Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2023

NOTE 6 FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair values of financial instruments are management's estimate of the values at which the instruments could be exchanged in a transaction between willing parties. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, other significant assets are not considered financial assets including deferred tax assets, premises, equipment and intangibles. Further, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered in any of the estimates.

Fair Value Measurements:

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

Available-for-sale securities, when quoted prices are available in an active market, securities are valued using the quoted price and are classified as Level 1.

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.

Available-for-sale securities classified as Level 2 are valued using the prices obtained from an independent pricing service. The prices are not adjusted. Securities of obligations of state and political subdivisions are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating. Substantially all assumptions used by the independent pricing service are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace.

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. The Bank holds some local municipals that the Bank evaluates based on the credit strength of the underlying project. The fair value is determined by valuing similar credit payment streams at similar rates.

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.

The following summarizes financial assets measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022, segregated by level or the valuation inputs within the fair value hierarchy utilized to measure fair value:


Assets and Liabilities Measured at Fair Value on a Recurring Basis
	(In Thousands)
June 30, 2023	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets - (Securities Available-for-Sale)
U.S. Treasury	$	86,127	$	-	$	-
U.S. Government agencies		-		127,891		-
Mortgage-backed securities		-		81,656		-
State and local governments		-		64,442		3,109
Total Securities Available-for-Sale	$	86,127	$	273,989	$	3,109


	(In Thousands)
December 31, 2022	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets - (Securities Available-for-Sale)
U.S. Treasury	$	94,678	$	-	$	-
U.S. Government agencies		-		139,767		-
Mortgage-backed securities		-		86,927		-
State and local governments		-		66,072		3,345
Total Securities Available-for-Sale	$	94,678	$	292,766	$	3,345

The following tables represent the changes in the Level 3 fair-value category of which unobservable inputs are relied upon as of the three and six month periods ended June 30, 2023 and June 30, 2022. During the three month period ended March 31, 2022, there was one security transferred from Level 3 to Level 2.


	(In Thousands)
	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	State and Local Governments
	Tax-Exempt			Taxable			Total
Balance at April 1, 2023	$	1,835		$	1,305		$	3,140

Change in Fair Value		(4	)		(27	)		(31	)

Payments & Maturities		-			-			-

Reclassification & Adjustments		-			-			-

Balance at June 30, 2023	$	1,831		$	1,278		$	3,109


	(In Thousands)
	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	State and Local Governments
	Tax-Exempt			Taxable			Total
Balance at April 1, 2022	$	2,108		$	1,394		$	3,502

Change in Fair Value		(19	)		(69	)		(88	)

Payments & Maturities		-			-			-

Reclassification & Adjustments		-			-			-

Balance at June 30, 2022	$	2,089		$	1,325		$	3,414


	(In Thousands)
	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	State and Local Governments
	Tax-Exempt			Taxable		Total
Balance at January 1, 2023	$	2,071		$	1,274	$	3,345

Change in Fair Value		5			4		9

Payments & Maturities		(245	)		-		(245	)

Reclassification & Adjustments		-			-		-

Balance at June 30, 2023	$	1,831		$	1,278	$	3,109


	(In Thousands)
	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	State and Local Governments
	Tax-Exempt			Taxable			Total
Balance at January 1, 2022	$	2,307		$	2,466		$	4,773

Change in Fair Value		(58	)		(152	)		(210	)

Payments & Maturities		(160	)		-			(160	)

Reclassification & Adjustments		-			(989	)		(989	)

Balance at June 30, 2022	$	2,089		$	1,325		$	3,414

Most of the Company's available-for-sale securities, including any bonds issued by local municipalities, have CUSIP numbers or have similar characteristics of those in the municipal markets, making them marketable and comparable as Level 2.

The Company also has assets that, under certain conditions, are subject to measurement at fair value on a non-recurring basis. At June 30, 2023 and December 31, 2022, such assets consist primarily of collateral dependent loans. Collateral dependent loans categorized as Level 3 assets consist of non-homogeneous loans that have expected credit losses. The Company estimates the fair value of the loans based on the present value of expected future cash flows using management's best 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.)

At June 30, 2023 and December 31, 2022, fair value of collateral dependent loans categorized as Level 3 was $45 thousand and $2.7 million, respectively.

During 2023, impairment was recognized on real estate servicing rights based upon the independent third party's quarterly valuation. A valuation allowance was established by strata to quantify the likely impairment of the value of the real estate servicing rights to the Company. If the carrying amount of an individual strata exceeds the fair value, impairment was recorded on that strata so the servicing asset was carried at fair value. Impairment was $2 thousand at June 30, 2023. There was no impairment at December 31, 2022.

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements:


	(In Thousands)				Range
	Fair Value at				(Weighted
	June 30, 2023		Valuation Technique	Unobservable Inputs	Average)
State and local government	$	3,109	Discounted Cash Flow	Credit strength of underlying project or entity / Discount rate	3.49- 5.48% (4.78%)

Collateral dependent loans		45	Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	25.00-25.00% (25.00%)

Real estate servicing rights		39	Discounted Cash Flow	Constant prepayment rate and probability of default / Discount rate	4.03- 4.65% (4.63%)


	(In Thousands)				Range
	Fair Value at				(Weighted
	December 31, 2022		Valuation Technique	Unobservable Inputs	Average)
State and local government	$	3,345	Discounted Cash Flow	Credit strength of underlying project or entity / Discount rate	2.08-5.01% (4.38%)

Collateral dependent impaired loans		2,667	Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	20.00-29.01% (24.13%)

Real estate servicing rights		-	Discounted Cash Flow	Constant prepayment rate and probability of default / Discount rate	-

The following table presents assets measured at fair value on a nonrecurring basis at June 30, 2023 and December 31, 2022:


	(In Thousands)
	Assets Measured at Fair Value on a Nonrecurring Basis at June 30, 2023
	Balance at June 30, 2023		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Collateral dependent loans	$	45	$	-	$	-	$	45
Real estate servicing rights		39		-		-		39


	(In Thousands)
	Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2022
	Balance at December 31, 2022		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Collateral dependent impaired loans	$	2,667	$	-	$	-	$	2,667

The estimated fair values, and related carrying or notional amounts, for on and off-balance sheet financial instruments as of June 30, 2023 and December 31, 2022 are reflected below.


	(In Thousands)
	June 30, 2023
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	71,193	$	71,193	$	71,193	$	-	$	-
Interest-bearing time deposits		3,485		3,473		-		3,473		-
Securities - available-for-sale		363,225		363,225		86,127		273,989		3,109
Other securities		17,535		17,535		-		-		17,535
Loans held for sale		1,459		1,437		-		-		1,437
Loans, net		2,490,883		2,316,031		-		-		2,316,031
Interest receivable		11,145		11,145		-		-		11,145

Financial Liabilities:
Interest bearing deposits	$	1,351,305	$	1,351,263	$	-	$	-	$	1,351,263
Non-interest bearing deposits		488,678		488,678		488,678		-		-
Time deposits		628,757		616,958		-		-		616,958
Total Deposits		2,468,740		2,456,899		488,678		-		1,968,221

Federal funds purchased and securities sold under agreement to repurchase		51,567		51,567		-		-		51,567
Federal Home Loan Bank advances		266,818		263,316		-		-		263,316
Other borrowings		-		-		-		-		-
Subordinated notes, net of unamortized issuance costs		34,644		29,070		-		29,070		-
Interest payable		3,655		3,655		-		-		3,655


	(In Thousands)
	December 31, 2022
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	84,409	$	84,409	$	84,409	$	-	$	-
Interest-bearing time deposits		4,442		4,440		-		4,440		-
Securities - available-for-sale		390,789		390,789		94,678		292,766		3,345
Other securities		9,799		9,799		-		-		9,799
Loans held for sale		827		815		-		-		815
Loans, net		2,336,074		2,171,152		-		-		2,171,152
Interest receivable		10,440		10,440		-		-		10,440

Financial Liabilities:
Interest bearing deposits	$	1,378,090	$	1,377,944	$	-	$	-	$	1,377,944
Non-interest bearing deposits		532,794		532,794		532,794		-		-
Time deposits		557,980		543,737		-		-		543,737
Total Deposits		2,468,864		2,454,475		532,794		-		1,921,681

Federal funds purchased and securities sold under agreement to repurchase		54,206		54,206		-		-		54,206
Federal Home Loan Bank advances		127,485		125,761		-		-		125,761
Other borrowings		10,000		10,000		-		10,000		-
Subordinated notes, net of unamortized issuance costs		34,586		30,993		-		30,993		-
Interest payable		1,739		1,739		-		-		1,739

- 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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