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Note 5 - Fair Value Measurements
 9 Months Ended
Sep. 30, 2023
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 and loans receivable: The Company’s derivative financial instruments and loans receivable consist of interest rate swaps on loans accounted for as fair value hedges. The Company’s derivative financial instruments also include back-to-back loan swaps to assist customers in managing their interest rate risk while executing offsetting interest rate swaps with dealer counterparties. The Company's derivative positions and related loans 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 and loans are 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 September 30, 2023 and December 31, 2022 (in thousands):

 

Description

 

Total

  

Level 1

  

Level 2

  

Level 3

 
                 

2023

                

Assets

                

Securities available-for-sale

                

U.S. government treasuries

 $202,522  $202,522  $-  $- 

U.S. government agencies

  98,049   -   98,049   - 

U.S. government mortgage-backed securities

  101,552   -   101,552   - 

State and political subdivisions

  265,299   -   265,299   - 

Corporate bonds

  69,522   -   69,522   - 

Loans receivable

  8,045   -   8,045   - 

Derivative financial instruments

  1,565   -   1,565   - 
                 

Liabilities

                

Derivative financial instruments

 $199  $-  $199  $- 
                 

2022

                

Assets

                

Securities available-for-sale

                

U.S. government treasuries

 $207,597  $207,597  $-  $- 

U.S. government agencies

  100,933   -   100,933   - 

U.S. government mortgage-backed securities

  116,741   -   116,741   - 

State and political subdivisions

  286,003   -   286,003   - 

Corporate bonds

  75,164   -   75,164   - 

Loans receivable

  8,494   -   8,494   - 

Derivative financial instruments

  1,096   -   1,096   - 

 

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 September 30, 2023 and December 31, 2022 (in thousands):

 

Description

 

Total

  

Level 1

  

Level 2

  

Level 3

 
                 

2023

                
                 

Loans receivable

 $268  $-  $-  $268 
                 

2022

                
                 

Loans receivable

 $304  $-  $-  $304 

 

The significant inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis as of September 30, 2023 and December 31, 2022 are as follows (in thousands):

 

  

2023

 
  

Estimated

  

Valuation

 

 

  

Range

 
  

Fair Value

  

Techniques

 Unobservable Inputs  

(Average)

 
              

Loans receivable

 $268  

Evaluation of collateral

 

Estimation of value

   NM* 

 

  

2022

 
  

Estimated

  

Valuation

 

 

  

Range

 
  

Fair Value

  

Techniques

 Unobservable Inputs  

(Average)

 
              

Loans receivable

 $304  

Evaluation of collateral

 

Estimation of value

   NM* 

 

* Not Meaningful.

 

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. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The following table includes the carrying amounts and estimated fair values of the Company’s financial assets and liabilities as of September 30, 2023 and December 31, 2022 (in thousands):

 

   

2023

  

2022

 
 

Fair Value

     

Estimated

      

Estimated

 
 

Hierarchy

 

Carrying

  

Fair

  

Carrying

  

Fair

 
 

Level

 

Amount

  

Value

  

Amount

  

Value

 
                  

Financial assets:

                 

Cash and cash equivalents

Level 1

 $90,063  $90,063  $27,884  $27,884 

Interest-bearing time deposits

Level 1

  9,889   9,221   14,669   14,340 

Securities available-for-sale

See previous table

  736,944   736,944   786,438   786,438 

FHLB and FRB stock

Level 2

  4,000   4,000   4,613   4,613 

Loans receivable, net

Level 2

  1,231,893   1,173,464   1,226,011   1,170,948 

Loans held for sale

Level 2

  428   428   154   154 

Accrued income receivable

Level 1

  13,794   13,794   11,275   11,275 

Derivative financial instruments

Level 2

  1,565   1,565   1,096   1,096 

Financial liabilities:

                 

Deposits

Level 2

 $1,828,681  $1,828,256  $1,897,957  $1,895,473 

Securities sold under agreements to repurchase

Level 1

  60,941   60,941   40,676   40,676 

Other borrowings

Level 2

  105,942   105,117   39,120   38,991 

Accrued interest payable

Level 1

  3,561   3,561   666   666 

Derivative financial instruments

Level 2

  199   199   -   - 

 

The methodologies used to determine fair value as of September 30, 2023 did not change from the methodologies described in the December 31, 2022 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.