Fair Value Measurements

6 Months Ended

Jun. 30, 2024

Fair Value Measurements [Abstract]

Fair Value Measurements

Note 10. Fair Value Measurements

Determination of Fair Value
The Company follows ASC 820, “Fair Value Measurements and Disclosures” to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. 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, 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.

• 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.

• 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.

• 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 and Liabilities 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 loss. 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. At June 30, 2024, there were no IRLCs and at December 31, 2023, there were $10 thousand of IRLCs.

The Company enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Company simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and offsetting terms. These back-to-back loan swaps are derivative financial instruments and are reported at fair value in “other assets” and “other liabilities” in the Consolidated Balance Sheets.  Changes in the fair value of loan swaps are recorded in other noninterest income and sum to zero because of the offsetting terms of swaps with borrowers and swaps with dealer counterparties. All of the Company’s interest rate swaps on loans are classified as Level 2.

Loans held for sale are carried at the lower of cost or fair value. Loans held for sale 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. There were no loans held for sale at June 30, 2024 and $470 thousand at December 31, 2023.

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 June 30, 2024 Using
(dollars in thousands)	Balance		Level 1		Level 2		Level 3
Assets:
Available-for-sale securities
U.S. Treasury securities	$	3,851	$	-	$	3,851	$	-
Obligations of  U.S. Government agencies		36,762		-		36,762		-
Obligations of state and political subdivisions		50,226		-		50,226		-
Mortgage-backed securities		77,306		-		77,306		-
Corporate bonds and other securities		23,982		-		23,982		-
Total available-for-sale securities		192,127		-		192,127		-
Derivatives
Interest rate swap on loans		1,724		-		1,724		-
Total assets	$	193,851	$	-	$	193,851	$	-
Liabilities:
Derivatives
Interest rate swap on loans		1,724		-		1,724		-
Total liabilities	$	1,724	$	-	$	1,724	$	-

			Fair Value Measurements at December 31, 2023 Using
(dollars in thousands)	Balance		Level 1		Level 2		Level 3
Available-for-sale securities
U.S. Treasury securities	$	3,857	$	-	$	3,857	$	-
Obligations of  U.S. Government agencies		42,735		-		42,735		-
Obligations of state and political subdivisions		50,597		-		50,597		-
Mortgage-backed securities		81,307		-		81,307		-
Corporate bonds and other securities		23,735		-		23,735		-
Total available-for-sale securities	$	202,231	$	-	$	202,231	$	-
Loans held for sale		470		-		470		-
Derivatives
Interest rate locks		10		-		10		-
Interest rate swap on loans		1,249		-		1,249		-
Total assets	$	203,960	$	-	$	203,960	$	-
Liabilities:
Derivatives
Interest rate swap on loans		1,249		-		1,249		-
Total liabilities	$	1,249	$	-	$	1,249	$	-

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure and recognize certain assets at fair value on a nonrecurring basis in accordance with GAAP. As of June 30, 2024 and December 31, 2023, the Company had no assets or liabilities recorded at fair value on a nonrecurring basis.

Fair Value of Financial Instruments

FASB ASC 825, “Financial Instruments”, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. The Company uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

The following tables reflect the carrying amounts and estimated fair values of the Company’s financial instruments whether or not recognized on the Consolidated Balance Sheets at fair value.

			Fair Value Measurements at June 30, 2024 Using
(dollars in thousands)	Carrying Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	92,745	$	92,745	$	-	$	-
Securities available-for-sale		192,127		-		192,127		-
Restricted securities		3,825		-		3,825		-
Loans, net		1,042,774		-		-		984,390
Derivatives
Interest rate swap on loans		1,724		-		1,724		-
Bank owned life insurance		35,623		-		35,623		-
Accrued interest receivable		4,873		-		4,873		-
Liabilities
Deposits	$	1,236,575	$	-	$	1,234,452	$	-
Overnight repurchase agreements		1,381		-		1,381		-
Federal Home Loan Bank advances		39,586		-		39,586		-
Subordinated notes		29,733		-		25,786		-
Derivatives
Interest rate swap on loans		1,724		-		1,724		-
Accrued interest payable		2,028		-		2,028		-

			Fair Value Measurements at December 31, 2023 Using
(dollars in thousands)	Carrying Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	78,759	$	78,759	$	-	$	-
Securities available-for-sale		202,231		-		202,231		-
Restricted securities		5,176		-		5,176		-
Loans held for sale		470		-		470		-
Loans, net		1,068,046		-		-		1,025,622
Derivatives
Interest rate lock		10		-		10		-
Interest rate swap on loans		1,249		-		1,249		-
Bank owned life insurance		35,088		-		35,088		-
Accrued interest receivable		4,921		-		4,921		-
Liabilities
Deposits	$	1,230,397	$	-	$	1,228,477	$	-
Overnight repurchase agreements		2,383		-		2,383		-
Federal Home Loan Bank advances		69,450		-		69,450		-
Subordinated notes		29,668		-		25,561		-
Derivatives
Interest rate swap on loans		1,249		-		1,249		-
Accrued interest payable		1,972		-		1,972		-