Fair Value Measurements

3 Months Ended

Mar. 31, 2023

NOTE 9. Fair Value Measurements

GAAP requires the Company to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

“Fair Value Measurements” defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:


•	Level 1	Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

•	Level 2	Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

•	Level 3	Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following section provides a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Securities Available for Sale: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

Derivative instruments are recorded at fair value on a recurring basis. The Company utilizes derivative instruments as part of the management of interest rate risk to modify the re-pricing characteristics of certain portions of the Company’s interest-bearing assets and liabilities. The Company has contracted with a third-party vendor to provide valuations for derivatives using standard valuation techniques and therefore classifies such valuations as Level 2. The Company has considered counterparty credit risk in the valuation of its derivative assets and has considered its own credit risk in the valuation of its derivative liabilities.

The following table presents balances of financial assets and liabilities measured at fair value on a recurring basis at March 31, 2023 and December 31, 2022:


			Fair Value Measurements at
			March 31, 2023
			Using
	Balance as of		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	March 31, 2023		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
Assets:
Securities available for sale
Obligations of U.S. government corporations and agencies	$	8,857	$	—	$	8,857	$	—
Mortgage-backed securities		129,400		—		129,400		—
Obligations of states and political subdivisions		6,372		—		6,372		—
Subordinated debt		4,261		—		4,261		—
Derivative:
Interest rate swaps		608		—		608		—
Total assets at fair value	$	149,498	$	—	$	149,498	$	—
Liabilities:
Interest rate swaps	$	608	$	—	$	608	$	—
Total liabilities at fair value	$	608	$	—	$	608	$	—

			Fair Value Measurements at
			December 31, 2022

	Balance as of		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	December 31, 2022		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
Assets:
Securities available for sale
Obligations of U.S. government corporations and agencies	$	9,135	$	—	$	9,135	$	—
U.S. treasury notes		—		—		—		—
Mortgage-backed securities		129,153		—		129,153		—
Obligations of states and political subdivisions		6,607		—		6,607		—
Subordinated debt		4,261		—		4,261		—
Derivative:
Interest rate swap		1,017		—		1,017		—
Total assets at fair value	$	150,173	$	—	$	150,173	$	—
Liabilities:
Interest rate swap	$	1,017	$	—	$	1,017	$	—
Total liabilities at fair value	$	1,017	$	—	$	1,017	$	—

Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower of cost or market accounting or write downs of individual assets.

The following describes the valuation techniques used by the Company to measure certain financial and nonfinancial assets recorded at fair value on a nonrecurring basis in the financial statements:

Loans Held for Sale: Loans held for sale are carried at the lower of cost or market value. These loans currently consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). The Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during three months ended March 31, 2023 and the year ended December 31, 2022.

Individually Evaluated Collateral-Dependent Loans: The estimated fair value of individually evaluated collateral-dependent loans is based on the value of the underlying collateral or the value of the underlying collateral, less estimated cost to sell, as appropriate. Collateral is generally real estate; however, collateral may include vehicles, equipment, inventory, accounts receivable, and/or other business assets. The value of real estate collateral is determined using a market valuation approach based on an appraisal conducted by an independent, licensed appraiser. The value of other assets may also be based on an appraisal, market quotations, aging schedules or other sources. Collateral-dependent individually evaluated loans are classified within Level 3 of the fair value hierarchy. Any fair value adjustments are recorded in the period incurred as a provision for credit losses on the Consolidated Statements of Income. There were no individually evaluated collateral dependent loans recorded at fair value at March 31, 2023 or December 31, 2022.

Other Real Estate Owned: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the fair value of the property, less estimated selling costs, establishing a new costs basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. The portion of interest costs relating to development of real estate is capitalized. Valuations are periodically obtained by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to fair value less cost to sell. The fair value measurement of real estate held in other real estate owned is assessed in the same manner as impaired loans described above. We believe that the fair value follows the provisions of GAAP. The Company held no other real estate owned at March 31, 2023 and had a balance of $108 thousand in other real etate owned at December 31, 2022.

The following table displays quantitative information about Level 3 Fair Value Measurements for certain assets measured at fair value on a nonrecurring basis at December 31, 2022:


	Quantitative information about Level 3 Fair Value Measurements
	December 31, 2022
	Valuation Technique(s)	Unobservable Input	Range	Weighted Average (1)
Assets:
Other real estate owned	Discounted contract price	Discount for selling costs	6%	6 %

(1) Unobservable inputs were weighted by the relative fair values of the instruments.

The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis at December 31, 2022:

Carrying value at

December 31, 2022

Balance as of

Quoted Prices
in Active
Markets
for Identical
Assets

Significant
Other
Observable
Inputs

Significant
Unobservable
Inputs

December 31, 2022

(Level 1)

(Level 2)

(Level 3)

(in thousands)

Nonfinancial Assets:

Other real estate owned

108

—

108

—

The carrying value and fair value of the Company’s financial instruments at March 31, 2023 and December 31, 2022 were as follows:


	Fair Value Measurements at
	March 31, 2023
	Using
	Carrying Value as of		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Fair Value as of
	March 31, 2023		(Level 1)		(Level 2)		(Level 3)		March 31, 2023
	(in thousands)
Financial assets:
Cash and short-term investments	$	128,715	$	128,715	$	—	$	—	$	128,715
Securities		148,890		—		148,890		—		148,890
Restricted Investments		11,302		—		11,302		—		11,302
Loans, net		1,386,750		—		—		1,319,238		1,319,238
Bank owned life insurance		24,041		—		24,041		—		24,041
Accrued interest receivable		4,290		—		4,290		—		4,290
Interest rate swaps		608		—		608		—		608
Financial liabilities:
Deposits	$	1,389,951	$	—	$	1,387,848	$	—	$	1,387,848
Federal Home Loan Bank advances, short-term		125,000		—		125,020		—		125,020
Federal Home Loan Bank advances, long-term		95,000		—		95,929		—		95,929
Subordinated debt, net of unamortized issuance costs		29,394		—		25,573		—		25,573
Accrued interest payable		2,028		—		2,028		—		2,028
Interest rate swaps		608		—		608		—		608


	Fair Value Measurements at
	December 31, 2022
	Using
	Carrying Value as of		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Fair Value as of
	December 31, 2022		(Level 1)		(Level 2)		(Level 3)		December 31, 2022
	(in thousands)
Financial assets:
Cash and short-term investments	$	66,894	$	66,894	$	—	$	—	$	66,894
Securities		149,156		—		149,156		—		149,156
Restricted Investments		9,233		—		9,233		—		9,233
Loans held for sale		153				153		—		153
Loans, net		1,312,565		—		—		1,260,149		1,260,149
Bank owned life insurance		23,862		—		23,862		—		23,862
Accrued interest receivable		3,902		—		3,902		—		3,902
Interest rate swap		1,017		—		1,017		—		1,017
Financial liabilities:
Deposits	$	1,264,075	$	—	$	1,262,859	$	—	$	1,262,859
Federal funds purchased		32,980		—		32,980		—		32,980
Federal Home Loan Bank advances, short-term		175,000		—		174,705		—		174,705
Subordinated debt, net of unamortized issuance costs		29,377		—		26,101		—		26,101
Accrued interest payable		926		—		926		—		926
Interest rate swap		1,017		—		1,017		—		1,017

- 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.

+ References + Details