Fair Values of Financial Instruments

12 Months Ended

Dec. 31, 2023

Fair Values of Financial Instruments [Abstract]

NOTE 16 – FAIR VALUES OF FINANCIAL INSTRUMENTS

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (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. In accordance with fair value accounting guidance, the Company measures, records, and reports various types of assets and liabilities at fair value on either a recurring or non-recurring basis in the Consolidated Financial Statements. Those assets and liabilities are presented in the sections entitled “Assets and Liabilities Required to be Measured and Reported at Fair Value on a Recurring Basis” and “Assets and Liabilities Required to be Measured and Reported at Fair Value on a Non-Recurring Basis”. There are three levels of inputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices such as 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.

Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Assets and Liabilities Required to be Measured and Reported at Fair Value on a Recurring Basis

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2023 and 2022 are as follows (in thousands):



	Fair Value Measurement Reporting Date using
Description	Total		Level 1		Level 2		Level 3
December 31, 2023
ASSETS
U.S. Treasury securities	$	53,600	$	—	$	53,600	$	—
U.S. Government agencies		15,996		—		15,996		—
States and political subdivisions		129,479		—		129,479		—
Mortgage-backed securities-government
sponsored entities		207,184		—		207,184		—
Interest rate derivatives		1,225		—		1,225		—

LIABILITIES
Interest rate derivatives		1,225		—		1,225		—

December 31, 2022
ASSETS
U.S. Treasury securities	$	41,854	$	—	$	41,854	$	—
U.S. Government agencies		18,323		—		18,323		—
States and political subdivisions		127,852		—		127,852		—
Mortgage-backed securities-government
sponsored entities		230,898		—		230,898		—
Interest rate derivatives		1,464		—		1,464		—

LIABILITIES
Interest rate derivatives		1464		—		1464		—

Securities:

The fair value of securities available for sale (carried at fair value) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted prices. For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3). In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) are used to support fair values of certain Level 3 investments, if applicable.

Interest Rate Swaps:

The fair value of interest rate swaps is based upon the present value of the expected future cash flows using the SOFR swap curve, the basis for the underlying interest rate. To price interest rate swaps, cash flows are first projected for each payment date using the fixed rate for the fixed side of the swap and the forward rates for the floating side of the swap. These swap cash flows are then discounted to time zero using SOFR zero-coupon interest rates. The sum of the present value of both legs is the fair market value of the interest rate swap. These valuations have been derived from our third party vendor’s proprietary models rather than actual market quotations. The proprietary models are based upon financial principles and assumptions that we believe to be reasonable.

Assets and Liabilities Required to be Measured and Reported at Fair Value on a Non-Recurring Basis

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2023 and 2022 are as follows (in thousands):



	Fair Value Measurement Reporting Date using
Description	Total		Level 1		Level 2		Level 3
December 31, 2023
Individually analyzed loans held for investment	$	7,487	$	—	$	—	$	7,487
Foreclosed real estate		97		—		—		97


December 31, 2022
Impaired loans	$	413	$	—	$	—	$	413
Foreclosed real estate		346		—		—		346

Individually Analyzed loans (generally carried at fair value):

The Company measures impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the lowest level of input that is significant to the fair value measurements.

As of December 31, 2023, the fair value investment in individually analyzed loans totaled $7,487,000, which included 28 loan relationships with a carrying value of $7,069,000 that did not require a specific allowance for credit loss since either the estimated realizable value of the collateral or the discounted cash flows exceeded the recorded investment in the loan. As of December 31, 2023, the Company has recognized charge-offs against the allowance for credit losses on these individually analyzed loans in the amount of $5,277,000 over the life of the loans. As of December 31, 2023, the fair value investment in individually analyzed loans included 21 loan relationships with a carrying value of $553,000 that required a valuation allowance of $135,000 since the estimated realizable value of the collateral did not support the recorded investment in the loan. As of December 31, 2023, the Company has recognized charge-offs against the allowance for credit losses on these individually analyzed loans in the amount of $0 over the life of the loan

As of December 31, 2022, the fair value investment in impaired loans totaled $413,000, which included two loan relationships with a carrying value of $413,000 that did not require a valuation allowance since either the estimated realizable value of the collateral or the discounted cash flows exceeded the recorded investment in the loan. As of December 31, 2022, the Company has recognized charge-offs against the allowance for loan losses on these impaired loans in the amount of $0 over the life of the loans. As of December 31, 2022, the fair value investment in impaired loans included one loan relationships with a carrying value of $50,000 that required a valuation allowance of $50,000 since the estimated realizable value of the collateral did not support the recorded investment in the loan. As of December 31, 2022, the Company has recognized charge-offs against the allowance for loan losses on this impaired loan in the amount of $0 over the life of the loan.

Foreclosed real estate owned (carried at fair value):

Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are carried at fair value less estimated cost to sell. Fair value is based upon independent market prices, appraised value of the collateral or management’s estimation of the value of the collateral. These assets are included in Level 3 fair value based upon the lowest level of input that is significant to the fair value measurement.

The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:



	Quantitative Information about Level 3 Fair Value Measurements
(dollars in thousands)	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)
December 31, 2023
Individually analyzed loans held for investment	$	7,487	Appraisal of collateral(1)	Appraisal adjustments(2)	0%-10.0% (2.68%)


Foreclosed real estate owned	$	97	Appraisal of collateral(1)	Liquidation Expenses(2)	16.67%-37.20% (28.07%)



	Quantitative Information about Level 3 Fair Value Measurements
(dollars in thousands)	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)
December 31, 2022
Impaired loans	$	413	Appraisal of collateral(1)	Appraisal adjustments(2)	0%-10.0% (8.92%)


Foreclosed real estate owned	$	346	Appraisal of collateral(1)	Liquidation Expenses(2)	7.00% ‎(7.00%)

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable, less any associated allowance.

(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

Assets and Liabilities Not Required to be Measured or Reported at Fair Value

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.

The estimated fair values of the Bank’s financial instruments not required to be measured or reported at fair value were as follows at December 31, 2023 and December 31, 2022. (In thousands):



	Fair Value Measurements at December 31, 2023

	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents (1)	$	66,120	$	66,120	$	66,120	$	—	$	—
Loans receivable, net		1,584,650		1,521,667		—		—		1,521,667
Mortgage servicing rights		188		506		—		—		506
Regulatory stock (1)		7,318		7,318		7,318		—		—
Bank owned life insurance (1)		46,439		46,439		46,439		—		—
Accrued interest receivable (1)		8,123		8,123		8,123		—		—

Financial liabilities:
Deposits		1,795,159		1,800,104		1,086,050		—		714,054
Short-term borrowings (1)		74,076		74,076		74,076		—		—
Other borrowings		124,236		124,058		—		—		124,058
Accrued interest payable (1)		10,510		10,510		10,510		—		—

Off-balance sheet financial instruments:
Commitments to extend credit and outstanding letters of credit		—		—		—		—		—



	Fair Value Measurements at December 31, 2022

	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents (1)	$	31,866	$	31,866	$	31,866	$	—	$	—
Loans receivable, net		1,456,946		1,418,300		—		—		1,418,300
Mortgage servicing rights		213		498		—		—		498
Regulatory stock (1)		5,418		5,418		5,418		—		—
Bank owned life insurance (1)		43,364		43,364		43,364		—		—
Accrued interest receivable (1)		6,917		6,917		6,917		—		—

Financial liabilities:
Deposits		1,727,727		1,727,184		1,223,958		—		503,226
Short-term borrowings (1)		93,215		93,215		93,215		—		—
Other borrowings		40,000		40,074		—		—		40,074
Accrued interest payable (1)		2,653		2,653		2,653		—		—

Off-balance sheet financial instruments:
Commitments to extend credit and outstanding letters of credit		—		—		—		—		—

(1) This financial instrument is carried at cost, which approximates the fair value of the instrument.

- 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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