Fair Value Measurements

6 Months Ended

Jun. 30, 2022

Fair Value Disclosures [Abstract]

Fair Value Measurements

Note 10. Fair Value Measurements

Determination of Fair Value

The Company follows ASC 820, “Fair Value Measurements and Disclosures,” to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. This codification clarifies that the fair value of a financial instrument is the price that would be received to sell 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 at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market for the asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Fair Value Hierarchy

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value:

Level 1 –	Valuation is based on quoted prices in active markets for identical assets and liabilities.
Level 2 –	Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
Level 3 –	Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the consolidated financial statements:

Securities available for sale

Securities AFS are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2).

Interest rate swaps

The Company recognizes interest rate swaps at fair value. The Company has contracted with a third-party to provide valuations for interest rate swaps using standard valuation techniques. The Company’s interest rate swaps are classified as Level 2.

The following tables present the balances measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021 (dollars in thousands):

			Fair Value Measurements at June 30, 2022 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Balance		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. Government treasuries	$	161,009	$	-	$	161,009	$	-
U.S. Government agencies		30,532		-		30,532		-
Mortgage-backed securities/CMOs		175,962		-		175,962		-
Corporate bonds		11,154		-		11,154		-
Municipal bonds		83,173		-		83,173		-
Total securities available for sale	$	461,830	$	-	$	461,830	$	-
Interest rate swap asset		310		-		310		-
Total assets at fair value	$	462,140	$	-	$	462,140	$	-

			Fair Value Measurements at December 31, 2021 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Balance		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. Government agencies	$	31,581	$	-	$	31,581	$	-
Mortgage-backed securities/CMOs		170,964		-		170,964		-
Municipal bonds		101,272		-		101,272		-
Total securities available for sale	$	303,817	$	-	$	303,817	$	-
Liabilities:
Interest rate swap liabilities	$	197	$	-	$	197	$	-
Total liabilities at fair value	$	197	$	-	$	197	$	-

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write downs of individual assets. The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the consolidated financial statements:

Other Real Estate Owned

Other real estate owned is measured at fair value less cost to sell, based on an appraisal conducted by an independent, licensed appraiser outside of the Company. If the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3. OREO is measured at fair value on a nonrecurring basis. Any initial fair value adjustment is charged against the ALLL. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense on the Consolidated Statements of Income. As of December 31, 2021, the Company had one OREO property acquired through the Merger which was carried at a fair value of $611 thousand. The Company sold this OREO property during the current quarter and therefore had a zero balance in OREO as of June 30, 2022.

Impaired Loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due. The measurement of loss associated with impaired loans can be based on either (a) the observable market price of the loan or the fair value of the collateral, or (b) using the present value of expected future cash flows discounted at the loan’s effective interest rate, which is not a fair value measurement. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered 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.

The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3).

Impaired loans allocated to the ALLL are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income. The Company had impaired loans, excluding PCI loans, of $1.4 million as of June 30, 2022 and $1.5 million as of December 31, 2021. All impaired loans were measured based on expected future cash flows discounted at the loan’s effective interest rate, or fair value of collateral, as noted above.

The following table presents the Company’s assets that were measured at fair value on a nonrecurring basis as of December 31, 2021. There were no such assets to report as of June 30, 2022.

			Fair Value Measurements at December 31, 2021 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Balance		(Level 1)		(Level 2)		(Level 3)
Assets:
Other Real Estate Owned	$	611	$	-	$	-		61100.0	%

For the assets measured at fair value on a nonrecurring basis as of December 31, 2021, the following table displays quantitative information about Level 3 Fair Value Measurements (dollars in thousands). There were no such assets to report as of June 30, 2022.

Description	Fair Value		Valuation Technique	Unobservable Inputs	Weighted Average
Assets:
Other Real Estate Owned	$	611	Market comparables	Discount applied to bonafide offer		6.0	%
* A discount percentage is applied based on estimated cost to sell.

ASC 825, “Financial Instruments,” requires disclosures about fair value of financial instruments for interim periods and excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The Company uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

The carrying values and estimated fair values of the Company's financial instruments as of June 30, 2022 and December 31, 2021 are as follows (dollars in thousands):

			Fair Value Measurements at June 30, 2022 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying value		Level 1		Level 2		Level 3		Fair Value
Assets
Cash and cash equivalent	$	215,667	$	215,667	$	-	$	-	$	215,667
Available for sale securities		461,830		-		461,830		-		461,830
Loans, net		954,689		-		-		929,045		929,045
Bank owned life insurance		38,046		-		38,046		-		38,046
Accrued interest receivable		4,229		-		2,055		2,174		4,229
Interest rate swap asset		310		-		310		-		310
Liabilities
Demand deposits and interest-bearing transaction and money market accounts	$	1,448,777	$	-	$	1,448,777	$	-	$	1,448,777
Certificates of deposit		150,121		-		144,556		-		144,556
Junior subordinated debt, net		3,390		-		3,459		-		3,459
Accrued interest payable		134		-		134		-		134

			Fair Value Measurements at December 31, 2021 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying value		Level 1		Level 2		Level 3		Fair Value
Assets
Cash and cash equivalent	$	508,840	$	508,840	$	-	$	-	$	508,840
Available for sale securities		303,817		-		303,817		-		303,817
Loans, net		1,055,227		-		-		1,059,650		1,059,650
Bank owned life insurance		31,234		-		31,234		-		31,234
Other real estate owned, net		611		-		-		611		611
Accrued interest receivable		3,778		-		1,252		2,526		3,778
Liabilities
Demand deposits and interest-bearing transaction and money market accounts	$	1,634,125	$	-	$	1,634,125	$	-	$	1,634,125
Certificates of deposit		162,045		-		161,850		-		161,850
Junior subordinated debt		3,367		-		3,367		-		3,367
Accrued interest payable		174		-		174		-		174
Interest rate swap liabilities		197		-		197		-		197

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. Consequently, the fair values of the Company’s financial instruments will fluctuate when interest rate levels change, and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk; however, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.