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Note 6 - Fair Value Measurements
 9 Months Ended
Sep. 30, 2022
Notes to Financial Statements  
Fair Value Disclosures [Text Block]

Note 6. Fair Value Measurements

 

Determination of Fair Value

 

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the “Fair Value Measurement and Disclosures” topic of FASB ASC, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

 

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

 

Fair Value Hierarchy

 

In accordance with this guidance, the Company groups its assets and liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

 

 

Level 1 -

Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

 

 

Level 2 -

Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

 

 

Level 3 -

Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires a significant management judgment or estimation.

 

An instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a recurring basis in the financial statements:

 

Securities available for sale

 

Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2).

 

Derivative asset/liability - cash flow hedges

 

Cash flow hedges are recorded at fair value on a recurring basis. The fair value of the Company's cash flow hedges is determined by a third party vendor using the discounted cash flow method (Level 2).

 

The following tables present the balances of assets measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021 (in thousands).  

 

      

Fair Value Measurements at September 30, 2022

 

Description

 Balance as of September 30, 2022  Quoted Prices in Active Markets for Identical Assets (Level 1)  Significant Other Observable Inputs (Level 2)  Significant Unobservable Inputs (Level 3) 

Assets:

                

Securities available for sale

                

U.S. Treasury securities

 $17,531  $—  $17,531  $— 

U.S. agency and mortgage-backed securities

  106,303   —   106,303   — 

Obligations of states and political subdivisions

  52,569   —   52,569   — 

Total securities available for sale

 $176,403  $—  $176,403  $— 

Derivatives - cash flow hedges

  2,723   —   2,723   — 

Total assets

 $179,126  $—  $179,126  $— 

 

      

Fair Value Measurements at December 31, 2021

 

Description

 Balance as of December 31, 2021  Quoted Prices in Active Markets for Identical Assets (Level 1)  Significant Other Observable Inputs (Level 2)  Significant Unobservable Inputs (Level 3) 

Assets:

                

Securities available for sale

                

U.S. Treasury securities

 $39,658  $—  $39,658  $— 

U.S. agency and mortgage-backed securities

  176,379   —   176,379   — 

Obligations of states and political subdivisions

  71,438   —   71,438   — 

Corporate debt securities

  2,020   —   2,020   — 

Total securities available for sale

 $289,495  $—  $289,495  $— 

Derivatives - cash flow hedges

  941   —   941   — 

Total assets

 $290,436  $—  $290,436  $— 

 

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

 

The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:

 

Impaired Loans

 

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreements will not be collected. The measurement of loss associated with impaired loans can be based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the observable market price of the loan, or the fair value of the collateral less estimated costs to sell. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Company’s collateral is real estate. The value of real estate collateral is determined utilizing a market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data (Level 2) within the last twelve months. However, if the collateral is a house or building in the process of construction or if an appraisal of the property is more than one year old and not solely based on observable market comparables or management determines the fair value of the collateral is further impaired below the appraised value, then a Level 3 valuation is considered to measure the fair value. The value of business equipment is based upon an outside appraisal, of one year or less, if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.  At September 30, 2022, there was no allowance for loan losses relating to impaired loans.

 

Other Real Estate Owned

 

Certain assets such as OREO are measured at fair value less cost to sell. Valuation of OREO is determined using current appraisals from independent parties, a Level 2 input. If current appraisals cannot be obtained prior to reporting dates, or if declines in value are identified after a recent appraisal is received, appraisal values are discounted, resulting in Level 3 estimates. If the Company markets the property with a realtor, estimated selling costs reduce the fair value, resulting in a valuation based on Level 3 inputs.

 

The following tables summarize the Company’s assets that were measured at fair value on a nonrecurring basis during the periods (dollars in thousands):

 

      

Fair Value Measurements at September 30, 2022

 

Description

 Balance as of September 30, 2022  Quoted Prices in Active Markets for Identical Assets (Level 1)  Significant Other Observable Inputs (Level 2)  Significant Unobservable Inputs (Level 3) 

Other real estate owned, net

 $1,578  $—  $—  $1,578 

Impaired loans, net

  1,454   —   —   1,454 

 

      

Fair Value Measurements at December 31, 2021

 

Description

 Balance as of December 31, 2021  Quoted Prices in Active Markets for Identical Assets (Level 1)  Significant Other Observable Inputs (Level 2)  Significant Unobservable Inputs (Level 3) 

Other real estate owned, net

 $1,848  $—  $—  $1,848 

Impaired loans, net

  1,454   —   —   1,454 

 

  

Quantitative information about Level 3 Fair Value Measurements for September 30, 2022

 
  

Fair Value

  

Valuation Technique

  

Unobservable Input

  

Range (Weighted Average) (1)

 

Other real estate owned, net

 $1,578  

Property appraisals

  

Selling cost

   10.00%

 

     

 

  

 

     

 

  

Quantitative information about Level 3 Fair Value Measurements for December 31, 2021

 
  

Fair Value

  

Valuation Technique

  

Unobservable Input

  

Range (Weighted Average) (1)

 

Other real estate owned, net

 $1,848  

Property appraisals

  

Selling cost

   10.00%

 

     

 

  

 

     

 

(1)Unobservable inputs were weighted by the relative fair value of the instruments.

 

Accounting guidance requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The carrying values and estimated fair values of the Company’s financial instruments at September 30, 2022 and December 31, 2021 are as follows (in thousands):

 

      

Fair Value Measurements at September 30, 2022 Using

 
  Carrying Amount  Quoted Prices in Active Markets for Identical Assets Level 1  Significant Other Observable Inputs Level 2  Significant Unobservable Inputs Level 3  

Fair Value

 

Financial Assets

                    

Cash and interest-bearing deposits in banks

 $75,785  $75,785  $—  $—  $75,785 

Securities available for sale

  176,403   —   176,403   —   176,403 

Securities held to maturity

  154,894   —   142,920   —   142,920 

Restricted securities

  1,908   —   1,908   —   1,908 

Loans, net

  900,222   —   —   TBD   — 

Bank owned life insurance

  24,375   —   24,375   —   24,375 

Accrued interest receivable

  4,247   —   4,247   —   4,247 

Derivatives - cash flow hedges

  2,723   —   2,723   —   2,723 

Financial Liabilities

                    

Deposits

 $1,266,046  $—   TBD   TBD  $— 

Subordinated debt

  4,995   —   —   TBD   — 

Junior subordinated debt

  9,279   —   —   TBD   — 

Accrued interest payable

  184   —   184   —   184 

 

      

Fair Value Measurements at December 31, 2021 Using

 
  Carrying Amount  Quoted Prices in Active Markets for Identical Assets Level 1  Significant Other Observable Inputs Level 2  Significant Unobservable Inputs Level 3  

Fair Value

 

Financial Assets

                    

Cash and interest-bearing deposits in banks

 $176,006  $176,006  $—  $—  $176,006 

Securities available for sale

  289,495   —   289,495   —   289,495 

Securities held to maturity

  33,441   —   33,617   —   33,617 

Restricted securities

  1,813   —   1,813   —   1,813 

Loans held for sale

  —   —   —   —   — 

Loans, net

  819,408   —   —   827,248   827,248 

Bank owned life insurance

  24,294   —   24,294   —   24,294 

Accrued interest receivable

  3,903   —   3,903   —   3,903 

Derivatives - cash flow hedges

  941   —   941   —   941 

Financial Liabilities

                    

Deposits

 $1,248,752  $—  $1,103,186  $145,101  $1,248,287 

Subordinated debt

  9,993   —   —   8,932   8,932 

Junior subordinated debt

  9,279   —   —   8,145   8,145 

Accrued interest payable

  152   —   152   —   152 

 

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.