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Note 5 - Fair Value Measurements

6 Months Ended

Jun. 30, 2022

Notes to Financial Statements

Fair Value Disclosures [Text Block]

5. Fair Value Measurements

Assets and liabilities carried at fair value are required to be classified and disclosed according to the process for determining fair value. There are three levels of determining fair value.

Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets.

Level 2: Inputs to the valuation methodology include: quoted prices for similar assets or liabilities in active markets; quoted prices 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 is a description of valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis.

Securities available-for-sale: 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.

Derivative financial instruments: The Company’s derivative financial instruments consist of interest rate swaps accounted for as fair value hedges. The Company's derivative positions are classified within Level 2 of the fair value hierarchy and are valued using models generally accepted in the financial services industry and that use actively quoted or observable market input values from external market data providers and/or non-binding broker-dealer quotations. The fair value of the derivatives is determined using discounted cash flow models. These models’ key assumptions include the contractual terms of the respective contract along with significant observable inputs, including interest rates, yield curves, nonperformance risk and volatility.

The following table presents the balances of assets measured at fair value on a recurring basis by level as of June 30, 2022 and December 31, 2021 (in thousands):

Description		Total				Level 1				Level 2				Level 3

2022
Assets
Securities available-for-sale
U.S. government treasuries		$	208,130			$	208,130			$	-			$	-
U.S. government agencies			110,149				-				110,149				-
U.S. government mortgage-backed securities			130,907				-				130,907				-
State and political subdivisions			298,733				-				298,733				-
Corporate bonds			80,470				-				80,470				-
Derivative financial instruments			733				-				733				-

2021
Assets
Securities available-for-sale
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				-

Liabilities
Derivative financial instruments		$	527			$	-			$	527			$	-

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 within the valuation hierarchy as of June 30, 2022 and December 31, 2021 (in thousands):

Description		Total				Level 1				Level 2				Level 3

2022

Loans receivable		$	8,762			$	-			$	-			$	8,762

2021

Loans receivable		$	9,012			$	-			$	-			$	9,012
Other real estate owned			218				-				-				218

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

The significant inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis as of June 30, 2022 and December 31, 2021 are as follows (in thousands):

		2022
		Estimated			Valuation			Range
		Fair Value			Techniques	Unobservable Inputs		(Average)

Loans receivable		$	8,762		Evaluation of collateral	Estimation of value			NM*

2021

Estimated

Valuation

Range

Fair Value

Techniques

Unobservable Inputs

(Average)

Loans receivable

$

9,012

Evaluation of collateral

Estimation of value

NM*

Other real estate owned

$

218

Appraisal

Appraisal adjustment

6%

-

8%

(7%)

* Evaluations of the underlying assets are completed for each collateral dependent impaired 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 the Company’s financial assets and liabilities as of June 30, 2022 and December 31, 2021 (in thousands):

			2022								2021
	Fair Value						Estimated								Estimated
	Hierarchy		Carrying				Fair				Carrying				Fair
	Level		Amount				Value				Amount				Value

Financial assets:
Cash and cash equivalents	Level 1		$	74,678			$	74,678			$	89,129			$	89,129
Interest-bearing time deposits	Level 1			14,677				14,677				16,922				16,922
Securities available-for-sale	See previous table			828,389				828,389				831,003				831,003
FHLB and FRB stock	Level 2			3,201				3,201				3,422				3,422
Loans receivable, net	Level 2			1,140,609				1,099,249				1,144,108				1,112,684
Loans held for sale	Level 2			473				473				-				-
Accrued income receivable	Level 1			9,478				9,478				10,124				10,124
Financial liabilities:
Deposits	Level 2		$	1,926,140			$	1,926,942			$	1,878,019			$	1,880,137
Securities sold under agreements to repurchase	Level 1			35,666				35,666				39,851				39,851
FHLB advances and other borrowings	Level 2			4,000				3,994				3,000				3,071
Accrued interest payable	Level 1			299				299				353				353

The methodologies used to determine fair value as of June 30, 2022 did not change from the methodologies described in the December 31, 2021 Annual Financial Statements.

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, taking into account 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.

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.

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