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Note 16 - Fair Value Measurements

12 Months Ended

Dec. 31, 2023

Notes to Financial Statements

Fair Value Disclosures [Text Block]

NOTE 16 – FAIR VALUE MEASUREMENTS

The Company determines fair value based on the requirements established in ASC Topic 820, Fair Value Measurements, which provides a framework for measuring fair value in accordance with U.S. GAAP and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC Topic 820 defines fair value as the exit price, or the price that would be received for 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 under current market conditions. ASU 2016 – 01, Financial Instruments – Overall (Subtopic 825 – 10), Recognition and Measurement of Financial Assets and Financial Liabilities, requires us to use the exit price notion when measuring the fair value of instruments for disclosure purposes.

The following definitions describe the levels of inputs that may be used to measure fair value:

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 methods were used to estimate the fair value of certain assets and liabilities on a recurring and nonrecurring basis.

Securities – The fair value of securities available-for-sale are recorded on a recurring basis. The fair value of investments and mortgage-backed securities are provided by a third-party pricing service. These valuations are based on market data using pricing models that vary by asset class and incorporate available current trade, bid and other market information, and for structured securities, cash flow, and loan performance data. The pricing processes utilize benchmark curves, benchmarking of similar securities, sector groupings, and matrix pricing. Option adjusted spread models are also used to assess the impact of changes in interest rates and to develop prepayment scenarios (Level 2). Transfers between the fair value hierarchy are determined through the third-party service provider which, from time to time will transfer between levels based on market conditions per the related security. All models and processes used consider market convention.

Mortgage Loans Held for Sale – The fair value of loans held for sale reflects the value of commitments with investors and/or the relative price as delivered into a To-Be-Announced (“TBA”) mortgage-backed security (Level 2).

Loans Receivable – Certain residential mortgage loans were initially originated for sale and measured at fair value; after origination, the loans were transferred to loans held for investment. As of December 31, 2023 and 2022, there were $15.1 million and $14.0 million, respectively, in residential mortgage loans recorded at fair value as they were previously transferred from held for sale to loans held for investment. The aggregate unpaid principal balance of these loans was $16.3 million and $15.6 million as of December 31, 2023 and 2022, respectively. Gains and losses from changes in fair value for these loans are reported in earnings as a component of “Other noninterest income” on the Consolidated Statements of Income. For the years ended December 31, 2023, 2022, and 2021, the Company recorded a net increase of $447,000, a net decrease of $1.7 million, and a net decrease of $29,000 in fair value, respectively. For loans originated as held for sale and transferred into loans held for investment, the fair value is determined based on quoted secondary market prices for similar loans (Level 2).

Derivative Instruments – Fair values for derivative assets and liabilities are measured on a recurring basis. The primary use of a derivative instrument is related to the mortgage banking activities of the Company. The fair value of the interest rate lock commitments and forward sales commitments are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions based on historical information, where appropriate. TBA mortgage-backed securities are fair valued on similar contracts in active markets (Level 2) while locks and forwards with customers and investors are fair valued using similar contracts in the market and changes in the market interest rates (Level 2 and 3). Derivative instruments not related to mortgage banking activities include interest rate swap agreements. The fair values of interest rate swap agreements are based on valuation models using observable market data as of the measurement date (Level 2). The Company’s derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including market transactions and third-party pricing services. The fair values of all interest rate swaps are determined from third-party pricing services without adjustment.

Other Real Estate Owned – Fair value adjustments to OREO are recorded at the lower of carrying amount of the loan or fair value of the collateral less selling costs. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the ACL on loans. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell (Level 3).

Collateral Dependent Loans – Expected credit losses on collateral dependent loans are measured based on the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable. If the fair value of the collateral is less than the amortized cost basis of the loan, the Company will recognize an allowance as the difference between the fair value of the collateral, less costs to sell (if applicable) at the reporting date and the amortized cost basis of the loan. If the fair value of the collateral exceeds the amortized cost basis of the loan, any expected recovery added to the amortized cost basis will be limited to the amount previously charged-off by the subsequent changes in the expected credit losses on collateral dependent loans are included within the provision for credit losses in the same manner in which the expected credit loss initially was recognized or as a reduction in the provision that would otherwise be reported (Level 3).

Mortgage Servicing Rights – The fair value of MSRs is estimated using net present value of expected cash flows using a third-party model that incorporates assumptions used in the industry to value such rights, adjusted for factors such as weighted average prepayments speeds based on historical information where appropriate (Level 3).

The following tables present securities available-for-sale, mortgage loans held for sale, loans receivable, at fair value, and derivative assets and liabilities measured at fair value on a recurring basis at the dates indicated:

Financial Assets		At December 31, 2023
Securities available-for-sale:		Level 1				Level 2				Level 3				Total
U.S. agency securities		$	—			$	18,018			$	—			$	18,018
Corporate securities			—				12,872				—				12,872
Municipal bonds			—				119,447				—				119,447
Mortgage-backed securities			—				101,248				—				101,248
U.S. Small Business Administration securities			—				41,348				—				41,348
Mortgage loans held for sale, at fair value			—				25,668				—				25,668
Loans receivable, at fair value			—				15,088				—				15,088
Derivatives:
Interest rate lock commitments with customers			—				—				329				329
Interest rate swaps - cash flow and fair value hedges			—				6,431				—				6,431
Interest rate swaps - dealer offsets to customer swap positions			—				64				—				64
Total assets measured at fair value		$	—			$	340,184			$	329			$	340,513
Financial Liabilities
Derivatives:
Mandatory and best effort forward commitments with investors		$	—			$	—			$	(188	)		$	(188	)
Forward TBA mortgage-backed securities			—				(284	)			—				(284	)
Interest rate swaps - cash flow and fair value hedges			—				(375	)			—				(375	)
Interest rate swaps - customer swap positions			—				(63	)			—				(63	)
Total liabilities measured at fair value		$	—			$	(722	)		$	(188	)		$	(910	)

Financial Assets		At December 31, 2022
Securities available-for-sale:		Level 1				Level 2				Level 3				Total
U.S. agency securities		$	—			$	17,288			$	—			$	17,288
Corporate securities			—				8,545				—				8,545
Municipal bonds			—				120,602				—				120,602
Mortgage-backed securities			—				69,966				—				69,966
U.S. Small Business Administration securities			—				12,851				—				12,851
Mortgage loans held for sale, at fair value			—				20,093				—				20,093
Loans receivable, at fair value			—				14,035				—				14,035
Derivatives:
Forward TBA mortgage-backed securities			—				164				—				164
Interest rate lock commitments with customers			—				—				107				107
Interest rate swaps - cash flow and fair value hedges			—				9,870				—				9,870
Total assets measured at fair value		$	—			$	273,414			$	107			$	273,521
Financial Liabilities
Derivatives:
Mandatory and best effort forward commitments with investors		$	—			$	—			$	(38	)		$	(38	)
Total liabilities measured at fair value		$	—			$	—			$	(38	)		$	(38	)

The following table presents financial assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy at the dated indicated. There were no financial assets measured at fair value on a nonrecurring basis as of December 31, 2022.

		December 31, 2023
		Level 1				Level 2				Level 3				Total
MSRs		$	—			$	—			$	38,163			$	38,163

Quantitative Information about Level 3 Fair Value Measurements – Shown in the table below is the fair value of financial instruments measured under a Level 3 unobservable input on a recurring and nonrecurring basis at the dates indicated:

Level 3

Significant

Weighted Average

Fair Value

Valuation

Unobservable

December 31,

December 31,

Instruments

Techniques

Inputs

Range

2023

2022

RECURRING

Interest rate lock commitments with customers

Quoted market prices

Pull-through expectations

80% - 99%

90.5

%

92.5

%

Individual forward sale commitments with investors

Quoted market prices

Pull-through expectations

80% - 99%

90.5

%

92.5

%

NONRECURRING

MSRs

Industry sources

Pre-payment speeds

0% - 50%

7.2

%

8.2

%

The pull-through rate is based on historical loan closing rates for similar interest rate lock commitments. An increase or decrease in the pull-through rate would have a corresponding positive or negative fair value adjustment.

The following table provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the years indicated:

						Purchases												Net change in				Net change in
		Beginning				and				Sales and				Ending				fair value for				fair value for
2023		Balance				Issuances				Settlements				Balance				gains/(losses) ⁽¹⁾				gains/(losses) ⁽²⁾
Interest rate lock commitments with customers		$	107			$	4,291			$	(4,069	)		$	329			$	222			$	—
Individual forward sale commitments with investors			(38	)			66				(216	)			(188	)			(150	)			—
2022
Interest rate lock commitments with customers		$	757			$	3,215			$	(3,865	)		$	107			$	(650	)		$	—
Individual forward sale commitments with investors			808				6,383				(7,229	)			(38	)			(846	)			—
2021
Interest rate lock commitments with customers		$	4,024			$	23,164			$	(26,431	)		$	757			$	(3,267	)		$	—
Individual forward sale commitments with investors			(67	)			2,526				(1,651	)			808				875				—
Securities available-for-sale, at fair value			1,111				40				(13	)			1,138				—				27

_____________________________

(1) Relating to items held at end of period included in income.

(2) Relating to items held at end of period included in other comprehensive income.

(Losses) gains on interest rate lock commitments and on forward sale commitments with investors carried at fair value are recorded in “Gain on sale of loans” on the Consolidated Statements of Income.

Fair values for financial instruments are management's estimates of the values at which the instruments could be exchanged in a transaction between willing parties. The Company uses the exit price notion when measuring the fair value of financial instruments.

The following table provides estimated fair values of the Company’s financial instruments at the dates indicated, whether recognized at fair value or not on the Consolidated Balance Sheets:

		December 31,								December 31,
		2023								2022
Financial Assets		Carrying				Fair				Carrying				Fair
Level 1 inputs:		Amount				Value				Amount				Value
Cash and cash equivalents		$	65,691			$	65,691			$	41,437			$	41,437
Certificates of deposit at other financial institutions			24,167				24,167				4,712				4,712
Level 2 inputs:
Securities available-for-sale, at fair value			292,933				292,933				229,252				229,252
Securities held-to-maturity			8,500				7,666				8,500				7,929
Loans held for sale, at fair value			25,668				25,668				20,093				20,093
FHLB stock, at cost			2,114				2,114				10,611				10,611
Forward TBA mortgage-backed securities			—				—				164				164
Loans receivable, at fair value			15,088				15,088				14,035				14,035
Interest rate swaps - cash flow and fair value hedges			6,431				6,431				9,870				9,870
Accrued interest receivable			14,005				14,005				11,144				11,144
Interest rate swaps - dealer offsets to customer swap positions			64				64				—				—
Level 3 inputs:
Loans receivable, gross			2,417,927				2,276,397				2,204,817				2,153,769
MSRs, held at lower of cost or fair value			9,090				20,552				18,017				35,478
MSRs held for sale, held at lower of cost or fair value			8,086				17,611				—				—
Fair value interest rate locks with customers			—				—				107				107
Financial Liabilities
Level 2 inputs:
Deposits			2,522,323				2,515,026				2,127,741				2,105,926
Borrowings			93,746				93,416				186,528				186,188
Subordinated notes, excluding unamortized debt issuance costs			50,000				43,480				50,000				44,500
Accrued interest payable			5,473				5,473				2,270				2,270
Interest rate swaps - cash flow and fair value hedges			375				375				—				—
Forward TBA mortgage-backed securities			284				284				—				—
Interest rate swaps - customer swap positions			63				63
Level 3 inputs:
Mandatory and best effort forward commitments with investors			188				188				38				38

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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