Fair Value

9 Months Ended

Sep. 30, 2023

Fair Value

Fair Value

NOTE 5. Fair Value

Fair Value Measurement

The Company follows FASB ASC Topic 820, “Fair Value Measurement and Disclosures,” which requires additional disclosures about the Company’s assets and liabilities that are measured at fair value. Fair value is 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. In determining fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable inputs. The Company utilizes techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed as follows:

Level 1 Inputs

● Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

● Generally, this includes debt and equity securities and derivative contracts that are traded in an active exchange market (i.e. New York Stock Exchange), as well as certain U.S. Treasury, U.S. Government and sponsored entity agency mortgage-backed securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2 Inputs

● Quoted prices for similar assets or liabilities in active markets.

● Quoted prices for identical or similar assets or liabilities in inactive markets.

● Inputs other than quoted prices that are observable, either directly or indirectly, for the term of the asset or liability (i.e. interest rates, yield curves, credit risks, prepayment speeds or volatilities) or “market corroborated inputs.”

● Generally, this includes U.S. Government and sponsored entity mortgage-backed securities, corporate debt securities and derivative contracts.

Level 3 Inputs

● Prices or valuation techniques that require inputs that are both unobservable (i.e. supported by little or no market activity) and that are significant to the fair value of the assets or liabilities.

● These assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Fair Value on a Recurring Basis

The following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis:

Debt Securities Available for Sale

The fair value of available for sale ("AFS") debt securities is the market value based on quoted market prices, when available, or market prices provided by recognized broker dealers (Level 1). If listed prices or quotes are not available, fair value is based upon quoted market prices for similar or identical assets or other observable inputs (Level 2) or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3).

As of September 30, 2023, the fair value of the Company’s AFS debt securities portfolio was $92.1 million. Most of the Company’s AFS debt securities were classified as Level 2 assets at September 30, 2023. The valuation of AFS debt securities using Level 2 inputs was primarily determined using the market approach, which uses quoted prices for similar assets or liabilities in active markets and all other relevant information. It includes model pricing, defined as valuing securities based upon their relationship with other benchmark securities.

Included in the Company’s AFS debt securities are two corporate bonds which are classified as Level 3 assets at September 30, 2023.  The valuation of these corporate bonds is determined using broker quotes or third-party vendor prices that are not adjusted by management.  Market inputs used in the other valuation techniques or underlying third-party vendor prices or broker quotes include benchmark and government bond yield curves, credit spreads and trade execution data. 

Equity Securities with Readily Determinable Fair Values

The fair value of equity securities is the market value based on quoted market prices, when available, or market prices provided by recognized broker dealers (Level 1). If listed prices or quotes are not available, fair value is based upon quoted market prices for similar or identical assets or other observable inputs (Level 2) or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3).

As of September 30, 2023, the fair value of the Company’s equity securities portfolio was $8.0 million.

All of the Company’s equity securities were classified as Level 1 assets at September 30, 2023.

Interest Rate Swap Agreements

The fair value of interest rate swap agreements is the market value based on quoted market prices, when available, or market prices provided by recognized broker dealers (Level 1). If listed prices or quotes are not available, fair value is based upon quoted market prices for similar or identical assets or other observable inputs (Level 2) or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3).

The Company’s derivative instruments are classified as Level 2 assets, as the readily observable market inputs to these models are validated to external sources, such as industry pricing services, or are corroborated through recent trades, dealer quotes, yield curves, implied volatility or other market-related data.

There were no material changes in the inputs or methodologies used to determine fair value during the period ended September 30, 2023, as compared to the periods ended December 31, 2022 and September 30, 2022.

The tables below present the balances of assets and liabilities measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022:

	Fair Value Measurements at September 30, 2023
			Quoted Prices in
	Assets/Liabilities		Active Markets		Significant Other		Significant
	Measured at Fair		for Identical		Observable		Unobservable
(In thousands)	Value		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Measured on a recurring basis:
Assets:
Debt securities available for sale:
U.S. Government sponsored entities	$	16,325	$	—	$	16,325	$	—
State and political subdivisions		362		—		362		—
Residential mortgage-backed securities		13,670		—		13,670		—
Corporate and other securities		61,765		—		57,502		4,263
Total debt securities available for sale	$	92,122	$	—	$	87,859	$	4,263
Equity securities with readily determinable fair values		8,013		8,013		—		—
Total equity securities	$	8,013	$	8,013	$	—	$	—
Interest rate swap agreements		1,264		—		1,264		—
Total swap agreements	$	1,264	$	—	$	1,264	$	—

	Fair value Measurements at December 31, 2022
			Quoted Prices in
	Assets/Liabilities		Active Markets		Significant Other		Significant
	Measured at Fair		for Identical		Observable		Unobservable
(In thousands)	Value		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Measured on a recurring basis:
Assets:
Debt securities available for sale:
U.S. Government sponsored entities	$	16,305	$	—	$	16,305	$	—
State and political subdivisions		613		—		613		—
Residential mortgage-backed securities		15,475		—		15,475		—
Corporate and other securities		63,000		—		58,325		4,675
Total debt securities available for sale	$	95,393	$	—	$	90,718	$	4,675
Equity securities with readily determinable fair values		9,793		—		9,793		—
Total equity securities	$	9,793	$	—	$	9,793	$	—
Interest rate swap agreements		1,537		—		1,537		—
Total swap agreements	$	1,537	$	—	$	1,537	$	—

There were no liabilities measured on a recurring basis as of September 30, 2023 or December 31, 2022.

Fair Value on a Nonrecurring Basis

The following tables present the assets and liabilities subject to fair value adjustments on a non-recurring basis carried on the balance sheet by caption and by level within the hierarchy (as described above):

	Fair Value Measurements at September 30, 2023
			Quoted Prices		Significant
			in Active		Other		Significant
	Assets/Liabilities		Markets for		Observable		Unobservable
	Measured at Fair		Identical Assets		Inputs		Inputs
(In thousands)	Value		(Level 1)		(Level 2)		(Level 3)
Measured on a non-recurring basis:
Financial assets:
OREO	$	251	$	—	$	—	$	251
Collateral-dependent loans	$	13,738	$	—	$	—	$	13,738

	Fair Value Measurements at December 31, 2022
			Quoted Prices		Significant
			in Active		Other		Significant
	Assets/Liabilities		Markets for		Observable		Unobservable
	Measured at Fair		Identical Assets		Inputs		Inputs
(In thousands)	Value		(Level 1)		(Level 2)		(Level 3)
Measured on a non-recurring basis:
Financial assets:
Collateral-dependent loans	$	8,803	$	—	$	—	$	8,803

Certain assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following is a description of the valuation methodologies used for instruments measured at fair value on a nonrecurring basis:

Collateral-Dependent Loans & OREO

Fair value is determined based on the fair value of the collateral. Partially charged-off loans are measured for impairment based upon a third-party appraisal for collateral-dependent loans. When an updated appraisal is received for a nonperforming loan, the value on the appraisal may be discounted. If there is a deficiency in the value after the Company applies these discounts, management applies a specific reserve and the loan remains in nonaccrual status. The receipt of an updated appraisal would not qualify as a reason to put a loan back into accruing status. The Company removes loans from nonaccrual status generally when the borrower makes six months of contractual payments and demonstrates the ability to service the debt going forward. Charge-offs are determined based upon the loss that management believes the Company will incur after evaluating collateral for impairment based upon the valuation methods described above and the ability of the borrower to pay any deficiency.

The valuation allowance for individually evaluated loans is included in the allowance for credit losses in the consolidated balance sheets. At September 30, 2023, the valuation allowance for individually evaluated loans was $1.7 million, compared to $1.8 million at December 31, 2022.

Fair Value of Financial Instruments

FASB ASC Topic 825, “Financial Instruments,” requires the disclosure of the estimated fair value of certain financial instruments, including those financial instruments for which the Company did not elect the fair value option. These estimated fair values as of September 30, 2023 and December 31, 2022 have been determined using available market information and appropriate valuation methodologies. Considerable judgment is required to interpret market data to develop estimates of fair value. The estimates presented are not necessarily indicative of amounts the Company could

realize in a current market exchange. The use of alternative market assumptions and estimation methodologies could have had a material effect on these estimates of fair value. The methodology for estimating the fair value of financial assets and liabilities that are measured on a recurring or nonrecurring basis are discussed above.

The following methods and assumptions were used to estimate the fair value of other financial instruments for which it is practicable to estimate that value:

Securities

The fair value of securities is based upon quoted market prices for similar or identical assets or other observable inputs (Level 2) or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3).

SBA Loans Held for Sale

The fair value of SBA loans held for sale is estimated by using a market approach that includes significant other observable inputs.

Loans

The fair value of loans is estimated by discounting the future cash flows using current market rates that reflect the interest rate risk inherent in the loan, except for previously discussed impaired loans.

Deposit Liabilities

The fair value of demand deposits and savings accounts is the amount payable on demand at the reporting date (i.e. carrying value). The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using current market rates.

Borrowed Funds and Subordinated Debentures

The fair value of borrowings is estimated by discounting the projected future cash flows using current market rates.

The table below presents the carrying amount and estimated fair values of the Company’s financial instruments presented as of September 30, 2023 and December 31, 2022:

	September 30, 2023
	Carrying
(In thousands)	amount		Level 1		Level 2		Level 3
Financial assets:
Debt securities held to maturity	$	35,956	$	—	$	27,155	$	—
SBA loans held for sale		19,387		—		20,322		—
Loans, net of allowance for credit losses		2,127,885		—		—		2,027,127
Financial liabilities:
Deposits		1,884,910		—		1,871,627		—
Borrowed funds and subordinated debentures		398,920		—		397,323		—

	December 31, 2022
	Carrying
(In thousands)	amount		Level 1		Level 2		Level 3
Financial assets:
Debt securities held to maturity	$	35,760	$	—	$	28,578	$	—
SBA loans held for sale		27,928		—		30,141		—
Loans, net of allowance for credit losses		2,053,435		—		1,981,207		8,803
Financial liabilities:
Deposits		1,787,528		—		1,772,270		—
Borrowed funds and subordinated debentures		393,310		—		391,312		—

Limitations

Fair value estimates are made at a point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the effect of fair value estimates have not been considered in the above estimates.