FAIR VALUE

9 Months Ended

Sep. 30, 2024

FAIR VALUE

FAIR VALUE

NOTE 6 – FAIR VALUE

ASC Topic 820 provides a framework for measuring and disclosing fair value under GAAP. ASC 820 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available for sale investment securities) or a nonrecurring basis (for example, impaired loans).

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The Fair Value Hierarchy

ASC 820-10 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. In accordance with ASC 820-10, these inputs are summarized in the three broad levels listed below:

● Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

● Level 2 – Other significant observable inputs (including quoted prices in active markets for similar securities).

● Level 3 – Significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value:

Investment Securities Available for Sale and Interest Rate Swaps. Investment securities available for sale and interest rate swap contracts are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the-counter markets, and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities, and interest rate swap contracts. Securities classified as Level 3 include asset-backed securities in illiquid markets.

The Bank may be required, from time to time, to measure certain other financial and non-financial assets and liabilities at fair value on a non-recurring basis in accordance with GAAP.

Loans. Impaired loans totaled $322,000 with $19,000 of specific reserves as of September 30, 2024. These assets included single-family residential, commercial and industrial, and automobile loans. They have been classified as impaired and include nonaccrual, past due 90 days or more and still accruing, and a homogeneous pool of indirect loans all considered to be impaired loans, which are valued under Level 3 inputs. Foreclosed real estate assets are primarily valued on a nonrecurring basis at the fair values of the underlying real estate collateral. The Company is predominantly a cash flow lender with real estate serving as collateral on a majority of loans. On a quarterly basis, the Company determines such fair values through a variety of data points and mostly relies on appraisals from independent appraisers. We obtain an appraisal of properties when they become impaired and conduct new appraisals at least every year. Typically, these appraisals do not include an inside inspection of the property as our loan documents do not require the borrower to allow access to the property. Therefore, the most significant unobservable inputs are the details of the amenities included within the property and the condition of the property. Further, we cannot always accurately assess the amount of time it takes to gain ownership of our collateral through the foreclosure process and the damage, as well as potential looting, of the property further decreasing our value. Thus, in determining the fair values we discount the current independent appraisals, within a range of 0% to 16%, based on individual circumstances.

The changes in the assets subject to fair value measurements are summarized below by level:

							Fair
(dollars in thousands)	Level 1		Level 2		Level 3		Value
September 30, 2024
Recurring:
Securities available for sale
Collateralized mortgage obligations	$	—	$	12,698	$	—	$	12,698
Agency mortgage-backed securities		547		41,119		—		41,666
Municipal securities		—		34,459		—		34,459
Corporate securities		—		1,343		—		1,343
U.S. Government agency securities		—		29,792		—		29,792
Non-recurring:
Impaired loans		—		—		303		303
	$	547	$	119,411	$	303	$	120,261
December 31, 2023
Recurring:
Securities available for sale
Collateralized mortgage obligations	$	—	$	13,661	$	—	$	13,661
Agency mortgage-backed securities		531		45,583		—		46,114
Municipal securities		—		33,729		—		33,729
Corporate securities		—		1,284		—		1,284
U.S. Government agency securities		—		37,694		—		37,694
U.S. Treasury securities		6,945		—		—		6,945
Non-recurring:
Impaired loans		—		—		398		398
	$	7,476	$	131,951	$	398	$	139,825

The estimated fair values of the Company’s financial instruments at September 30, 2024 and December 31, 2023 are summarized in the following table. The fair values of a significant portion of these financial instruments are estimates derived using present value techniques and may not be indicative of the net realizable or liquidation values. Also, the calculation of estimated fair values is based on market conditions at a specific point in time and may not reflect current or future fair values.

	September 30, 2024				December 31, 2023
(dollars in thousands)	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash and due from banks	$	2,255	$	2,255	$	1,940	$	1,940
Interest-bearing deposits in other financial institutions		20,127		20,127		12,189		12,189
Federal funds sold		80		80		1,112		1,112
Investment securities available for sale		119,958		119,958		139,427		139,427
Investments in restricted stock		246		246		1,217		1,217
Ground rents		124		124		130		130
Loans, less allowance for credit losses		204,227		196,740		174,150		161,802
Accrued interest receivable		1,478		1,478		1,192		1,192
Cash value of life insurance		8,789		8,789		8,657		8,657
Financial liabilities:
Deposits		314,273		270,290		300,067		252,707
Short-term borrowings		30,000		30,125		30,000		30,000
Accrued interest payable		993		993		366		366
Unrecognized financial instruments:
Commitments to extend credit		31,345		31,345		33,162		33,162
Standby letters of credit		255		255		45		45

The following table presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments that were estimated using an exit pricing notion.

(dollars in thousands)
	Carrying		Fair
September 30, 2024	Amount		Value		Level 1		Level 2		Level 3
Financial instruments - Assets
Cash and cash equivalents	$	22,462	$	22,462	$	22,462	$	—	$	—
Loans receivable, net		204,227		196,740		—		—		196,740
Cash value of life insurance		8,789		8,789		—		8,789		—
Financial instruments - Liabilities
Deposits		314,273		270,290		25,772		244,518		—
Short-term debt		30,000		30,125		—		30,125		—

Fair values are based on quoted market prices for similar instruments or estimated using discounted cash flows. The discounts used are estimated using comparable market rates for similar types of instruments adjusted to be commensurate with the credit risk, overhead costs, and optionality of such instruments.

The fair value of cash and due from banks, federal funds sold, investments in restricted stocks and accrued interest receivable are equal to the carrying amounts. The fair values of investment securities are determined using market quotations, if available, or measured using pricing models or other model-based valuation techniques such as present value and future value cash flows. The fair value of loans receivable is estimated using discounted cash flow analysis. For cash surrender value of life insurance, the carrying value is a reasonable estimate of fair value. The cash surrender value of life insurance is reported in the Level 2 fair value category. The fair value of the Bank Term Funding Program loans is equal to the carrying amounts. The fair value of FHLB borrowings is estimated based upon discounted future cash flows using a discounted rate comparable to the current market rate for such borrowings. FHLB borrowings are reported in the Level 2 fair value category.

The fair value of noninterest-bearing deposits, interest-bearing checking, savings, and money market deposit accounts, securities sold under agreements to repurchase, and accrued interest payable are equal to the carrying amounts.  The fair value of fixed-maturity time deposits is estimated using discounted cash flow analysis.