FAIR VALUE MEASUREMENTS

3 Months Ended

Mar. 31, 2022

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

NOTE 10 — FAIR VALUE MEASUREMENTS

Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell the asset or transfer the 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. This guidance provides additional information on determining when the volume and level of activity for the asset or liability has significantly decreased. The guidance also includes information on identifying circumstances when a transaction may not be considered orderly.

Fair value measurement and disclosure guidance provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from

that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with the fair value measurement and disclosure guidance.

This guidance clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The guidance provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own belief about the assumptions market participants would use in pricing the asset or liability based upon the best information available. Fair value measurement and disclosure guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 Inputs:     Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 Inputs:     Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability;

Level 3 Inputs:     Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth as follows.

Financial Assets Measured at Fair Value on a Recurring Basis

At March 31, 2022 and December 31, 2021, securities measured at fair value on a recurring basis and the valuation methods used are as follows:

(Dollars in thousands)
March 31, 2022	Level 1		Level 2		Level 3		Total
Debt Securities Available-for-Sale:
U.S. Treasury securities	$	19,307	$	—	$	—	$	19,307
Obligations of U.S. Government Agencies and Sponsored Agencies:
Mortgaged-backed		—		112,518		—		112,518
Other		—		6,744		—		6,744
Other mortgage backed debt securities		—		40,510		—		40,510
Obligations of state and political subdivisions		—		176,223		—		176,223
Asset backed securities		—		33,970		—		33,970
Corporate debt securities		—		45,609		—		45,609
Total debt securities available-for-sale		19,307		415,574		—		434,881
Marketable equity securities		1,899		—		—		1,899
Total recurring fair value measurements	$	21,206	$	415,574	$	—	$	436,780

(Dollars in thousands)
December 31, 2021	Level 1		Level 2		Level 3		Total
Debt Securities Available-for-Sale:
U.S. Treasury securities	$	7,729	$	—	$	—	$	7,729
Obligations of U.S. Government Agencies and Sponsored Agencies:
Mortgaged-backed		—		114,911		—		114,911
Other		—		7,576		—		7,576
Other mortgage backed debt securities		—		39,550		—		39,550
Obligations of state and political subdivisions		—		186,176		—		186,176
Asset backed securities		—		36,542		—		36,542
Corporate debt securities		—		45,432		—		45,432
Total debt securities available-for-sale		7,729		430,187		—		437,916
Marketable equity securities		1,962		—		—		1,962
Total recurring fair value measurements	$	9,691	$	430,187	$	—	$	439,878

The estimated fair values of equity securities and US Treasury debt securities classified as Level 1 are derived from quoted market prices in active markets; the equity securities consist mainly of stocks held in other banks. The estimated fair values of all debt securities classified as Level 2 are obtained from nationally-recognized third-party pricing agencies. The estimated fair values are derived primarily from cash flow models, which include assumptions for interest rates, credit losses, and prepayment speeds. The significant inputs utilized in the cash flow models are based on market data obtained from sources independent of the Company (observable inputs), and are therefore classified as Level 2 within the fair value hierarchy. The Company does not have any Level 3 inputs for securities. There were no transfers between Level 1 and Level 2 during 2022 or 2021.

Financial Assets Measured at Fair Value on a Nonrecurring Basis

At March 31, 2022 and December 31, 2021, impaired loans measured at fair value on a nonrecurring basis are as follows:

(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets at March 31, 2022
Impaired loans:
Commercial Real Estate	$	—	$	—	$	5,936	$	5,936
Residential Real Estate		—		—		30		30
Total impaired loans	$	—	$	—	$	5,966	$	5,966

(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets at December 31, 2021
Impaired loans:
Commercial Real Estate	$	—	$	—	$	5,954	$	5,954
Residential Real Estate		—		—		30		30
Total impaired loans	$	—	$	—	$	5,984	$	5,984

The Company’s impaired loan valuation procedure for any loans greater than $250,000 requires an appraisal to be obtained and reviewed annually at year end unless the Board of Directors waives such requirement for a specific loan, in favor of obtaining a Certificate of Inspection instead, defined as an internal evaluation completed by the Company. A quarterly collateral evaluation is performed which may include a site visit, property pictures and discussions with realtors and other similar business professionals to ascertain current values. For impaired loans less than $250,000 upon classification and annually at year end, the Company completes a Certificate of Inspection, which includes an onsite inspection, and considers value indicators such as insured values, tax assessed values, recent sales comparisons and a review of the previous evaluations.These assets are included as Level 3 fair values, based upon the lowest level that is

significant to the fair value measurements. The fair value consists of the impaired loan balances less the valuation allowance and/or charge-offs. There were no transfers between valuation levels in 2022 and 2021.

Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis

There were no foreclosed assets held for resale measured at fair value on a nonrecurring basis at March 31, 2022 and December 31, 2021.

The Company’s foreclosed asset valuation procedure requires an appraisal or a Certificate of Inspection, which considers the sales prices of similar properties in the proximate vicinity, to be completed periodically with the exception of those cases in which the Bank has obtained a sales agreement. These assets are included as Level 3 fair values, based upon the lowest level that is significant to the fair value measurements. There were no transfers between valuation levels in 2022 and 2021.

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine the fair value:

(Dollars in thousands)	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value					Weighted
March 31, 2022	Estimate		Valuation Technique	Unobservable Input	Range	Average
Impaired loans - collateral dependent	$	3,120	Appraisal of collateral1,3 Certificate of Inspection1,3	Appraisal adjustments2 Qualitative Adjustments4	(15%) – (44%)	(15%)
Impaired loans - other	$	2,846	Discounted cash flow	Discount rate	(7%) – (7%)	(7%)
December 31, 2021
Impaired loans - collateral dependent	$	3,120	Appraisal of collateral1,3 Certificate of Inspection1,3	Appraisal adjustments2 Qualitative Adjustments4	(15%) – (44%)	(15%)
Impaired loans - other	$	2,864	Discounted cash flow	Discount rate	(7%) – (7%)	(7%)

1. Fair value is generally determined through independent appraisals or Certificates of Inspection of the underlying collateral, as defined by Bank regulators.

2. Appraisals may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses. The typical range of appraisal adjustments are presented as a percent of the appraisal value.

3. Includes qualitative adjustments by management and estimated liquidation expenses.

4. Collateral values may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses.

Fair Value of Financial Instruments Measured on a Nonrecurring Basis

(Dollars in thousands)	Carrying		Fair Value Measurements at March 31, 2022
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	8,831	$	8,831	$	—	$	—	$	8,831
Interest-bearing deposits in other banks		1,068		—		1,068		—		1,068
Time deposits with other banks		—		—		—		—		—
Restricted investment in bank stocks		3,049		—		3,049		—		3,049
Net loans		770,091		—		—		763,313		763,313
Mortgage servicing rights		374		—		—		374		374
Accrued interest receivable		4,321		—		4,321		—		4,321
FINANCIAL LIABILITIES:
Demand, savings and other deposits		878,808		—		878,808		—		878,808
Time deposits		166,669		—		163,772		—		163,772
Short-term borrowings		52,331		—		52,291		—		52,291
Long-term borrowings		35,000		—		34,962		—		34,962
Subordinated debentures		25,000		—		23,338		—		23,338
Accrued interest payable		506		—		506		—		506
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS		—		—		—		—		—

(Dollars in thousands)	Carrying		Fair Value Measurements at December 31, 2021
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	9,600	$	9,600	$	—	$	—	$	9,600
Interest-bearing deposits in other banks		51,738		—		51,738		—		51,738
Time deposits with other banks		247		—		247		—		247
Restricted investment in bank stocks		1,919		—		1,919		—		1,919
Net loans		744,161		—		—		762,914		762,914
Mortgage servicing rights		367		—		—		367		367
Accrued interest receivable		4,361		—		4,361		—		4,361
FINANCIAL LIABILITIES:
Demand, savings and other deposits		904,877		—		904,877		—		904,877
Time deposits		173,092		—		172,897		—		172,897
Short-term borrowings		27,377		—		27,380		—		27,380
Long-term borrowings		35,000		—		35,987		—		35,987
Subordinated debentures		25,000		—		24,384		—		24,384
Accrued interest payable		251		—		251		—		251
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS		—		—		—		—		—