hedging derivatives:

 

 

 

 

 

 

 

 

 

Mortgage loan interest rate lock commitments

 

$

285

 

 

Consensus pricing

 

Origination pull-through rate

 

80% - 100% (95%)

 

 

 

 

 

 

 

 

 

 

Range

 

 

Fair

 

 

Valuation

 

 

 

(Weighted-

December 31, 2022

 

Value

 

 

Technique(s)

 

Unobservable Input(s)

 

Average)

Assets:

 

 

 

 

 

 

 

 

 

Non-hedging derivatives:

 

 

 

 

 

 

 

 

 

Mortgage loan interest rate lock commitments

 

$

6

 

 

Consensus pricing

 

Origination pull-through rate

 

80% - 100% (94%)

 

Assets measured at fair value on a nonrecurring basis are summarized below (in thousands):

 

 

 

 

 

 

Quoted prices

 

 

 

 

 

 

 

 

 

 

 

 

in active

 

 

Significant

 

 

 

 

 

 

 

 

 

markets for

 

 

other

 

 

Significant

 

 

 

 

 

 

identical

 

 

observable

 

 

unobservable

 

 

 

Carrying

 

 

assets

 

 

inputs

 

 

inputs

 

 

 

Value

 

 

(level 1)

 

 

(level 2)

 

 

(level 3)

 

Fair value measurements at December 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated loans:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

384

 

 

 

 

 

 

 

 

$

384

 

Commercial real estate - non-owner occupied

 

 

152

 

 

 

 

 

 

 

 

 

152

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value measurements at December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

3,169

 

 

 

 

 

 

 

 

$

3,169

 

 

 

The following table presents quantitative information about Level 3 fair value measurements for assets measured at fair value on a nonrecurring basis (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

Range

 

 

Fair

 

 

Valuation

 

 

 

(Weighted-

December 31, 2023

 

Value

 

 

Technique(s)

 

Unobservable Input(s)

 

Average)

Individually evaluated loans:

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

384

 

 

Income approach

 

Fair value discount

 

10%

Commercial real estate - non-owner occupied

 

 

152

 

 

Income approach

 

Fair value discount

 

10%

 

 

 

 

 

 

 

 

 

 

December 31, 2022

 

 

 

 

 

 

 

 

 

Impaired loans:

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

3,069

 

 

Sales comparison approach

 

Appraisal discounts

 

10%

Commercial and industrial

 

 

100

 

 

Income approach

 

Fair value discount

 

9%

 

Fair Value of Financial Instruments

The carrying value and estimated fair values of the Company’s financial instruments at December 31, 2023 and 2022 were as follows (in thousands):

 

 

 

December 31, 2023

 

 

December 31, 2022

 

 

 

 

 

Carrying

 

 

 

 

 

Carrying

 

 

 

 

 

Fair value

 

 

amount

 

 

Fair value

 

 

amount

 

 

Fair value

 

 

level of input

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks, interest-bearing deposits in
   financial institutions

 

$

249,611

 

 

$

249,611

 

 

$

130,838

 

 

$

130,838

 

 

Level 1

Federal funds sold

 

 

10,000

 

 

 

10,000

 

 

 

4,467

 

 

 

4,467

 

 

Level 1

Securities available-for-sale

 

 

359,320

 

 

 

359,320

 

 

 

396,416

 

 

 

396,416

 

 

Level 2

Securities held-to-maturity

 

 

 

 

 

 

 

 

1,240

 

 

 

1,240

 

 

Level 2

Loans held for sale

 

 

32,264

 

 

 

33,937

 

 

 

44,708

 

 

 

46,585

 

 

Level 2

Restricted equity securities

 

 

13,334

 

 

N/A

 

 

 

16,632

 

 

N/A

 

 

N/A

Loans held for investment

 

 

2,269,746

 

 

 

2,178,502

 

 

 

2,312,798

 

 

 

2,265,617

 

 

Level 3

Accrued interest receivable

 

 

12,588

 

 

 

12,588

 

 

 

10,511

 

 

 

10,511

 

 

Level 2

Other assets

 

 

92,408

 

 

 

92,408

 

 

 

93,230

 

 

 

93,230

 

 

Level 2 / Level 3

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

2,662,252

 

 

 

2,422,383

 

 

 

2,679,819

 

 

 

2,659,822

 

 

Level 2

Subordinated notes and Federal Home Loan bank advances and other borrowings

 

 

79,800

 

 

 

79,768

 

 

 

44,666

 

 

 

43,831

 

 

Level 2

Other liabilities

 

 

9,216

 

 

 

9,216

 

 

 

4,605

 

 

 

4,605

 

 

Level 3

 

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

(a)
Cash and Due from Banks, Interest-Bearing Deposits in Financial Institutions

For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

(b)
Federal Funds Sold

Federal funds sold clear on a daily basis. For this reason, the carrying amount is a reasonable estimate of fair value.

(c)
Loans Held for Sale

Loans held for sale include residential mortgage loans, the guaranteed portion of SBA loans, and Tri-Net loans. The fair value of residential mortgage and SBA loans held for sale is measured using an exit price notion. The fair value of Tri-Net loans held for sale is measured using an exit price notion in as much as observable market data is available. Where there is no observable market data, the fair value of Tri-Net loans held for sale is estimated using discounted cash flow models. There were no Tri-Net loans held for sale as of December 31, 2023.

(d)
Restricted Equity Securities

It is not practical to determine the fair value of restricted securities due to restrictions placed on their transferability.

(e)
Loans Held for Investment

In accordance with the adoption of ASU 2016-01, the fair value of loans is measured using an exit price notion. Fair values for impaired loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral.

(f)
Accrued interest receivable

The carrying amount of accrued interest approximates fair value.

 

(g)
Other Assets

Included in other assets are bank owned life insurance and certain interest rate swap agreements. The fair values of interest rate swap agreements are based on independent pricing services that utilize pricing models with observable market inputs. For bank owned life insurance, the carrying amount is based on the cash surrender value and is a reasonable estimate of fair value.

(h)
Deposits

The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated by discounted cash flow models, using current market interest rates offered on certificates with similar remaining maturities.

(i)
Federal Home Loan Bank Advances and Other Borrowings

The fair value of fixed rate Federal Home Loan Bank Advances and other borrowings is estimated using discounted cash flow models, using current market interest rates offered on certificates, advances and other borrowings with similar remaining maturities.

(j)
Other Liabilities

Included in other liabilities are accrued interest payable and certain interest rate swap agreements. The fair values of interest rate swap agreements are based on independent pricing services that utilize pricing models with observable market inputs. The carrying amounts of accrued interest approximate fair value.

(k)
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.

(l)
Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters

of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on estimating on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, fixed assets are not considered financial instruments and their value has not been incorporated into the fair value estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.