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Note 10 - Fair Value Measurements
 9 Months Ended
Sep. 30, 2024
Notes to Financial Statements  
Fair Value Disclosures [Text Block]

NOTE 10 – FAIR VALUE MEASUREMENTS

 

The Company determines fair value based on the requirements established in Accounting Standards Codification (“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.

 

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 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 September 30, 2024 and December 31, 2023, there were $13.9 million and $15.1 million, respectively, in residential mortgage loans recorded at fair value as they were previously transferred from held for sale, at fair value to loans held for investment. The aggregate unpaid principal balance of these loans was $14.6 million and $16.3 million as of September 30, 2024 and December 31, 2023, 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 three months ended September 30, 2024, the Company recorded a net increase in fair value of $262,000, as compared to a net decrease in fair value of $343,000 for the three months ended September 30, 2023. For the nine months ended  September 30, 2024, the Company recorded a net increase in fair value of $448,000, as compared to a net decrease in fair value of $285,000 for the nine months ended  September 30, 2023. 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 derivative instruments 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-though 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 the market inputs we use 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 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.  Subsequent adjustments in the expected credit losses for collateral-dependent loans are included within the provision for credit losses in the same way 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 September 30, 2024

 

Securities available-for-sale:

 

Level 1

  

Level 2

  

Level 3

  

Total

 

U.S. agency securities

 $—  $17,682  $—  $17,682 

Corporate securities

  —   15,404   —   15,404 

Municipal bonds

  —   72,326   —   72,326 

Mortgage-backed securities

  —   110,919   —   110,919 

U.S. Small Business Administration securities

  —   11,868   —   11,868 

Mortgage loans held for sale, at fair value

  —   49,373   —   49,373 

Loans receivable, at fair value

  —   13,861   —   13,861 

Derivatives:

                

Interest rate lock commitments with customers

  —   —   292   292 

Interest rate swaps - cash flow and fair value hedges

  —   1,943   —   1,943 

Interest rate swaps - dealer offsets to customer swap positions

  —   47   —   47 

Total assets measured at fair value

 $—  $293,376  $292  $293,668 

Financial Liabilities

                

Derivatives:

                

Interest rate swaps - customer swap positions

 $—  $(46) $—  $(46)

Interest rate swaps - cash flow and fair value hedges

  —   (1,175)  —   (1,175)

Mandatory and best effort forward commitments with investors

  —   —   (77)  (77)

Forward TBA mortgage-backed securities

  —   (61)  —   (61)

Total liabilities measured at fair value

 $—  $(1,282) $(77) $(1,359)

 

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)
                 

 

The following table presents financial assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy at September 30, 2024 and  December 31, 2023. Level 3 assets recorded at fair value on a nonrecurring basis included loans for which a partial charge-off was recorded based on the fair value of collateral.

 

  

September 30, 2024

 
  

Level 1

  

Level 2

  

Level 3

  

Total

 

Collateral dependent loans

 $—  $—  $1,386  $1,386 

MSRs

  —   —   19,901   19,901 

 

  

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 Rate

 

Fair Value

 

Valuation

 

Unobservable

     

September 30,

  

December 31,

 

Instruments

 

Techniques

 

Inputs

 

Range

  

2024

  

2023

 

RECURRING

                

Interest rate lock commitments with customers

 

Quoted market prices

 

Pull-through expectations

  80% - 99%   90.2%  90.5%

Individual forward sale commitments with investors

 

Quoted market prices

 

Pull-through expectations

  80% - 99%   90.2%  90.5%

NONRECURRING

                

Collateral dependent loans

 

Fair value of underlying collateral

 

Discount applied to the obtained appraisal

  0% - 25%   —%  —%

MSR

 

Industry sources

 

Pre-payment speeds

  0% - 50%   11.8%  7.2%

 

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 dates indicated:

 

      

Purchases

          

Net change in

  

Net change in

 

Three Months Ended

 

Beginning

  

and

  

Sales and

  

Ending

  

fair value for

  

fair value for

 

September 30, 2024

 

Balance

  

Issuances

  

Settlements

  

Balance

  

gains/(losses) (1)

  

gains/(losses) (2)

 

Interest rate lock commitments with customers

 $378  $1,587  $(1,673) $292  $(86) $— 

Individual forward sale commitments with investors

  (316)  (1,138)  1,377   (77)  239   — 

September 30, 2023

                        

Interest rate lock commitments with customers

 $273  $1,109  $(1,207) $175  $(98) $— 

Individual forward sale commitments with investors

  123   —   (102)  21   (102)  — 

 

      

Purchases

          

Net change in

  

Net change in

 

Nine Months Ended

 

Beginning

  

and

  

Sales and

  

Ending

  

fair value for

  

fair value for

 

September 30, 2024

 

Balance

  

Issuances

  

Settlements

  

Balance

  

gains/(losses) (1)

  

gains/(losses) (2)

 

Interest rate lock commitments with customers

 $329  $3,245  $(3,282) $292  $(37) $— 

Individual forward sale commitments with investors

  (188)  (1,117)  1,228   (77)  (111)  — 

September 30, 2023

                        

Interest rate lock commitments with customers

 $107  $3,051  $(2,983) $175  $68  $— 

Individual forward sale commitments with investors

  (38)  410   (351)  21   (59)  — 

 

(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.

 

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 held for sale” on the Consolidated Statements of Income.

 

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:

 

  

September 30,

  

December 31,

 
  

2024

  

2023

 

Financial Assets

 

Carrying

  

Fair

  

Carrying

  

Fair

 

Level 1 inputs:

 

Amount

  

Value

  

Amount

  

Value

 

Cash and cash equivalents

 $40,340  $40,340  $65,691  $65,691 

Certificates of deposit at other financial institutions

  12,001   12,001   24,167   24,167 

Level 2 inputs:

                

Securities available-for-sale, at fair value

  228,199   228,199   292,933   292,933 

Securities held-to-maturity, gross

  8,500   7,983   8,500   7,666 

Loans held for sale, at fair value

  49,373   49,373   25,668   25,668 

FHLB stock, at cost

  9,504   9,504   2,114   2,114 

Loans receivable, at fair value

  13,861   13,861   15,088   15,088 

Interest rate swaps - cash flow and fair value hedges

  1,943   1,943   6,431   6,431 

Accrued interest receivable

  14,014   14,014   14,005   14,005 

Interest rate swaps - dealer offsets to customer swap positions

  47   47   64   64 

Level 3 inputs:

                

Loans receivable, gross

  2,481,068   2,353,912   2,417,927   2,276,397 

MSRs, held at lower of cost or fair value

  8,739   19,901   9,090   20,552 

MSRs held for sale, held at lower of cost or fair value

  —   —   8,086   17,611 

Fair value interest rate locks with customers

  292   292   —   — 

Financial Liabilities

                

Level 2 inputs:

                

Deposits

  2,427,331   2,429,371   2,522,323   2,515,026 

Borrowings

  163,806   163,723   93,746   93,416 

Subordinated notes, excluding unamortized debt issuance costs

  50,000   45,514   50,000   43,480 

Accrued interest payable

  2,349   2,349   5,473   5,473 

Interest rate swaps - cash flow and fair value hedges

  1,175   1,175   375   375 

Forward TBA mortgage-backed securities

  61   61   284   284 

Interest rate swaps - customer swap positions

  46   46   63   63 

Level 3 inputs:

                

Mandatory and best effort forward commitments with investors

  77   77   188   188