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Fair value

6 Months Ended

Jun. 30, 2022

Note 11 – Fair value

The Company determines the fair value of its financial instruments based on the requirements established in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification ("ASC") 820: Fair Value Measurements, which provides a framework for measuring fair value under GAAP and requires an entity to maximize the use of observable inputs when measuring fair value. ASC 820 defines fair value as the exit price, the price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions.

ASC 820 establishes a hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair values hierarchy is as follows:

Level 1 Inputs — 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 Inputs — 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 Inputs — Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods to determine the fair value of each type of financial instrument:

Securities: Fair values for securities available-for-sale are obtained from an independent pricing service. The prices are not adjusted. The independent pricing service uses industry-standard models to price U.S. Government agency obligations and mortgage backed securities 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. Securities of obligations of state and political subdivisions are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating. Substantially all assumptions used by the independent pricing service 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 (Levels 1 and 2). If the inputs used to provide the evaluation for certain securities are unobservable and/or there is little, if any, market activity, then the security would fall to the lowest level of the hierarchy (Level 3).

Impaired loans: The Company does not record loans held for investment at fair value on a recurring basis. However, there are instances when a loan is considered impaired and an allowance for loan losses is established. The Company measures impairment either based on the fair value of the loan using the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent, or using the present value of expected future cash flows discounted at the loan’s effective interest rate, which is not a fair value measurement. The Company maintains a valuation allowance to the extent that this measure of the impaired loan is less than the recorded investment in the loan. When an impaired loan is measured at fair value based solely on observable market prices or a current appraisal without further adjustment for unobservable inputs, the Company records the impaired loan as a nonrecurring fair value measurement classified as Level 2. However, if based on management’s review, additional discounts to observed market prices or appraisals are required or if observable inputs are not available, the Company records the impaired loan as a nonrecurring fair value measurement classified as Level 3. Impaired loans that are measured based on expected future cash flows discounted at the loan’s effective interest rate rather than the market rate of interest, are not recorded at fair value and are therefore excluded from fair value disclosure requirements

Loans held for sale: Fair value of the Company's loans held for sale is based on observable market prices for similar instruments traded in the secondary mortgage loan markets in which the Company conducts business. The Company's portfolio of loans held for sale is classified as Level 2. Gains and losses on the sale of loans are recorded within mortgage banking income, net on the Consolidated Statements of Income.

Derivative asset – interest rate lock commitments (“IRLCs”): The Company recognizes IRLCs at fair value based on the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis while taking into consideration the probability that the rate lock commitments will close. All of the Company's IRLCs are classified as Level 2.

Derivative asset/liability – forward sale commitments: Best efforts sale commitments are entered into for loans intended for sale in the secondary market at the time the borrower commitment is made. The best efforts commitments are valued using the committed price to the counter-party against the current market price of the interest rate lock commitment or mortgage loan held for sale. All of the Company’s forward sale commitments are classified as Level 2.

Assets and liabilities measured at fair value under Topic 820 on a recurring and non-recurring basis are summarized below for the indicated dates (in thousands):


		Fair Value Measurement
		at June 30, 2022 Using
					Quoted Prices
					in Active			Other			Significant
					Markets for			Observable			Unobservable
		Carrying			Identical Assets			Inputs			Inputs
		Value			(Level 1)			(Level 2)			(Level 3)
Financial Assets - Recurring
US Government Agencies		$	58,120		$	—		$	58,120		$	—
Mortgage-backed securities			59,638			—			59,638			—
Municipals			1,705			—			1,705			—
Subordinated debt			12,160			—			10,660			1,500
Loans held for sale			7,963			—			7,963			—
IRLC			406			—			406			—

Financial Liabilities - Recurring
Forward sales commitment			556			—			556			—


		Fair Value Measurement
		at December 31, 2021 Using
					Quoted Prices
					in Active			Other			Significant
					Markets for			Observable			Unobservable
		Carrying			Identical Assets			Inputs			Inputs
		Value			(Level 1)			(Level 2)			(Level 3)
Financial Assets - Recurring
US Government Agencies		$	40,999		$	—		$	40,999		$	—
Mortgage-backed securities			40,495			—			40,495			—
Municipals			2,209						2,209
Subordinated debt			10,996			—			9,246			1,750
Loans held for sale			5,141			—			5,141			—
IRLC			471			—			471			—

Financial Liabilities - Recurring
Forward sales commitment			651			—			651			—

There were no Level 3 fair value measurements for financial instruments measured on a non-recurring basis at fair value at June 30, 2022 and December 31, 2021.

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 Company. In accordance with Accounting Standards

Update (“ASU”) 2016-01, the Company uses the exit price notion, rather than the entry price notion, in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

The following table reflects the carrying amounts and estimated fair values of the Company’s financial instruments whether or not recognized on the Consolidated Balance Sheets at fair value (in thousands).


				June 30,						December 31,
				2022						2021
		Level in Fair
		Value		Carrying			Estimated			Carrying			Estimated
		Hierarchy		Value			Fair Value			Value			Fair Value
Financial assets
Cash		Level 1		$	22,176		$	22,176		$	12,071		$	12,071
Cash equivalents		Level 2			32,720			32,720			80,545			80,545
Investment securities available for sale		Level 2			130,123			130,123			92,949			92,949
Investment securities available for sale		Level 3			1,500			1,500			1,750			1,750
Federal Home Loan Bank stock		Level 2			373			373			353			353
Loans held for sale		Level 2			7,963			7,963			5,141			5,141
Loans		Level 3			527,556			515,482			526,457			526,668
Bank owned life insurance		Level 2			12,638			12,638			12,494			12,494
Accrued interest receivable		Level 2			3,321			3,321			3,245			3,245
Interest rate lock commitments		Level 2			406			406			471			471

Financial liabilities
Deposits		Level 2			674,641			674,397			664,048			663,898
Trust preferred securities		Level 2			8,764			8,930			8,764			9,554
Other borrowings		Level 2			5,676			5,676			5,660			5,660
Accrued interest payable		Level 2			61			61			68			68
Forward sales commitment		Level 2			556			556			651			651

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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