Fair Value Measurements

9 Months Ended

Sep. 30, 2022

Fair Value Measurements

Fair Value Measurements

Note 12. Fair Value Measurements

The Company follows ASC 820-10 Fair Value Measurements and Disclosures (“ASC 820-10”), which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. ASC 820-10 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available for sale investment securities) or on a nonrecurring basis (for example, impaired loans).

ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an 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. ASC 820-10 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.

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 recorded at fair value on a recurring basis in the financial statements:

Investment Securities Available for Sale:

Investment securities available for sale 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). In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Currently, all of the Company’s investment securities available for sale are considered to be Level 2 securities.

The following table presents the balances of financial assets measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021:

							Fair
Dollars are in thousands	Level 1		Level 2		Level 3		Value
September 30, 2022
Securities available for sale:
Obligations of U.S. Government agencies and corporations	$	—	$	13,502	$	—	$	13,502
Obligations of States and political subdivisions		—		25,619		—		25,619
Mortgage-backed securities		—		89,939		—		89,939
Subordinated debt investments		—		2,405		—		2,405
Total securities available for sale	$	—	$	131,465	$	—	$	131,465
December 31, 2021
Securities available for sale:
Obligations of U.S. Government agencies and corporations	$	—	$	6,451	$	—	$	6,451
Obligations of States and political subdivisions		—		31,126		—		31,126
Mortgage-backed securities		—		82,403		—		82,403
Subordinated debt investments		—		2,041		—		2,041
Total securities available for sale	$	—	$	122,021	$	—	$	122,021

Certain financial assets are measured at fair value on a nonrecurring basis in accordance with U.S. GAAP. Adjustments to the fair value of these financial 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 financial assets recorded at fair value on a nonrecurring basis in the financial statements:

Loans Held for Sale:

Loans held for sale are loans originated by JMC for sale in the secondary market. Loans originated for sale by JMC are recorded at lower of cost or market. No market adjustments were required at September 30, 2022; therefore,

loans held for sale were carried at cost. Because of the short-term nature, the book value of these loans approximates fair value at September 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 the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. 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 a 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 is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’s 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 allowance for credit losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as a provision for credit losses on the consolidated statement of income.

Other Real Estate Owned:

OREO 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 allowance for credit losses. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense on the consolidated statement of income.

The following table presents the balances of financial assets measured at fair value on a nonrecurring basis as of September 30, 2022 and December 31, 2021.

							Fair
Dollars are in thousands	Level 1		Level 2		Level 3		Value
September 30, 2022
Impaired loans	$	—	$	—	$	3,216	$	3,216
Total	$	—	$	—	$	3,216	$	3,216
December 31, 2021
Impaired loans	$	—	$	—	$	4,653	$	4,653
OREO		—		—		837		837
Total	$	—	$	—	$	5,490	$	5,490

The following tables present additional quantitative information about financial assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value as of September 30, 2022 and December 31, 2021:

September 30, 2022			Valuation	Unobservable	Range of
Dollars are in thousands	Fair Value		Technique	Inputs	Inputs
Impaired loans	$	3,216	Appraisals	Discount to reflect current market conditions and estimated selling costs	8%
Total	$	3,216

December 31, 2021			Valuation	Unobservable	Range of
Dollars are in thousands	Fair Value		Technique	Inputs	Inputs
Impaired loans	$	4,653	Appraisals	Discount to reflect current market conditions and estimated selling costs	8%
OREO		837	Appraisals or Listing Price	Discount to reflect current market conditions and estimated selling costs	8-10%
Total	$	5,490