Fair Value Measurements and Disclosures

9 Months Ended

Sep. 30, 2024

Fair Value Measurements and Disclosures

Fair Value Measurements and Disclosures

8. 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 and ORE. 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.

Investments

The fair value of available for sale securities and held to maturity securities is based on quoted market prices. The Company’s available for sale and 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 available for sale securities and 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 fixed 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 not been adjusted for such factors as prepayment risk or the effect of the maturity of balloon notes. The fair value of floating rate loans is estimated to be its carrying value. At each reporting period, the Company determines which loans are collateral dependent. Accordingly, the Company’s collateral dependent loans are reported at their estimated fair value on a non-recurring basis. An allowance for each loan, which is 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 collateral dependent loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for credit losses. Collateral dependent 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 or repossession 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 or internally prepared valuations. Other real estate is a non-recurring Level 3 asset.

Deposits

The fair value of non-interest bearing demand and interest bearing savings and demand deposits is the amount reported in the financial statements. The fair value of time deposits is estimated by discounting the cash flows using current rates of time deposits with similar remaining maturities. The cash flows considered in computing the fair value of such deposits are based on contractual maturities, since approximately 98% of time deposits provide for automatic renewal at current interest rates.

Borrowings from Federal Home Loan Bank

The fair value of Federal Home Loan Bank (“FHLB”) fixed rate borrowings is estimated using discounted cash flows based on current incremental borrowing rates for similar types of borrowing arrangements. The fair value of FHLB variable rate borrowings is estimated to be its carrying value.

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 September 30, 2024 and December 31, 2023, were as follows (in thousands):

			Fair Value Measurements Using
	Total		Level 1		Level 2		Level 3
September 30, 2024:
U.S. Treasuries	$	133,792	$	—	$	133,792	$	—
Mortgage-backed securities		44,627		—		44,627		—
Collateralized mortgage obligations		78,775		—		78,775		—
States and political subdivisions		84,684		—		84,684		—
Total	$	341,878	$	—	$	341,878	$	—
December 31, 2023:
U.S. Treasuries	$	115,458	$	—	$	115,458	$	—
Mortgage-backed securities		47,785		—		47,785		—
Collateralized mortgage obligations		95,006		—		95,006		—
States and political subdivisions		81,228		—		81,228		—
Total	$	339,477	$	—	$	339,477	$	—

Collateral dependent loans, which are measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of September 30, 2024 and December 31, 2023 were as follows (in thousands):

			Fair Value Measurements Using
	Total		Level 1		Level 2		Level 3
September 30, 2024	$	—	$	—	$	—	$	—
December 31, 2023	$	6	$	—	$	—	$	6

Other real estate, which is measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of September 30, 2024 and December 31, 2023 were zero, respectively.

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):

	September 30, 2024		December 31, 2023
Balance, beginning of year	$	—	$	259
Loans transferred to ORE		9		952
Sales		(9)		(1,114)
Write-downs		—		(97)
Balance, end of year	$	—	$	—

The carrying value and estimated fair value of financial instruments, by level within the fair value hierarchy, at September 30, 2024 and December 31, 2023 are as follows (in thousands):

	Carrying		Fair Value Measurements Using
	Amount		Level 1		Level 2		Level 3		Total
September 30, 2024:
Financial Assets:
Cash and due from banks	$	42,253	$	42,253	$	—	$	—	$	42,253
Available for sale securities		341,878		—		341,878		—		341,878
Held to maturity securities, net		133,635		—		123,415		—		123,415
Other investments		350		350		—		—		350
Federal Home Loan Bank stock		434		—		434		—		434
Loans, net		236,168		—		—		229,498		229,498
Financial Liabilities:
Deposits:
Non-interest bearing		187,866		187,866		—		—		187,866
Interest bearing		439,941		—		—		401,749		401,749
Time deposits		38,279		—		—		37,715		37,715
Borrowings Federal Home Loan Bank		—		—		—		—		—
Borrowings under Bank Term Funding Program		30,000		—		30,000		—		30,000

	Carrying		Fair Value Measurements Using
	Amount		Level 1		Level 2		Level 3		Total
December 31, 2023:
Financial Assets:
Cash and due from banks	$	22,794	$	22,794	$	—	$	—	$	22,794
Available for sale securities		339,477		—		339,477		—		339,477
Held to maturity securities, net		150,911		—		138,523		—		138,523
Other investments		350		350		—		—		350
Federal Home Loan Bank stock		2,334		—		2,334		—		2,334
Loans, net		235,115		—		—		221,896		221,896
Financial Liabilities:
Deposits:
Non-interest bearing		174,933		174,933		—		—		174,933
Interest bearing		483,662		—		—		424,398		424,398
Time deposits		29,895		—		—		28,939		28,939
Borrowings from Federal Home Loan Bank		18,500		—		18,500		—		18,500