Fair Value Measurements

3 Months Ended

Mar. 31, 2024

Fair Value Disclosures [Abstract]

Fair Value Measurements

6. FAIR VALUE MEASUREMENTS

Fair Value Hierarchy

The Company groups its assets and liabilities 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. Valuations within these levels are based upon:

Level 1 - Quoted market prices for identical instruments traded in active exchange markets.

Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data.

Level 3 - Model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use on pricing the asset or liability. Valuation techniques include management judgment and estimation which may be significant.

Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.

Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.

The carrying amounts and estimated fair values of financial instruments at March 31, 2024 and December 31, 2023 are as follows:

	Carrying Amount		Fair Value Measurements
(Dollars in thousands)			Level 1		Level 2		Level 3		Total
As of March 31, 2024:
Financial assets:
Cash and cash equivalents	$	203,098	$	203,098	$	—	$	—	$	203,098
Investment securities:
Available for sale		31,078		—		31,078		—		31,078
Held to maturity		95,840				77,361		7,352		84,713
Loans, net		1,506,133		—		—		1,438,856		1,438,856
Accrued interest receivable		10,120		—		1,018		9,102		10,120
Financial liabilities:
Deposits	$	1,639,516	$	1,311,636	$	328,188	$	—	$	1,639,824
Subordinated debt		54,326		—		—		50,196		50,196
Accrued interest payable		3,216		—		3,114		102		3,216
As of December 31, 2023:
Financial assets:
Cash and due from banks	$	212,354	$	212,354	$	—	$	—	$	212,354
Investment securities:
Available for sale		44,560		—		44,560		—		44,560
Held to maturity		100,841				82,806		7,224		90,030
Loans, net		1,544,612				—		1,470,794		1,470,794
Accrued interest receivable		8,847		—		982		7,865		8,847
Financial liabilities:
Deposits	$	1,625,244	$	1,315,032	$	311,213	$	—	$	1,626,245
Other borrowings		75,000		—		—		75,000		75,000
Subordinated debt		54,291		—		—		50,248		50,248
Accrued interest payable		3,292		—		2,593		699		3,292

These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

The methods and assumptions used to estimate fair values are described as follows:

Cash and Due from banks—The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

Investment Securities—Since quoted prices are generally not available for identical securities, fair values are calculated based on market prices of similar securities on similar dates, resulting in Level 2 classification. For securities where market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators, resulting in Level 3 classification.

FHLB, IBFC, PCBB Stock—It is not practical to determine the fair value of these correspondent bank stocks due to restrictions placed on their transferability.

Loans—Fair values of loans for March 31, 2024 and December 31, 2023 are estimated on an exit price basis with contractual cash flow, prepayments, discount spreads, credit loss and liquidity premium assumptions. Loans with similar characteristics such as prepayment rates, terms and rate indexed are aggregated for purposes of the calculations. Loans are generally classified using Level 3 inputs.

Loans individually evaluated for expected credit losses/impairment—Certain loans are individually evaluated on a quarterly basis for additional expected credit losses/impairment and adjusted accordingly. The fair value of loans that are individually evaluated with specific allocations of the allowance for credit losses that are secured by real property is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. The methods utilized to estimate the fair value of individually evaluated loans do not necessarily represent an exit price.

Deposits—The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in Level 1 classification. The carrying amounts of variable rate and fixed-term money market accounts approximate their fair values at the reporting date resulting in Level 1 classification. For time certificates of deposit, the estimated remaining cash flows were discounted, based on current rates for similar instruments in market, to determine the fair value (premium)/discount and accordingly are classified as Level 2.

FHLB Advances—FHLB Advances are included in Other Borrowings. Fair values for FHLB Advances are estimated using discounted cash flow analyses using interest rates offered at each reporting date by correspondent banks for advances with similar maturities resulting in Level 3 classification.

Senior Notes—Fair values for senior notes are estimated using a discounted cash flow calculation based on current rates for similar types of debt, which may be unobservable, and by considering recent trading activity of similar instruments in the market, which may be inactive. Accordingly, senior notes are classified within the Level 3 classification.

Junior Subordinated Debt Securities—Fair values for subordinated debt are calculated based on their respective terms and discounted to the date of the valuation. A market rate based on recent debt offerings by peer banks, which may be unobservable, is used to discount the cash flows until the repricing date and the subsequent cash flows are discounted at Prime plus 2%. Additionally, the Company considers recent trading activity of similar instruments in the market, which may be inactive. Accordingly, junior subordinated debt securities are classified within the Level 3 classification.

Accrued Interest Receivable—The carrying amounts of accrued interest receivable approximate fair value resulting in a Level 2 classification for accrued interest receivable on investment securities and a Level 3 classification for accrued interest receivable on loans since investment securities are generally classified using Level 2 inputs and loans are generally classified using Level 3 inputs.

Accrued Interest Payable—The carrying amounts of accrued interest payable approximate fair value resulting in a Level 2 classification, since accrued interest payable is from deposits that are generally classified using Level 2 inputs.

Off Balance Sheet Instruments—Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, as well as considering the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

Assets Recorded at Fair Value on a Recurring Basis

The Company is required or permitted to record the following assets at fair value on a recurring basis as of March 31, 2024 and December 31, 2023.

(Dollars in thousands)	Fair Value		Level 1		Level 2		Level 3
As of March 31, 2024:
Investments available for sale:
Mortgage backed securities	$	11,523	$	—	$	11,523	$	—
Government agencies		19,555		—		19,555		—
Total assets measured at fair value on a recurring basis	$	31,078	$	—	$	31,078	$	—
As of December 31, 2023:
Investments available for sale:
Mortgage backed securities	$	15,149	$	—	$	15,149	$	—
Government agencies		29,411		—		29,411		—
Total assets measured at fair value on a recurring basis	$	44,560	$	—	$	44,560	$	—

Fair values for available-for-sale investment securities are based on quoted market prices for exact or similar securities. During the periods presented, there were no significant transfers in or out of Levels 1 and 2 and there were no changes in the valuation techniques used. Additionally, there were no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at March 31, 2024 and December 31, 2023.

Assets Recorded at Fair Value on a Non-Recurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a non-recurring basis. These include assets that are measured at the lower of cost or market value that were recognized at fair value which was below cost at the reporting date. The following table summarizes impaired loans measured at fair value on a non-recurring basis as of March 31, 2024 and December 31, 2023.

	Carrying Amount		Fair Value Measurements
(Dollars in thousands)			Level 1		Level 2		Level 3
As of March 31, 2024:
Individually evaluated loans - Commercial	$	1,159	$	—	$	—	$	1,159
Individually evaluated loans - SBA		53		—		—		53
Total assets measured at fair value on a non-recurring basis	$	1,212	$	—	$	—	$	1,452
As of December 31, 2023:
Impaired loans - Commercial	$	3,728	$	—	$	—	$	3,728
Impaired loans - SBA		53		—		—		53
Total assets measured at fair value on a non-recurring basis	$	3,781	$	—	$	—	$	3,781

The fair value of individually evaluated loans is based upon independent market prices, estimated liquidation values of loan collateral or appraised value of the collateral as determined by third-party independent appraisers, less selling costs. Level 3 fair value measurement includes other real estate owned that has been measured at fair value upon transfer to foreclosed assets and loans collateralized by real property and other business asset collateral where a specific reserve has been established or a charge-off has been recorded. The unobservable inputs and qualitative information about the unobservable inputs are based on management’s best estimates of appropriate discounts in arriving at fair value. Increases or decreases in any of those inputs could result in a significantly lower or higher fair value measurement. For example, a change in either direction of actual loss rates would have a directionally opposite change in the calculation of the fair value of individually evaluated loans.