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Fair Value Measurement

9 Months Ended

Sep. 30, 2023

Fair Value Measurement

Fair Value Measurement

Note 12: Fair Value Measurement

The Company categorizes its assets and liabilities measured at fair value into a three-level hierarchy based on the priority of the inputs to the valuation technique used to determine fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used in the determination of the fair value measurement fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement. Assets and liabilities valued at fair value are categorized based on the inputs to the valuation techniques as follows:

Level 1 – Inputs that utilized quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.

Level 2 – Inputs that 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 instruments. Fair values for these instruments are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows.

Level 3 – Inputs that are unobservable for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity.

Subsequent to initial recognition, the Company may re-measure the carrying value of assets and liabilities measured on a nonrecurring basis to fair value. Adjustments to fair value usually result when certain assets are impaired. Such assets are written down from their carrying amounts to their fair value.

Professional standards allow entities the irrevocable option to elect to measure certain financial instruments and other items at fair value for the initial and subsequent measurement on an instrument-by-instrument basis. The Company adopted the policy to value certain financial instruments at fair value. The Company has not elected to measure any existing financial instruments at fair value; however, it may elect to measure newly acquired financial instruments at fair value in the future.

Recurring Basis

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The following tables present the balances of assets and liabilities measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022:


		September 30, 2023
(dollars in thousands)		Level 1			Level 2			Level 3			Total
Fair Value of Financial Assets:
Securities Available for Sale:
U.S. Treasury Securities		$	2,864		$	—		$	—		$	2,864
Municipal Bonds			—			122,497			—			122,497
Mortgage-Backed Securities			—			210,375			—			210,375
Corporate Securities			—			121,717			—			121,717
SBA Securities			—			19,966			—			19,966
Asset-Backed Securities			—			75,657			—			75,657
Interest Rate Caps			—			23,006			—			23,006
Interest Rate Swaps			—			21,101			—			21,101
Total Fair Value of Financial Assets		$	2,864		$	594,319		$	—		$	597,183
Fair Value of Financial Liabilities:
Interest Rate Swaps		$	—		$	9,962		$	—		$	9,962
Total Fair Value of Financial Liabilities		$	—		$	9,962		$	—		$	9,962


		December 31, 2022
(dollars in thousands)		Level 1			Level 2			Level 3			Total
Fair Value of Financial Assets:
Securities Available for Sale:
U.S. Treasury Securities		$	2,580		$	—		$	—		$	2,580
Municipal Bonds			—			131,354			—			131,354
Mortgage-Backed Securities			—			237,784			—			237,784
Corporate Securities			—			109,827			—			109,827
SBA Securities			—			20,877			—			20,877
Asset-Backed Securities			—			46,191			—			46,191
Interest Rate Caps			—			19,406			—			19,406
Interest Rate Swaps			—			18,717			—			18,717
Total Fair Value of Financial Assets		$	2,580		$	584,156		$	—		$	586,736
Fair Value of Financial Liabilities:
Interest Rate Swaps		$	—		$	9,542		$	—		$	9,542
Total Fair Value of Financial Liabilities		$	—		$	9,542		$	—		$	9,542

Investment Securities

When available, the Company uses quoted market prices to determine the fair value of investment securities; such items are classified in Level 1 of the fair value hierarchy.

For the Company’s investments, when quoted prices are not available for identical securities in an active market, the Company determines fair value utilizing vendors who apply matrix pricing for similar bonds where no price is observable or may compile prices from various sources. These models are primarily industry-standard models that consider various assumptions, including time value, yield curve, volatility factors, prepayment speeds, default rates, loss severity, current market, and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially, all of these assumptions are observable in the marketplace and can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Fair values from these models are verified, where possible, against quoted market prices for recent trading activity of assets with similar characteristics to the security being valued. Such methods are generally classified as Level 2. However, when prices from independent sources vary, or cannot be obtained or corroborated, a security is generally classified as Level 3.

Interest Rate Caps

The fair value of the caps is calculated by determining the total expected asset or liability exposure of the derivatives. Total expected exposure incorporates both the current and potential future exposure of the derivative, derived from using observable inputs, such as yield curves and volatilities, and accordingly are valued using Level 2 inputs.

Interest Rate Swaps

Interest rate swaps are traded in over-the-counter markets where quoted market prices are not readily available. For those interest rate swaps, fair value is determined using internally developed models of a third party that uses primarily market observable inputs, such as yield curves and option volatilities, and accordingly are valued using Level 2 inputs.

Nonrecurring Basis

Certain assets are measured at fair value on a nonrecurring basis. These assets are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment or a change in the amount of previously recognized impairment.

The following tables present net impairment losses related to nonrecurring fair value measurements of certain assets at September 30, 2023 and December 31, 2022:


		September 30, 2023
(dollars in thousands)		Level 1			Level 2			Level 3			Loss
Individually Evaluated Loans		$	—		$	175		$	—		$	179
Totals		$	—		$	175		$	—		$	179


		December 31, 2022
(dollars in thousands)		Level 1			Level 2			Level 3			Loss
Impaired Loans		$	—		$	96		$	—		$	71
Totals		$	—		$	96		$	—		$	71

Individually Evaluated Loans (Impaired Loans prior to January 1, 2023)

In accordance with the provisions of the individually evaluated loan guidance, credit loss is measured on loans when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. The Company has elected to use the practical expedient to measure individually evaluated loans as collateral dependent when repayment is expected to be provided substantially through the operation or sale of the collateral. The credit loss is measured as the difference between the amortized cost basis of the loan and the fair value of the underlying collateral. The fair value of the collateral is adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent on the sale of the collateral. Those individually evaluated loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. Individually evaluated loans for which an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. Collateral values are estimated using Level 2 inputs based on customized discounting criteria.

Credit loss amounts on individually evaluated loans represent specific valuation allowance and write-downs during the period presented that were individually evaluated for impairment based on the estimated fair value of the collateral less estimated selling costs, excluding impaired loans fully charged-off.

Fair Value

Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the consolidated balance sheets. In cases where quoted market prices are not available, fair values are based on estimates using present value of cash flow or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases could not be realized in immediate settlement of the instruments. Certain financial instruments with a fair value that is not practicable to estimate and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Company.

Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters that could affect the estimates. Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business. Deposits with no stated maturities are defined as having a fair value equivalent to the amount payable on demand. This prohibits adjusting fair value derived from retaining those deposits for an expected future period of time. This component, commonly referred to as a deposit base intangible, is neither considered in the above amounts nor is it recorded as an intangible asset on the balance sheet. In addition, the tax ramifications related to the

realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

The following tables present the carrying amounts and estimated fair values of financial instruments at September 30, 2023 and December 31, 2022:


		September 30, 2023
					Fair Value Hierarchy
		Carrying												Estimated
(dollars in thousands)		Amount			Level 1			Level 2			Level 3			Fair Value
Financial Assets:
Cash and Due From Banks		$	124,358		$	124,358		$	—		$	—		$	124,358
Bank-Owned Certificates of Deposit			1,225			—			1,210			—			1,210
Securities Available for Sale			553,076			2,864			550,212			—			553,076
FHLB Stock, at Cost			17,056			—			17,056			—			17,056
Loans, Net			3,664,464			—			3,522,379			—			3,522,379
Accrued Interest Receivable			15,182			—			15,182			—			15,182
Interest Rate Caps			23,006			—			23,006			—			23,006
Interest Rate Swaps			21,101			—			21,101			—			21,101

Financial Liabilities:
Deposits		$	3,675,509		$	—		$	3,653,876		$	—		$	3,653,876
Notes Payable			13,750			—			13,771			—			13,771
FHLB Advances			294,500			—			292,436			—			292,436
Subordinated Debentures			79,192			—			71,794			—			71,794
Accrued Interest Payable			3,816			—			3,816			—			3,816
Interest Rate Swaps			9,962			—			9,962			—			9,962


		December 31, 2022
					Fair Value Hierarchy
		Carrying												Estimated
(dollars in thousands)		Amount			Level 1			Level 2			Level 3			Fair Value
Financial Assets:
Cash and Due From Banks		$	87,043		$	87,043		$	—		$	—		$	87,043
Bank-Owned Certificates of Deposit			1,181			—			1,173			—			1,173
Securities Available for Sale			548,613			2,580			546,033			—			548,613
FHLB Stock, at Cost			19,606			—			19,606			—			19,606
Loans, Net			3,512,157			—			3,314,190			—			3,314,190
Accrued Interest Receivable			13,479			—			13,479			—			13,479
Interest Rate Caps			19,406			—			19,406			—			19,406
Interest Rate Swaps			18,717			—			18,717			—			18,717

Financial Liabilities:
Deposits		$	3,416,543		$	—		$	3,390,416		$	—		$	3,390,416
Federal Funds Purchased			287,000			—			287,000			—			287,000
Notes Payable			13,750			—			13,473			—			13,473
FHLB Advances			97,000			—			96,061			—			96,061
Subordinated Debentures			78,905			—			70,931			—			70,931
Accrued Interest Payable			2,831			—			2,831			—			2,831
Interest Rate Swaps			9,542			—			9,542			—			9,542

The following methods and assumptions were used by the Company to estimate fair value of consolidated financial statements not previously discussed.

Cash and due from banks – The carrying amount of cash and cash equivalents approximates their fair value.

Bank-owned certificates of deposit – Fair values of bank-owned certificates of deposit are estimated using the discounted cash flow analysis based on current rates for similar types of deposits.

FHLB stock – The carrying amount of FHLB stock approximates its fair value.

Loans, net – Fair values for loans are estimated based on discounted cash flows, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality.

Accrued interest receivable – The carrying amount of accrued interest receivable approximates its fair value since it is short term in nature and does not present anticipated credit concerns.

Deposits – The fair values disclosed for demand deposits without stated maturities (interest and noninterest transaction, savings, and money market accounts) are equal to the amount payable on demand at the reporting date (their carrying amounts). Fair values for the fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Federal funds purchased – The carrying amount of federal funds purchased approximates the fair value.

FHLB advances – The fair values of the Company’s FHLB advances are estimated using discounted cash flow analysis based on the Company’s current incremental borrowing rates for similar types of borrowing agreements.

Subordinated debentures – The fair values of the Company’s subordinated debt are estimated using a discounted cash flow analysis, based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements.

Accrued interest payable – The carrying amount of accrued interest payable approximates its fair value since it is short term in nature.

Off-balance sheet instruments – Fair values of the Company’s off-balance sheet instruments (lending commitments and unused lines of credit) are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the counterparties’ credit standing and discounted cash flow analysis. The fair value of these off-balance sheet items approximates the recorded amounts of the related fees and was not material at September 30, 2023 and December 31, 2022.

Limitations – The fair value of a financial instrument is the current amount that would be exchanged between market participants, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Consequently, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

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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