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Fair value
6 Months Ended
Jun. 30, 2024
Fair value  
Fair value

Note 11 – Fair value

The Company determines the fair value of its financial instruments based on the requirements established in 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).

Collateral dependent: 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 collateral dependent and an allowance for credit losses is established. The Company measures expected credit losses based on the fair value of the collateral either through the operation of the collateral or the sale of the collateral to include estimated cost to sell. The Company maintains a valuation allowance to the extent that this measure of the collateral dependent loan is less than the recorded investment in the loan. The Company records the collateral dependent loan as a nonrecurring fair value measurement classified as Level 2. However, if based on management’s review, additional discounts to appraisals are required or if observable inputs are not available, the Company records the collateral dependent loan as a nonrecurring fair value measurement classified as Level 3.

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.

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 Company has elected the fair value option on their firm commitments under ASC 825.  

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, 2024 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

U.S. Government Agencies

$

640

$

$

640

$

Mortgage-backed securities

 

70,206

 

70,206

 

Municipals

1,670

1,670

Subordinated debt

 

10,608

 

 

10,108

 

500

Loans held for sale

8,236

8,236

IRLC

237

237

Forward sales commitment

22

22

Fair Value Measurement

at December 31, 2023 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

U.S. Government Agencies

$

20,615

$

$

20,615

$

Mortgage-backed securities

 

72,537

 

 

72,537

 

Municipals

1,656

1,656

Subordinated debt

 

10,777

 

 

10,277

500

Loans held for sale

4,983

4,983

IRLC

271

271

Financial Liabilities - Recurring

Forward sales commitment

506

506

There were no Level 3 fair value measurements for financial instruments measured on a non-recurring basis at fair value at June 30, 2024 and December 31, 2023.

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, 

2024

2023

    

Level in Fair

    

    

    

    

Value

Carrying

Estimated

Carrying

Estimated

Hierarchy

Value

Fair Value

Value

Fair Value

Financial assets

 

  

 

  

 

  

 

  

 

  

Cash

 

Level 1

$

17,154

$

17,154

$

10,383

$

10,383

Cash equivalents

 

Level 2

 

1,337

 

1,337

 

7,331

 

7,331

Investment securities available for sale

 

Level 2

 

82,624

 

82,624

 

105,085

 

105,085

Investment securities available for sale

 

Level 3

 

500

 

500

 

500

 

500

Restricted stock

 

Level 2

 

2,277

 

2,277

 

2,985

 

2,985

Loans held for sale

 

Level 2

 

8,236

 

8,236

 

4,983

 

4,983

Loans

 

Level 3

 

605,408

 

582,559

 

575,008

 

547,935

Bank owned life insurance

 

Level 2

 

13,291

 

13,291

 

13,120

 

13,120

Accrued interest receivable

 

Level 2

 

3,857

 

3,857

 

3,827

 

3,827

Interest rate lock commitments

Level 2

237

237

271

271

Forward sales commitment

Level 2

22

22

Financial liabilities

 

  

 

  

 

  

 

  

 

  

Deposits

 

Level 2

 

628,912

 

628,932

 

605,345

 

605,226

FHLB borrowings

 

Level 2

 

30,000

 

29,854

 

45,000

 

44,999

Trust preferred securities

 

Level 2

 

8,764

 

8,920

 

8,764

 

8,848

Other borrowings

 

Level 2

 

5,700

 

5,700

 

5,700

 

5,700

Accrued interest payable

 

Level 2

 

489

 

489

 

210

 

210

Forward sales commitment

Level 2

506

506