Note 8 - Fair Value Measurements

9 Months Ended

Sep. 30, 2024

Notes to Financial Statements

Fair Value Disclosures [Text Block]

8. 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 individually evaluated 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 as of the periods indicated:

September 30, 2024
					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	$	120,169	$	120,169	$	120,169	$	-	$	-
Held-to-maturity securities		225,373		203,222		-		203,222		-
Available-for-sale debt securities		334,446		334,446		-		334,446		-
Restricted investments in bank stock		3,944		3,944		-		3,944		-
Loans and leases, net		1,774,156		1,650,914		-		-		1,650,914
Loans held-for-sale		1,762		1,792		-		1,792		-
Accrued interest receivable		9,802		9,802		-		9,802		-
Interest rate swaps		135		135		-		135		-
Financial liabilities:
Deposits with no stated maturities		2,033,390		2,033,390		-		2,033,390		-
Time deposits		309,116		308,177		-		308,177		-
Short-term borrowings		25,000		25,000		-		25,000		-
Secured borrowings		6,323		5,420		-		-		5,420
Accrued interest payable		4,434		4,434		-		4,434		-
Interest rate swaps		2,420		2,420		-		2,420		-

December 31, 2023
					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	$	111,949	$	111,949	$	111,949	$	-	$	-
Held-to-maturity securities		224,233		197,176		-		197,176		-
Available-for-sale debt securities		344,040		344,040		-		344,040		-
Restricted investments in bank stock		3,905		3,905		-		3,905		-
Loans and leases, net		1,666,292		1,532,195		-		-		1,532,195
Loans held-for-sale		1,457		1,483		-		1,483		-
Accrued interest receivable		9,092		9,092		-		9,092		-
Interest rate swaps		171		171		-		171		-
Financial liabilities:
Deposits with no stated maturities		1,945,456		1,945,456		-		1,945,456		-
Time deposits		212,969		210,423		-		210,423		-
Short-term borrowings		117,000		117,010		-		117,010		-
Secured borrowings		7,372		8,067		-		-		8,067
Accrued interest payable		3,042		3,042		-		3,042		-
Interest rate swaps		2,332		2,332		-		2,332		-

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

● Short-term borrowings and

● Accrued interest.

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.

Accruing loans and leases: The fair value of accruing loans is estimated by calculating the net present value of the future expected cash flows discounted at current offering rates for similar loans. Current offering rates consider, among other things, credit risk. 

The carrying value that fair value is compared to is net of the allowance for credit 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.

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 derivative instruments are determined by valuations provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions.

Time deposits: The fair value of time deposits 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)	September 30, 2024		(Level 1)		(Level 2)		(Level 3)
Assets:
Available-for-sale securities:
Agency - GSE	$	28,571	$	-	$	28,571	$	-
Obligations of states and political subdivisions		122,782		-		122,782		-
MBS - GSE residential		183,093		-		183,093		-
Total available-for-sale debt securities	$	334,446	$	-	$	334,446	$	-
Interest rate swaps		135		-		135		-
Total assets	$	334,581	$	-	$	334,581	$	-
Liabilities:
Interest rate swaps	$	2,420	$	-	$	2,420	$	-
Total liabilities	$	2,420	$	-	$	2,420	$	-

	Total carrying value		Quoted prices in active markets		Significant other observable inputs		Significant other unobservable inputs
(dollars in thousands)	December 31, 2023		(Level 1)		(Level 2)		(Level 3)
Assets:
Available-for-sale securities:
Agency - GSE	$	27,545	$	-	$	27,545	$	-
Obligations of states and political subdivisions		122,797		-		122,797		-
MBS - GSE residential		193,698		-		193,698		-
Total available-for-sale debt securities	$	344,040	$	-	$	344,040	$	-
Interest rate swaps		171		-		171		-
Total assets	$	344,211	$	-	$	344,211	$	-
Liabilities:
Interest rate swaps	$	2,332	$	-	$	2,332	$	-
Total liabilities	$	2,332	$	-	$	2,332	$	-

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  September 30, 2024 and December 31, 2023, respectively.

From time-to-time, the Company may be required to record at fair value financial instruments on a non-recurring basis, such as individually evaluated 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 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)	Valuation techniques	at September 30, 2024		(Level 1)		(Level 2)		(Level 3)
Individually evaluated loans	Fair value of collateral appraised value	$	2,378	$	-	$	-	$	2,378
Other repossessed assets	Fair value of asset less selling costs		10		-		-		10
Total		$	2,388	$	-	$	-	$	2,388

				Quoted prices in		Significant other		Significant other
		Total carrying value		active markets		observable inputs		unobservable inputs
(dollars in thousands)		at December 31, 2023		(Level 1)		(Level 2)		(Level 3)
Individually evaluated loans	Fair value of collateral appraised value	$	120	$	-	$	-	$	120
Other real estate owned	Fair value of asset less selling costs		1		-		-		1
Total		$	121	$	-	$	-	$	121

The following describes valuation methodologies used for financial instruments measured at fair value on a non-recurring basis. Individually evaluated loans that are collateral dependent are written down to fair value through the establishment of specific reserves, a component of the allowance for credit 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 individually evaluated, collateral dependent 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  September 30, 2024 and December 31, 2023, the range of liquidation expenses and other valuation adjustments applied to individually evaluated, collateral dependent loans ranged from -13.57% to -21.00% and from -31.47% to -31.47%, respectively. The weighted average of liquidation expenses and other valuation adjustments applied to individually evaluated, collateral dependent loans amounted to -16.93% as of September 30, 2024 and -31.47% as of December 31, 2023, 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 individually evaluated, collateral dependent 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, 2023, the discounts applied to the appraised values of ORE ranged from -77.60% to -77.60%, and the weighted average of discount to the appraisal values of ORE amounted to -77.60%. At  September 30, 2024, the net realizable values of properties in ORE were higher than the carrying value.

At  September 30, 2024, there was one other repossessed asset totaling $10 thousand. At December 31, 2023, there were no other repossessed assets. The Company refers to the National Automobile Dealers Association (NADA) guide to determine a vehicle’s fair value.