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Disclosures about Fair Value Measurements and Financial Instruments

6 Months Ended

Jun. 30, 2024

Disclosures about Fair Value Measurements and Financial Instruments

Disclosures about Fair Value Measurements and Financial Instruments

16. Disclosures about Fair Value Measurements and Financial Instruments

The following disclosures establish a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The three broad levels defined within this hierarchy are as follows:

Level I: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II: Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.

Level III: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

Assets and Liabilities Measured and Recorded on a Recurring Basis

Equity securities are reported at fair value utilizing Level 1 inputs. These securities are mutual funds held within a rabbi trust for the Company's executive deferred compensation plan. The mutual funds held are open-end funds that are registered with the Securities and Exchange Commission. These funds are required to publish their daily net asset value and to transact at that price.

Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quoted market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. It should be noted that available for sale securities are reported at fair value, net of any related allowance for credit losses.

The fair values of the simultaneous interest rate swaps and the interest rate hedge used for interest rate risk management and the risk participation agreements associated with certain commercial real estate loans are based on an external derivative valuation model using data inputs from similar transactions as of the valuation date and classified Level 2.

The following table presents the assets and liabilities measured and reported on the Consolidated Balance Sheets on a recurring basis at their fair value as of June 30, 2024 and December 31, 2023, by level within the fair value hierarchy (in thousands).

Fair Value Measurements at June 30, 2024

TOTAL

(LEVEL 1)

(LEVEL 2)

(LEVEL 3)

Equity securities ⁽¹⁾

341

—

Available for sale securities:

U.S. Agency

4,747

—

4,747

—

U.S. Agency mortgage-backed securities

91,991

—

91,991

—

Municipal

10,063

—

10,063

—

Corporate bonds

57,178

—

57,178

—

Interest rate swap asset ⁽¹⁾

5,058

—

5,058

—

Interest rate hedge ⁽¹⁾

443

—

443

—

Interest rate swap liability ⁽²⁾

(5,108)

—

(5,108)

—

Risk participation agreement ⁽²⁾

(239)

—

(239)

—


	Fair Value Measurements at December 31, 2023
	TOTAL		(LEVEL 1)		(LEVEL 2)		(LEVEL 3)
Equity securities ⁽¹⁾	$	499	$	499	$	—	$	—
Available for sale securities:
U.S. Agency		5,339		—		5,339		—
U.S. Agency mortgage-backed securities		93,075		—		93,075		—
Municipal		10,360		—		10,360		—
Corporate bonds		56,937		—		56,937		—
Interest rate swap asset ⁽¹⁾		4,582		—		4,582		—
Interest rate swap liability ⁽²⁾		(4,665)		—		(4,665)		—
Interest rate hedge ⁽²⁾		(446)		—		(446)		—
Risk participation agreement ⁽²⁾		(410)		—		(410)		—

(1)	Included within other assets on the Consolidated Balance Sheets.

(2)	Included within other liabilities on the Consolidated Balance Sheets.

Assets Measured and Recorded on a Non-Recurring Basis

The Company evaluates individual loans for expected credit losses when those loans do not share similar risk characteristics with loans evaluated using a collective (pooled) basis. Individually evaluated loans are reported at the fair value of the underlying collateral if the repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on observable market data which at times are discounted using unobservable inputs. At June 30, 2024, individually evaluated loans using the collateral method with a carrying value of $3.6 million were reduced by a specific valuation allowance totaling $1.6 million resulting in a net fair value of $2.0 million. At December 31, 2023, the Company had no individually evaluated loans using the collateral method which were carried at fair value.

Other real estate owned is measured at fair value based on appraisals, less estimated costs to sell at the date of foreclosure. The Bank’s internal Collections and Assigned Risk Department estimates the fair value of repossessed assets, such as vehicles and equipment, using a formula driven analysis based on automobile or other industry data, less estimated costs to sell at the time of repossession. Valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less costs to sell. Income and expenses from operations and changes in valuation allowance are included in the net expenses from OREO and repossessed assets.

Assets measured and recorded at fair value on a non-recurring basis are summarized below (in thousands, except range data):

Fair Value Measurements

June 30, 2024

TOTAL

(LEVEL 1)

(LEVEL 2)

(LEVEL 3)

Individually evaluated loans

1,980

—

1,980

Other real estate owned and repossessed assets

1,803

—

1,803


	Fair Value Measurements
December 31, 2023	TOTAL		(LEVEL 1)		(LEVEL 2)		(LEVEL 3)
Other real estate owned and repossessed assets	$	15	$	—	$	—	$	15


	Quantitative Information About Level 3 Fair Value Measurements
			Valuation	Unobservable
June 30, 2024	Fair Value		Techniques	Input	Range (Wgtd Avg)
Individually evaluated loans	$	1,980	Appraisal of collateral ⁽¹⁾	Appraisal adjustments ⁽²⁾	10% (10%)
Other real estate owned and repossessed assets		1,803	Appraisal of collateral ⁽¹⁾	Appraisal adjustments ⁽²⁾	18% to 63% (24%)
				Liquidation expenses	0% to 33% (4%)


	Quantitative Information About Level 3 Fair Value Measurements
			Valuation	Unobservable
December 31, 2023	Fair Value		Techniques	Input	Range (Wgtd Avg)
Other real estate owned and repossessed assets	$	15	Appraisal of collateral ⁽¹⁾	Appraisal adjustments ⁽²⁾	63% (63%)
				Liquidation expenses	33% (33%)

(1)	Fair Value is generally determined through independent appraisals of the underlying collateral, which generally include various level 3 inputs which are not identifiable. Also includes qualitative adjustments by management and estimated liquidation expenses.

(2)	Appraisals may be adjusted by management for qualitative factors such as economic conditions.

Fair Value of Financial Instruments

For the Company, as for most financial institutions, approximately 90% of its assets and liabilities are considered financial instruments. Many of the Company’s financial instruments, however, lack an available trading market characterized by a willing buyer and willing seller engaging in an exchange transaction. Therefore, significant estimates and present value calculations were used by the Company for the purpose of this disclosure.

Fair values have been determined by the Company using independent third party valuations that use the best available data (Level 2) and an estimation methodology (Level 3) the Company believes is suitable for each category of financial instruments. Management believes that cash and cash equivalents, bank owned life insurance, regulatory stock, accrued interest receivable and payable, deposits with no stated maturities, and short-term borrowings have fair values which approximate the recorded carrying values. The fair value measurements for all of these financial instruments are Level 1 measurements.

The estimated fair values based on U.S. GAAP measurements and recorded carrying values at June 30, 2024 and December 31, 2023 for the remaining financial instruments not required to be reported at fair value were as follows:

June 30, 2024

Carrying

Value

Fair Value

(Level 1)

(Level 2)

(Level 3)

(In Thousands)

FINANCIAL ASSETS:

Investment securities – HTM

66,446

60,763

—

58,875

1,888

Loans held for sale

225

241

—

Loans, net of allowance for credit losses and unearned income

1,024,422

952,143

—

952,143

FINANCIAL LIABILITIES:

Deposits with stated maturities

327,566

326,983

—

326,983

All other borrowings ⁽¹⁾

77,618

76,200

—

76,200


	December 31, 2023
	Carrying
	Value			Fair Value		(Level 1)		(Level 2)		(Level 3)

		(In Thousands)
FINANCIAL ASSETS:
Investment securities – HTM	$	63,979	$	58,621	$	—	$	56,769	$	1,852
Loans held for sale		130		132		132		—		—
Loans, net of allowance for credit losses and unearned income		1,023,218		950,402		—		—		950,402
FINANCIAL LIABILITIES:
Deposits with stated maturities		322,477		321,660		—		—		321,660
All other borrowings ⁽¹⁾		71,247		70,061		—		—		70,061

(1)	All other borrowings include advances from Federal Home Loan Bank and subordinated debt.

Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values. The Company’s remaining assets and liabilities which are not considered financial instruments have not been valued differently than has been customary under historical cost accounting.