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Fair Value of Financial Instruments
9 Months Ended
Sep. 30, 2023
Fair Value of Financial Instruments [Abstract]  
Fair Value of Financial Instruments
(6) Fair Value of Financial Instruments

FASB Topic 820, Fair Value Measurements (“ASC 820”) defines fair value as 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. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes 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 can access as of the measurement date.

Level 2 – Significant other 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 company’s own assumptions about the value that market participants would use in pricing an asset or liability.

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

Securities Available for Sale: The fair value of securities available for sale is determined utilizing an independent pricing service for identical assets or significantly similar securities. The pricing service uses a variety of techniques to arrive at fair value including market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows. This results in a Level 1 or Level 2 classification of the inputs for determining fair value. Interest and dividend income is recorded on the accrual method and is included in the Consolidated Statements of Income in the respective investment class under total interest and dividend income. The Company does not have any securities that would be designated as Level 3.

Other Real Estate Owned: Assets acquired through 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. 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 to adjust for differences between the comparable sales and income data available. This results in a Level 3 classification of the inputs for determining fair value.

Individually evaluated loans: Periodically the Company records non-recurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans.  Non-recurring adjustments can also include certain adjustments for collateral-dependent loans to adjust balances to fair value and generally have had a charge-off through the allowance for credit losses. For collateral dependent loans, fair value is commonly based on recent real estate 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 to adjust for differences between the comparable sales and income data available. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value. When obtained, non-real estate 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. Loans individually evaluated are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Indications of value for both collateral-dependent loans and other real estate owned are obtained from third party providers or the Company’s internal Appraisal Department. All indications of value are reviewed for reasonableness by a member of the Appraisal Department for the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value via comparison with independent data sources such as recent market data or industry-wide statistics.

There were no transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2023 and 2022.

Assets and liabilities measured at fair value under ASC 820 on a recurring basis are summarized below:

 
Fair Value Measurements at
 
   
September 30, 2023 Using:
 
                 Significant        
           Quoted Prices in      Other      Significant  
           Active Markets for      Observable      Unobservable  
     Carrying      Identical Assets      Inputs      Inputs  
(dollars in thousands)
 
Value
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
                         
U.S. government sponsored enterprises
 
$
121,474
   
$
-
   
$
121,474
   
$
-
 
State and political subdivisions
   
34
     
-
     
34
     
-
 
Mortgage backed securities and collateralized mortgage obligations - residential
   
233,719
     
-
     
233,719
     
-
 
Corporate bonds
   
76,935
     
-
     
76,935
     
-
 
Small Business Administration- guaranteed participation securities
   
17,316
     
-
     
17,316
     
-
 
Other securities
   
657
     
-
     
657
     
-
 
                                 
Total securities available for sale
 
$
450,135
   
$
-
   
$
450,135
   
$
-
 

 
Fair Value Measurements at
 
   
December 31, 2022 Using:
 
                 Significant        
           Quoted Prices in      Other      Significant  
           Active Markets for      Observable      Unobservable  
     Carrying      Identical Assets      Inputs      Inputs  
(dollars in thousands)
 
Value
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
                         
Securities available for sale:
                       
U.S. government sponsored enterprises
 
$
118,187
   
$
-
   
$
118,187
   
$
-
 
State and political subdivisions
   
34
     
-
     
34
     
-
 
Mortgage backed securities and collateralized mortgage obligations - residential
   
260,316
     
-
     
260,316
     
-
 
Corporate bonds
   
81,346
     
-
     
81,346
     
-
 
Small Business Administration- guaranteed participation securities
   
20,977
     
-
     
20,977
     
-
 
Other securities
   
653
     
-
     
653
     
-
 
                                 
Total securities available for sale
 
$
481,513
   
$
-
   
$
481,513
   
$
-
 

Assets measured at fair value on a non-recurring basis are summarized below:

 
 
Fair Value Measurements at
 
 
 
 
     
 
 
September 30, 2023 Using:
 
 
 
 
     
                 Significant                    
           Quoted Prices in      Other      Significant              
           Active Markets for      Observable      Unobservable              
     Carrying      Identical Assets      Inputs      Inputs              
(dollars in thousands)
 
Value
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Valuation technique
 
Unobservable inputs
 
Range (Weighted Average)
 
 
                       
 
 
 
     
Other real estate owned
 
$
1,185
   
$
-
   
$
-
   
$
1,185
 
Sales comparison approach
 
Adjustments for differences between comparable sales
   
0% - 77% (29
%)
Loans individually evaluated
    -       -       -       -   Sales comparison
  Adjustments for differences between comparable sales     N/A
 

 
 
Fair Value Measurements at
 
 
 
 
     
 
 
December 31, 2022 Using:
 
 
 
 
     
                 Significant                    
           Quoted Prices in      Other      Significant              
           Active Markets for      Observable      Unobservable              
     Carrying      Identical Assets      Inputs      Inputs              
(dollars in thousands)
 
Value
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Valuation technique
 
Unobservable inputs
 
Range (Weighted Average)
 
 
                       
 
 
 
     
Other real estate owned
 
$
2,061
   
$
-
   
$
-
   
$
2,061
 
Sales comparison approach
 
Adjustments for differences between comparable sales
   
2% - 47% (18
%)
Impaired loans:
                                             
Real estate mortgage -1 to 4 family
    -       -       -       -   Sales comparison   Adjustments for differences between comparable sales     N/A
 

Other real estate owned, that is carried at fair value less costs to sell was approximately $1.2 million at September 30, 2023 and consisted of residential real estate properties. There were no commercial real estate properties.  A valuation charge of $143 thousand is included in earnings for the nine months ended September 30, 2023.

Of the total individually evaluated loans of $25.6 million at September 30, 2023, there are no loans that are collateral dependent and are carried at fair value measured on a non-recurring basis.  Due to the sufficiency of charge offs taken on these loans and the adequacy of the underlying collateral, there were no specific valuation allowances for these loans at September 30, 2023. There were no gross charge offs related to residential individually evaluated loans included in the table above for the three and nine months ended September 30, 2023.

Other real estate owned, which is carried at fair value less costs to sell, was approximately $2.1 million at December 31, 2022, and consisted of only residential real estate properties. A valuation charge of $68 thousand is included in earnings for the year ended December 31, 2022.

Of the total individually evaluated loans of $25.7 million at December 31, 2022, there are no loans that were collateral dependent and are carried at fair value measured on a non-recurring basis. Due to the sufficiency of charge-offs taken on these loans and the adequacy of the underlying collateral, there were no specific valuation allowances for these loans at December 31, 2022.

In accordance with FASB Topic 825, Financial Instruments (“ASC 825”), the carrying amounts and estimated fair values of financial instruments, at September 30, 2023 and December 31, 2022 are as follows:

(dollars in thousands)
       
Fair Value Measurements at
 
   
Carrying
   
September 30, 2023 Using:
 
   
Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets:
                             
Cash and cash equivalents
 
$
507,261
     
507,261
     
-
     
-
     
507,261
 
Securities available for sale
   
450,135
     
22
     
450,113
     
-
     
450,135
 
Held to maturity securities
   
6,724
     
-
     
6,444
     
-
     
6,444
 
Federal Home Loan Bank stock
   
6,203
     
N/A
     
N/A
     
N/A
     
N/A
 
Net loans
   
4,913,055
     
-
     
-
     
4,366,535
     
4,366,535
 
Accrued interest receivable
   
13,429
     
590
     
1,873
     
10,966
     
13,429
 
Financial liabilities:
                                       
Demand deposits
   
773,293
     
773,293
     
-
     
-
     
773,293
 
Interest bearing deposits
   
4,461,072
     
2,879,568
     
1,556,686
     
-
     
4,436,254
 
Short-term borrowings
   
103,110
     
-
     
103,110
     
-
     
103,110
 
Accrued interest payable
   
2,480
     
237
     
2,243
     
-
     
2,480
 

(dollars in thousands)
       
Fair Value Measurements at
 
   
Carrying
   
December 31, 2022 Using:
 
   
Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets:
                             
Cash and cash equivalents
 
$
650,599
     
650,599
     
-
     
-
     
650,599
 
Securities available for sale
   
481,513
     
-
     
481,513
     
-
     
481,513
 
Held to maturity securities
   
7,707
     
-
     
7,580
     
-
     
7,580
 
Federal Reserve Bank and Federal
                                       
Home Loan Bank stock
   
5,797
     
N/A
     
N/A
     
N/A
     
N/A
 
Net loans
   
4,687,169
     
-
     
-
     
4,328,508
     
4,328,508
 
Accrued interest receivable
   
11,492
     
189
     
1,866
     
9,437
     
11,492
 
Financial liabilities:
                                       
Demand deposits
   
838,147
     
838,147
     
-
     
-
     
838,147
 
Interest bearing deposits
   
4,354,663
     
3,325,900
     
1,012,528
     
-
     
4,338,428
 
Short-term borrowings
   
122,700
     
-
     
122,700
     
-
     
122,700
 
Accrued interest payable
   
602
     
60
     
542
     
-
     
602