Fair Value Measurements

9 Months Ended

Sep. 30, 2023

NOTE 6 – FAIR VALUE MEASUREMENTS

The following tables present information about assets and liabilities measured at fair value on a recurring basis and the valuation techniques used to determine those fair values.

In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that ChoiceOne Bank has the ability to access.

Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. ChoiceOne Bank’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

Disclosures concerning assets and liabilities measured at fair value are as follows:

Assets and Liabilities Measured at Fair Value on a Recurring Basis


	Quoted Prices
	In Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable		Balance
(Dollars in thousands)	Assets		Inputs		Inputs		at Date
	(Level 1)		(Level 2)		(Level 3)		Indicated
Equity Securities Held at Fair Value - September 30, 2023
Equity securities	$	4,543	$	-	$	2,719	$	7,262

Investment Securities, Available for Sale - September 30, 2023
U.S. Treasury notes and bonds	$	77,032	$	-	$	-	$	77,032
State and municipal		-		212,714		-		212,714
Mortgage-backed		-		189,064		-		189,064
Corporate		-		709		-		709
Asset-backed securities		-		11,285		-		11,285
Total	$	77,032	$	413,772	$	-	$	490,804

Derivative Instruments - September 30, 2023
Interest rate derivative contracts - assets	$	-	$	29,900	$	-	$	29,900
Interest rate derivative contracts - liabilities	$	-	$	-	$	-	$	-

Equity Securities Held at Fair Value - December 31, 2022
Equity securities	$	6,024	$	-	$	2,542	$	8,566

Investment Securities, Available for Sale - December 31, 2022
U. S. Government and federal agency	$	-	$	-	$	-	$	-
U. S. Treasury notes and bonds		78,204		-		-		78,204
State and municipal		-		229,938		-		229,938
Mortgage-backed		-		208,563		-		208,563
Corporate		-		711		-		711
Asset-backed securities		-		12,333		-		12,333
Total	$	78,204	$	451,545	$	-	$	529,749

Derivative Instruments - December 31, 2022
Interest rate derivative contracts - assets	$	-	$	9,204	$	-	$	9,204
Interest rate derivative contracts - liabilities	$	-	$	5,823	$	-	$	5,823

Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis


	Nine Months Ended
(Dollars in thousands)	September 30,
	2023		2022
Equity Securities Held at Fair Value
Balance, January 1	$	2,542	$	1,768
Total realized and unrealized gains included in noninterest income		67		18
Net purchases, sales, calls, and maturities		110		75
Net transfers into Level 3		-		-
Balance, September 30,	$	2,719	$	1,861

Amount of total losses for the period included in earning attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at September 30,	$	67	$	18

Investment Securities, Available for Sale
Balance, January 1	$	-	$	21,050
Total unrealized gains included in other comprehensive income		-		-
Net purchases, sales, calls, and maturities		-		-
Net transfers into Level 3		-		-
Transfer to held to maturity		-		(21,050	)
Balance, September 30,	$	-	$	-

Amount of total losses for the period included in earning attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at September 30,	$	-	$	-

Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 investment securities and liabilities. As a result, the unrealized gains and losses for these assets and liabilities presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs.

Securities categorized as Level 3 assets as of September 30, 2023 and December 31, 2022 primarily consist of common and preferred equity securities of community banks. ChoiceOne estimates the fair value of these equity securities based on the present value of expected future cash flows using management’s best estimate of key assumptions, including forecasted interest yield and payment rates, credit quality and a discount rate commensurate with the current market and other risks involved.

ChoiceOne also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets are not normally measured at fair value, but can be subject to fair value adjustments in certain circumstances, such as impairment. Disclosures concerning assets measured at fair value on a non-recurring basis are as follows:

Assets Measured at Fair Value on a Non-recurring Basis


			Quoted Prices
			In Active		Significant
			Markets for		Other		Significant
	Balances at		Identical		Observable		Unobservable
(Dollars in thousands)	Dates		Assets		Inputs		Inputs
	Indicated		(Level 1)		(Level 2)		(Level 3)
Collateral Dependent Loans
September 30, 2023	$	1,896	$	-	$	-	$	1,896
December 31, 2022	$	2,846	$	-	$	-	$	2,846

Other Real Estate
September 30, 2023	$	122	$	-	$	-	$	122
December 31, 2022	$	-	$	-	$	-	$	-

Collateral dependent loans categorized as Level 3 assets consist of non-homogeneous loans that are considered non-accrual or higher risk. ChoiceOne estimates the fair value of the loans based on the present value of expected future cash flows using management’s estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals). The changes in fair value consisted of charge-downs of collateral dependent loans that were posted to the allowance for credit losses and write-downs of other real estate that were posted to a valuation account.

- 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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