Note 13 - Fair Value Measurements

12 Months Ended

Dec. 31, 2022

Notes to Financial Statements

Fair Value Disclosures [Text Block]

13. FAIR VALUE MEASUREMENTS

The accounting guidelines establish a framework for measuring and disclosing information about fair value measurements. The guidelines of fair value reporting instituted a valuation hierarchy for disclosure of the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:

Level 1 - inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 - inputs are quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument;

Level 3 - inputs are unobservable and are based on the Company’s own assumptions to measure assets and liabilities at fair value. Level 3 pricing for securities may also include unobservable inputs based upon broker-traded transactions.

A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The Company uses fair value to measure certain assets and, if necessary, liabilities on a recurring basis when fair value is the primary measure for accounting. Thus, the Company uses fair value for AFS securities. Fair value is used on a non-recurring basis to measure certain assets when adjusting carrying values to market values, such as impaired loans, other real estate owned (ORE) and other repossessed assets.

The following table represents the carrying amount and estimated fair value of the Company’s financial instruments:

December 31, 2022
					Quoted prices		Significant		Significant
					in active		other		other
	Carrying		Estimated		markets		observable inputs		unobservable inputs
(dollars in thousands)	amount		fair value		(Level 1)		(Level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	29,091	$	29,091	$	29,091	$	-	$	-
Held-to-maturity securities		222,744		187,280		-		187,280		-
Available-for-sale debt securities		420,862		420,862		-		420,862		-
Restricted investments in bank stock		5,268		5,268		-		5,268		-
Loans and leases, net		1,547,025		1,440,151		-		-		1,440,151
Loans held-for-sale		1,637		1,660		-		1,660		-
Accrued interest receivable		8,487		8,487		-		8,487		-
Interest rate swaps		213		213		-		213		-
Financial liabilities:
Deposits with no stated maturities		2,049,689		2,049,689		-		2,049,689		-
Time deposits		117,224		113,252		-		113,252		-
Short-term borrowings		12,940		12,940		-		12,940		-
Secured borrowings		7,619		7,275		-		-		7,275
Accrued interest payable		448		448		-		448		-
Interest rate swaps		213		213		-		213		-

December 31, 2021
					Quoted prices		Significant		Significant
					in active		other		other
	Carrying		Estimated		markets		observable inputs		unobservable inputs
(dollars in thousands)	amount		fair value		(Level 1)		(Level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	96,877	$	96,877	$	96,877	$	-	$	-
Available-for-sale debt securities		738,980		738,980		-		738,980		-
Restricted investments in bank stock		3,206		3,206		-		3,206		-
Loans and leases, net		1,417,504		1,404,103		-		-		1,404,103
Loans held-for-sale		31,727		32,013		-		32,013		-
Accrued interest receivable		7,526		7,526		-		7,526		-
Financial liabilities:
Deposits with no stated maturities		2,031,072		2,031,072		-		2,031,072		-
Time deposits		138,793		138,291		-		138,291		-
Secured borrowings		10,620		10,690		-		-		10,690
Accrued interest payable		155		155		-		155		-

The carrying value of short-term financial instruments, as listed below, approximates their fair value. These instruments generally have limited credit exposure, no stated or short-term maturities, carry interest rates that approximate market and generally are recorded at amounts that are payable on demand:

● Cash and cash equivalents;

● Non-interest bearing deposit accounts;

● Savings, interest-bearing checking and money market accounts and

● Short-term borrowings.

Securities: Fair values on investment securities are determined by prices provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions.

Originated loans and leases: The fair value of accruing loans is estimated by calculating the net present value of the future expected cash flows discounted using the exit price notion. The discount rate is based upon current offering rates, with an additional discount for expected potential charge-offs. Additionally, an environmental general credit risk adjustment is subtracted from the net present value to arrive at the total estimated fair value of the accruing loan portfolio.

The carrying value that fair value is compared to is net of the allowance for loan losses and since there is significant judgment included in evaluating credit quality, loans are classified within Level 3 of the fair value hierarchy.

Non-accrual loans: Loans which the Company has measured as non-accruing are 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. These loans are classified within Level 3 of the fair value hierarchy. The fair value consists of loan balances less the valuation allowance.

Acquired loans: Acquired loans (performing and non-performing) are initially recorded at their acquisition-date fair values using Level 3 inputs. For more information on the calculation of the fair value of acquired loans, see Footnote 21, “Acquisition.”

Loans held-for-sale: The fair value of loans held-for-sale is estimated using rates currently offered for similar loans and is typically obtained from the Federal National Mortgage Association (FNMA) or the Federal Home Loan Bank of Pittsburgh (FHLB).

Interest rate swaps: Fair values on investment securities are determined by prices provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions.

Certificates of deposit: The fair value of certificates of deposit is based on discounted cash flows using rates which approximate market rates for deposits of similar maturities.

Secured borrowings: The fair value for these obligations uses an income approach based on expected cash flows on a pooled basis.

The following tables illustrate the financial instruments measured at fair value on a recurring basis segregated by hierarchy fair value levels as of the periods indicated:

	Total carrying value		Quoted prices in active markets		Significant other observable inputs		Significant other unobservable inputs
(dollars in thousands)	December 31, 2022		(Level 1)		(Level 2)		(Level 3)
Available-for-sale securities:
Agency - GSE	$	31,533	$	-	$	31,533	$	-
Obligations of states and political subdivisions		171,894		-		171,894		-
MBS - GSE residential		217,435		-		217,435		-
Total available-for-sale debt securities	$	420,862	$	-	$	420,862	$	-

	Total carrying value		Quoted prices in active markets		Significant other observable inputs		Significant other unobservable inputs
(dollars in thousands)	December 31, 2021		(Level 1)		(Level 2)		(Level 3)
Available-for-sale securities:
Agency - GSE	$	117,003	$	-	$	117,003	$	-
Obligations of states and political subdivisions		364,710		-		364,710		-
MBS - GSE residential		257,267		-		257,267		-
Total available-for-sale debt securities	$	738,980	$	-	$	738,980	$	-

Debt securities in the AFS portfolio are measured at fair value using market quotations provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions. Assets classified as Level 2 use valuation techniques that are common to bond valuations. That is, in active markets whereby bonds of similar characteristics frequently trade, quotes for similar assets are obtained.

There were no changes in Level 3 financial instruments measured at fair value on a recurring basis as of and for the periods ending December 31, 2022 and 2021, respectively.

The following table illustrates the financial instruments measured at fair value on a non-recurring basis segregated by hierarchy fair value levels as of the periods indicated:

			Quoted prices in		Significant other		Significant other
	Total carrying value		active markets		observable inputs		unobservable inputs
(dollars in thousands)	at December 31, 2022		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	1,515	$	-	$	-	$	1,515
Other real estate owned		168		-		-		168
Total	$	1,683	$	-	$	-	$	1,683

			Quoted prices in		Significant other		Significant other
	Total carrying value		active markets		observable inputs		unobservable inputs
(dollars in thousands)	at December 31, 2021		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	2,245	$	-	$	-	$	2,245
Other real estate owned		198		-		-		198
Total	$	2,443	$	-	$	-	$	2,443

From time-to-time, the Company may be required to record at fair value financial instruments on a non-recurring basis, such as impaired loans, ORE and other repossessed assets. These non-recurring fair value adjustments involve the application of lower-of-cost-or-market accounting on write downs of individual assets. The fair value of impaired loans was calculated using the value of the impaired loans with an allowance less the related allowance.

The following describes valuation methodologies used for financial instruments measured at fair value on a non-recurring basis. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves, a component of the allowance for loan losses, and as such are carried at the lower of net recorded investment or the estimated fair value. Estimates of fair value of the collateral are determined based on a variety of information, including available valuations from certified appraisers for similar assets, present value of discounted cash flows and inputs that are estimated based on commonly used and generally accepted industry liquidation advance rates and estimates and assumptions developed by management.

Valuation techniques for impaired loans are typically determined through independent appraisals of the underlying collateral or may be determined through present value of discounted cash flows. Both techniques include various Level 3 inputs which are not identifiable. The valuation technique may be adjusted by management for estimated liquidation expenses and qualitative factors such as economic conditions. If real estate is not the primary source of repayment, present value of discounted cash flows and estimates using generally accepted industry liquidation advance rates and other factors may be utilized to determine fair value.

At December 31, 2022 and December 31, 2021, the range of liquidation expenses and other valuation adjustments applied to impaired loans ranged from -19.61% and -29.58% and from -33.08% to -47.66%, respectively. The weighted average of liquidation expenses and other valuation adjustments applied to impaired loans amounted to -21.77% as of December 31, 2022 and -44.50% as of December 31, 2021, respectively. Due to the multitude of assumptions, many of which are subjective in nature, and the varying inputs and techniques used to determine fair value, the Company recognizes that valuations could differ across a wide spectrum of techniques employed. Accordingly, fair value estimates for impaired loans are classified as Level 3.

For ORE, fair value is generally determined through independent appraisals of the underlying properties which generally include various Level 3 inputs which are not identifiable. Appraisals form the basis for determining the net realizable value from these properties. Net realizable value is the result of the appraised value less certain costs or discounts associated with liquidation which occurs in the normal course of business. Management’s assumptions may include consideration of the location and occupancy of the property, along with current economic conditions. Subsequently, as these properties are actively marketed, the estimated fair values may be periodically adjusted through incremental subsequent write-downs. These write-downs usually reflect decreases in estimated values resulting from sales price observations as well as changing economic and market conditions. At December 31, 2022 and December 31, 2021, the discounts applied to the appraised values of ORE ranged from -39.07% and -77.60% and from -20.16% and -77.60%, respectively. As of December 31, 2022, and December 31, 2021, the weighted average of discount to the appraisal values of ORE amounted to -39.61% and -28.21%, respectively.

At December 31, 2022 and 2021, there were no other repossessed assets. The Company refers to the National Automobile Dealers Association (NADA) guide to determine a vehicle’s fair value.

Financial Instruments with Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of the Company’s involvement in particular classes of financial instruments. Because of the nature of these instruments, the fair values of these off-balance sheet items are not material.

The notional amount of the Company’s financial instruments with off-balance sheet risk was as follows:

	December 31,
(dollars in thousands)	2022		2021
Off-balance sheet financial instruments:
Commitments to extend credit	$	390,644	$	306,852
Standby letters of credit		16,634		6,352

Commitments to Extend Credit and Standby Letters of Credit

The Company’s exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. The Company evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by the Company on extension of credit, is based on management’s credit assessment of the customer.

Financial standby letters of credit are conditional commitments issued by the Company to guarantee performance of a customer to a third party. Those guarantees are issued primarily to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The Company’s performance under the guarantee is required upon presentation by the beneficiary of the financial standby letter of credit. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company was not required to recognize any liability in connection with the issuance of these financial standby letters of credit.

The following table summarizes outstanding financial letters of credit as of December 31, 2022:

			More than
	Less than		one year to		Over five
(dollars in thousands)	one year		five years		years		Total
Secured by:
Collateral	$	5,680	$	2,850	$	1,007	$	9,537
Bank lines of credit		1,903		3,300		—		5,203
Other		658		—		—		658
		8,241		6,150		1,007		15,398
Unsecured		821		415		—		1,236
Total	$	9,062	$	6,565	$	1,007	$	16,634

The Company has not incurred losses on its commitments in 2022, 2021 or 2020.