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Fair Value of Financial Instruments
 9 Months Ended
Sep. 30, 2022
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments

Note 6—Fair Value of Financial Instruments

 

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. The Company’s 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 Available-for-Sale - 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.

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.

 

Securities Sold Under Agreements to Repurchase - 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 Debt - The fair value of junior subordinated debt is 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 September 30, 2022 and December 31, 2021 are as follows:

 

                                       
   September 30, 2022 
   Carrying   Fair Value 
(Dollars in thousands)  Amount   Total   Level 1   Level 2   Level 3 
Financial Assets:                         
Cash and short term investments  $38,253   $38,253   $38,253   $—   $— 
Held-to-maturity securities   233,301    216,947    —    216,947      
Available-for-sale securities   338,350    338,350    4,983    333,367    — 
Other investments, at cost   1,929    1,929    —    —    1,929 
Loans held for sale   1,758    1,758    —    1,758    — 
Net loans receivable   938,895    917,141    —    —    917,141 
Accrued interest   4,449    4,449    4,449    —    — 
Financial liabilities:                         
Non-interest bearing demand  $484,747   $484,747   $—   $484,747   $— 
Interest bearing demand deposits and money market accounts   652,043    652,043    —    652,043    — 
Savings   160,309    160,309    —    160,309    — 
Time deposits   139,157    139,149    —    139,149    — 
Total deposits   1,436,256    1,436,248    —    1,436,248    — 
Short term borrowings   73,659    73,659    —    73,659    — 
Junior subordinated debentures   14,964    13,235    —    13,235    — 
Accrued interest payable   334    334    334    —    — 
                          
   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 tables summarize quantitative disclosures about the fair value for each category of assets carried at fair value as of September 30, 2022 and December 31, 2021 that are measured on a recurring basis. There were no liabilities carried at fair value as of September 30, 2022 or December 31, 2021 that are measured on a recurring basis.

(Dollars in thousands)

Description  September 30,
2022		   (Level 1)   (Level 2)   (Level 3) 
Available- for-sale securities                    
US Treasury Securities  $55,723   $—   $55,723   $— 
Government Sponsored Enterprises   2,096    —    2,096    — 
Mortgage-backed securities   250,109    4,983    245,126    — 
Small Business Administration pools   22,279    —    22,279    — 
State and local government   —    —    —    — 
Corporate and other securities   8,143    —    8,143    — 
Total Available-for-sale securities   338,350    4,983    333,367    — 
Loans held for sale   1,758    —    1,758    — 
Total  $340,108   $4,983   $335,125   $— 
                     
(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 pools   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 September 30, 2022 and December 31, 2021 that are measured on a non-recurring basis. There were no Level 3 financial instruments for the three months ended September 30, 2022 and September 30, 2021 measured on a recurring basis.

 

(Dollars in thousands)                
Description  September 30,
2022		   (Level 1)   (Level 2)   (Level 3) 
Impaired loans:                    
Commercial & Industrial  $—   $—   $—   $— 
Real estate:                    
Mortgage-residential   39    —    —    39 
Mortgage-commercial   4,759    —    —    4,759 
Consumer:                    
Home equity   168    —    —    168 
Other   —    —    —    — 
Total impaired   4,966    —    —    4,966 
Other real estate owned:                    
Construction   894    —    —    894 
Mortgage-commercial   90    —    —    90 
Total other real estate owned   984    —    —    984 
Total  $5,950   $—   $—   $5,950 
(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   1,560    —    —    1,560 
Consumer:                    
Home equity   —    —    —    — 
Other   —    —    —    — 
Total impaired   1,693    —    —    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 consists 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, among others, geographic sales trends, the value of comparable surrounding properties and the condition of the property. The aggregate amount of impaired loans was $5.0 million and $1.7 million as of September 30, 2022 and December 31, 2021, respectively. 

For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of September 30, 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 September 30,
2022		     Valuation Technique   Significant
Observable
Inputs		   Significant
Unobservable
Inputs
OREO   $ 984     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   $ 4,966     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