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Note 9 - Fair Value Measurements
 9 Months Ended
Sep. 30, 2025
Notes to Financial Statements  
Fair Value Disclosures [Text Block]

NOTE 9 – 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 with the fair value option elected; after origination, these loans were transferred to loans held for investment. As of September 30, 2025 and December 31, 2024, there were $12.6 million and $12.7 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 $13.2 million and $13.8 million as of September 30, 2025 and December 31, 2024, 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, 2025, the Company recorded a net increase in fair value of $203,000, as compared to a net increase in fair value of $262,000, for the three months ended  September 30, 2024.   For the nine months ended  September 30, 2025 and 2024, the Company recorded a net increase in fair value of $469,000 and $448,000, 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 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 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.

 

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 is limited to the amount previously charged off.  Subsequent changes in expected credit losses on collateral-dependent loans are included within the provision for credit losses, either as an additional provision or as a reduction of 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, 2025

  

Securities available-for-sale:

  

Level 1

    

Level 2

    

Level 3

    

Total

  

U.S. agency securities

   $ —     $ 17,988     $ —     $ 17,988  

Corporate securities

     —       15,451       —       15,451  

Municipal bonds

     —       70,705       —       70,705  

Mortgage-backed securities

     —       197,222       —       197,222  

Asset-backed securities

     —       10,329       —       10,329  

Mortgage loans held for sale, at fair value

     —       38,579       —       38,579  

Loans receivable, at fair value

     —       12,571       —       12,571  

Derivatives:

                                

Interest rate lock commitments with customers

     —       —       275       275  

Forward TBA mortgage-backed securities

     —       30       —       30  

Interest rate swaps - cash flow and fair value hedges

     —       1,714       —       1,714  

Interest rate swaps - dealer offsets to customer swap positions

     —       59       —       59  

Total assets measured at fair value

   $ —     $ 364,648     $ 275     $ 364,923  

Financial Liabilities

                                

Derivatives:

                                

Interest rate swaps - customer swap positions

   $ —     $ (59 )   $ —     $ (59 )

Interest rate swaps - cash flow and fair value hedges

     —       (665 )     —       (665 )

Mandatory and best effort forward commitments with investors

     —       —       (28 )     (28 )

Total liabilities measured at fair value

   $ —     $ (724 )   $ (28 )   $ (752 )

 

 

Financial Assets

  

At December 31, 2024

  

Securities available-for-sale:

  

Level 1

    

Level 2

    

Level 3

    

Total

  

U.S. agency securities

   $ —     $ 17,138     $ —     $ 17,138  

Corporate securities

     —       15,126       —       15,126  

Municipal bonds

     —       70,344       —       70,344  

Mortgage-backed securities

     —       167,186       —       167,186  

Asset-backed securities

     —       11,381       —       11,381  

Mortgage loans held for sale, at fair value

     —       27,835       —       27,835  

Loans receivable, at fair value

     —       12,728       —       12,728  

Derivatives:

                                

Mandatory and best effort forward commitments with investors

     —       —       31       31  

Interest rate lock commitments with customers

     —       —       103       103  

Forward TBA mortgage-backed securities

     —       180       —       180  

Interest rate swaps- cash flow and fair value hedges

     —       7,244       —       7,244  

Interest rate swaps - dealer offsets to customer swap positions

     —       62       —       62  

Total assets measured at fair value

   $ —     $ 329,224     $ 134     $ 329,358  

Financial Liabilities

                                

Derivatives:

                                

Interest rate swaps - customer swap positions

   $ —     $ (61 )   $ —     $ (61 )

Total liabilities measured at fair value

   $ —     $ (61 )   $ —     $ (61 )

 

The following tables present financial assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy at September 30, 2025 and  December 31, 2024. 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, 2025

  
   

Level 1

    

Level 2

    

Level 3

    

Total

  

Collateral dependent loans

   $ —     $ —     $ 9,349     $ 9,349  

MSRs

     —       —       21,691       21,691  

 

   

December 31, 2024

  
   

Level 1

    

Level 2

    

Level 3

    

Total

  

Collateral dependent loans

   $ —     $ —     $ 1,130     $ 1,130  

MSRs

     —       —       21,043       21,043  

 

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

    

2025

    

2024

  

RECURRING

                                

Interest rate lock commitments with customers

  

Quoted market prices

  

Pull-through expectations

     80% - 99%       89.9 %     94.0 %

Individual forward sale commitments with investors

  

Quoted market prices

  

Pull-through expectations

     80% - 99%       89.9 %     94.0 %

NONRECURRING

                                

Collateral dependent loans

  

Fair value of underlying collateral

  

Discount applied to the obtained appraisal

     0% - 25%       12.0 %     — %

MSRs

  

Industry sources

  

Pre-payment speeds

     0% - 50%       8.3 %     8.3 %

 

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, 2025

  

Balance

    

Issuances

    

Settlements

    

Balance

    

gains/(losses) (1)

    

gains/(losses) (2)

  

Interest rate lock commitments with customers

   $ 409     $ 864     $ (998 )   $ 275     $ (134 )   $ —  

Individual forward sale commitments with investors

     (162 )     (92 )     226       (28 )     134       —  

September 30, 2024

                                                

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       —  

 

           

Purchases

                    

Net change in

    

Net change in

  

Nine Months Ended

  

Beginning

    

and

    

Sales and

    

Ending

    

fair value for

    

fair value for

  

September 30, 2025

  

Balance

    

Issuances

    

Settlements

    

Balance

    

gains/(losses) (1)

    

gains/(losses) (2)

  

Interest rate lock commitments with customers

   $ 103     $ 3,104     $ (2,932 )   $ 275     $ 172     $ —  

Individual forward sale commitments with investors

     31       (345 )     286       (28 )     (59 )     —  

September 30, 2024

                                                

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 )     —  

 

(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, 2025

    

December 31, 2024

  

Financial Assets

  

Carrying

    

Fair

    

Carrying

    

Fair

  

Level 1 inputs:

  

Amount

    

Value

    

Amount

    

Value

  

Cash and cash equivalents

   $ 61,280     $ 61,280     $ 31,635     $ 31,635  

Certificates of deposit at other financial institutions

     —       —       1,727       1,727  

Level 2 inputs:

                                

Securities available-for-sale, at fair value

     311,695       311,695       281,175       281,175  

Securities held-to-maturity, gross

     31,606       32,142       8,500       8,144  

Loans held for sale, at fair value

     38,579       38,579       27,835       27,835  

FHLB stock, at cost

     7,975       7,975       15,621       15,621  

Forward TBA mortgage-backed securities

     30       30       180       180  

Loans receivable, at fair value

     12,571       12,571       12,728       12,728  

Interest rate swaps - cash flow and fair value hedges

     1,714       1,714       7,244       7,244  

Interest rate swaps - dealer offsets to customer swap positions

     59       59       62       62  

Level 3 inputs:

                                

Loans receivable, gross

     2,617,086       2,525,412       2,521,093       2,385,213  

MSRs, held at lower of cost or fair value

     8,506       21,691       9,204       21,043  

Mandatory and best effort forward commitments with investors

     —       —       31       31  

Fair value interest rate locks with customers

     275       275       103       103  

Financial Liabilities

                                

Level 2 inputs:

                                

Time deposits

     1,299,774       1,300,722       1,028,896       1,024,663  

Borrowings

     129,305       128,100       307,806       307,408  

Subordinated notes, excluding unamortized debt issuance costs

     50,000       48,654       50,000       45,504  

Interest rate swaps - cash flow and fair value hedges

     665       665       —       —  

Interest rate swaps - customer swap positions

     59       59       61       61  

Level 3 inputs:

                                

Mandatory and best effort forward commitments with investors

     28       28       —       —