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Fair Value Measurements

3 Months Ended

Mar. 31, 2023

Note 10. Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the “Fair Value Measurements and Disclosures” topics of FASB ASU No. 2010-06, FASB ASU No. 2011-04, and FASB ASU No. 2016-01, the fair value of a financial instrument is the price that would be received in the sale of an asset or transfer of a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market for the asset or 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. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value can be a reasonable point within a range that is most representative of fair value under current market conditions.

In estimating the fair value of assets and liabilities, the Company relies mainly on two models. The first model used by the Company’s bond accounting service provider, determines the fair value of securities. Securities are priced based on an evaluation of observable market data, including benchmark yield curves, reported trades, broker/dealer quotes, and issuer spreads. Pricing is also impacted by credit information about the issuer, perceived market movements, and current news events impacting the individual sectors. The second source is a third party vendor the Company utilizes to provide fair value exit pricing for loans and interest bearing deposits in accordance with guidance.

In accordance with ASC 820, “Fair Value Measurements and Disclosures,” the Company groups its financial assets and financial liabilities generally measured at fair value into 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.

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Level 1: Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

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Level 2: Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

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Level 3: Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 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 determination of fair value requires significant management judgment or estimation.

An instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Assets Measured at Fair Value on a Recurring Basis

Debt securities with readily determinable fair values that are classified as “available-for-sale” are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. 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 available-for-sale securities are considered to be Level 2 securities.

The Company recognizes IRLCs at fair value. Fair value of IRLCs is based on either (i) the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis or (ii) the observable price for individual loans traded in the secondary market for loans that will be delivered on a mandatory basis. All of the Company’s IRLCs are classified as Level 2.

The Company recognizes interest rate swaps on loans at fair value. The Company has contracted with a third party vendor to provide valuations for these interest rate swaps using standard valuation techniques. All of the Company’s interest rate swaps on loans are classified as Level 2.

The following tables present the balances of certain assets measured at fair value on a recurring basis as of the dates indicated:

			Fair Value Measurements at March 31, 2023 Using
(dollars in thousands)	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Available-for-sale securities
U.S. Treasury securities	$	7,748	$	-	$	7,748	$	-
Obligations of U.S. Government agencies		39,741		-		39,741		-
Obligations of state and political subdivisions		60,653		-		60,653		-
Mortgage-backed securities		88,696		-		88,696		-
Money market investments		1,661		-		1,661		-
Corporate bonds and other securities		25,414		-		25,414		-
Total available-for-sale securities		223,913		-		223,913		-
Derivatives
Interest rate swap on loans		1,478		-		1,478		-
Total assets	$	225,391	$	-	$	225,391	$	-

Liabilities:
Derivatives
Interest rate swap on loans		1,478		-		1,478		-
Total liabilities	$	1,478	$	-	$	1,478	$	-

			Fair Value Measurements at December 31, 2022 Using
(dollars in thousands)	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities
U.S. Treasury securities	$	7,671	$	-	$	7,671	$	-
Obligations of U.S. Government agencies		42,399		-		42,399		-
Obligations of state and political subdivisions		59,384		-		59,384		-
Mortgage-backed securities		88,913		-		88,913		-
Money market investments		1,816		-		1,816		-
Corporate bonds and other securities		25,335		-		25,335		-
Total available-for-sale securities	$	225,518	$	-	$	225,518	$	-
Derivatives
Interest rate lock		23		-		23		-
Interest rate swap on loans		1,447		-		1,447		-
Total assets	$	226,988	$	-	$	226,988	$	-

Assets Measured at Fair Value on a Nonrecurring Basis

Under certain circumstances, adjustments are made to the fair value for assets and liabilities although they are not measured at fair value on an ongoing basis.

Other Real Estate Owned (OREO)

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less estimated costs to sell at the date of foreclosure. Initial fair value is based upon appraisals the Company obtains from independent licensed appraisers. Subsequent to foreclosure, management periodically performs valuations of the foreclosed assets based on updated appraisals, general market conditions, recent sales of similar properties, length of time the properties have been held, and the ability and intent with regard to continued ownership of the properties. The Company may incur additional write-downs of foreclosed assets to fair value less estimated costs to sell if valuations indicate a further deterioration in market conditions. As such, the Company records OREO as a nonrecurring fair value measurement classified as Level 3.

At March 31, 2023 and December 31, 2022 there was no OREO that was measured at fair value.

Loans Held For Sale

Loans held for sale are carried at the lower of cost or fair value. These loans currently consist of residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). Gains and losses on the sale of loans are reported on a separate line item on the Company’s Consolidated Statements of Income.

The following table presents the assets carried on the consolidated balance sheets for which a nonrecurring change in fair value has been recorded. Assets are shown by class of loan and by level in the fair value hierarchy, as of the dates indicated. Certain impaired loans are valued by the present value of the loan’s expected future cash flows, discounted at the loan’s effective interest rate rather than at a market rate. These loans are not carried on the consolidated balance sheets at fair value and, as such, are not included in the tables below.

			Carrying Value at March 31, 2023
(dollars in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Loans
Loans held for sale	$	325	$	-	$	325	$	-

			Carrying Value at December 31, 2022
(dollars in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans
Mortgage loans on real estate:
Construction	$	110	$	-	$	-	$	110
Total	$	110	$	-	$	-	$	110

Loans
Loans held for sale	$	421	$	-	$	421	$	-

The following table displays quantitative information about Level 3 Fair Value Measurements as of December 31, 2022.

			Quantitative Information About Level 3 Fair Value Measurements
(dollars in thousands)	Fair Value at December 31, 2022		Valuation Techniques	Unobservable Input	Range (Weighted Average)
Impaired loans
Construction	$	110	Market comparables	Selling costs		3.00% -8.00% (7.25	%)

The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments as of the dates indicated are as follows:

			Fair Value Measurements at March 31, 2023 Using
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Cash and cash equivalents	$	29,069	$	29,069	$	-	$	-
Securities available-for-sale		223,913		-		223,913		-
Restricted securities		4,479		-		4,479		-
Loans held for sale		325		-		325		-
Loans, net		1,069,714		-		-		1,047,941
Derivatives
Interest rate swap on loans		1,478		-		1,478		-
Bank owned life insurance		34,304		-		34,304		-
Accrued interest receivable		4,427		-		4,427		-

Liabilities
Deposits	$	1,199,615	$	-	$	1,200,738	$	-
Overnight repurchase agreements		4,517		-		4,517		-
Federal Home Loan Bank advances		72,500		-		72,500		-
Long term borrowings		29,570		-		25,356		-
Derivatives
Interest rate swap on loans		1,478		-		1,478		-
Accrued interest payable		725		-		725		-

			Fair Value Measurements at December 31, 2022 Using
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Cash and cash equivalents	$	19,250	$	19,250	$	-	$	-
Securities available-for-sale		225,518		-		225,518		-
Restricted securities		3,434		-		3,434		-
Loans held for sale		421		-		421		-
Loans, net		1,016,559		-		-		996,807
Derivatives
Interest rate lock		23		-		23		-
Interest rate swap on loans		1,447		-		1,447		-
Bank owned life insurance		34,049		-		34,049		-
Accrued interest receivable		4,253		-		4,253		-

Liabilities
Deposits	$	1,156,019	$	-	$	1,179,631	$	-
Federal funds purchased		11,378		-		-		-
Overnight repurchase agreements		4,987		-		4,536		-
Federal Reserve Bank borrowings		46,100		-		480		-
Long term borrowings		29,538		-		29,657		-
Derivatives
Interest rate swap on loans		1,447		-		1,447		-
Accrued interest payable		834		-		834		-

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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