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Fair Value of Financial Instruments and Fair Value Measurements
 12 Months Ended
Dec. 31, 2023
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments and Fair Value Measurements

(20) Fair Value of Financial Instruments and Fair Value Measurements

 

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (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. There are three levels of inputs that may be used to measure fair values:

 

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

Level 2 – Significant other 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.

 

Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

 

Fair value estimates of the Company’s financial instruments as of December 31, 2023 and 2022, including methods and assumptions utilized, are set forth below:

 

                          
(Dollars in thousands)  As of December 31, 2023 
   Carrying                 
   amount   Level 1   Level 2   Level 3   Total 
Financial assets:                         
Cash and cash equivalents  $27,101   $27,101   $-   $-   $27,101 
Interest-bearing deposits at other banks   4,918    -    4,918    -    4,918 
Investment securities available-for-sale   452,769    95,667    357,102    -    452,769 
Investment securities held-to-maturity   3,555    -    3,049    -    3,049 
Bank stocks, at cost   8,123     n/a      n/a      n/a      n/a  
Loans, net   937,619    -    -    920,984    920,984 
Loans held for sale   853    -    853    -    853 
Mortgage servicing rights   3,158    -    9,498    -    9,498 
Accrued interest receivable   7,341    327    2,280    4,734    7,341 
Derivative financial instruments   114    -    114    -    114 
                          
Financial liabilities:                         
Non-maturity deposits  $(1,133,097)  $(1,133,097)  $-   $-   $(1,133,097)
Certificates of deposit   (183,154)   -    (181,655)   -    (181,655)
FHLB and other borrowings   (64,662)   -    (65,478)   -    (65,478)
Subordinated debentures   (21,651)   -    (18,906)   -    (18,906)
Repurchase agreements   (12,714)   -    (12,714)   -    (12,714)
Accrued interest payable   (1,979)   -    (1,979)   -    (1,979)
Derivative financial instruments   (14)   -    (14)   -    (14)

 

                          
(Dollars in thousands)  As of December 31, 2022 
   Carrying                 
   amount   Level 1   Level 2   Level 3   Total 
Financial assets:                         
Cash and cash equivalents  $23,156   $23,156   $-   $-   $23,156 
Interest-bearing deposits at other banks   9,084    -    9,084    -    9,084 
Investment securities available-for-sale   489,306    123,111    366,195    -    489,306 
Investment securities held-to-maturity   3,524    -    3,452    -    3,452 
Bank stocks, at cost   5,470     n/a      n/a      n/a      n/a  
Loans, net   841,149    -    -    828,726    828,726 
Loans held for sale   2,488    -    2,488    -    2,488 
Mortgage servicing rights   3,813    -    10,282    -    10,282 
Accrued interest receivable   5,879    426    2,150    3,303    5,879 
Derivative financial instruments   126    -    126    -    126 
                          
Financial liabilities:                         
Non-maturity deposits  $(1,207,371)  $(1,207,371)  $-   $-   $(1,207,371)
Certificates of deposit   (93,278)   -    (90,760)   -    (90,760)
FHLB and other borrowings   (17,200)   -    (14,981)   -    (14,981)
Subordinated debentures   (21,651)   -    (18,189)   -    (18,189)
Repurchase agreements   (29,402)   -    (29,402)   -    (29,402)
Accrued interest payable   (439)   -    (439)   -    (439)

 

 

Transfers

 

The Company did not transfer any assets or liabilities among levels during the year ended December 31, 2023 or 2022.

 

Valuation Methods for Instruments Measured at Fair Value on a Recurring Basis

 

The following table represents the Company’s financial instruments that are measured at fair value on a recurring basis at December 31, 2023 and 2022, allocated to the appropriate fair value hierarchy:

 

                     
(Dollars in thousands)      As of December 31, 2023 
       Fair value hierarchy 
   Total   Level 1   Level 2   Level 3 
Assets:                
Available-for-sale securities                    
U. S. treasury securities  $95,667   $95,667   $-   $- 
Municipal obligations, tax exempt   120,623    -    120,623    - 
Municipal obligations, taxable   79,083    -    79,083    - 
Agency mortgage-backed securities   157,396    -    157,396    - 
Loans held for sale   853    -    853    - 
Derivative financial instruments   114    -    114    - 
Liabilities:                    
Derivative financial instruments   (14)   -    (14)   - 

 

                     
(Dollars in thousands)      As of December 31, 2022 
       Fair value hierarchy 
   Total   Level 1   Level 2   Level 3 
Assets:                
Available-for-sale securities                    
U. S. treasury securities  $123,111   $123,111   $-   $- 
U. S. federal agency obligations   1,988    -    1,988    - 
Municipal obligations, tax exempt   127,262    -    127,262    - 
Municipal obligations, taxable   67,244    -    67,244    - 
Agency mortgage-backed securities   169,701    -    169,701    - 
Loans held for sale   2,488    -    2,488    - 
Derivative financial instruments   126    -    126    - 

 

The Company’s investment securities classified as available-for-sale include U.S. treasury securities, U.S. federal agency securities, municipal obligations and agency mortgage-backed securities. Quoted exchange prices are available for the Company’s U.S treasury securities which are classified as Level 1. U.S. federal agency securities and agency mortgage-backed obligations are priced utilizing industry-standard models that consider various assumptions, including time value, yield curves, 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, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. These measurements are classified as Level 2. Municipal securities are valued using a type of matrix, or grid, pricing in which securities are benchmarked against U.S. treasury rates based on credit rating. These model and matrix measurements are classified as Level 2 in the fair value hierarchy.

 

Changes in the fair value of available-for-sale securities are included in other comprehensive income to the extent the changes are not considered credit-related.

 

Mortgage loans originated and intended for sale in the secondary market are carried at estimated fair value. The mortgage loan valuations are based on quoted secondary market prices for similar loans and are classified as Level 2. Changes in the fair value of mortgage loans originated and intended for sale in the secondary market and derivative financial instruments are included in gains on sales of loans.

 

 

The aggregate fair value, contractual balance (including accrued interest), and gain or loss on loans held for sale were as follows:

 

           
   As of December 31, 
(Dollars in thousands)  2023   2022 
Aggregate fair value  $853   $2,488 
Contractual balance   848    2,468 
Gain  $5   $20 

 

The Company’s derivative financial instruments consist of interest rate lock commitments and forward commitments for the future delivery of these mortgage loans. The fair values of these derivatives are based on quoted prices for similar loans in the secondary market. The market prices are adjusted by a factor, based on the Company’s historical data and its judgment about future economic trends, which considers the likelihood that a commitment will ultimately result in a closed loan. These instruments are classified as Level 2. The amounts are included in other assets or other liabilities on the consolidated balance sheets and gains on sale of loans, net in the consolidated statements of earnings. The total amount of gains and losses from changes in fair value of derivative financial instruments included in earnings were as follows:

 

                
   As of December 31, 
(Dollars in thousands)  2023   2022   2021 
Total change in fair value  $(26)  $(368)  $(836)

 

Valuation Methods for Instruments Measured at Fair Value on a Nonrecurring Basis

 

The Company does not record its loan portfolio at fair value. Collateral-dependent loans are generally carried at the lower of cost or fair value of the collateral, less estimated selling costs. Collateral values are determined based on appraisals performed by qualified licensed appraisers hired by the Company and then further adjusted if warranted based on relevant facts and circumstances. The appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales and income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Individually evaluated loans are reviewed at least quarterly for additional impairment and adjusted accordingly, based on the same factors identified above. The carrying value of the Company’s individually evaluated loans was $4.3 million at December 31, 2023 and $4.1 million at December 31, 2022, respectively. The Company’s individually evaluated loans with an allowance for credit losses was $1.7 million and $755,000, with an allocated allowance of $311,000 and $654,000, at December 31, 2023 and December 31, 2022, respectively.

 

Real estate owned includes assets acquired through, or in lieu of, foreclosure and land previously acquired for expansion. Real estate owned is initially recorded at the fair value of the collateral less estimated selling costs. Subsequent valuations are updated periodically and are based upon independent appraisals, third party price opinions or internal pricing models. The appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales and income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Real estate owned is reviewed and evaluated at least annually for additional impairment and adjusted accordingly, based on the same factors identified above.

 

 

The following table presents quantitative information about Level 3 fair value measurements for individually evaluated loans measure at fair value on a non-recurring basis as of December 31, 2023 and 2022.

 

(Dollars in thousands) 
   Fair value   Valuation technique  Unobservable inputs  Range 
As of December 31, 2023                
Individual evaluated loans:                
One-to-four family residential real estate  $31   Sales comparison  Adjustment to appraised value   7%
Commercial loans   1,386   Sales comparison  Adjustment to comparable sales   0%-50%
Real estate owned:                
One-to-four family residential real estate   266   Sales comparison  Adjustment to appraised value   10%
                 
As of December 31, 2022                
Impaired loans:                
Commercial loans  $101   Sales comparison  Adjustment to comparable sales   0%-25%
Real estate owned:                
One-to-four family residential real estate   272   Sales comparison  Adjustment to appraised value   15%
Commercial real estate   234   Sales comparison  Adjustment to appraised value   15%