Fair Value

9 Months Ended

Sep. 30, 2022

Generally accepted accounting principles define fair value, establish a framework for measuring fair value, recommend disclosures about fair value, and establish a hierarchy for determining fair value measurement. The hierarchy includes three levels and is based upon the valuation techniques used to measure assets and liabilities. The three levels are as follows:

Level 1 - Inputs to the valuation method are quoted prices (unadjusted) for identical assets or liabilities in active markets;

Level 2 - Inputs to the valuation method 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; and

Level 3 - Inputs to the valuation method are unobservable and significant to the fair value measurement.

Fair value measurements on a recurring basis

Investment securities available for sale - The fair values of the Company's investment securities available for sale are provided by an independent pricing service. The fair values of the Company's securities are determined based on quoted prices for similar securities under Level 2 inputs.

Marketable equity securities - The fair value of marketable equity securities is provided by an independent pricing service. The fair value is determined based on quoted prices for similar securities using Level 1 inputs.

Loans held for sale - The fair value of loans held for sale is determined using Level 2 inputs of quoted prices for a similar asset, adjusted for specific attributes of that loan.

Derivative financial instruments - Derivative instruments used to hedge residential mortgage loans held for sale and the related interest rate lock commitments include forward commitments to sell mortgage loans and are reported at fair value utilizing Level 2 inputs. The fair values of derivative financial instruments are based on derivative market data inputs as of the valuation date and the underlying value of mortgage loans for rate lock commitments.

The Company has categorized its financial instruments measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021 as follows:


Fair Value of Financial Instruments
(in thousands)
September 30, 2022	Total		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
Investment securities available for sale
U.S. Treasuries	$	214,940	$	214,940	$	—	$	—

Municipal	8,087		—		8,087		—
Corporate	4,648		—		4,648		—
Asset-backed securities	8,222		—		8,222		—
Mortgage-backed securities	33,723		—		33,723		—
Total	$	269,620	$	214,940	$	54,680	$	—
Marketable equity securities	$	232	$	232	$	—	$	—
Loans held for sale	$	6,875	$	—	$	6,875	$	—
Derivative assets	$	44	$	—	$	44	$	—
Derivative liabilities	$	31	$	—	$	31	$	—


December 31, 2021
Investment securities available for sale
U.S. Treasuries	$	131,001	$	131,001	$	—	$	—

Municipal	10,474		—		10,474		—
Corporate	4,934		—		4,934		—
Asset-backed securities	10,140		—		10,140		—
Mortgage-backed securities	27,906		—		27,906		—
Total	$	184,455	$	131,001	$	53,454	$	—
Marketable equity securities	$	245	$	245	$	—	$	—
Loans held for sale	$	15,989	$	—	$	15,989	$	—
Derivative assets	$	34	$	—	$	34	$	—
Derivative liabilities	$	16	$	—	$	16	$	—

Financial instruments recorded using FASB ASC 825-10

Under FASB ASC 825-10, the Company may elect to report most financial instruments and certain other items at fair value on an instrument-by-instrument basis with changes in fair value reported in net income. After the initial adoption, the election is made at the acquisition of an eligible financial asset, financial liability or firm commitment or when certain specified reconsideration events occur. The fair value election, with respect to an item, may not be revoked once an election is made.

The following table reflects the difference between the fair value carrying amount of loans held for sale, measured at fair value under FASB ASC 825-10, and the aggregate unpaid principal amount the Company is contractually entitled to receive at maturity:


Fair Value of Loans Held for Sale
(in thousands)	September 30, 2022		December 31, 2021
Aggregate fair value	$	6,875	$	15,989
Contractual principal	6,237		14,504
Difference	$	638	$	1,485

The Company has elected to account for loans held for sale at fair value to eliminate the mismatch that would occur by recording changes in market value on derivative instruments used to hedge loans held for sale while carrying the loans at the lower of cost or market.

Fair value measurements on a nonrecurring basis

Impaired loans - The Company has measured impairment generally based on the fair value of the loan's collateral and discounted cash flow analysis. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values. As of September 30, 2022 and December 31, 2021, the fair values consist of loan balances of $8.4 million and $11.3 million, with specific reserves of $159 thousand and $218 thousand, respectively.

Foreclosed real estate - The Company's foreclosed real estate is measured at fair value less cost to sell. Fair value was determined based on offers and/or appraisals. Cost to sell the real estate was based on standard market factors. The Company has categorized its foreclosed real estate as Level 3.

The Company has categorized its impaired loans and foreclosed real estate as follows:


Fair Value of Impaired Loans and Foreclosed Real Estate
(in thousands)	September 30, 2022		December 31, 2021
Impaired loans


Level 3 inputs	$	8,261	$	11,121
Total	$	8,261	$	11,121

Foreclosed real estate


Level 3 inputs	$	—	$	86
Total	$	—	$	86

The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at September 30, 2022 and December 31, 2021:

Unobservable Inputs

Valuation Technique

Unobservable Inputs

Range of Inputs

Impaired Loans

Appraised Value/Discounted Cash Flows

Discounts to appraisals or cash flows for estimated holding and/or selling costs

11 to 25%

Foreclosed Real Estate

Appraised Value/Comparable Sales

Discounts to appraisals for estimated holding and/or selling costs

11 to 25%

Fair value of financial instruments

Fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value is based upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership in an entity, or contracts that convey or impose on an entity the contractual right or obligation to either receive or deliver cash for another financial instrument.

The information used to determine fair value is highly subjective and judgmental in nature and, therefore, the results are imprecise. Subjective factors include, among other things, estimates of cash

flows, risk characteristics, credit quality, and interest rates, all of which are subject to change. Since the fair value is estimated as of the balance sheet date, the amounts that will actually be realized or paid upon settlement or maturity on these various instruments could be significantly different.

The fair value of the Company’s loan portfolio includes a credit risk assumption in the determination of the fair value of its loans. 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. However, under the new guidance, the Company believes a further credit risk discount must be applied through the use of a discounted cash flow model to compensate for illiquidity risk, based on certain assumptions included within the discounted cash flow model, primarily the use of discount rates that better capture inherent credit risk over the lifetime of a loan. This consideration of enhanced credit risk provides an estimated exit price for the Company’s loan portfolio.

For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values. Fair values for impaired loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral.

The fair value of cash and cash equivalents and investments in restricted stocks is the carrying amount. Restricted stock includes equity of the Federal Reserve and other banker’s banks.

The fair value of noninterest bearing deposits and securities sold under agreements to repurchase is the carrying amount.

The fair value of checking, savings, and money market deposits is the amount payable on demand at the reporting date. Fair value of fixed maturity term accounts and individual retirement accounts is estimated using rates currently offered for accounts of similar remaining maturities.

The fair value of certificates of deposit in other financial institutions is estimated based on interest rates currently offered for deposits of similar remaining maturities.

The fair value of borrowings is estimated by discounting the value of contractual cash flows using current market rates for borrowings with similar terms and remaining maturities.

The fair value of outstanding loan commitments, unused lines of credit, and letters of credit are not included in the table since the carrying value generally approximates fair value. These instruments generate fees that approximate those currently charged to originate similar commitments.

The table below presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments.


Fair Value of Selected Financial Instruments
	September 30, 2022				December 31, 2021
(in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets
Level 1
Cash and due from banks	$	14,774	$	14,774	$	42,914	$	42,914
Interest bearing deposits at other financial institutions	20,867		20,867		136,824		136,824
Marketable equity securities	232		232		245		245
Federal funds sold	1,421		1,421		3,657		3,657
Level 3

Loans receivable, net (1)	$	1,624,572	$	1,572,842	$	1,607,086	$	1,598,228

Restricted investments	3,627		3,627		3,498		3,498

Financial liabilities
Level 1
Noninterest bearing deposits	$	806,033	$	806,033	$	787,650	$	787,650

Level 3
Interest bearing deposits	$	931,558	$	931,882	$	1,009,487	$	1,011,121
FHLB advances and other borrowed funds	34,062		31,116		34,062		34,263

________________________

(1) Includes SBA-PPP loans and portfolio loans.

- 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.

+ References + Details