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Fair Value of Financial Instruments and Fair Value Measurements
 6 Months Ended
Jun. 30, 2025
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments and Fair Value Measurements

 

10.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 June 30, 2025 and December 31, 2024, including methods and assumptions utilized, are set forth below:

   

   amount   Level 1   Level 2   Level 3   Total 
   As of June 30, 2025 
   Carrying                 
   amount   Level 1   Level 2   Level 3   Total 
Financial assets:                         
Cash and cash equivalents  $25,038   $25,038   $-   $-   $25,038 
Interest-bearing deposits at other banks   3,463    -    3,463    -    3,463 
Investment securities available-for-sale   352,442    51,624    300,818    -    352,442 
Investment securities held-to-maturity   3,730    -    3,448    -    3,448 
Bank stocks, at cost   10,946    n/a     n/a     n/a     n/a  
Loans, net   1,103,407    -    -    1,102,118    1,102,118 
Loans held for sale   4,773    -    4,773    -    4,773 
Mortgage servicing rights   3,082    -    8,775    -    8,775 
Accrued interest receivable   7,326    180    1,955    5,191    7,326 
Derivative financial instruments   279    -    279    -    279 
    Derivative assets    Derivative assets    Derivative assets    Derivative assets    Derivative assets 
                          
Financial liabilities:                         
Non-maturity deposits  $(1,063,004)  $(1,063,004)  $-   $-   $(1,063,004)
Certificates of deposit   (210,897)   -    (210,058)   -    (210,058)
FHLB and other borrowings   (155,110)   -    (155,073)   -    (155,073)
Subordinated debentures   (21,651)   -    (18,670)   -    (18,670)
Repurchase agreements   (5,825)   -    (5,825)   -    (5,825)
Accrued interest payable   (1,642)   -    (1,642)   -    (1,642)
Derivative financial instruments   (61)   -    (61)   -    (61)

 

   amount   Level 1   Level 2   Level 3   Total 
   As of December 31, 2024 
   Carrying                 
   amount   Level 1   Level 2   Level 3   Total 
Financial assets:                         
Cash and cash equivalents  $20,275   $20,275   $-   $-   $20,275 
Interest-bearing deposits at other banks   4,110    -    4,110    -    4,110 
Investment securities available-for-sale   372,512    64,458    308,054    -    372,512 
Investment securities held-to-maturity   3,672    -    3,290    -    3,290 
Bank stocks, at cost   6,618    n/a     n/a     n/a     n/a  
Loans, net   1,039,221    -    -    1,027,865    1,027,865 
Loans held for sale   3,420    -    3,420    -    3,420 
Mortgage servicing rights   3,061    -    9,615    -    9,615 
Accrued interest receivable   7,132    219    2,001    4,912    7,132 
Derivative financial instruments   200    -    200    -    200 
                          
Financial liabilities:                         
Non-maturity deposits  $(1,134,072)  $(1,134,072)  $-   $-   $(1,134,072)
Certificates of deposit   (194,694)   -    (193,901)   -    (193,901)
FHLB and other borrowings   (53,046)   -    (48,846)   -    (48,846)
Subordinated debentures   (21,651)   -    (18,556)   -    (18,556)
Repurchase agreements   (13,808)   -    (13,808)   -    (13,808)
Accrued interest payable   (1,833)   -    (1,833)   -    (1,833)

 

 

Transfers

 

The Company did not transfer any assets or liabilities among levels during the six months ended June 30, 2025 or during the year ended December 31, 2024.

 

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

 

The following tables represent the Company’s financial instruments that are measured at fair value on a recurring basis as of June 30, 2025 and December 31, 2024, allocated to the appropriate fair value hierarchy:

   

   Total   Level 1   Level 2   Level 3 
       As of June 30, 2025 
       Fair value hierarchy 
(Dollars in thousands)  Total   Level 1   Level 2   Level 3 
Assets:                    
Available-for-sale investment securities:                    
U. S. treasury securities  $51,624   $51,624   $-   $- 
Municipal obligations, tax exempt   100,802    -    100,802    - 
Municipal obligations, taxable   75,037    -    75,037    - 
Agency mortgage-backed securities   124,979    -    124,979    - 
Loans held for sale   4,773    -    4,773    - 
Derivative financial instruments   279    -    279    - 
Liability:                    
Derivative financial instruments   (61)   -    (61)   - 

 

   Total   Level 1   Level 2   Level 3 
       As of December 31, 2024 
       Fair value hierarchy 
   Total   Level 1   Level 2   Level 3 
Assets:                    
Available-for-sale investment securities:                    
U. S. treasury securities  $64,458   $64,458   $-   $- 
Municipal obligations, tax exempt   107,128    -    107,128    - 
Municipal obligations, taxable   71,715    -    71,715    - 
Agency mortgage-backed securities   129,211    -    129,211    - 
Loans held for sale   3,420    -    3,420    - 
Derivative financial instruments   200    -    200    - 

 

The Company’s investment securities classified as available-for-sale include U.S. treasury 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 mortgage-backed securities 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 obligations 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 to be credit related which would instead result in a credit loss reserve. The Company evaluates any potential credit losses on available-for-sale securities on a quarterly basis and credit losses identified on individual securities result in a write-down of the relevant security’s cost basis.

 

Mortgage loans originated and intended for sale in the secondary market are carried at 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 gains on loans held for sale as of June 30, 2025 and December 31, 2024 were as follows:

   

   As of   As of 
   June 30,   December 31, 
(Dollars in thousands)  2025   2024 
Aggregate fair value  $4,773   $3,420 
Contractual balance   4,711    3,376 
Gain  $62   $44 

 

The Company’s derivative financial instruments consist of interest rate lock commitments and corresponding forward sales contracts on mortgage loans held for sale. 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 accrued interest and other assets or accrued interest and other liabilities on the consolidated balance sheets and gains on sales of loans, net in the consolidated statements of earnings. The total amount of gains from changes in fair value of derivative financial instruments included in earnings for the periods indicated were as follows:

   

(Dollars in thousands)            
   Three months ended   Six months ended 
   June 30,   June 30, 
(Dollars in thousands)  2025   2024   2025   2024 
Total change in fair value  $(101)  $70   $18   $215 

 

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 allowance and adjusted accordingly, based on the same factors identified above. The carrying value of the Company’s individually evaluated loans was $18.5 million at June 30, 2025 and $15.0 million at December 31, 2024. The Company’s individually evaluated loans with an allowance for credit losses were $10.8 million and $2.5 million, with an allocated allowance of $2.1 million and $777,000, at June 30, 2025 and December 31, 2024, respectively.

 

Real estate held-for-sale includes premises and equipment that were previously used as a bank branch facility and is included in other assets on the balance sheet. Real estate held-for-sale 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 held-for-sale is reviewed and evaluated at least annually for additional allowance and adjusted accordingly, based on the same factors identified above.

 

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 allowance and adjusted accordingly, based on the same factors identified above.

 

 

The following table presents quantitative information about Level 3 fair value measurements measured at fair value on a nonrecurring basis as of June 30, 2025 and December 31, 2024:

   

(Dollars in thousands)  Fair value   Valuation technique  Unobservable inputs  Range 
As of June 30, 2025                
Individual evaluated loans:                
Commercial  $8,709   Sales comparison  Adjustment to comparable value   0%-50%  
                 
As of December 31, 2024                
Individual evaluated loans:                
Commercial  $1,768   Sales comparison  Adjustment to comparable value   0%-50%