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Fair Value Measurements

9 Months Ended

Sep. 30, 2022

Note 8 - Fair Value Measurements

The following tables present estimated fair values of the Company’s financial instruments as of the period indicated, whether or not recognized or recorded in the consolidated balance sheets at the period indicated:


	September 30, 2022				Fair Value Measurements Using
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands; unaudited)
Financial assets
Cash and due from banks	$	37,482	$	37,482	$	37,482	$	—	$	—
Interest earning deposits with other banks	373,246		373,246		373,246		—		—
Investment securities	98,871		98,753		97,316		1,437		—
Other investments	10,581		10,581		—		8,009		2,572
Loans held for sale	43,314		43,314		—		43,314
Loans receivable	2,507,889		2,548,820		—		—		2,548,820
Accrued interest receivable	13,114		13,114		—		13,114		—
Financial liabilities
Deposits	$	2,837,066	2,836,117		$	—	$	2,836,117	$	—
Subordinated debt	24,343		21,643		—		21,643		—
Junior subordinated debentures	3,588		3,464		—		3,464		—
Accrued interest payable	153		153		—		153		—


	December 31, 2021				Fair Value Measurements Using
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands; unaudited)
Financial assets
Cash and due from banks	$	14,496	$	14,496	$	14,496	$	—	$	—
Interest earning deposits with other banks	798,665		798,665		798,665		—		—
Investment securities	36,623		36,675		34,998		1,677		—
Other investments	8,478		8,478		—		6,156		2,322
Loans receivable, net	1,714,103		1,686,124		—		—		1,686,124
Accrued interest receivable	8,105		8,105		—		8,105		—
Financial liabilities
Deposits	$	2,363,787	$	2,363,624	$	—	$	2,363,624	$	—
FHLB advances	24,999		24,447		—		24,447		—
Subordinated debt	24,288		21,891		—		21,891		—
Junior subordinated debentures	3,586		2,771		—		2,771		—
Accrued interest payable	357		357		—		357		—

The Company measures and discloses certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (that is, not a forced liquidation or distressed sale). GAAP establishes a consistent framework for measuring fair value and disclosure requirements about fair value measurements. Among other things, the accounting standard requires the reporting entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s estimates for market assumptions. These two types of inputs create the following fair value hierarchy:

•Level 1 – Quoted prices in active markets for identical instruments. An active market is a market in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

•Level 2 – Observable inputs other than Level 1 including quoted prices in active markets for similar instruments, quoted prices in less active markets for identical or similar instruments, or other observable inputs that can be corroborated by observable market data.

•Level 3 – Unobservable inputs supported by little or no market activity for 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; also includes observable inputs from nonbinding single dealer quotes not corroborated by observable market data.

The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize at a future date. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for certain financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.

Items measured at fair value on a recurring basis – The following fair value hierarchy table presents information about the Company’s assets that are measured at fair value on a recurring basis at the dates indicated:


	Level 1		Level 2		Level 3		Total Fair Value
	(dollars in thousands; unaudited)
September 30, 2022
Available-for-sale
U.S. Treasury securities	$	97,316	$	—	$	—	$	97,316
U.S. Agency collateralized mortgage obligations	—		1		—		1
U.S. Agency residential mortgage-backed securities	—		54		—		54
Municipals	—		250		—		250
	$	97,316	$	305	$	—	$	97,621
December 31, 2021
Available-for-sale
U.S. Treasury securities	$	34,998	$	—	$	—	$	34,998
U.S. Agency collateralized mortgage obligations	—		70		—		70
U.S. Agency residential mortgage-backed securities	—		3		—		3
Municipals	—		256		—		256
	$	34,998	$	329	$	—	$	35,327

The following methods were used to estimate the fair value of the class of financial instruments above:

Investment securities - The fair value of securities is based on quoted market prices, pricing models, quoted prices of similar securities, independent pricing sources, and discounted cash flows.

Limitations: The fair value estimates presented herein are based on pertinent information available to management as of September 30, 2022 and December 31, 2021. The factors used in the fair values estimates are subject to change subsequent to the dates the fair value estimates are completed, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

Items measured at fair value on a nonrecurring basis – The following table presents financial assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy of the fair value measurements for those assets at the dates indicated:


	Level 1		Level 2		Level 3		Total Fair Value
	(dollars in thousands; unaudited)
September 30, 2022
Impaired loans	$	—	$	—	$	7,061	$	7,061
Equity securities					2,572		2,572
Total	$	—	$	—	$	9,633	$	9,633

December 31, 2021
Impaired loans	$	—	$	—	$	221	$	221
Equity securities					2,322		2,322
Total	$	—	$	—	$	2,543	$	2,543

The amounts disclosed above represent the fair values at the time the nonrecurring fair value measurements were made, and not necessarily the fair value as of the dates reported on.

Impaired loans - A loan is considered impaired when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Impairment is measured based on the fair value of the underlying collateral or the discounted cash expected future cash flows. Subsequent changes in the value of impaired loans are included within the provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the provision that would otherwise be reported. Impaired loans are evaluated quarterly to determine if valuation adjustments should be recorded. The need for valuation adjustments arises when observable market prices or current appraised values of collateral indicate a shortfall in collateral value compared to current carrying values of the related loan. If the Company determines that the value of the impaired loan is less than the carrying value of the loan, the Company either establishes an impairment reserve as a specific component of the allowance for loan losses or charges off the impairment amount. These valuation adjustments are considered nonrecurring fair value adjustments.

Equity securities – The Company measures equity securities without readily determinable fair values at cost less impairment (if any), plus or minus observable price changes from an identical or similar investment of the same issuer, with price changes recognized in earnings.

Assets measured at fair value using significant unobservable inputs (Level 3)

The following table presents the carrying value of equity securities without readily determinable fair values, as of September 30, 2022, with adjustments recorded during the periods presented for those securities with observable price changes, if applicable. These equity securities are included in other investments on the balance sheet.


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(dollars in thousands; unaudited)	2022		2021		2022		2021
Carrying value, beginning of period	$	2,672	$	850	$	2,322	$	850
Purchases	—		—		350		—
Net change recognized in earnings	(100)		1,472		(100)		1,472
Carrying value, end of period	$	2,572	$	2,322	$	2,572	$	2,322

The following table provides a description of the valuation technique, unobservable inputs, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a nonrecurring basis at the dates indicated:

(unaudited)

Valuation Technique

Unobservable Inputs

September 30, 2022

Weighted

Average Rate

December 31, 2021

Weighted

Average Rate

Impaired loans

Collateral valuations

Discount to appraised value

8.0%

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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