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FAIR VALUE MEASUREMENT
12 Months Ended
Dec. 31, 2022
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASUREMENT

Note 5—FAIR VALUE MEASUREMENT

The Company adopted FASB ASC Fair Value Measurement Topic 820, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about 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 (an 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 value:

Level l Quoted prices in active markets for identical assets or liabilities.
Level 2 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 for substantially the full term of the assets or liabilities.
Level 3 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 the determination of fair value requires significant management judgment or estimation.

 

FASB ASC 825-10-50 “Disclosure about Fair Value of Financial Instruments”, requires the Company to disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below.

  

Cash and short term investments—The carrying amount of these financial instruments (cash and due from banks, interest-bearing bank balances, federal funds sold and securities purchased under agreements to resell) approximates fair value. All mature within 90 days and do not present unanticipated credit concerns and are classified as Level 1.

Investment Securities—Measurement is on a recurring basis based upon quoted market prices, if available. If quoted market prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for prepayment assumptions, projected credit losses, and liquidity. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, or by dealers or brokers in active over-the-counter markets. Level 2 securities include mortgage-backed securities issued both by government sponsored enterprises and private label mortgage-backed securities. Generally, these fair values are priced from established pricing models. Level 3 securities include corporate debt obligations and asset–backed securities that are less liquid or for which there is an inactive market.

 

Other investments, at cost—The carrying value of other investments, such as FHLB stock, approximates fair value based on redemption provisions.

Loans Held for Sale—The Company originates fixed rate residential loans on a servicing released basis in the secondary market. Loans closed but not yet settled with an investor, are carried in the Company’s loans held for sale portfolio. These loans are fixed rate residential loans that have been originated in the Company’s name and have closed. Virtually all of these loans have commitments to be purchased by investors at a locked in price with the investors on the same day that the loan was locked in with the Company’s customers. Therefore, these loans present very little market risk for the Company and are classified as Level 2. The carrying amount of these loans approximates fair value.

Loans— The valuation of loans receivable is estimated using the exit price notion which incorporates factors, such as enhanced credit risk, illiquidity risk and market factors that sometimes exist in exit prices in dislocated markets. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the following categories: variable rate loans, impaired loans and all other loans. The results are then adjusted to account for credit risk as described above.

 

Other Real Estate Owned (“OREO”)—OREO is carried at the lower of carrying value or fair value on a non-recurring basis. Fair value is based upon independent appraisals or management’s estimation of the collateral and is considered a Level 3 measurement.

Accrued Interest Receivable—The fair value approximates the carrying value and is classified as Level 1.

Deposits—The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposits is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturities. Deposits are classified as Level 2.

Federal Home Loan Bank Advances—Fair value is estimated based on discounted cash flows using current market rates for borrowings with similar terms and are classified as Level 2.

Short Term Borrowings—The carrying value of short term borrowings (securities sold under agreements to repurchase and demand notes to the Treasury) approximates fair value. These are classified as Level 2.

Junior Subordinated Debentures—The fair values of junior subordinated debentures are estimated by using discounted cash flow analyses based on incremental borrowing rates for similar types of instruments. These are classified as Level 2.

Accrued Interest Payable—The fair value approximates the carrying value and is classified as Level 1.

Commitments to Extend Credit—The fair value of these commitments is immaterial because their underlying interest rates approximate market. 

The carrying amount and estimated fair value by classification Level of the Company’s financial instruments as of December 31, 2022 and December 31, 2021 are as follows: 

 

                                       
   December 31, 2022 
   Carrying   Fair Value 
(Dollars in thousands)  Amount   Total   Level 1   Level 2   Level 3 
Financial Assets:                         
Cash and short term investments  $37,401   $37,401   $37,401   $   $ 
Available-for-sale securities   331,862    331,862        331,862     
Held-to-maturity securities   228,701    213,613        213,613     
Other investments, at cost   4,191    4,191            4,191 
Loans held for sale   1,779    1,779        1,779     
Net loans receivable   969,521    943,498            943,498 
Accrued interest   5,217    5,217    5,217         
Financial liabilities:                         
Non-interest bearing demand  $461,010   $461,010   $   $461,010   $ 
Interest bearing demand deposits and money market accounts   629,763    629,763        629,763     
Savings   161,770    161,770        161,770     
Time deposits   132,839    132,825        132,825     
Total deposits   1,385,382    1,385,368        1,385,368     
Federal Home Loan Bank Advances   50,000    50,000        50,000     
Short term borrowings   90,743    90,743        90,743     
Junior subordinated debentures   14,964    13,402        13,402     
Accrued interest payable   520    520    520         

 

                                       
   December 31, 2021 
   Carrying   Fair Value 
(Dollars in thousands)  Amount   Total   Level 1   Level 2   Level 3 
Financial Assets:                         
Cash and short term investments  $69,022   $69,022   $69,022   $   $ 
Available-for-sale securities   564,839    564,839    39,829    525,010     
Other investments, at cost   1,785    1,785            1,785 
Loans held for sale   7,120    7,120        7,120     
Net loans receivable   852,523    851,822            851,822 
Accrued interest   3,927    3,927    3,927         
Financial liabilities:                         
Non-interest bearing demand  $444,688   $444,688   $   $444,688   $ 
Interest bearing demand deposits and money
market accounts
   619,057    619,057        619,057     
Savings   143,765    143,765        143,765     
Time deposits   153,781    154,030        154,030     
Total deposits   1,361,291    1,361,540        1,361,540     
Short term borrowings   54,216    54,216        54,216     
Junior subordinated debentures   14,964    15,015        15,015     
Accrued interest payable   404    404    404         

The following table summarizes quantitative disclosures about the fair value for each category of assets carried at fair value as of December 31, 2022 and December 31, 2021 that are measured on a recurring basis. There were no liabilities carried at fair value as of December 31, 2022 or December 31, 2021 that are measured on a recurring basis. 

AVAILABLE-FOR-SALE:

(Dollars in thousands)

Description  December 31,
2022
   (Level 1)   (Level 2)   (Level 3) 
Available- for-sale securities                    
US Treasury Securities  $55,983   $   $55,983   $ 
Government Sponsored Enterprises   2,074        2,074     
Mortgage-backed securities   244,600        244,600     
Small Business Administration pools   21,087        21,087     
State and local government                
Corporate and other securities   8,118        8,118     
Total Available-for-sale securities   331,862        331,862     
Loans held for sale   1,779        1,779     
Total  $333,641   $   $333,641   $ 

 

(Dollars in thousands)

Description  December 31,
2021
   (Level 1)   (Level 2)   (Level 3) 
Available-for-sale securities                    
US treasury securities  $15,436   $   $15,436   $ 
Government sponsored enterprises   2,501        2,501     
Mortgage-backed securities   397,729    25,934    371,796     
Small Business Administration securities   31,273        31,273     
State and local government   109,848    12,896    96,952     
Corporate and other securities   8,052    1,000    7,052     
Total Available-for-sale securities   564,839    39,830    525,010     
Loans held-for-sale   7,120        7,120     
Total  $571,959   $39,830   $532,130   $ 

 

The following tables summarize quantitative disclosures about the fair value for each category of assets carried at fair value as of December 31, 2022 and December 31, 2021 that are measured on a non-recurring basis. There were no liabilities carried at fair value and measured on a non-recurring basis at December 31, 2022 and 2021. 

 

Fair Value, Assets Measured on Non-Recurring Basis 

(Dollars in thousands)                
Description  December 31,
2022
   (Level 1)   (Level 2)   (Level 3) 
Impaired loans:                    
Commercial & Industrial  $   $   $   $ 
Real estate:                    
Mortgage-residential   34            34 
Mortgage-commercial   4,752            4,752 
Consumer:                    
Home equity   168            168 
Other                
Total impaired   4,954            4,954 
Other real estate owned:                    
Construction   412            412 
Mortgage-commercial   522            522 
Total other real estate owned   934            934 
Total  $5,888   $   $   $5,888 
(Dollars in thousands)                
Description  December 31,
2021
   (Level 1)   (Level 2)   (Level 3) 
Impaired loans:                    
Commercial & Industrial  $   $   $   $ 
Real estate:                    
Mortgage-residential   133            133 
Mortgage-commercial   1,561            1,561 
Consumer:                    
Home equity                
Other                
Total impaired   1,694            1,694 
Other real estate owned:                    
Construction   624            624 
Mortgage-commercial   541            541 
Total other real estate owned   1,165            1,165 
Total  $2,859   $   $   $2,859 

 

The Company has a large percentage of loans with real estate serving as collateral. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair value of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be Level 3 inputs. Third party appraisals are generally obtained when a loan is identified as being impaired or at the time it is transferred to OREO. This internal process would consist of evaluating the underlying collateral to independently obtained comparable properties. With respect to less complex or smaller credits, an internal evaluation may be performed. Generally, the independent and internal evaluations are updated annually. Factors considered in determining the fair value include geographic sales trends, the value of comparable surrounding properties as well as the condition of the property.

 

For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2022 and December 31, 2021, the significant unobservable inputs used in the fair value measurements were as follows:

 

 

(Dollars in thousands)  Fair Value as
of December 31,
2022
   Valuation Technique   Significant
Observable
Inputs
   Significant
Unobservable
Inputs
 
OREO  $934    Appraisal Value/Comparison
Sales/Other estimates
    Appraisals and or sales of comparable properties    Appraisals discounted 6% to 16% for sales commissions and other holding cost 
Impaired loans  $4,954    Appraisal Value    Appraisals and or sales of comparable properties    Appraisals discounted 6% to 16% for sales commissions and other holding cost 
                     

 

(Dollars in thousands)  Fair Value as
of December 31,
2021
   Valuation Technique   Significant
Observable
Inputs
   Significant
Unobservable
Inputs
 
OREO  $1,165    Appraisal Value/Comparison
Sales/Other estimates
    Appraisals and or sales of comparable properties    Appraisals discounted 6% to 16% for sales commissions and other holding cost 
Impaired loans  $1,694    Appraisal Value    Appraisals and or sales of comparable properties    Appraisals discounted 6% to 16% for sales commissions and other holding cost