Fair Value Measurements

3 Months Ended

Mar. 31, 2023

Fair Value Measurements

Fair Value Measurements

Note 8— Fair Value Measurements

Determination of Fair Value

The Company determines the fair values of its financial instruments based on the fair value hierarchy established by Accounting Standards Codification (“ASC”) Topic 820 – Fair Value Measurement, which defines fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market and in an orderly transaction between market participants on the measurement date.

The fair value measurements and disclosures topic specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions.

Fair Value Hierarchy

In accordance with this guidance, the Company groups its assets and liabilities 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 that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 - Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on 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 for substantially the full term of the asset or liability.

Level 3 - Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Assets Measured at Fair Value on a Recurring Basis

In accordance with ASC Topic 820, the following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a recurring basis in the financial statements.

Securities Available-for-sale and Equity Securities

Securities available-for-sale and equity securities with readily determinable fair values 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 (Level 2). If the inputs used to provide the evaluation for certain securities are unobservable and/or there is little, if any, market activity then the security would fall to the lowest level of the hierarchy (Level 3).

The Company’s investment portfolio is primarily valued using fair value measurements that are considered to be Level 2. The Company has contracted with a third party portfolio accounting service vendor for valuation of its portfolio of debt securities. The vendor’s primary source for security valuation is ICE Data Services, which evaluates securities based on market data. ICE Data Services utilizes evaluated pricing models that vary by asset class and include available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.

Interest Rate Swap Agreements

Interest rate swap agreements are measured by alternative pricing sources using a discounted cash flow method that incorporates current market interest rates. Based on the complex nature of interest rate swap agreements, the markets these instruments trade in are not as efficient and are less liquid than that of the more mature Level 1 markets. These characteristics classify interest rate swap agreements as Level 2 in the fair value hierarchy.

The vendor utilizes proprietary valuation matrices for valuing all municipals securities. The initial curves for determining the price, movement, and yield relationships within the municipal matrices are derived from industry benchmark curves or sourced from a municipal trading desk. The securities are further broken down according to issuer, credit support, state of issuance and rating to incorporate additional spreads to the industry benchmark curves.

The following tables summarize the fair value of assets measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022.

			Fair Value Measurements at March 31, 2023 Using
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
	Balance as of		Identical Assets		Observable Inputs		Inputs
(Dollars in thousands)	March 31, 2023		(Level 1)		(Level 2)		(Level 3)
Assets:
Securities available-for-sale:
U.S. Treasuries	$	50,568	$	—	$	50,568	$	—
U.S. government and federal agencies		35,283		—		35,283		—
Corporate bonds		2,639		—		2,639		—
Collateralized mortgage obligations		37,988		—		37,988		—
Tax-exempt municipal		2,666		—		2,666		—
Taxable municipal		582		—		582		—
Mortgage-backed		210,433		—		210,433		—
Equity securities, at fair value		2,590		2,590		—		—
Interest rate swap agreements		1,038		—		1,038		—
Total assets at fair value	$	343,787	$	2,590	$	341,197	$	—
Liabilities:
Interest rate swap agreements	$	1,038	$	—	$	1,038	$	—
Total liabilities at fair value	$	1,038	$	—	$	1,038	$	—

			Fair Value Measurements at December 31, 2022 Using
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
	Balance as of		Identical Assets		Observable Inputs		Inputs
(Dollars in thousands)	December 31, 2022		(Level 1)		(Level 2)		(Level 3)
Assets:
Securities available-for-sale:
U.S. Treasuries	$	59,210	$	—	$	59,210	$	—
U.S. government and federal agencies		34,760		—		34,760		—
Corporate bonds		2,614		—		2,614		—
Collateralized mortgage obligations		38,474		—		38,474		—
Tax-exempt municipal		4,645		—		4,645		—
Taxable municipal		579		—		579		—
Mortgage-backed		217,294		—		217,294		—
Equity securities, at fair value		2,115		2,115		—		—
Interest rate swap agreement		1,217		—		1,217		—
Total assets at fair value	$	360,908	$	2,115	$	358,793	$	—
Liabilities:
Interest rate swap agreement	$	1,217	$	—	$	1,217	$	—
Total liabilities at fair value	$	1,217	$	—	$	1,217	$	—

Assets Measured at Fair Value on a Nonrecurring Basis

Under certain circumstances, the Company makes adjustments to fair value for assets and liabilities although they are not measured at fair value on an ongoing basis. The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:

Collateral Dependent Loans

In accordance with ASC 326, loans that do not share risk characteristics are evaluated on an individual basis. The Company designates individually evaluated loans on nonaccrual status as collateral dependent loans, as well as other loans that management of the Company designates as having higher risk and loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral. The measurement of loss associated with collateral dependent loans can be based on either the observable market price of the loan or the fair value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Company’s collateral is real estate. The value of real estate collateral is determined utilizing a market valuation approach based on an appraisal, of one year or less, conducted by an independent, licensed appraiser using observable market data (Level 2). However, if the collateral is a house or building in the process of construction, or if an appraisal of the property is more than one-year-old and not solely based on observable market comparables, or management determines the fair value of the collateral is further impaired below the appraised value, then a Level 3 valuation is considered to measure the fair value. The value of business equipment is based upon an outside appraisal, of one year or less, if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income. The Company had no collateral dependent loans with a recorded reserve as of March 31, 2023 or December 31, 2022.

Other Real Estate Owned (“OREO”)

OREO is carried at the lower of cost or fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value using observable market data, the Company records the property as Level 2. When an appraised value using observable market data is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the property as Level 3 valuation. Any fair value adjustments are recorded in the period incurred and expensed against current earnings. The Company had no OREO as of March 31, 2023 or December 31, 2022.

The following tables present the carrying value and estimated fair value, including the level within the fair value hierarchy, of the Company’s financial instruments as of March 31, 2023 and December 31, 2022.

			Fair Value Measurements at March 31, 2023 Using
			Quoted Prices in
			Active Markets				Significant
			for Identical		Significant Other		Unobservable
	Carrying Value as of		Assets		Observable Inputs		Inputs		Fair Value as of
(Dollars in thousands)	March 31, 2023		(Level 1)		(Level 2)		(Level 3)		March 31, 2023
Assets:
Cash and cash equivalents	$	103,359	$	103,359	$	—	$	—	$	103,359
Securities:
Available-for-sale		340,159		—		340,159		—		340,159
Held-to-maturity		98,507		—		81,966		—		81,966
Equity securities, at fair value		2,590		2,590		—		—		2,590
Restricted securities, at cost		4,529		—		4,529		—		4,529
Loans, net		1,749,653		—		—		1,660,163		1,660,163
Interest rate swap agreements		1,038		—		1,038		—		1,038
Bank owned life insurance		21,270		—		21,270		—		21,270
Accrued interest receivable		5,471		—		5,471		—		5,471
Liabilities:
Deposits	$	2,088,642	$	—	$	2,085,334	$	—	$	2,085,334
Subordinated debt		24,645		—		—		22,152		22,152
Interest rate swap agreements		1,038		—		1,038		—		1,038
Accrued interest payable		972		—		972		—		972

			Fair Value Measurements at December 31, 2022 Using
			Quoted Prices in
			Active Markets				Significant
			for Identical		Significant Other		Unobservable
	Carrying Value as of		Assets		Observable Inputs		Inputs		Fair Value as of
(Dollars in thousands)	December 31, 2022		(Level 1)		(Level 2)		(Level 3)		December 31, 2022
Assets:
Cash and cash equivalents	$	61,599	$	61,599	$	—	$	—	$	61,599
Securities:
Available-for-sale		357,576		—		357,576		—		357,576
Held-to-maturity		99,415		—		81,161		—		81,161
Equity securities, at fair value		2,115		2,115		—		—		2,115
Restricted securities, at cost		4,425		—		4,425		—		4,425
Loans, net		1,769,300		—		—		1,676,887		1,676,887
Interest rate swap agreement		1,217		—		1,217		—		1,217
Bank owned life insurance		21,170		—		21,170		—		21,170
Accrued interest receivable		5,531		—		5,531		—		5,531
Liabilities:
Deposits	$	2,067,740	$	—	$	2,065,248	$	—	$	2,065,248
FHLB advances		—		—		—		—		—
Subordinated debt		24,624		—		—		22,457		22,457
Federal funds purchased		25,500		—		25,500		—		25,500
Interest rate swap agreement		1,217		—		1,217		—		1,217
Accrued interest payable		1,035		—		1,035		—		1,035