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Note 5 - Fair Value Measurements
 9 Months Ended
Sep. 30, 2025
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 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 at fair value on a recurring basis on the Consolidated Balance Sheet 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.

 

 

   

September 30, 2025

  

(Dollar amounts in thousands)

  

Level I

    

Level II

    

Level III

    

Total

  

Assets measured on a recurring basis:

                                

Subordinated debt

   $ -     $ 21,893     $ 1,679     $ 23,572  

Obligations of states and political subdivisions

     -       124,373       -       124,373  

Mortgage-backed securities in government-sponsored entities

     -       7,910       -       7,910  

Total investment securities available for sale

     -       154,176       1,679       155,855  
                                 

Equity securities

     743       -       -       743  

Interest rate derivative assets

           547             547  

Liabilities measured on a recurring basis:

                                

Interest rate derivative liabilities

           547             547  

 

   

December 31, 2024

  

(Dollar amounts in thousands)

  

Level I

    

Level II

    

Level III

    

Total

  

Assets measured on a recurring basis:

                                

Subordinated debt

   $ -     $ 25,830     $ 6,639     $ 32,469  

Obligations of states and political subdivisions

     -       124,966       -       124,966  

Mortgage-backed securities in government-sponsored entities

     -       8,367       -       8,367  

Total investment securities available for sale

     -       159,163       6,639       165,802  
                                 

Equity securities

     753       -       -       753  

 

Investment Securities Available for Sale - An independent pricing service provides the Company fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, benchmarked yield curve, credit spreads and prices from market makers and live trading systems. These securities have been categorized in 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.

 

Interest Rate Derivatives - An independent third-party values interest rate derivatives using pricing models based on a discounted cash flow methodology.  The models take into account both Level I and Level II inputs such as swap rates, deposit rates, and other market-based rates and curves. A Level II categorization has been assigned. Interest rate derivatives are included in "accrued interest receivable and other assets" and "accrued interest payable and other liabilities" on the Consolidated Balance Sheet.

 

The following table presents the fair value reconciliation of Level III assets measured at fair value on a recurring basis.

 

   

Subordinated debt

  

(Dollar amounts in thousands)

  

September 30, 2025

    

December 31, 2024

  

Beginning of year

   $ 6,639     $ 8,801  

Settlements

     (5,000 )     -  

Transfers out of Level III (1)

     -       (2,250 )

Net change in unrealized loss on investment securities available-for-sale

     40       88  

End of year

   $ 1,679     $ 6,639  

 

 

(1)

Transfers between hierarchy levels are based on the availability of sufficient observable inputs to meet Level II versus Level III criteria. The level designation of each financial instrument is reassessed at the end of each period.

 

The following table presents the assets measured at fair value on a non-recurring basis on the Consolidated Balance Sheet by level within the fair value hierarchy. 

 

   

September 30, 2025

  

(Dollar amounts in thousands)

  

Level I

    

Level II

    

Level III

    

Total

  

Assets measured on a non-recurring basis:

                                

Premises and equipment held for sale

   $ -     $ -     $ 998     $ 998  

Collateral-dependent loans

     -       -       6,007       6,007  

 

   

December 31, 2024

  

(Dollar amounts in thousands)

  

Level I

    

Level II

    

Level III

    

Total

  

Assets measured on a non-recurring basis:

                                

Collateral-dependent loans

   $ -     $ -     $ 3,321     $ 3,321  

 

 

Premises and Equipment Held for Sale - Premises and equipment held for sale consist of a branch location held for sale.  The Company has measured impairment on branch locations held for sale based on the fair value of the property. Fair value is based on the listed selling price, which is predominately determined using market transactions for similar properties. In some cases, management may adjust the sales price due to changes in market conditions, length of time that the property has been on the market, or other factors that a market participant may take into account when valuing the property. Additionally, management estimates expected costs to sell the property. If the fair value of the premises and equipment held for sale is less than the carrying amount, a charge is taken to reduce the property to its fair value (less estimated selling costs), and the property is included in the above table as a Level III measurement in the period in which the adjustment is recorded. If the fair value of the property exceeds the carrying amount, then the property is not included in the above table as it is not currently being carried at its fair value. The fair values in the preceding tables include selling costs of $53,000 for September 30, 2025.

 

Collateral-Dependent Loans – The Company has measured expected credit loss on collateral-dependent individually analyzed loans generally based on the fair value of the loan’s collateral. Fair value is generally determined based on 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 credit 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 in the period in which the adjustment is recorded. 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 preceding tables include selling costs of $1.8 million and $968,000 for September 30, 2025, and  December 31, 2024

 

The following table presents 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:

 

   

September 30, 2025

  

(Dollar amounts in thousands)

  

Fair Value Estimate

  

Valuation Techniques

  

Unobservable Input

  

Range (Weighted Average)

  

Collateral-dependent loans

   $ 6,007  

Appraisal of collateral

  

Appraisal adjustments

     12.8 - 29.2% (25.2%)  

Premises and equipment held for sale

   $ 998  

Sale price

  

Adjustments to selling price

     5.0%  

 

   

December 31, 2024

  

(Dollar amounts in thousands)

  

Fair Value Estimate

  

Valuation Techniques

  

Unobservable Input

  

Range (Weighted Average)

  

Collateral-dependent loans

   $ 3,321  

Appraisal of collateral

  

Appraisal adjustments

     0 - 23.9% (23.9%)  

 

The estimated fair value of the Company’s financial instruments not recorded at fair value on a recurring basis is as follows:

 

   

September 30, 2025

  
   

Carrying

                            

Total

  

(Dollar amounts in thousands)

  

Value

    

Level I

    

Level II

    

Level III

    

Fair Value

  

Financial assets:

                                        

Net loans

   $ 1,583,995     $ -     $ -     $ 1,572,635     $ 1,572,635  

Mortgage servicing rights

     1,423       -       -       2,398       2,398  
                                         

Financial liabilities:

                                        

Non-maturing deposits

   $ 1,351,857     $ 1,351,857     $ -     $ -     $ 1,351,857  

Time deposits

     270,445       -       -       269,408       269,408  

Other borrowings

     11,502       -       -       11,502       11,502  

 

   

December 31, 2024

  
   

Carrying

                            

Total

  

(Dollar amounts in thousands)

  

Value

    

Level I

    

Level II

    

Level III

    

Fair Value

  

Financial assets:

                                        

Net loans

   $ 1,497,167     $ -     $ -     $ 1,462,650     $ 1,462,650  

Mortgage servicing rights

     1,497       -       -       2,522       2,522  
                                         

Financial liabilities:

                                        

Non-maturing deposits

   $ 1,197,989     $ 1,197,989     $ -     $ -     $ 1,197,989  

Time deposits

     247,704       -       -       245,999       245,999  

Other borrowings

     11,660       -       -       11,660       11,660  

 

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 to issue $8.0 million of floating rate, obligated mandatorily redeemable securities. The rate adjusts quarterly, equal to SOFR 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 above tables, cash and cash equivalents, bank-owned life insurance, Federal Home Loan Bank (the “FHLB”) stock, other investments, accrued interest receivable, FHLB advances, finance lease liabilities, and accrued interest payable, are carried at cost, which approximates the fair value of the instruments.