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FAIR VALUE MEASUREMENT

9 Months Ended

Sep. 30, 2023

NOTE 16 – FAIR VALUE MEASUREMENT

ASC Topic 820, “Fair Value Measurement,” defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy, and expands disclosures about fair value measurements. Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between

market participants at the measurement date reflecting assumptions that a market participant would use when pricing an asset or liability. The hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the reporting entity has the ability to access at the measurement date.

Level 2 – Observable prices in active markets for similar assets and liabilities; prices for identical or similar assets or liabilities in markets that are not active; directly observable market inputs for substantially the full term of the asset and liability; market inputs that are not directly observable but are derived from or corroborated by observable market data.

Level 3 – Unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

We use fair value to measure certain assets and liabilities on a recurring basis, primarily securities available-for-sale. For assets measured at the lower of cost or fair value, the fair value measurement criteria may or may not be met during a reporting period and such measurements are therefore considered “nonrecurring” for purposes of disclosing our fair value measurements. Fair value is used on a nonrecurring basis to adjust carrying values for individually evaluated loans and other real estate owned and to record impairment on certain assets, such as goodwill, core deposit intangible, and other long-lived assets.

In certain cases, the inputs used to measure fair value may fall into different levels of the hierarchy. In such cases, the lowest level of inputs that is significant to the measurement is used to determine the hierarchy for the entire asset or liability. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with our quarterly valuation process. There were no transfers between levels during the three and nine months ended September 30, 2023 and 2022.

The following assets are measured at fair value on a recurring basis as of the dates indicated:


	Total Estimated		Fair Value Measurements
	Fair Value		Level 1		Level 2		Level 3
September 30, 2023
U.S. Government Agencies	$	1,501	$	—	$	1,501	$	—
Municipal securities		18,185		—		18,185		—
Mortgage-backed securities		28,426		—		28,426		—
Collateralized mortgage obligations		25,643		—		25,643		—
SBA securities		5,593		—		5,593		—
Corporate bonds		66,497		—		66,497		—
Equity securities		11,639		11,639		—		—
Total	$	157,484	$	11,639	$	145,845	$	—


	Total Estimated		Fair Value Measurements
	Fair Value		Level 1		Level 2		Level 3
December 31, 2022
U.S. Government Agencies	$	1,505	$	—	$	1,505	$	—
Municipal securities		19,557		—		19,557		—
Mortgage-backed securities		33,010		—		33,010		—
Collateralized mortgage obligations		25,424		—		25,424		—
SBA securities		4,305		—		4,305		—
Corporate bonds		70,203		—		70,203		—
Equity securities		13,757		13,757		—		—
Total	$	167,761	$	13,757	$	154,004	$	—

The following assets are measured at fair value on a nonrecurring basis as of the dates indicated:


	Total Estimated		Fair Value Measurements
	Fair Value		Level 1		Level 2		Level 3
September 30, 2023
Individually evaluated loans (1)	$	14,321		—		—	$	14,321
OREO		—		—		—		—
Total	$	14,321	$	—	$	—	$	14,321

	Total Estimated		Fair Value Measurements
	Fair Value		Level 1		Level 2		Level 3
December 31, 2022
Performing impaired loans (1)	$	759	$	—	$	—	$	759
Nonperforming impaired loans		15,223		—		—		15,223
OREO		21		—		—		21
Total	$	16,003	$	—	$	—	$	16,003

(1)

For each quarter the loan was outstanding in 2023, with the adoption of CECL, one performing modified loan to a borrower experiencing financial difficulty was individually evaluated in determining the estimated allowance for credit losses.

The Company does not record loans at fair value on a recurring basis. However, from time to time, certain loans have individual risk characteristics not consistent with a pool of loans and are individually evaluated for credit reserves. Loans for which it is probable that payment of interest and principal will not be made in accordance with the original contractual terms of the loan agreement are typically individually evaluated. The fair value of individually evaluated loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise and liquidation value and discounted cash flows. Those individually evaluated loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. When the fair value of the collateral is based on an observable market price or a current appraised value which uses substantially observable data, the Company records the individually evaluated loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is less than the appraised value or the appraised value contains a significant assumption and there is no observable market price, the Company records the individually evaluated loan as nonrecurring Level 3.

The Company records foreclosed assets, or OREO, at fair value on a nonrecurring basis based on the collateral value of the property. When the fair value of the collateral is based on an observable market price or a current appraised value which uses substantially observable data, the Company records the OREO as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is less than the appraised value or the appraised value contains a significant assumption, and there is no observable market price, the Company records the OREO as nonrecurring Level 3. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Management also incorporates assumptions regarding

market trends or other relevant factors and selling and commission costs ranging from 5% to 7%. Such adjustments and assumptions are typically significant and result in a Level 3 classification of the inputs for determining fair value.