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Note P - Fair Value Measurements and Disclosures

12 Months Ended

Dec. 31, 2022

Notes to Financial Statements

Fair Value Disclosures [Text Block]

NOTE P - FAIR VALUE MEASUREMENTS AND DISCLOSURES:

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Available for sale securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record other assets at fair value on a non-recurring basis, such as impaired loans, ORE and intangible assets. These non-recurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets. Additionally, the Company is required to disclose, but not record, the fair value of other financial instruments.

Fair Value Hierarchy

The Company groups assets and liabilities at fair value in 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. These levels are:

Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2 - Valuation is based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques.

Following is a description of valuation methodologies used to determine the fair value of financial assets and liabilities.

Cash and Due from Banks

The carrying amount shown as cash and due from banks approximates fair value.

Available for Sale Securities

The fair value of available for sale securities is based on quoted market prices. The Company’s available for sale securities are reported at their estimated fair value, which is determined utilizing several sources. The primary source is ICE Data Pricing and Reference Date, LLC (“ICE”) which purchased Interactive Data Corporation (“IDC”) but kept the IDC methodologies. Those methodologies include utilizing pricing models that vary based on asset class and include available trade, bid and other market information and whose methodology includes broker quotes, proprietary models and vast descriptive databases. Another source for determining fair value is matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark securities. The Company’s available for sale securities for which fair value is determined through the use of such pricing models and matrix pricing are classified as Level 2 assets.

Held to Maturity Securities

The fair value of held to maturity securities is based on quoted market prices. The Company’s held to maturity securities are reported at their amortized cost, and their estimated fair value, which is determined utilizing several sources, is disclosed in the financial statements and footnotes. The primary source is ICE Data Pricing and Reference Date, LLC (“ICE”) which purchased Interactive Data Corporation (“IDC”) but kept the IDC methodologies. Those methodologies include utilizing pricing models that vary based on asset class and include available trade, bid and other market information and whose methodology includes broker quotes, proprietary models and vast descriptive databases. Another source for determining fair value is matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark securities. The Company’s held to maturity securities for which fair value is determined through the use of such pricing models and matrix pricing are classified as Level 2 assets.

Other Investments

The carrying amount shown as other investments approximates fair value.

Federal Home Loan Bank Stock

The carrying amount shown as Federal Home Loan Bank Stock approximates fair value.

Loans

The fair value of both fixed and floating rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings for the remaining maturities. The cash flows considered in computing the fair value of such loans are segmented into categories relating to the nature of the contract and collateral based on contractual principal maturities. Appropriate adjustments are made to reflect probable credit losses. Cash flows have been adjusted for such factors as prepayment risk or the effect of the maturity of balloon notes. The fair value of floating rate loans are estimated at market value. At each reporting period, the Company determines which loans are impaired. Accordingly, the Company’s impaired loans are reported at their estimated fair value on a non-recurring basis. An allowance for each impaired loan, which are generally collateral-dependent, is calculated based on the fair value of its collateral. The fair value of the collateral is based on appraisals performed by third-party valuation specialists. Factors including the assumptions and techniques utilized by the appraiser are considered by Management. If the recorded investment in the impaired loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses. Impaired loans are non-recurring Level 3 assets.

Other Real Estate

In the course of lending operations, Management may determine that it is necessary to foreclose on the related collateral. Other real estate acquired through foreclosure is carried at fair value, less estimated costs to sell. The fair value of the collateral is based on appraisals performed by third-party valuation specialists. Factors including the assumptions and techniques utilized by the appraiser are considered by Management. If the current appraisal is more than one year old and/or the loan balance is more than $200,000, a new appraisal is obtained. Otherwise, the Bank’s in-house property evaluator and Management will determine the fair value of the collateral, based on comparable sales, market conditions, Management’s plans for disposition and other estimates of fair value obtained from principally independent sources, adjusted for estimated selling costs. Other real estate is a non-recurring Level 3 asset.

Cash Surrender Value of Life Insurance

The carrying amount of cash surrender value of bank-owned life insurance approximates fair value.

Intangible Asset

The carrying amount shown as intangible asset approximates fair value.

Deposits

The fair value of all deposits both non-interest bearing and interest bearing demand and savings deposits along with time deposits are estimated by discounting the cash flows using the Federal Home Loan Bank bulletin curve rates deposits with similar remaining maturities. The cash flows considered in computing the fair value of such deposits are based on contractual maturities.

Borrowings from Federal Home Loan Bank

The fair value of Federal Home Loan Bank (“FHLB”) fixed and variable rate borrowings are estimated using repricing rates for similar types of borrowing arrangements.

The balances of available for sale securities, which are the only assets measured at fair value on a recurring basis, by level within the fair value hierarchy and by investment type, as of December 31, 2022 and 2021, were as follows (in thousands):

					Fair Value Measurements Using
		Total				Level 1				Level 2				Level 3
December 31, 2022:
U.S. Treasuries		$	108,368			$				$	108,368			$
Mortgage-backed securities			56,439								56,439
Collateralized mortgage obligations			107,377								107,377
States and political subdivisions			77,984								77,984
Total		$	350,168			$				$	350,168			$

December 31, 2021:
U.S. Treasuries		$	73,154			$				$	73,154			$
Mortgage-backed securities			71,982								71,982
Collateralized mortgage obligations			129,987								129,987
States and political subdivisions			101,680								101,680
Total		$	376,803			$				$	376,803			$
Total		$	753,606			$				$	753,606			$

Impaired loans, which are measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of December 31, 2022 and 2021 were as follows (in thousands):

					Fair Value Measurements Using
December 31:		Total				Level 1				Level 2				Level 3
2022		$	1,026			$				$				$	1,026
2021		$	129			$				$				$	129

Other real estate, which is measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of December 31, 2022 and 2021 are as follows (in thousands):

					Fair Value Measurements Using
December 31:		Total				Level 1				Level 2				Level 3
2022		$	259			$				$				$	259
2021		$	1,891			$				$				$	1,891

The following table presents a summary of changes in the fair value of other real estate which is measured using Level 3 inputs (in thousands):

		2022				2021
Balance, beginning of year		$	1,891			$	3,475

Loans transferred to ORE							14

Sales			(1,477	)			(1,299	)

Write-downs			(155	)			(299	)

Balance, end of year		$	259			$	1,891

The carrying value and estimated fair value of financial instruments, by level within the fair value hierarchy, at December 31, 2022 and 2021 are as follows (in thousands):

		Carrying				Fair Value Measurements Using
		Amount				Level 1				Level 2				Level 3				Total
December 31, 2022:
Financial Assets:
Cash and due from banks		$	32,836			$	32,836			$				$				$	32,836
Available for sale securities			350,168								350,168								350,168
Held to maturity securities			195,217								180,050								180,050
Other investments			350				350												350
Federal Home Loan Bank stock			2,175								2,175								2,175
Loans, net			234,540												223,494				223,494
Cash surrender value of life insurance			20,768								20,768								20,768
Intangible asset			600												600				600
Financial Liabilities:
Deposits:
Non-interest bearing			198,097				198,097												198,097
Interest bearing			587,683												497,950				497,950
Borrowings from Federal Home Loan
Bank

		Carrying				Fair Value Measurements Using
		Amount				Level 1				Level 2				Level 3				Total
December 31, 2021:
Financial Assets:
Cash and due from banks		$	49,991			$	49,991			$				$				$	49,991
Available for sale securities			376,803								376,803								376,803
Held to maturity securities			110,208								111,340								111,340
Other investments			2,404				2,404												2,404
Federal Home Loan Bank stock			2,153								2,153								2,153
Loans, net			235,851												238,305				238,305
Cash surrender value of life insurance			20,150								20,150								20,150
Financial Liabilities:
Deposits:
Non-interest bearing			193,473				193,473												193,473
Interest bearing			511,365												512,034				512,034
Borrowings from Federal Home Loan
Bank			889								1,072								1,072

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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