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Note 6 - Fair Value Measurements
 9 Months Ended
Sep. 30, 2023
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).

 

Notes to Consolidated Financial Statements (Unaudited)

 

The following tables present the balances of assets measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022 (in thousands).  

 

           

Fair Value Measurements at September 30, 2023

  

Description

  

Balance as of September 30, 2023

    

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

   $ 11,113     $ —     $ 11,113     $ —  

U.S. agency and mortgage-backed securities

     84,294       —       84,294       —  

Obligations of states and political subdivisions

     52,768       —       52,768       —  

Total securities available for sale

   $ 148,175     $ —     $ 148,175     $ —  

Derivatives - cash flow hedges

     3,065       —       3,065       —  

Total assets

   $ 151,240     $ —     $ 151,240     $ —  

 

           

Fair Value Measurements at December 31, 2022

  

Description

  

Balance as of December 31, 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

   $ 11,229     $ —     $ 11,229     $ —  

U.S. agency and mortgage-backed securities

     96,918       —       96,918       —  

Obligations of states and political subdivisions

     54,760       —       54,760       —  

Total securities available for sale

   $ 162,907     $ —     $ 162,907     $ —  

Derivatives - cash flow hedges

     2,679       —       2,679       —  

Total assets

   $ 165,586     $ —     $ 165,586     $ —  

 

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:

 

Collateral Dependent Loans with an ACLL

 

In accordance with ASC 326, the Company may determine that an individual loan exhibits unique risk characteristics which differentiate it from other loans within our loan pools. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things. A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. We reevaluate the fair value of collateral supporting collateral dependent loans on a quarterly basis. The fair value of real estate collateral supporting collateral dependent loans is evaluated by appraisal services using a methodology that is consistent with the Uniform Standards of Professional Appraisal Practice.  There was no allowance for credit losses on collateral dependent loans at September 30, 2023.

 

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.

 

Notes to Consolidated Financial Statements (Unaudited)

 

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, 2023

  

Description

  

Balance as of September 30, 2023

    

Quoted Prices in Active Markets for Identical Assets (Level 1)

    

Significant Other Observable Inputs (Level 2)

    

Significant Unobservable Inputs (Level 3)

  

Collateral dependent loans

   $ 3,116     $ —     $ —     $ 3,116  
                                 

 

           

Fair Value Measurements at December 31, 2022

  

Description

  

Balance as of December 31, 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

   $ 184     $ —     $ —     $ 184  

Impaired loans, net

     197       —       —       197  

 

   

Quantitative information about Level 3 Fair Value Measurements for September 30, 2023

  
   

Fair Value

  

Valuation Technique

  

Unobservable Input

  

Range (Weighted Average) (1)

  

Collateral dependent loans

   $ 3,116  

Property appraisals

  

Selling cost

     6.00 %
                       

 

   

Quantitative information about Level 3 Fair Value Measurements for December 31, 2022

  
   

Fair Value

  

Valuation Technique

  

Unobservable Input

  

Range (Weighted Average) (1)

  

Other real estate owned

   $ 184  

Property appraisals

  

Selling cost

     10.00 %

Impaired loans, net

     197  

Present value of cash flows

  

Discount rate

     6.50 %

 

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

 

Notes to Consolidated Financial Statements (Unaudited)

 

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, 2023 and December 31, 2022 are as follows (in thousands):

 

           

Fair Value Measurements at September 30, 2023 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

   $ 50,099     $ 50,099     $ —     $ —     $ 50,099  

Securities available for sale

     148,175       —       148,175       —       148,175  

Securities held to maturity, net

     149,948       —       134,728       —       134,728  

Restricted securities

     2,077       —       2,077       —       2,077  

Loans, net

     943,603       —       —       901,921       901,921  

Bank owned life insurance

     24,734       —       24,734       —       24,734  

Accrued interest receivable

     4,502       —       4,502       —       4,502  

Derivatives - cash flow hedges

     3,065       —       3,065       —       3,065  

Financial Liabilities

                                        

Deposits

   $ 1,235,173     $ —       1,050,754       179,959     $ 1,230,713  

Subordinated debt

     4,997       —       —       5,161       5,161  

Junior subordinated debt

     9,279       —       —       6,290       6,290  

Accrued interest payable

     667       —       667       —       667  

 

           

Fair Value Measurements at December 31, 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

   $ 66,914     $ 66,914     $ —     $ —     $ 66,914  

Securities available for sale

     162,907       —       162,907       —       162,907  

Securities held to maturity, net

     153,158       —       141,797       —       141,797  

Restricted securities

     1,908       —       1,908       —       1,908  

Loans, net

     913,077       —       —       880,473       880,473  

Bank owned life insurance

     24,531       —       24,531       —       24,531  

Accrued interest receivable

     4,543       —       4,543       —       4,543  

Derivatives - cash flow hedges

     2,679       —       2,679       —       2,679  

Financial Liabilities

                                        

Deposits

   $ 1,241,332     $ —     $ 1,104,483     $ 131,304     $ 1,235,787  

Subordinated debt

     4,995       —       —       5,267       5,267  

Junior subordinated debt

     9,279       —       —       6,067       6,067  

Accrued interest payable

     163       —       163       —       163  

 

Notes to Consolidated Financial Statements (Unaudited)

 

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.