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Note 18 - Fair Value Measurements and Fair Value of Financial Instruments
 12 Months Ended
Dec. 31, 2024
Notes to Financial Statements  
Fair Value Disclosures [Text Block]

NOTE 18 - FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

 

In accordance with accounting guidance, we group financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows:

 

Fair Value Hierarchy

 

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

 

Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, prepayment speeds, volatilities, etc.) or model-based valuation techniques where all significant assumptions are observable, either directly or indirectly, in the market.

 

Level 3 - Valuation is generated from model-based techniques where one or more significant inputs are not observable, either directly or indirectly, in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques may include use of matrix pricing, DCF models, and similar techniques.

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

Securities: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1) or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2).

 

Interest Rate Lock Contracts and Forward Mortgage Loan Sale Contracts: The fair values of interest rate lock contracts and forward mortgage loan sale contracts are determined by loan lock-in rate, loan funded rate, market interest rate, fees to be collected from the borrower, fees and costs associated with the origination of the loan, expiration timing, sale price, and the value of the retained servicing. We classified these derivatives as level 3 due to management’s estimate of market rate, cost and expiration timing on these contracts.

 

Assets and Liabilities Measured on a Non-Recurring Basis

 

Collateral-dependent individually evaluated loans: 

 

Collateral-dependent individually evaluated loans are carried at fair value when it is probable that we will be unable to collect all amounts due according to the contractual terms of the original loan agreement and the loan has been written down to the fair value of its underlying collateral, net of expected selling costs.

 

The fair value of collateral-dependent individually evaluated loans is based on third party appraisals of the property, less management’s estimate of selling costs. Third party appraisals generally use a sales comparison or income capitalization approach to derive the appraised value based on market transactions involving similar or comparable properties. Adjustments are routinely made by the third party appraisers to adjust for differences between the comparable sales and income data used in the appraisal. Adjustments may also result from the consideration of relevant economic and demographic factors which may affect property values. Positive adjustments in the appraisal represent increases to the sales comparisons and negative adjustments represent decreases.

 

Other Real Estate Owned (“OREO”):

 

OREO is initially recorded at fair value less estimated selling costs at the date of transfer. This amount becomes the property's new basis. Fair values are generally based on third party appraisals of the property and discounted by management to reflect estimated selling costs (Level 3).

 

 

The following table provides the hierarchy and fair value for each major category of assets and liabilities measured at fair value as of the dates indicated:

 

  Fair Value Measurements Using:     

December 31, 2024

 

Level 1

  

Level 2

  

Level 3

  

Total

 

Assets measured at fair value:

 

(dollars in thousands)

     

On a recurring basis:

                

Securities available for sale

                

Government agency securities

 $—  $21,042  $—  $21,042 

SBA agency securities

  —   26,764   —   26,764 

Mortgage-backed securities

  —   55,677   —   55,677 

Collateralized mortgage obligations

  —   197,132   —   197,132 

Commercial paper

  —   78,685   —   78,685 

Corporate debt securities

  —   31,815   —   31,815 

Municipal securities

  —   9,075   —   9,075 
  $—  $420,190  $—  $420,190 

On a non-recurring basis:

                

Collateral dependent individually evaluated loans:

                

Construction and land development loans

 $—  $—  $35,176  $35,176 

Commercial real estate loans (1)

  —   —   7,007   7,007 

SBA loans

  —   —   66   66 
  $—  $—  $42,249  $42,249 
                 

(1) 

Collateral includes CRE and a SFR.

 

December 31, 2023

 

Level 1

  

Level 2

  

Level 3

  

Total

 

Assets measured at fair value:

 (dollars in thousands)

On a recurring basis:

                

Securities available for sale

                

Government agency securities

 $—  $8,161  $—  $8,161 

SBA agency securities

  —   13,217   —   13,217 

Mortgage-backed securities

  —   34,652   —   34,652 

Collateralized mortgage obligations

  —   149,626   —   149,626 

Commercial paper

  —   73,105   —   73,105 

Corporate debt securities

  —   30,691   —   30,691 

Municipal securities

  —   9,509   —   9,509 

Interest Rate Lock Contracts

  —   —   32   32 

Forward Mortgage Loan Sale Contracts

  —   —   14   14 
  $—  $318,961  $46  $319,007 

On a non-recurring basis:

                

Collateral dependent individually evaluated loans:

                

Commercial real estate loans

 $—  $—  $10,209  $10,209 

SBA loans

  —   —   1,148   1,148 
  $—  $—  $11,357  $11,357 

 

The individually evaluated loan balances shown in the table above as measured on a non-recurring basis represent those defaulted loans for which expected credit loss was recognized during the years ended December 31, 2024 and 2023. The credit loss includes any charge-offs and specific reserves recognized during each period.

 

During the year ended December 31, 2024, there were partial charge-offs of $1.6 million and specific reserves of $6.8 million for collateral-dependent individually evaluated loans with an aggregate fair value of $42.2 million as of December 31, 2024. The fair value is based on third party appraisals, including adjustments to comparable market data as summarized in the table below.

 

December 31, 2024

 

Fair Value

 

Valuation Techniques

 

Unobservable Input(s)

 

Range

 
  

(dollars in thousands)

 

Collateral dependent loans:

           

Construction and land development loans

 $35,176 

Market approach

 

Adjustments (2)

  (19%) to 5% 

Commercial real estate loans (1)

  7,007 

Market approach

 

Adjustments (2)

  (41%) to 4% 

SBA loans

  66 

Market approach

 

Adjustments (2)

  (4%) to 11% 

Total

 $42,249        

 

(1) 

Collateral includes CRE and a SFR.

(2)Represents the minimum and maximum range of adjustments made by appraisers for differences in comparable sales.

 

During the year ended December 31, 2023, there were partial charge-offs of $521,000 on collateral-dependent individually evaluated loans with an aggregate fair value of $11.4 million as of December 31, 2023. The fair value is based on third party appraisals, including adjustments to comparable market data as summarized in the table below.

 

December 31, 2023

 

Fair Value

 

Valuation Techniques

 

Unobservable Input(s)

 

Range

 
  

(dollars in thousands)

 

Collateral dependent loans:

           

Commercial real estate loans

 $10,209 

Market approach

 

Adjustments (1)

  (36%) to 28% 

SBA loans

  1,148 

Market approach

 

Adjustments (1)

  26% to 33% 

Total

 $11,357        

 

(1) 

Represents the minimum and maximum range of adjustments made by appraisers for differences in comparable sales.

 

There was no OREO as of December 31, 2024 or  December 31, 2023. During 2024, we foreclosed on and sold three properties, and recognized a total gain on OREO of $1.0 million. 

 

The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

 

Fair value estimates are based on financial instruments both on and off the balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a potential effect on fair value estimates and have not been considered in many of the estimates.

 

Because no market exists for a significant portion of our financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented. Management uses its best judgment in estimating the fair value of our financial instruments; however, there are inherent limitations in any estimation technique.

 

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Management maximizes the use of observable inputs and attempts to minimize the use of unobservable inputs when determining fair value measurements. Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering our entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

 

The following methods and assumptions were used to estimate the fair value of significant financial instruments not previously presented:

 

Cash and Due From Banks -- The carrying amounts of cash and short-term instruments approximate fair values, a Level 1 measurement.

 

Time Deposits in Other Banks -- Fair values for time deposits with other banks are estimated using DCF analyses, using interest rates currently being offered with similar terms, a Level 1 measurement.

 

Investment securities available for sale and held to maturity -- Fair values are measured by using quoted market prices for similar securities or dealer quotes, a Level 2 measurement. 

 

Loans Held for Sale -- Fair value is based on quotes or bids from third party investors, recent sale prices, or third party appraisals, a Level 2 measurement.

 

Loans -- For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for all other loans are estimated using DCF analyses, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. The fair value of loans as of December 31, 2024, and 2023 was measured using an exit price notion, a Level 3 measurement. 

 

Individually evaluated loans -- Defaulted loans are reviewed individually for expected credit loss, if any, and are recorded at fair value on a non-recurring basis. These defaulted loans are excluded from the loan pools used within the collective evaluation of estimated credit losses. When a defaulted loan is collateral dependent, we measure expected credit loss based on the estimated fair value of the underlying collateral. The fair value of each loan’s collateral is based on third party appraisals, adjusted for estimated selling costs; a Level 2 measurement. When adjustments are made to an appraised value to reflect various factors such as the age of the appraisal or known changes in the market or the collateral, such valuation inputs are considered unobservable and the fair value measurement is categorized as a Level 3 measurement.

 

Equity Securities -- The fair values of equity securities are measured based on unobservable inputs at the reporting date, a Level 3 measurement. Equity securities are comprised primarily of affordable housing investment funds, CRA investments, other bank stocks and investments in limited partnerships with less than 3% ownership.

 

Investment in FHLB Stock -- Investments in FHLB stock are recorded at cost and measured for impairment quarterly. Ownership of FHLB stock is restricted to member banks and does not have a readily determinable market value. Purchases and sales of these securities are at par value with the issuer. The fair value of investments in FHLB stock is equal to the carrying amount and is categorized as a Level 2 measurement.

 

Servicing Rights -- Mortgage and SBA servicing rights are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan, a Level 3 measurement.

 

Accrued Interest Receivable -- Accrued interest receivable includes accrued interest on investment securities (Level 2), accrued interest on loans (Level 3), accrued interest on due from banks (Level 1), and accrued interest on equity securities (Level 3).

 

Off-Balance Sheet Financial Instruments -- The fair value of commitments to extend credit and standby letters of credit, interest rate lock commitments and forward mortgage loan sales contracts is estimated using the fees currently charged to enter into similar agreements. Unobservable inputs that reflect the Company's own assumptions about the assumptions that market participants would use in pricing an asset or liability result in a Level 3 measurement. 

 

Deposits -- The fair values disclosed for demand deposits, including interest and noninterest demand accounts, savings, and certain types of money market accounts are, by definition based on carrying value. Fair value for fixed-rate certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregate expected monthly maturities on time deposits, a Level 2 measurement. Early withdrawal of fixed-rate certificates of deposit is not expected to be significant.

 

FHLB Advances -- The fair values of the Company’s FHLB Advances are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk, a Level 3 measurement.

 

Long-Term Debt -- The fair values of the Company’s long-term borrowings are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk, a Level 3 measurement.

 

Subordinated Debentures -- The fair values of the Company’s subordinated debentures are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk, a Level 3 measurement.

 

Accrued Interest Payable -- Accrued interest payable includes accrued interest on deposits (Level 2), accrued interest on FHLB advances (Level 3), accrued interest on long-term debt (Level 3), and accrued interest on subordinated debentures (Level 3).

 

Fair value is estimated in accordance with ASC Topic 825. Fair value estimates are made at specific points in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument. Because no market exists for a significant portion of our financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

 

The fair value hierarchy level and estimated fair value of significant financial instruments at December 31, 2024 and 2023 are summarized as follows:

 

   

December 31, 2024

  

December 31, 2023

 
 

Fair Value

 

Carrying

  

Fair

  

Carrying

  

Fair

 
 

Hierarchy

 Value  Value  Value  Value 

Financial Assets:

  

(dollars in thousands)

 

Cash and due from banks

Level 1

 $257,745  $257,745  $431,373  $431,373 

Interest-earning deposits in other financial institutions

Level 1

  600   600   600   600 

Investment securities - AFS

Level 2

  420,190   420,190   318,961   318,961 

Investment securities - HTM

Level 2

  5,191   4,948   5,209   5,097 

Loans held for sale

Level 2

  11,250   11,250   1,911   1,845 

Loans, net

Level 3

  3,005,501   2,942,026   2,989,958   2,918,296 

Equity securities (1)

Level 3

  22,944   22,944   23,392   23,392 

Investment in FHLB stock

Level 2

  15,000   15,000   15,000   15,000 

Servicing assets

Level 3

  6,985   13,761   8,110   14,883 

Accrued interest receivable (1)

Level 1/2/3

  14,582   14,582   13,743   13,743 
                  
   

Notional

  

Fair

  

Notional

  

Fair

 

Derivative assets:

  

Value

  

Value

  

Value

  

Value

 

Interest Rate Lock Contracts (1)

Level 3

 $—  $—  $1,255  $32 

Forward Mortgage Loan Sale Contracts (1)

Level 3

  —   —   1,104   14 
                  
   

Carrying

  

Fair

  

Carrying

  

Fair

 

Financial Liabilities:

  

Value

  

Value

  

Value

  

Value

 

Deposits

Level 2

 $3,083,789  $3,078,409  $3,174,760  $3,181,495 

FHLB advances

Level 3

  200,000   198,783   150,000   144,891 

Long-term debt

Level 3

  119,529   109,463   119,147   83,864 

Subordinated debentures

Level 3

  15,156   14,975   14,938   14,566 

Accrued interest payable

Level 2/3

  7,950   7,950   11,671   11,671 

 

(1) Included in “Accrued interest and other assets” on the consolidated balance sheets.