FAIR VALUE

9 Months Ended

Sep. 30, 2024

FAIR VALUE

FAIR VALUE

NOTE 10 – FAIR VALUE

Financial Instruments Measured at 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 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.

Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The following presents the assets and liabilities as of September 30, 2024 and December 31, 2023 which are measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements fall, and the financial instruments carried on the consolidated balance sheet by caption and by level in the fair value hierarchy, for which a nonrecurring change in fair value has been recorded:

	September 30, 2024
									Total Gains
(Dollars in thousands)	Total		Level 1		Level 2		Level 3		(Losses)
Assets
Recurring fair value measurements:
Securities available for sale:
Obligations of U.S. Government entities and agencies	$	4,511	$	—	$	—	$	4,511
States and political subdivisions		6,826		—		6,826		—
Mortgage-backed GSE residential		6,869		—		6,869		—
Total securities available for sale		18,206		—		13,695		4,511
Equity securities		10,568		10,568		—		—
SBA and USDA servicing asset		7,309		—		—		7,309
Interest rate derivatives		18,895		—		18,895		—
	$	54,978	$	10,568	$	32,590	$	11,820
Nonrecurring fair value measurements:
Collateral-dependent loans	$	1,525	$	—	$	—	$	1,525	$	1
Foreclosed real estate, net		854		—		—		854		(377)
	$	2,379	$	—	$	—	$	2,379	$	(376)
Liabilities
Recurring fair value measurements:
Interest rate swaps	$	589	$	—	$	589	$	—

	December 31, 2023
									Total Gains
(Dollars in thousands)	Total		Level 1		Level 2		Level 3		(Losses)
Assets
Recurring fair value measurements:
Securities available for sale:
Obligations of U.S. Government entities and agencies	$	4,637	$	—	$	—	$	4,637
States and political subdivisions		6,782		—		6,782		—
Mortgage-backed GSE residential		7,074		—		7,074		—
Total securities available for sale		18,493		—		13,856		4,637
Equity securities		10,335		10,335		—		—
SBA and USDA servicing asset		7,251		—		—		7,251
Interest rate derivatives		31,781		—		31,781		—
	$	67,860	$	10,335	$	45,637	$	11,888
Nonrecurring fair value measurements:
Collateral-dependent loans	$	1,526	$		$		$	1,526	$	(148)
Foreclosed real estate, net		526		—		—		526		(239)
	$	2,052	$	—	$	—	$	2,052	$	(387)
Liabilities
Recurring fair value measurements:
Interest rate swaps	$	476	$	—	$	476	$	—

The Company used the following methods and significant assumptions to estimate fair value:

Securities, Available for Sale: The Company carries securities available for sale at fair value. For securities where quoted prices are not available (Level 2), the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. The investments in the Company’s portfolio are generally not quoted on an exchange but are actively traded in the secondary institutional markets.

The Company owns certain SBA investments for which the fair value is determined using Level 3 hierarchy inputs and assumptions as the trading market for such securities was determined to be “not active.” This determination was based on the limited number of trades or, in certain cases, the existence of no reported trades. Discounted cash flows are calculated by a third party using interest rate curves that are updated to incorporate current market conditions, including prepayment vectors and credit risk. During time when trading is more liquid, broker quotes are used to validate the model.

Equity Securities: The Company carries equity securities at fair value. Equity securities are measured at fair value using quoted market prices on nationally recognized and foreign securities exchanges (Level 1).

SBA Servicing Assets and Interest Only Strip: The fair values of the Company’s servicing assets are determined using Level 3 inputs. All separately recognized servicing assets and servicing liabilities are initially measured at fair value and at each reporting date and changes in fair value are reported in earnings in the period in which they occur.

The fair values of the Company’s interest-only strips are determined using Level 3 inputs. When the Company sells loans to others, it may hold interest-only strips, which is an interest that continues to be held by the transferor in the securitized receivable. It may also obtain servicing assets or assume servicing liabilities that are initially measured at fair value. Gain or loss on sale of the receivables depends in part on both (a) the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold and the interests that continue to be held by the transferor based on their relative fair value at the date of transfer, and (b) the proceeds received. To obtain fair values, quoted market prices are used if available. However, quotes are generally not available for interests that continue to be held by the

transferor, so the Company generally estimates fair value based on the future expected cash flows estimated using management’s best estimates of the key assumptions — credit losses and discount rates commensurate with the risks involved.

Interest Rate Derivatives: Exchange-traded derivatives are valued using quoted prices and are classified within Level 1 of the valuation hierarchy. However, few classes of derivative contracts are listed on an exchange; thus, the Company’s derivative positions are valued by third parties using their valuation models and confirmed by the Company. Since the model inputs can be observed in a liquid market and the models do not require significant judgement, such derivative contracts are classified within Level 2 of the fair value hierarchy. The Company’s interest rate derivatives contracts (designated as cash flow hedges) are classified within Level 2.

Under certain circumstances we make adjustments to fair value for our assets and liabilities although they are not measured at fair value on an ongoing basis.

Collateral-dependent loans: Collateral-dependent loans are loans where repayment is expected to be provided solely by the sale of the underlying collateral and there are no other available and reliable sources of repayment. Fair value for both collateral-dependent loans are measured based on the value of the collateral securing these loans and are classified at a Level 3 in the fair value hierarchy. Collateral may include real estate, or business assets including equipment, inventory and accounts receivable. The value of real estate collateral is determined based on an appraisal by qualified licensed appraisers hired by the Company. The value of business equipment is based on an appraisal by qualified licensed appraisers hired by the Company if significant, or the equipment’s net book value on the business’ financial statements. Inventory and accounts receivable collateral are valued based on independent field examiner review or aging reports. Appraisals may utilize a single valuation approach or a combination or 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. Appraised values are reviewed by management using historical knowledge, market considerations, and knowledge of the client and client’s business.

Changes in level 3 fair value measurements

The table below presents a reconciliation of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2024 and 2023:

	Obligations of		SBA and USDA
(Dollars in thousands)	U.S. Government		Servicing		Interest Only
Three Months Ended:	Entities and Agencies		Asset		Strip		Liabilities
Fair value, July 1, 2024	$	4,554	$	7,108	$	—	$	—
Total gains included in income		—		201		—		—
Settlements		—		—		—		—
Prepayments/paydowns		(43)		—		—		—
Transfers in and/or out of Level 3		—		—		—		—
Fair value, September 30, 2024	$	4,511	$	7,309	$	—	$	—
Fair value, July 1, 2023	$	4,790	$	8,018	$	—	$	—
Total losses included in income		—		(911)		—		—
Settlements		—		—		—		—
Prepayments/paydowns		(112)		—		—		—
Transfers in and/or out of Level 3		—		—		—		—
Fair value, September 30, 2023	$	4,678	$	7,107	$	—	$	—
Nine Months Ended:
Fair value, January 1, 2024	$	4,637	$	7,251	$	—	$	—
Total gains included in income		—		58		—		—
Settlements		—		—		—		—
Prepayments/paydowns		(126)		—		—		—
Transfers in and/or out of Level 3		—		—		—		—
Fair value, September 30, 2024	$	4,511	$	7,309	$	—	$	—
Fair value, January 1, 2023	$	5,059	$	7,038	$	47	$	—
Total gains/(losses) included in income		—		69		(47)		—
Settlements		—		—		—		—
Prepayments/paydowns		(381)		—		—		—
Transfers in and/or out of Level 3		—		—		—		—
Fair value, September 30, 2023	$	4,678	$	7,107	$	—	$	—

There were no gains or losses included in earnings for securities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the periods presented above. The only activity for these securities were prepayments. There were no purchases, sales, or transfers into and out of Level 3. The following table presents quantitative information about recurring Level 3 fair value measures at September 30, 2024 and December 31, 2023:

	Valuation	Unobservable	General
	Technique	Input	Range
September 30, 2024:
Recurring:
Obligations of U.S. Government entities and agencies	Discounted cash flows	Discount rate	4%-6%
SBA and USDA servicing asset	Discounted cash flows	Prepayment speed	8.99%-21.65%
		Discount rate	5.95%-10.88%
Nonrecurring:
Collateral-dependent loans	Appraised value less estimated selling costs	Estimated selling costs	6%
Foreclosed real estate	Appraised value less estimated selling costs	Estimated selling costs	6%
December 31, 2023:
Recurring:
Obligations of U.S. Government entities and agencies	Discounted cash flows	Discount rate	4%-6%
SBA and USDA servicing asset	Discounted cash flows	Prepayment speed	7.29%-20.23%
		Discount rate	8.66%-14.73%
Nonrecurring:
Collateral-dependent loans	Appraised value less estimated selling costs	Estimated selling costs	6%
Foreclosed real estate	Appraised value less estimated selling costs	Estimated selling costs	6%

The carrying amounts and estimated fair values of the Company’s financial instruments at September 30, 2024 and December 31, 2023 are as follows:

	Carrying			Estimated Fair Value at September 30, 2024
(Dollars in thousands)	Amount		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash, due from banks, and federal funds sold	$	291,214	$	—	$	291,214	$	—	$	291,214
Investment securities		28,774		10,568		13,695		4,511		28,774
FHLB stock		20,251		—		—		—		N/A
Loans held for sale		4,598		—		4,598		—		4,598
Loans, net		3,069,237		—		—		2,990,665		2,990,665
Accrued interest receivable		15,667		—		59		15,608		15,667
SBA and USDA servicing asset		7,309		—		—		7,309		7,309
Mortgage servicing asset		1,296		—		—		6,594		6,594
Interest rate derivatives		18,895		—		18,895		—		18,895
Financial Liabilities:
Deposits		2,723,120		—		2,724,209		—		2,724,209
Federal Home Loan Bank advances		375,000		—		381,600		—		381,600
Accrued interest payable		3,593		—		3,593		—		3,593
Interest rate derivatives		589		—		589		—		589

	Carrying		Estimated Fair Value at December 31, 2023
(Dollars in thousands)	Amount		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash, due from banks, and federal funds sold	$	144,805	$	—	$	144,805	$	—	$	144,805
Investment securities		28,828		10,335		13,856		4,637		28,828
FHLB stock		17,846		—		—		—		N/A
Loans held for sale		22,267		—		22,267		—		22,267
Loans, net		3,123,993		—		—		2,982,789		2,982,789
Accrued interest receivable		15,125		—		101		15,024		15,125
SBA and USDA servicing asset		7,251		—		—		7,251		7,251
Mortgage servicing asset		1,273		—		—		6,344		6,344
Interest rate derivatives		31,781		—		31,781		—		31,781
Financial Liabilities:
Deposits		2,730,936		—		2,729,024		—		2,729,024
Federal Home Loan Bank advances		325,000		—		322,075		—		322,075
Accrued interest payable		4,133		—		4,133		—		4,133
Interest rate derivatives		476		—		476		—		476