Fair Value Measurements

3 Months Ended

Mar. 31, 2024

NOTE 6 – FAIR VALUE MEASUREMENTS

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis at March 31, 2024 and December 31, 2023, and the valuation techniques used by the Company 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 the Company 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. The Company’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 - March 31, 2024
Equity securities	$	4,705	$	-	$	2,855	$	7,560

Investment Securities, Available for Sale - March 31, 2024
U.S. Treasury notes and bonds	$	79,276	$	-	$	-	$	79,276
State and municipal		-		230,928		-		230,928
Mortgage-backed		-		183,750		-		183,750
Corporate		-		204		-		204
Asset-backed securities		-		10,478		-		10,478
Total	$	79,276	$	425,360	$	-	$	504,636

Derivative Instruments - March 31, 2024
Interest rate derivative contracts - assets	$	-	$	20,231	$	-	$	20,231
Interest rate derivative contracts - liabilities	$	-	$	-	$	-	$	-

Loan Swaps - March 31, 2024
Loan swaps - assets	$	-	$	18	$	-	$	18
Loan swaps - liabilities	$	-	$	18	$	-	$	18

Equity Securities Held at Fair Value - December 31, 2023
Equity securities	$	4,749	$	-	$	2,756	$	7,505

Investment Securities, Available for Sale - December 31, 2023
U. S. Treasury notes and bonds	$	80,194	$	-	$	-	$	80,194
State and municipal		-		234,682		-		234,682
Mortgage-backed		-		188,501		-		188,501
Corporate		-		204		-		204
Asset-backed securities		-		11,017		-		11,017
Total	$	80,194	$	434,404	$	-	$	514,598

Derivative Instruments - December 31, 2023
Interest rate derivative contracts - assets	$	-	$	8,880	$	-	$	8,880
Interest rate derivative contracts - liabilities	$	-	$	-	$	-	$	-

Securities classified as available for sale are generally reported at fair value utilizing Level 2 inputs. ChoiceOne’s external investment advisor obtained fair value measurements from an independent pricing service that uses matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs). The fair value measurements considered observable data that may include dealer quotes, market spreads, cash flows and the bonds' terms and conditions, among other things. Securities classified in Level 2 included U.S. Government and federal agency securities, state and municipal securities, mortgage-backed securities, corporate bonds, and asset backed securities. The Company classified certain state and municipal securities and corporate bonds, and equity securities as Level 3. Based on the lack of observable market data, estimated fair values were based on the observable data available and reasonable unobservable market data.

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


	Three Months Ended
(Dollars in thousands)	March 31,
	2024		2023
Equity Securities Held at Fair Value
Balance, January 1	$	2,756	$	2,542
Total realized and unrealized gains included in noninterest income		79		25
Net purchases, sales, calls, and maturities		20		70
Net transfers into Level 3		-		-
Balance, March 31,	$	2,855	$	2,637

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 March 31,	$	1	$	5

Of the Level 3 assets that were held by the Company at March 31, 2024, the net unrealized gain as of March 31, 2024 was $291,000, compared to $165,000 as of March 31, 2023. The change in the net unrealized gain or loss is recognized in noninterest income or other comprehensive income in the consolidated balance sheets and income statements. Amounts recognized in noninterest income relate to changes in equity securities. A total of $20,000 and $70,000 of Level 3 securities were purchased during the three months ended 2024 and 2023, respectively.

Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 assets 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.

The Company 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
March 31, 2024	$	1,611	$	-	$	-	$	1,611
December 31, 2023	$	387	$	-	$	-	$	387

Other Real Estate
March 31, 2024	$	122	$	-	$	-	$	122
December 31, 2023	$	122	$	-	$	-	$	122

Collateral dependent loans classified as Level 3 are loans for which the repayment is expected to be provided substantially through the sale or operation of the collateral when the borrower is experiencing financial difficulty. The fair value of the collateral should be adjusted for estimated costs to sell if the repayment depends on the sale of the collateral. The net carrying amount of the loan should not exceed the fair value of the collateral (less costs to sell, if applicable).

- 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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