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Note 15 - Fair Value Measurements
 12 Months Ended
Dec. 31, 2021
Notes to Financial Statements  
Fair Value Disclosures [Text Block]

Note 15. 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 an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.

 

The standards require the use of valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques are consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, a fair value hierarchy was established for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

 

Level 1:          Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

 

Level 2:          Inputs to the valuation methodology include: quoted prices for similar assets or liabilities in active markets; quoted process for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatility, prepayment speeds, credit risk); or inputs derived principally from or can be corroborated by observable market data by correlation or other means.

 

Level 3:          Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

The following table presents the balances of assets measured at fair value on a recurring basis by level as of December 31, 2021 and 2020 (in thousands):

 

Description

 

Total

  

Level 1

  

Level 2

  

Level 3

 
                 

2021

                
                 

U.S. government treasuries

 $190,479  $190,479  $-  $- 

U.S. government agencies

  116,014   -   116,014   - 

U.S. government mortgage-backed securities

  149,601   -   149,601   - 

State and political subdivisions

  292,859   -   292,859   - 

Corporate bonds

  82,050   -   82,050   - 
                 

Total assets at fair value on a recurring basis

 $831,003  $190,479  $640,524  $- 
                 

2020

                
                 

U.S. government treasuries

 $12,053  $12,053  $-  $- 

U.S. government agencies

  111,199   -   111,199   - 

U.S. government mortgage-backed securities

  150,195   -   150,195   - 

State and political subdivisions

  251,584   -   251,584   - 

Corporate bonds

  71,968   -   71,968   - 
                 

Total assets at fair value on a recurring basis

 $596,999  $12,053  $584,946  $- 

 

 

Level 1 securities include U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets. U.S. government agencies, mortgage-backed securities, state and political subdivisions, and most corporate bonds are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things.

 

The Company reviews the prices supplied by the independent pricing service, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices. In general, the Company does not purchase investment portfolio securities that are esoteric or that have a complicated structure. The Company’s entire portfolio consists of traditional investments, nearly all of which are federal agency or mortgage pass-through securities, general obligation or revenue based municipal bonds and corporate bonds. Annually, the Company will validate prices supplied by the independent pricing service by comparison to prices obtained from third-party sources.

 

Certain assets are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment or a change in previously recognized impairment). The following table presents the assets carried on the balance sheet (after specific reserves) by caption and by level with the valuation hierarchy as of December 31, 2021 and 2020 (in thousands):

 

Description

 

Total

  

Level 1

  

Level 2

  

Level 3

 
                 

2021

                
                 

Loans

 $9,012  $-  $-  $9,012 

Other real estate owned

  218   -   -   218 
                 

Total assets at fair value on a nonrecurring basis

 $9,230  $-  $-  $9,230 
                 

2020

                
                 

Loans

 $10,306  $-  $-  $10,306 

Other real estate owned

  218   -   -   218 
                 

Total assets at fair value on a nonrecurring basis

 $10,524  $-  $-  $10,524 

 

The significant inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis as of December 31, 2021 and 2020 are as follows (in thousands):

 

 

  

2021

 
  

 

 

Valuation

Range of

 

Range

 
    Fair Value 

Techniques

Unobservable Inputs 

(Average)

 
             

Loans

 $9,012 

Evaluation of collateral

Estimation of value

   NM*  
             

Other real estate owned

 $218 

Appraisal

Appraisal adjustment

  6%-8%(7%)

 

  

2020

 
  

 

 

Valuation

Range of

 

Range

 
    Fair Value 

Techniques

Unobservable Inputs 

(Average)

 
             

Loans

 $10,306 

Evaluation of collateral

Estimation of value

   NM*  
             

Other real estate owned

 $218 

Appraisal

Appraisal adjustment

  6%-8%(7%)

 

* Not Meaningful.

 

Evaluations of the underlying assets are completed for each impaired collateral dependent loan with a specific reserve. The types of collateral vary widely and could include accounts receivables, inventory, a variety of equipment and real estate. Collateral evaluations are reviewed and discounted as appropriate based on knowledge of the specific type of collateral. In the case of real estate, an independent appraisal may be obtained. Types of discounts considered included aging of receivables, condition of the collateral, potential market for the collateral and estimated disposal costs. These discounts will vary from loan to loan, thus providing a range would not be meaningful.

 

GAAP requires disclosure of the fair value of financial assets and financial liabilities, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis. The following table includes the carrying amounts and estimated fair values of financial assets and liabilities as of December 31, 2021 and 2020 (in thousands):

 

   

2021

  

2020

 
 

Fair Value

     

Estimated

      

Estimated

 
 

Hierarchy

 

Carrying

  

Fair

  

Carrying

  

Fair

 
 

Level

 

Amount

  

Value

  

Amount

  

Value

 
                  

Financial assets:

                 

Cash and cash equivalents

Level 1

 $89,129  $89,129  $173,097  $173,097 

Interest-bearing time deposits

Level 2

  16,922   16,922   18,426   18,426 

Securities available-for-sale

See previous table

  831,003   831,003   596,999   596,999 

FHLB and FRB stock

Level 2

  3,422   3,422   3,148   3,148 

Loans receivable, net

Level 2

  1,144,108   1,112,684   1,129,505   1,116,352 

Loans held for sale

Level 2

  -   -   1,621   1,621 

Accrued income receivable

Level 1

  10,124   10,124   11,143   11,143 

Financial liabilities:

                 

Deposits

Level 2

 $1,878,019  $1,880,137  $1,716,446  $1,720,023 

Securities sold under agreements to repurchase

Level 1

  39,851   39,851   37,293   37,293 

FHLB advances

Level 2

  3,000   3,071   3,000   3,111 

Accrued interest payable

Level 1

  353   353   829   829 

 

Commitments to extend credit and standby letters of credit: The fair values of commitments to extend credit and standby letters of credit are based on fees currently charged to enter into similar agreements, considering the remaining terms of the agreement and credit worthiness of the counterparties. The carrying value and fair value of the commitments to extend credit and standby letters of credit are not considered significant.

 

Limitations: Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.