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Note 5 - Fair Value Measurements | 6 Months Ended
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Jun. 30, 2022
Notes to Financial Statements |
Fair Value Disclosures [Text Block] | NOTE 5 - FAIR VALUE MEASUREMENTS Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. GAAP establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following levels:
Level I: | Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level II: | Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.
Level III: | Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
This hierarchy requires the use of observable market data when available. The following tables present the assets measured on a recurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
|  |  |  |  |  | June 30, 2022 |  |  |  |  |
(Dollar amounts in thousands) |  | Level I |  |  | Level II |  |  | Level III |  |  | Total |
Assets measured on a recurring basis: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Subordinated debt |  | $ | - |  |  | $ | 21,478 |  |  | $ | 9,830 |  |  | $ | 31,308 |
Obligations of states and political subdivisions |  |  | - |  |  |  | 132,308 |  |  |  | - |  |  |  | 132,308 |
Mortgage-backed securities in government-sponsored entities |  |  | - |  |  |  | 8,342 |  |  |  | - |  |  |  | 8,342 |
Total debt securities |  |  | - |  |  |  | 162,128 |  |  |  | 9,830 |  |  |  | 171,958 |
Equity securities in financial institutions |  |  | 779 |  |  |  | - |  |  |  | - |  |  |  | 779 |
Total |  | $ | 779 |  |  | $ | 162,128 |  |  | $ | 9,830 |  |  | $ | 172,737 |
|  |  |  |  |  | December 31, 2021 |  |  |  |  |
(Dollar amounts in thousands) |  | Level I |  |  | Level II |  |  | Level III |  |  | Total |
Assets measured on a recurring basis: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Subordinated debt |  | $ | - |  |  | $ | 20,337 |  |  | $ | 12,200 |  |  | $ | 32,537 |
Obligations of states and political subdivisions |  |  | - |  |  |  | 127,345 |  |  |  | - |  |  |  | 127,345 |
Mortgage-backed securities in government-sponsored entities |  |  | - |  |  |  | 10,317 |  |  |  | - |  |  |  | 10,317 |
Total debt securities |  |  | - |  |  |  | 157,999 |  |  |  | 12,200 |  |  |  | 170,199 |
Equity securities in financial institutions |  |  | 818 |  |  |  | - |  |  |  | - |  |  |  | 818 |
Total |  | $ | 818 |  |  | $ | 157,999 |  |  | $ | 12,200 |  |  | $ | 171,017 |
Investment Securities Available for Sale - An independent pricing service provides the Company fair values which represent quoted prices for similar assets, fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level II). Level III securities are assets whose fair value cannot be determined by using observable measures. The inputs to the valuation methodology of these securities are unobservable and significant to the fair value measurement. Currently, this category includes certain subordinated debt investments that are valued based on the discounted cash flow approach assuming a yield curve of similarly structured instruments. While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of specific financial instruments could result in a different estimate of fair value at the reporting date. Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective period-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments following the respective reporting dates may be different from the amounts reported at each period-end. Equity Securities - Equity securities that are traded on a national securities exchange are valued at their last reported sales price as of the measurement date. Equity securities traded in the over-the-counter (“OTC”) markets and listed securities for which no sale was reported on that date are generally valued at their last reported “bid” price if held long, and last reported “ask” price if sold short. To the extent equity securities are actively traded and valuation adjustments are not applied, they are categorized in Level I of the fair value hierarchy. The following table presents the fair value reconciliation of Level 3 assets measured at fair value on a recurring basis.
(Dollar amounts in thousands) |  |  |  |
|  | Subordinated debt |
Balance as of January 1, 2022 |  | $ | 12,200 |
Transfers out of Level III (1) |  |  | (2,250 | )
Net unrealized holding gain on available-for-sale investment securities |  |  | (120 | )
Balance as of June 30, 2022 |  | $ | 9,830 |
| (1) | Transfers between hierarchy levels are based on the availability of sufficient observable inputs to meet Level II versus Level II criteria. The level designation of each financial instrument is reassessed at the end of each period.
The following tables present the assets measured on a non-recurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Collateral-dependent impaired loans are carried at fair value if they have been charged down to fair value or if a specific valuation allowance has been established. A new cost basis is established at the time a property is initially recorded in OREO. OREO properties are carried at fair value if a devaluation has been taken to the property’s value after the initial measurement.
|  |  |  |  |  | June 30, 2022 |  |  |  |  |
(Dollar amounts in thousands) |  | Level I |  |  | Level II |  |  | Level III |  |  | Total |
Assets measured on a non-recurring basis: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans |  | $ | - |  |  | $ | - |  |  | $ | 1,106 |  |  | $ | 1,106 |
Other real estate owned |  |  | - |  |  |  | - |  |  |  | 6,792 |  |  |  | 6,792 |
|  |  |  |  |  | December 31, 2021 |  |  |  |  |
(Dollar amounts in thousands) |  | Level I |  |  | Level II |  |  | Level III |  |  | Total |
Assets measured on a non-recurring basis: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans |  | $ | - |  |  | $ | - |  |  | $ | 4,162 |  |  | $ | 4,162 |
Impaired Loans – The Company has measured impairment on collateral-dependent impaired loans generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management makes estimates about expected costs to sell the property, which are also included in the net realizable value. If the fair value of the collateral-dependent loan is less than the carrying amount of the loan, a specific reserve for the loan is made in the allowance for loan losses, or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included in the above table as a Level III measurement. If the fair value of the collateral exceeds the carrying amount of the loan, then the loan is not included in the above table as it is not currently being carried at its fair value. The fair values in the above table exclude estimated selling costs of $376,000 and $901,000 as of June 30, 2022, and December 31, 2021, respectively. Other Real Estate Owned (OREO) – OREO is carried at the lower of cost or fair value, which is measured at the date of foreclosure. If the fair value of the collateral exceeds the carrying amount of the loan, no charge-off or adjustment is necessary, the loan is not considered to be carried at fair value and is therefore not included in the above table. If the fair value of the collateral is less than the carrying amount of the loan, management will charge the loan down to its estimated realizable value. The fair value of OREO is based on the appraised value of the property, which is generally unadjusted by management and is based on comparable sales for similar properties in the same geographic region as the subject property and is included in the above table as a Level II measurement. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. In these cases, the loans are categorized in the above table as a Level III measurement since these adjustments are considered to be unobservable inputs. Income and expenses from operations and further declines in the fair value of the collateral after foreclosure are included in net expenses from OREO. The following tables present additional quantitative information about assets measured at fair value on a non-recurring basis and for which the Company uses Level III inputs to determine fair value:
|  | Quantitative Information about Level III Fair Value Measurements |
(Dollar amounts in thousands) |  | Fair Value Estimate |  | Valuation Techniques | Unobservable Input |  | Range (Weighted Average) |
June 30, 2022 |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans |  | $ | 1,106 |  | Appraisal of collateral (1) | Appraisal adjustments (2) |  | 32.5% | to | 76.6% | (51.3%) |
Other real estate owned |  | $ | 6,792 |  | Appraisal of collateral (1) | Appraisal adjustments (2) |  |  |  |  | 14.2% |
|  | Quantitative Information about Level III Fair Value Measurements |
(Dollar amounts in thousands) |  | Fair Value Estimate |  | Valuation Techniques | Unobservable Input |  | Range (Weighted Average) |
December 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans |  | $ | 4,162 |  | Appraisal of collateral (1) | Appraisal adjustments (2) |  | 25.0% | to | 72.2% | (36.6%) |
| (1) | Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level III inputs that are not identifiable, less any associated allowance.
| (2) | Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.
The estimated fair value of the Company’s financial instruments not recorded at fair value on a recurring basis is as follows:
|  | June 30, 2022 |
|  | Carrying |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Total |
|  | Value |  |  | Level I |  |  | Level II |  |  | Level III |  |  | Fair Value |
|  | (Dollar amounts in thousands) |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans held for sale |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Net loans |  | $ | 963,447 |  |  |  | - |  |  |  | - |  |  | $ | 940,261 |  |  |  | 940,261 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | $ | 1,147,166 |  |  | $ | 972,333 |  |  | $ | - |  |  | $ | 171,863 |  |  | $ | 1,144,196 |
Other borrowings |  |  | 12,910 |  |  |  | - |  |  |  | - |  |  |  | 12,910 |  |  |  | 12,910 |
|  | December 31, 2021 |
|  | Carrying |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Total |
|  | Value |  |  | Level I |  |  | Level II |  |  | Level III |  |  | Fair Value |
|  | (Dollar amounts in thousands) |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans held for sale |  | $ | 1,051 |  |  |  | - |  |  | $ | 1,051 |  |  | $ | - |  |  | $ | 1,051 |
Net loans |  |  | 967,349 |  |  |  | - |  |  |  | - |  |  |  | 961,645 |  |  |  | 961,645 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | $ | 1,166,610 |  |  | $ | 967,885 |  |  | $ | - |  |  | $ | 199,503 |  |  | $ | 1,167,388 |
Other borrowings |  |  | 12,901 |  |  |  | - |  |  |  | - |  |  |  | 12,901 |  |  |  | 12,901 |
Included within other borrowings is an $8.2 million note payable, which matures in December 2037. These borrowings were used to form a special purpose entity (“Entity”) to issue $8.0 million of floating rate, obligated mandatorily redeemable securities. The rate adjusts quarterly, equal to LIBOR plus 1.67%. The borrowing is a floating rate instrument, and any difference between the cost and fair value is insignificant. In addition to the financial instruments included in the preceding tables, cash and cash equivalents, bank-owned life insurance, Federal Home Loan Bank stock, accrued interest receivable, and accrued interest payable, are carried at cost, which approximates the fair value of the instruments.

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- Definition 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. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI https://asc.fasb.org/extlink&oid=126976982&loc=d3e19207-110258 + Details
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