FAIR VALUE MEASUREMENT

3 Months Ended

Mar. 31, 2024

FAIR VALUE MEASUREMENT

FAIR VALUE MEASUREMENT

11. FAIR VALUE MEASUREMENT

Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact. Additional guidance is provided on determining when the volume and level of activity for the asset or liability has significantly decreased. The guidance also includes instruction on identifying circumstances when a transaction may not be considered orderly.

Fair value measurement and disclosure guidance provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes that there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed, and significant adjustments to the related prices may be necessary to estimate fair value in accordance with fair value measurement and disclosure guidance.

This guidance clarifies that, when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The guidance provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.

The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

Level 2 Inputs – 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 Inputs – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

An asset’s or liability’s placement in the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy, is set forth below.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Equity Securities – The fair value of equity securities is based upon quoted prices in active markets and is reported using Level 1 inputs.

Debt Securities – For debt securities where quoted prices are not available, fair values are calculated based on market prices of similar securities and are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurement from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the debt securities’ terms and conditions, among other things. For debt securities where quoted prices or market prices of similar securities are not available, fair values are calculated using other market indicators and are reported at fair value utilizing Level 3 inputs.

Other Real Estate Owned – Certain assets included in other real estate owned are carried at fair value as a result of impairment and accordingly are presented as measured on a non-recurring basis. Values are estimated using Level 3 inputs, based on appraisals that consider the sales prices of property in the proximate vicinity.

Mortgage Servicing Rights – The fair value of servicing assets is based on the present value of estimated future cash flows on pools of mortgages stratified by rate and maturity date and are considered Level 3 inputs.

The following tables summarize financial assets and financial liabilities measured at fair value as of March 31, 2024 and December 31, 2023 segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value. There were no assets measured at fair value on a non-recurring basis as of March 31, 2024 or December 31, 2023.

	(Level 1)		(Level 2)		(Level 3)
	Quoted Prices in		Significant		Significant
(Dollars in thousands)	Active Markets		Other		Other
	for Identical		Observable		Unobservable
March 31, 2024	Assets		Inputs		Inputs		Total
Assets measured at fair value on a recurring basis:
Debt securities available for sale:
Obligations of U.S. Government agencies and corporations	$	—	$	14,127	$	—	$	14,127
Obligations of state and political subdivisions		—		6,462		—		6,462
Corporate debt securities		—		7,922		6,494		14,416
Mortgage-backed securities		—		31,634		—		31,634
Total debt securities available for sale	$	—	$	60,145	$	6,494	$	66,639
Equity securities	$	1,060	$	—	$	—	$	1,060
Mortgage servicing rights	$	—	$	—	$	81	$	81

	(Level 1)		(Level 2)		(Level 3)
	Quoted Prices in		Significant		Significant
(Dollars in thousands)	Active Markets		Other		Other
	for Identical		Observable		Unobservable
December 31, 2023	Assets		Inputs		Inputs		Total
Assets measured at fair value on a recurring basis:
Debt securities available for sale:
Obligations of U.S. Government agencies and corporations	$	—	$	14,173	$	—	$	14,173
Obligations of state and political subdivisions		—		6,508		—		6,508
Corporate debt securities		—		7,675		6,153		13,828
Mortgage-backed securities		—		33,055		—		33,055
Total debt securities available for sale	$	—	$	61,411	$	6,153	$	67,564
Equity securities	$	1,073	$	—	$	—	$	1,073
Mortgage servicing rights	$	—	$	—	$	83	$	83

The table below presents a reconciliation of the beginning and ending balances of investment securities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three month periods ended March 31, 2024 and 2023.

	Three Months Ended
(Dollars in thousands)	March 31,
	2024		2023
Investment Securities:
Beginning balance	$	6,153	$	7,145
Total gain (loss) included in OCI		341		(496)
Purchases		—		—
Principal payments and other		—		—
Sales		—		—
Balance, end of period	$	6,494	$	6,649

Mortgage servicing rights and assets measured at fair value on a nonrecurring basis for which Level 3 inputs have been used to determine fair value are immaterial to the Company’s consolidated financial statements.

Fair Value of Financial Instruments

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, the fair value estimates reported herein are not necessarily indicative of the amounts the Company could have realized in sales transactions on the dates indicated. The estimated fair value amounts have been measured as of their respective year ends and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments after the respective reporting dates may be different from the amounts reported at each quarter end.

The information presented below should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is provided only 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 carrying amounts and estimated fair values of the Company’s financial instruments are as follows:

	Financial Instruments
(Dollars in thousands)	March 31, 2024				December 31, 2023
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Financial assets:
Cash and due from banks	$	5,085	$	5,085	$	17,189	$	17,189
Interest bearing deposits with banks		8,352		8,352		11,741		11,741
Debt securities available for sale		66,639		66,639		67,564		67,564
Debt securities held to maturity		198,680		193,182		200,644		198,147
Loans, net of allowance for credit losses		530,924		511,280		519,717		500,439
Accrued interest receivable		2,621		2,621		2,438		2,438
Financial liabilities:
Time deposits	$	198,177	$	194,800	$	197,387	$	194,219
Securities sold under agreements to repurchase		17,214		N/A		12,810		N/A
Short-term borrowings		40,000		39,853		40,000		39,868
Long-term debt		20,000		19,748		20,000		19,638
Other interest bearing liabilities		884		880		951		947
Accrued interest payable		1,809		1,809		1,397		1,397
Off-balance sheet financial instruments:
Commitments to extend credit	$	—	$	—	$	—	$	—
Letters of credit		—		—		—		—

The following tables present the carrying amount, fair value and placement in the fair value hierarchy of the Company’s financial instruments not previously disclosed as of March 31, 2024 and December 31, 2023. The tables exclude financial instruments for which the carrying amount approximates fair value.

					(Level 1)		(Level 2)		(Level 3)
					Quoted Prices in		Significant		Significant
(Dollars in thousands)					Active Markets		Other		Other
	Carrying				for Identical		Observable		Unobservable
	Amount		Fair Value		Assets or Liabilities		Inputs		Inputs
March 31, 2024
Financial instruments – Assets
Debt securities held to maturity	$	198,680	$	193,182	$	—	$	193,182	$	—
Loans, net of allowance for credit losses		530,924		511,280		—		—		511,280
Financial instruments – Liabilities
Time deposits	$	198,177	$	194,800	$	—	$	194,800	$	—
Short-term borrowings		40,000		39,853		—		39,853		—
Long-term debt		20,000		19,748		—		19,748		—
Other interest bearing liabilities		884		880		—		880		—

					(Level 1)		(Level 2)		(Level 3)
					Quoted Prices in		Significant		Significant
(Dollars in thousands)					Active Markets		Other		Other
	Carrying				for Identical		Observable		Unobservable
	Amount		Fair Value		Assets or Liabilities		Inputs		Inputs
December 31, 2023
Financial instruments – Assets
Debt securities held to maturity	$	200,644	$	198,147	$	—	$	198,147	$	—
Loans, net of allowance for credit losses		519,717		500,439		—		—		500,439
Financial instruments – Liabilities
Time deposits	$	197,387	$	194,219	$	—	$	194,219	$	—
Short-term borrowings		40,000		39,868		—		39,868		—
Long-term debt		20,000		19,638		—		19,638		—
Other interest bearing liabilities		951		947		—		947		—