Fair Value Measurements

12 Months Ended

Dec. 31, 2023

NOTE 21. 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 certain 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 in an orderly transaction between market participants as of 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 December 31, 2023 and December 31, 2022:


			Fair Value Measurements at
			December 31, 2023
			Using
	Balance as of		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	December 31, 2023		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
Assets:
Securities available for sale
Obligations of U.S. government corporations and agencies	$	8,591	$	—	$	8,591	$	—
Mortgage-backed securities		118,822		—		118,822		—
Obligations of states and political subdivisions		5,931		—		5,931		—
Subordinated debt		4,099		—		4,099		—
Derivative:
Interest rate swaps on loans		1,465		—		1,465		—
Total assets at fair value	$	138,908	$	—	$	138,908	$	—
Liabilities:
Interest rate swaps on loans	$	1,465			$	1,465	$	—
Total liabilities at fair value	$	1,465	$	—	$	1,465	$	—


			Fair Value Measurements at
			December 31, 2022
			Using
	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 swaps on loans		1,017		—		1,017		—
Total assets at fair value	$	150,173	$	—	$	150,173	$	—
Liabilities:
Interest rate swaps on loans	$	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:

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 December 31, 2023 or 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 credit losses on loans. 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 the lower of its cost or 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 collateral-dependent loans described above. We believe that the fair value component in its valuation follows the provisions of GAAP. The Company had a a balance of $0 and $108 thousand in other real estate owned at December 31, 2023 and 2022, respectively.

Loans Held for Sale: Loans held for sale are carried at the lower of cost or fair value. These loans consisted of one-to-four family residential loans originated for sale in the secondary market at December 31, 2023. Fair value is based on prices the 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 at December 31, 2023 and December 31, 2022.

The following table displays quantitative information about Level 3 Fair Value Measurements for certain financial 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
Assets:
Other real estate owned	Discounted contract price	Discount for selling costs	6 %	6 %

(1)

Weighted based on the relative fair values of the specific items measured at fair value.

The following table summarizes the Company’s financial and nonfinancial 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 amount and fair value of the Company’s financial instruments at December 31, 2023 and 2022 were as follows:


			Fair Value Measurements at
			December 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
	December 31, 2023		(Level 1)		(Level 2)		(Level 3)		December 31, 2023
	(in thousands)
Financial Assets:
Cash and short-term investments	$	138,353	$	138,353	$	—	$	—	$	138,353
Securities available for sale		137,443		—		137,443		—		137,443
Restricted Investments		9,568		—		9,568		—		9,568
Loans held for sale		1,661		—		1,661		—		1,661
Loans, net		1,448,193		—		—		1,377,017		1,377,017
Bank owned life insurance		29,575		—		29,575		—		29,575
Accrued interest receivable		5,008		—		5,008		—		5,008
Interest rate swaps		1,465		—		1,465		—		1,465
Financial Liabilities:
Deposits	$	1,506,322	$	—	$	1,506,147	$	—	$	1,506,147
Federal Home Loan Bank advances, short-term		20,000		—		19,954		—		19,954
Federal Home Loan Bank advances, long-term		145,000		—		145,141		—		145,141
Subordinated debt		29,444		—		25,581		—		25,581
Accrued interest payable		2,364		—		2,364		—		2,364
Interest rate swaps		1,465		—		1,465		—		1,465


			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 available for sale		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 swaps		1,017		—		1,017		—		1,017
Financial Liabilities:
Deposits	$	1,264,075	$	—	$	1,262,859	$	—	$	1,262,859
Federal funds purchased and securities sold under agreements to repurchase		32,980		—		32,980		—		32,980
Federal Home Loan Bank advances, short-term		175,000		—		174,705		—		174,705
Subordinated debt		29,377		—		26,101		—		26,101
Accrued interest payable		926		—		926		—		926
Interest rate swaps		1,017		—		1,017		—		1,017

The Company assumes interest rate risk (the risk that general interest rate levels will change) during its normal operations. As a result, the fair value of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities in order to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay their principal balance in a rising rate environment and more likely to do so in a falling rate environment. Conversely, depositors who are receiving fixed rate interest payments are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting the terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

- 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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