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Fair Value Measurements
9 Months Ended
Sep. 30, 2022
Fair Value Disclosures [Abstract]  
Fair Value Measurements

NOTE 9. Fair Value Measurements

GAAP requires the Company to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of assets and liabilities is 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 for the asset or liability in an orderly transaction between market participants on the measurement date.

“Fair Value Measurements” defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

 

 

Level 1

 

Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

 

 

 

Level 2

 

Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

 

 

 

Level 3

 

Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following section provides a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy:

 

Securities Available for Sale: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

 

Derivative instruments are recorded at fair value on a recurring basis. The Company utilizes derivative instruments as part of the management of interest rate risk to modify the re-pricing characteristics of certain portions of the Company’s interest-bearing assets and liabilities. The Company has contracted with a third-party vendor to provide valuations for derivatives using standard valuation techniques and therefore classifies such valuations as Level 2. The Company has considered counterparty credit risk in the valuation of its derivative assets and has considered its own credit risk in the valuation of its derivative liabilities.

The following table presents balances of financial assets and liabilities measured at fair value on a recurring basis at September 30, 2022 and December 31, 2021:

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

September 30, 2022

 

 

 

 

 

 

Using

 

 

 

Balance as of

 

 

Quoted Prices
in Active
Markets for
Identical Assets

 

 

Significant
Other
Observable
Inputs

 

 

Significant
Unobservable
Inputs

 

 

 

September 30, 2022

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of U.S. government corporations and agencies

 

$

9,211

 

 

$

 

 

$

9,211

 

 

$

 

Mortgage-backed securities

 

 

131,542

 

 

 

 

 

 

131,542

 

 

 

 

Obligations of states and political subdivisions

 

 

6,619

 

 

 

 

 

 

6,619

 

 

 

 

Subordinated debt

 

 

4,381

 

 

 

 

 

 

4,381

 

 

 

 

Derivative:

 

 

 

 

 

 

 

 

 

 

 

 

      Interest rate swaps

 

 

1,120

 

 

 

 

 

 

1,120

 

 

 

 

Total assets at fair value

 

$

152,873

 

 

$

 

 

$

152,873

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

      Interest rate swaps

 

$

1,120

 

 

$

 

 

$

1,120

 

 

$

 

Total liabilities at fair value

 

$

1,120

 

 

$

 

 

$

1,120

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

Balance as of

 

 

Quoted Prices
in Active
Markets for
Identical Assets

 

 

Significant
Other
Observable
Inputs

 

 

Significant
Unobservable
Inputs

 

 

 

December 31, 2021

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

      Obligations of U.S. government corporations and agencies

 

$

14,921

 

 

$

 

 

$

14,921

 

 

$

 

U.S. treasury notes

 

 

2,003

 

 

 

 

 

 

2,003

 

 

 

 

Mortgage-backed securities

 

 

151,012

 

 

 

 

 

 

151,012

 

 

 

 

Obligations of states and political subdivisions

 

 

21,877

 

 

 

 

 

 

21,877

 

 

 

 

Subordinated debt

 

 

2,508

 

 

 

 

 

 

2,508

 

 

 

 

Derivative:

 

 

 

 

 

 

 

 

 

 

 

 

      Interest rate swap

 

 

58

 

 

 

 

 

 

58

 

 

 

 

Total assets at fair value

 

$

192,379

 

 

$

 

 

$

192,379

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

      Interest rate swap

 

$

58

 

 

$

 

 

$

58

 

 

$

 

Total liabilities at fair value

 

$

58

 

 

$

 

 

$

58

 

 

$

 

 

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 write downs of individual assets.

 

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

Loans Held for Sale: Loans held for sale are carried at the lower of cost or market value. These loans currently consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). The Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during three and nine months ended September 30, 2022 and the year ended December 31, 2021.

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 the present value of its expected future cash flows discounted at the loan's coupon rate, or at the loans' observable market price or the fair value of the collateral securing the loans, if they are collateral dependent. 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 a market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data within the last twelve months (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). 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 on the Consolidated Statements of Income.

Other Real Estate Owned: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the fair value of the property, less estimated selling costs, establishing a new costs basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. The portion of interest costs relating to development of real estate is capitalized. Valuations are periodically obtained by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to fair value less cost to sell. The fair value measurement of real estate held in other real estate owned is assessed in the same manner as impaired loans described above. We believe that the fair value follows the provisions of GAAP. The Company held no other real estate owned at September 30, 2022 and December 31, 2021.

The following table displays quantitative information about Level 3 Fair Value Measurements for certain financial assets measured at fair value on a nonrecurring basis at September 30, 2022 and December 31, 2021:

 

 

 

Quantitative information about Level 3 Fair Value Measurements

 

 

September 30, 2022

 

 

Valuation Technique(s)

 

Unobservable Input

 

Range

 

Weighted Average (1)

Assets:

 

 

 

 

 

 

 

 

Impaired loans

 

Present value of cash flows

 

Discount rate

 

4% - 6%

 

5 %

 

 

 

 

 

 

 

 

 

 

 

Quantitative information about Level 3 Fair Value Measurements

 

 

December 31, 2021

 

 

Valuation Technique(s)

 

Unobservable Input

 

Range

 

Weighted Average (1)

Assets:

 

 

 

 

 

 

 

 

Impaired loans

 

Discounted appraised value

 

Selling cost

 

12 %

 

12 %

Impaired loans

 

Present value of cash flows

 

Discount rate

 

4% - 6%

 

5 %

 

(1) Unobservable inputs were weighted by the relative fair values of the instruments.

The following table summarizes the Company’s financial and nonfinancial assets that were measured at fair value on a nonrecurring basis at September 30, 2022 and December 31, 2021:

 

 

 

 

 

 

Carrying value at

 

 

 

 

 

 

September 30, 2022

 

 

 

Balance as of

 

 

Identical
Assets

 

 

Observable
Inputs

 

 

Unobservable
Inputs

 

 

 

September 30, 2022

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

 

(in thousands)

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

643

 

 

$

 

 

$

 

 

$

643

 

 

 

 

 

 

Carrying value at

 

 

 

 

 

 

December 31, 2021

 

 

 

Balance as of

 

 

Quoted Prices
in Active
Markets
for Identical
Assets

 

 

Significant
Other
Observable
Inputs

 

 

Significant
Unobservable
Inputs

 

 

 

December 31, 2021

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

 

(in thousands)

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

746

 

 

$

 

 

$

 

 

$

746

 

 

 

 

The carrying value and fair value of the Company’s financial instruments at September 30, 2022 and December 31, 2021 were as follows:

 

 

 

Fair Value Measurements at

 

 

 

September 30, 2022

 

 

 

Using

 

 

 

Carrying
Value
as of

 

 

Quoted Prices
in Active
Markets for
Identical
Assets

 

 

Significant
Other
Observable
Inputs

 

 

Significant
Unobservable
Inputs

 

 

Fair Value
as of

 

 

 

September 30, 2022

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

September 30, 2022

 

 

 

(in thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and short-term investments

 

$

35,935

 

 

$

35,935

 

 

$

 

 

$

 

 

$

35,935

 

Securities

 

 

151,753

 

 

 

 

 

 

151,753

 

 

 

 

 

 

151,753

 

Restricted Investments

 

 

4,608

 

 

 

 

 

 

4,608

 

 

 

 

 

 

4,608

 

Loans held for sale

 

 

90

 

 

 

 

 

 

90

 

 

 

 

 

 

90

 

Loans, net

 

 

1,191,099

 

 

 

 

 

 

 

 

 

1,182,235

 

 

 

1,182,235

 

Bank owned life insurance

 

 

23,731

 

 

 

 

 

 

23,731

 

 

 

 

 

 

23,731

 

Accrued interest receivable

 

 

3,079

 

 

 

 

 

 

3,079

 

 

 

 

 

 

3,079

 

Interest rate swaps

 

 

1,120

 

 

 

 

 

 

1,120

 

 

 

 

 

 

1,120

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

1,254,114

 

 

$

 

 

$

1,254,480

 

 

$

 

 

$

1,254,480

 

Federal Home Loan Bank advances

 

 

75,000

 

 

 

 

 

 

74,978

 

 

 

 

 

 

74,978

 

Subordinated debt, net of unamortized issuance costs

 

 

29,360

 

 

 

 

 

 

29,352

 

 

 

 

 

 

29,352

 

Accrued interest payable

 

 

1,196

 

 

 

 

 

 

1,196

 

 

 

 

 

 

1,196

 

Interest rate swaps

 

 

1,120

 

 

 

 

 

 

1,120

 

 

 

 

 

 

1,120

 

 

 

 

Fair Value Measurements at

 

 

 

December 31, 2021

 

 

 

Using

 

 

 

Carrying Value
as of

 

 

Quoted Prices
in Active
Markets for
Identical
Assets

 

 

Significant
Other
Observable
Inputs

 

 

Significant
Unobservable
Inputs

 

 

Fair Value
as of

 

 

 

December 31, 2021

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

December 31, 2021

 

 

 

(in thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and short-term investments

 

$

64,068

 

 

$

64,068

 

 

$

 

 

$

 

 

$

64,068

 

Securities

 

 

192,321

 

 

 

 

 

 

192,321

 

 

 

 

 

 

192,321

 

Restricted Investments

 

 

1,049

 

 

 

 

 

 

1,049

 

 

 

 

 

 

1,049

 

Loans held for sale

 

 

876

 

 

 

 

 

 

876

 

 

 

 

 

 

876

 

Loans, net

 

 

976,933

 

 

 

 

 

 

 

 

 

969,612

 

 

 

969,612

 

Bank owned life insurance

 

 

23,236

 

 

 

 

 

 

23,236

 

 

 

 

 

 

23,236

 

Accrued interest receivable

 

 

2,634

 

 

 

 

 

 

2,634

 

 

 

 

 

 

2,634

 

Interest rate swap

 

 

58

 

 

 

 

 

 

58

 

 

 

 

 

 

58

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

1,177,235

 

 

$

 

 

$

1,177,582

 

 

$

 

 

$

1,177,582

 

Accrued interest payable

 

 

67

 

 

 

 

 

 

67

 

 

 

 

 

 

67

 

Interest rate swap

 

 

58

 

 

 

 

 

 

58

 

 

 

 

 

 

58