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Fair Value of Assets and Liabilities
 9 Months Ended
Sep. 30, 2024
Fair Value of Assets and Liabilities  
Fair Value of Assets and Liabilities

NOTE 9: Fair Value of Assets and Liabilities

​

Fair value is defined 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. GAAP requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels. These levels are:

 

●Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets. Level 1 assets and liabilities include debt securities traded in an active exchange market, as well as U.S. Treasury securities.

 

●Level 2—Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

●Level 3—Valuation is determined using model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect the Corporation’s estimates of assumptions that market participants would use in pricing the respective asset or liability. Valuation techniques may include the use of pricing models, discounted cash flow models and similar techniques.

 

GAAP allows an entity the irrevocable option to elect fair value (the fair value option) for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis.  The Corporation has elected to use fair value accounting for its entire portfolio of loans held for sale (LHFS).

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

The following describes the valuation techniques and inputs used by the Corporation in determining the fair value of certain assets recorded at fair value on a recurring basis in the financial statements.

 

Securities available for sale. The Corporation primarily values its investment portfolio using Level 2 fair value measurements, but may also use Level 1 or Level 3 measurements if required by the composition of the portfolio. At September 30, 2024 and December 31, 2023, the Corporation’s entire securities portfolio was comprised of investments in debt securities classified as available for sale, which were valued using Level 2 fair value measurements. The Corporation has contracted with third party portfolio accounting service vendors for valuation of its securities portfolio. The vendors’ sources for security valuation are ICE Data Services (ICE), Refinitiv, and Bloomberg Valuation Service (BVAL).  Each source provides opinions, known as evaluated prices, as to the value of individual securities based on model-based pricing techniques that are partially based on available market data, including prices for similar instruments in active markets and prices for identical assets in markets that are not active. ICE provides evaluated prices for the Corporation’s obligations of states and political subdivisions category of securities.  ICE uses proprietary pricing models and pricing systems, mathematical tools and judgment to determine an evaluated price for a security based upon a hierarchy of market information regarding that security or securities with similar characteristics.  Refinitiv and BVAL provide evaluated prices for the Corporation’s U.S. treasury, government agencies and corporations, mortgage-backed, and corporate categories of securities.  U.S. treasury securities and fixed-rate callable securities of U.S. government agencies and corporations are individually evaluated on an option adjusted spread basis for callable issues or on a nominal spread basis incorporating the term structure of agency market spreads and the appropriate risk free benchmark curve for non-callable issues.  Pass-through mortgage-backed securities (MBS) in the mortgage-backed category are grouped into aggregate categories defined by issuer program, weighted average coupon, and weighted average maturity.  Each aggregate is benchmarked to relative to-be-announced mortgage-backed securities (TBA securities) or other benchmark prices. TBA securities prices are obtained from market makers and live trading systems. Collateralized mortgage obligations in the mortgage-backed category are individually evaluated based upon a hierarchy of security specific information and market data regarding that security or securities with similar characteristics.  Each evaluation is determined using an option adjusted spread and prepayment model based on volatility-driven, multi-dimensional spread tables. Fixed-rate securities issued by the Small Business Association in the mortgage backed category are individually evaluated based upon a hierarchy of security specific information and market data regarding that security or securities with similar characteristics.

​

Other investments. The Corporation holds equity investments in funds that provide debt and equity financing to small businesses. These investments are recorded at fair value and included in other assets in the Consolidated Balance Sheets.  Changes in fair value are recognized in net income. The funds are managed by investment companies, and the net asset value of each fund is reported regularly by the investment companies. At September 30, 2024 and December 31, 2023, the combined fair value of these investments was $1.63 million and $1.93 million, respectively.  These investments, measured at net asset value, are not presented in the tables below related to fair value measurements. Changes in fair value of these investments resulted in the recognition of unrealized gains of $140,000 and $238,000 for the three and nine months ended September 30, 2024, respectively, and unrealized gains of $72,000 and $270,000 for the same periods in 2023.

​

The Corporation also holds certain equity investments consisting of equity interests in an independent insurance agency and a full service title and settlement agency (collectively, the agencies). These investments are subject to contractual sale restrictions that only permit the sale of the investments back to the agencies themselves.  These investments are recorded at fair value and included in other assets in the Consolidated Balance Sheets. At September 30, 2024 and December 31, 2023, the fair value of these investments was $3.92 million and $3.75 million, respectively. These investments are recorded at fair value based on the contractual redemption value of the Corporation’s proportionate share of the agencies’ equity.  Changes in fair value are recognized in net income and resulted in the recognition of unrealized gains of $194,000 and $433,000 for the three and nine months ended September 30, 2024, respectively, and unrealized gains of $137,000 and $210,000 for the same periods in 2023.  The Corporation’s investments in these agencies are classified as Level 2.

  

Loans held for sale. Fair value of the Corporation’s LHFS is based on observable market prices for similar instruments traded in the secondary mortgage loan markets in which the Corporation conducts business. The Corporation’s portfolio of LHFS is classified as Level 2.

​

Derivative asset - IRLCs. The Corporation recognizes IRLCs at fair value. Fair value of IRLCs is based on either (i) the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis or (ii) the observable price for individual loans traded in the secondary market for loans that will be delivered on a mandatory basis. All of the Corporation’s IRLCs are classified as Level 2.

​

Derivative asset/liability – interest rate swaps on loans. The Corporation recognizes interest rate swaps at fair value.  The Corporation has contracted with a third party vendor to provide valuations for these interest rate swaps using the discounted cash flow method. All of the Corporation’s interest rate swaps on loans are classified as Level 2.

​

Derivative asset/liability – cash flow hedges. The Corporation recognizes cash flow hedges at fair value. The Corporation has contracted with a third party vendor to provide valuations for these cash flow hedges using the discounted cash flow method.  All of the Corporation’s cash flow hedges are classified as Level 2.

​

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis. The fair value of forward sales of mortgage loans were not material to the consolidated financial statements of the Corporation at September 30, 2024 or December 31, 2023.

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

September 30, 2024

 

​

​

Fair Value Measurements Classified as

​

Assets/Liabilities at

 

(Dollars in thousands)

  

Level 1

    

Level 2

    

Level 3

    

 Fair Value 

 

Assets:

​

​

​

​

​

​

​

​

​

​

​

​

​

Securities available for sale

​

​

​

​

​

​

​

​

​

​

​

​

​

U.S. Treasury securities

​

$

—

​

$

10,684

​

$

—

​

$

10,684

​

U.S. government agencies and corporations

​

​

—

​

​

63,669

​

​

—

​

​

63,669

​

Mortgage-backed securities

​

 

—

​

 

166,977

​

 

—

​

 

166,977

​

Obligations of states and political subdivisions

​

 

—

​

 

147,176

​

 

—

​

 

147,176

​

Corporate and other debt securities

​

​

—

​

​

20,539

​

​

—

​

​

20,539

​

Total securities available for sale

​

 

—

​

 

409,045

​

 

—

​

 

409,045

​

Loans held for sale

​

 

—

​

 

44,677

​

 

—

​

 

44,677

​

Other investments

​

​

—

​

​

3,919

​

​

—

​

​

3,919

​

Derivatives

​

​

​

​

​

​

​

​

​

​

​

​

​

IRLC

​

 

—

​

 

714

​

 

—

​

 

714

​

Interest rate swaps on loans

​

​

—

​

​

4,900

​

​

—

​

​

4,900

​

Cash flow hedges

​

 

—

​

 

865

​

 

—

​

 

865

​

Total assets

​

$

—

​

$

464,120

​

$

—

​

$

464,120

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Liabilities:

​

​

​

​

​

​

​

​

​

​

​

​

​

Derivatives

​

​

​

​

​

​

​

​

​

​

​

​

​

Interest rate swaps on loans

​

$

—

​

$

4,900

​

$

—

​

$

4,900

​

Cash flow hedges

​

​

—

​

​

305

​

​

—

​

​

305

​

Total liabilities

​

$

—

​

$

5,205

​

$

—

​

$

5,205

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

December 31, 2023

 

​

​

Fair Value Measurements Classified as

​

Assets/Liabilities at

 

(Dollars in thousands)

  

Level 1

    

Level 2

    

Level 3

    

 Fair Value 

 

Assets:

​

​

​

​

​

​

​

​

​

​

​

​

​

Securities available for sale

​

​

​

​

​

​

​

​

​

​

​

​

​

U.S. Treasury securities

​

$

—

​

$

45,103

​

$

—

​

$

45,103

​

U.S. government agencies and corporations

​

​

—

​

​

87,094

​

​

—

​

​

87,094

​

Mortgage-backed securities

​

 

—

​

 

161,696

​

 

—

​

 

161,696

​

Obligations of states and political subdivisions

​

 

—

​

 

147,111

​

 

—

​

 

147,111

​

Corporate and other debt securities

​

 

—

​

 

21,440

​

 

—

​

 

21,440

​

Total securities available for sale

​

 

—

​

 

462,444

​

 

—

​

 

462,444

​

Loans held for sale

​

 

—

​

 

14,176

​

 

—

​

 

14,176

​

Other investments

​

​

—

​

​

3,751

​

​

—

​

​

3,751

​

Derivatives

​

​

​

​

​

​

​

​

​

​

​

​

​

IRLC

​

 

—

​

 

335

​

 

—

​

 

335

​

Interest rate swaps on loans

​

 

—

​

 

6,110

​

 

—

​

 

6,110

​

Cash flow hedges

​

​

—

​

​

1,415

​

​

—

​

​

1,415

​

Total assets

​

$

—

​

$

488,231

​

$

—

​

$

488,231

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Liabilities:

​

​

​

​

​

​

​

​

​

​

​

​

​

Derivatives

​

​

​

​

​

​

​

​

​

​

​

​

​

Interest rate swaps on loans

​

$

—

​

$

6,110

​

$

—

​

$

6,110

​

Total liabilities

​

$

—

​

$

6,110

​

$

—

​

$

6,110

​

​

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

​

The Corporation may be required, from time to time, to measure and recognize certain assets at fair value on a nonrecurring basis in accordance with GAAP. As of September 30, 2024 and December 31, 2023, the Corporation had no assets or liabilities recorded at fair value on a nonrecurring basis.

​

Fair Value of Financial Instruments

​

FASB ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Corporation. The Corporation uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

​

The following tables reflect the carrying amounts and estimated fair values of the Corporation’s financial instruments whether or not recognized on the Consolidated Balance Sheets at fair value.

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

  

Carrying

  

Fair Value Measurements at September 30, 2024 Classified as

  

 Total Fair 

 

(Dollars in thousands)

​

      Value      

​

Level 1

​

Level 2

​

Level 3

​

      Value      

 

Financial assets:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Cash and short-term investments

​

$

50,703

​

$

49,193

​

$

1,510

​

$

—

​

$

50,703

​

Securities available for sale

​

 

409,045

​

​

—

​

 

409,045

​

​

—

​

 

409,045

​

Loans, net

​

 

1,868,638

​

 

—

​

 

—

​

 

1,823,821

​

 

1,823,821

​

Loans held for sale

​

 

44,677

​

 

—

​

 

44,677

​

 

—

​

 

44,677

​

Other investments

​

​

3,919

​

​

—

​

​

3,919

​

​

—

​

​

3,919

​

Derivatives

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

IRLC

​

​

714

​

​

—

​

​

714

​

​

—

​

​

714

​

Interest rate swaps on loans

​

​

4,900

​

​

—

​

​

4,900

​

​

—

​

​

4,900

​

Cash flow hedges

​

​

865

​

​

—

​

​

865

​

​

—

​

​

865

​

Bank-owned life insurance

​

​

21,827

​

​

—

​

​

21,827

​

​

—

​

​

21,827

​

Accrued interest receivable

​

 

10,198

​

 

10,198

​

 

—

​

 

—

​

 

10,198

​

Financial liabilities:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Demand and savings deposits

​

​

1,325,040

​

​

1,325,040

​

​

—

​

​

—

​

​

1,325,040

​

Time deposits

​

 

810,851

​

 

—

​

 

807,686

​

 

—

​

 

807,686

​

Borrowings

​

 

134,076

​

 

—

​

 

125,192

​

 

—

​

 

125,192

​

Derivatives

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Interest rate swaps on loans

​

​

4,900

​

​

—

​

​

4,900

​

​

—

​

​

4,900

​

Cash flow hedges

​

​

305

​

​

—

​

​

305

​

​

—

​

​

305

​

Accrued interest payable

​

 

3,967

​

 

3,967

​

 

—

​

 

—

​

 

3,967

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

  

 Carrying 

  

Fair Value Measurements at December 31, 2023 Classified as

  

 Total Fair 

 

(Dollars in thousands)

​

      Value      

​

Level 1

​

Level 2

​

Level 3

​

      Value      

 

Financial assets:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Cash and short-term investments

​

$

77,403

​

$

75,159

​

$

2,244

​

$

—

​

$

77,403

​

Securities available for sale

​

 

462,444

​

​

—

​

 

462,444

​

​

—

​

 

462,444

​

Loans, net

​

 

1,702,488

​

 

—

​

 

—

​

 

1,643,462

​

 

1,643,462

​

Loans held for sale

​

 

14,176

​

 

—

​

 

14,176

​

 

—

​

 

14,176

​

Other investments

​

​

3,751

​

​

—

​

​

3,751

​

​

—

​

​

3,751

​

Derivatives

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

IRLC

​

​

335

​

​

—

​

​

335

​

​

—

​

​

335

​

Interest rate swaps on loans

​

​

6,110

​

​

—

​

​

6,110

​

​

—

​

​

6,110

​

Cash flow hedges

​

​

1,415

​

​

—

​

​

1,415

​

​

—

​

​

1,415

​

Bank-owned life insurance

​

​

21,464

​

​

—

​

​

21,464

​

​

—

​

​

21,464

​

Accrued interest receivable

​

 

10,398

​

 

10,398

​

 

—

​

 

—

​

 

10,398

​

Financial liabilities:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Demand and savings deposits

​

​

1,392,931

​

​

1,392,931

​

​

—

​

​

—

​

​

1,392,931

​

Time deposits

​

 

673,199

​

 

—

​

 

668,965

​

 

—

​

 

668,965

​

Borrowings

​

 

103,618

​

 

—

​

 

90,120

​

 

—

​

 

90,120

​

Derivatives

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Interest rate swaps on loans

​

​

6,110

​

​

—

​

​

6,110

​

​

—

​

​

6,110

​

Accrued interest payable

​

 

3,493

​

 

3,493

​

 

—

​

 

—

​

 

3,493

​

​