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Note 13 - Fair Value

6 Months Ended

Jun. 30, 2024

Fair Value Measurement and Measurement Inputs, Recurring and Nonrecurring [Text Block]

Note 13. Fair Value

Financial Instruments Measured at Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The fair value hierarchy ranks the inputs used in measuring fair value as follows:

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Level 1 – Observable, unadjusted quoted prices in active markets

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Level 2 – Inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability

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Level 3 – Unobservable inputs with little or no market activity that require the Company to use reasonable inputs and assumptions

The Company uses fair value measurements to record adjustments to certain financial assets and liabilities on a recurring basis. The Company may be required to record certain assets at fair value on a nonrecurring basis in specific circumstances, such as evidence of impairment. Methodologies used to determine fair value might be highly subjective and judgmental in nature; therefore, valuations may not be precise. If the Company determines that a valuation technique change is necessary, the change is assumed to have occurred at the end of the respective reporting period. The following discussion describes the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments under the valuation hierarchy.

Assets and Liabilities Reported at Fair Value on a Recurring Basis

Available-for-sale Debt Securities

Debt securities available-for-sale are reported at fair value on a recurring basis. The fair value of Level 1 securities is based on quoted market prices in active markets, if available. If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are primarily derived from or corroborated by observable market data. Level 2 securities use fair value measurements from independent pricing services obtained by the Company. These fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and bond terms and conditions. The Company’s Level 2 securities include U.S. Agency and Treasury securities, municipal securities, and mortgage-backed securities. Securities are based on Level 3 inputs when there is limited activity or less transparency to the valuation inputs. In the absence of observable or corroborated market data, internally developed estimates that incorporate market-based assumptions are used when such information is available.

Fair value models may be required when trading activity has declined significantly or does not exist, prices are not current, or pricing variations are significant. For Level 3 securities, the Company obtains the cash flow of specific securities from third parties that use modeling software to determine cash flows based on market participant data and knowledge of the structures of each individual security. The fair values of Level 3 securities are determined by applying proper market observable discount rates to the cash flow derived from third-party models. Securities with increased uncertainty about the receipt of cash flows are discounted at higher rates due to the addition of a deal specific credit premium based on assumptions about the performance of the underlying collateral. Finally, internal fair value model pricing and external pricing observations are combined by assigning weights to each pricing observation. Pricing is reviewed for reasonableness based on the direction of specific markets and the general economic indicators.

Equity Securities. Equity securities are recorded at fair value on a recurring basis and included in other assets in the consolidated balance sheets. The Company uses Level 1 inputs to value equity securities that are traded in active markets. Equity securities that are not actively traded are classified in Level 2.

Loans Held for Investment. Loans held for investment that are subject to a fair value hedge are reported at fair value derived from third-party models. Loans designated in fair value hedges are recorded at fair value on a recurring basis.

Deferred Compensation Assets and Liabilities. Securities held for trading purposes are recorded at fair value on a recurring basis and included in other assets in the consolidated balance sheets. These securities include assets related to employee deferred compensation plans, which are generally invested in Level 1 equity securities. The liability associated with these deferred compensation plans is carried at the fair value of the obligation to the employee, which corresponds to the fair value of the invested assets.

Derivative Assets and Liabilities. Derivatives are recorded at fair value on a recurring basis. The Company obtains dealer quotes, Level 2 inputs, based on observable data to value derivatives.

The following tables summarize financial assets and liabilities recorded at fair value on a recurring basis, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:

	*June 30, 2024*
	*Total*		*Fair Value Measurements Using*
(Amounts in thousands)	*Fair Value*		*Level 1*		*Level 2*		*Level 3*
Available-for-sale debt securities
U.S. Treasury securities	$	10,771	$	-	$	10,771	$	-
Municipal securities		15,690		-		15,690		-
Corporate Notes		26,982				26,982
Agency mortgage-backed securities		76,243		-		76,243		-
Total available-for-sale debt securities		129,686		-		129,686		-
Equity securities		55		-		55		-
Fair value loans		3,176		-		-		3,176
Derivative assets		161		-		161		-
Deferred compensation assets		7,912		7,912		-		-
Deferred compensation liabilities		9,452		9,452		-		-

	*December 31, 2023*
	*Total*		*Fair Value Measurements Using*
(Amounts in thousands)	*Fair Value*		*Level 1*		*Level 2*		*Level 3*
Available-for-sale debt securities
U.S. Agency securities	$	5,749	$	-	$	5,749	$	-
U.S. Treasury securities		145,826		-		145,826		-
Municipal securities		19,377		-		19,377		-
Corporate notes		27,081		-		27,081		-
Agency mortgage-backed securities		82,928		-		82,928		-
Total available-for-sale debt securities		280,961		-		280,961		-
Equity securities		55		-		55		-
Fair value loans		3,421		-		-		3,421
Derivative assets		136		-		136		-
Deferred compensation assets		6,729		6,729		-		-
Deferred compensation liabilities		8,282		8,282		-		-

Assets Measured at Fair Value on a Nonrecurring Basis

Impaired Loans. Fair value is based on appraised value adjusted for customized discounting criteria, Level 3 inputs.

The Company maintains an active and robust problem credit identification system. The impairment review includes obtaining third-party collateral valuations to help management identify potential credit impairment and determine the amount of impairment to record. The Company’s Special Assets staff manages and monitors all impaired loans. Internal collateral valuations are generally performed within two to four weeks of identifying the initial potential impairment. The internal valuation compares the original appraisal to current local real estate market conditions and considers experience and expected liquidation costs. The Company typically receives a third-party valuation within thirty to forty-five days of completing the internal valuation. When a third-party valuation is received, it is reviewed for reasonableness. Once the valuation is reviewed and accepted, discounts are applied to fair market value, based on, but not limited to, our historical liquidation experience for like collateral, resulting in an estimated net realizable value. The estimated net realizable value is compared to the outstanding loan balance to determine the appropriate amount of specific impairment reserve.

OREO. OREO is recorded at fair value on a nonrecurring basis using Level 3 inputs. The Company calculates the fair value of OREO from current or prior appraisals that have been adjusted for valuation declines, estimated selling costs, and other proprietary qualitative adjustments that are deemed necessary.

The following tables present assets measured at fair value on a nonrecurring basis, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:

	*June 30, 2024*
	*Total*		*Fair Value Measurements Using*
	*Fair Value*		*Level 1*		*Level 2*		*Level 3*
(Amounts in thousands)
Collateral dependent assets with specific reserves	$	825	$	-	$	-	$	825
OREO		100		-		-		100

	*December 31, 2023*
	*Total*		*Fair Value Measurements Using*
	*Fair Value*		*Level 1*		*Level 2*		*Level 3*
(Amounts in thousands)
Collateral dependent assets with specific reserves	$	825	$	-	$	-	$	825
OREO		192		-		-		192

Quantitative Information about Level 3 Fair Value Measurements

The following tables provides quantitative information for assets measured at fair value on a nonrecurring basis using Level 3 valuation inputs as of the dates indicated:

			*Discount Range*
	*Valuation*	*Unobservable*	*(Weighted Average)*
	*Technique*	*Input*	*June 30, 2024*

Collateral dependent assets with specific reserves	Discounted appraisals(1)	Appraisal adjustments(2)		16% (16%)
OREO	Discounted appraisals⁽¹⁾	Appraisal adjustments⁽²⁾		20% to 100% (75%)

(1)	Fair value is generally based on appraisals of the underlying collateral.
(2)	Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.

			*Discount Range*
	*Valuation*	*Unobservable*	*(Weighted Average)*
	*Technique*	*Input*	*December 31, 2023*

Collateral dependent assets with specific reserves	Discounted appraisals⁽¹⁾	Appraisal adjustments⁽²⁾		42% (42%)
OREO	Discounted appraisals⁽¹⁾	Appraisal adjustments⁽²⁾		20% to 100% (60%)

(1)	Fair value is generally based on appraisals of the underlying collateral.
(2)	Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.

Fair Value of Financial Instruments

The following tables present the carrying amounts and fair values of financial instruments, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:

	*June 30, 2024*
	*Carrying*				*Fair Value Measurements Using*
(Amounts in thousands)	*Amount*		*Fair Value*		*Level 1*		*Level 2*		*Level 3*
Assets
Cash and cash equivalents	$	329,877	$	329,877	$	329,877	$	-	$	-
Debt securities available-for-sale		129,686		129,686		-		129,686		-
Equity securities		55		55		-		55		-
Loans held for investment, net of allowance		2,438,383		2,207,323		-		-		2,207,323
Derivative financial assets		161		161		-		161		-
Interest receivable		9,984		9,984		-		653		9,331
Deferred compensation assets		7,912		7,912		7,912		-		-

Liabilities
Time deposits		245,556		243,566		-		243,566		-
Securities sold under agreements to repurchase		894		894		-		894		-
Interest payable		812		812		-		812		-
Deferred compensation liabilities		9,452		9,452		9,452		-		-

	*December 31, 2023*
	*Carrying*				*Fair Value Measurements Using*
(Amounts in thousands)	*Amount*		*Fair Value*		*Level 1*		*Level 2*		*Level 3*
Assets
Cash and cash equivalents	$	116,420	$	116,420	$	116,420	$	-	$	-
Debt securities available-for-sale		280,961		280,961		-		280,961		-
Equity securities		55		55		-		55		-
Loans held for investment, net of allowance		2,536,109		2,350,071		-		-		2,350,071
Interest receivable		10,881		10,881		-		1,246		9,635
Deferred compensation assets		6,729		6,729		6,729		-		-
Derivative assets		136		136		-		136		-

Liabilities
Time deposits		253,373		247,141		-		247,141		-
Securities sold under agreements to repurchase		1,119		1,119		-		1,119		-
Interest payable		556		556		-		556		-
Deferred compensation liabilities		8,282		8,282		8,282		-		-