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Note 16 - Fair Value Measurements
 12 Months Ended
Dec. 31, 2023
Notes to Financial Statements  
Fair Value Disclosures [Text Block]

Note 16. 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 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 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.

 

 

The following table presents the balances of assets measured at fair value on a recurring basis by level as of December 31, 2023 and 2022 (in thousands):

 

Description

  

Total

    

Level 1

    

Level 2

    

Level 3

  
                                 

2023

                                

Assets

                                

Securities available-for-sale

                                

U.S. government treasuries

   $ 200,088     $ 200,088     $ -     $ -  

U.S. government agencies

     92,615       -       92,615       -  

U.S. government mortgage-backed securities

     101,864       -       101,864       -  

State and political subdivisions

     269,891       -       269,891       -  

Corporate bonds

     71,931       -       71,931       -  

Loans

     8,327       -       8,327       -  

Derivative financial instruments

     1,225       -       1,225       -  
                                 

Liabilities

                                

Derivative financial instruments

   $ 745     $ -     $ 745     $ -  
                                 

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

     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 with the valuation hierarchy as of December 31, 2023 and 2022 (in thousands):

 

Description

  

Total

    

Level 1

    

Level 2

    

Level 3

  
                                 

2023

                                
                                 

Loans receivable

   $ 105     $ -     $ -     $ 105  
                                 

2022

                                
                                 

Loans receivable

   $ 304     $ -     $ -     $ 304  

 

As of December 31, 2023, individually analyzed loans with a carrying value of $224 thousand were reduced by a specific reserve of $119 thousand, resulting in a reported fair value of $105 thousand. As of December 31, 2022, impaired loans with a carrying value of $399 thousand were reduced by a specific reserve of $95 thousand resulting in a reporting fair value of $304 thousand.

 

 

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

 

   

2023

  
   

Estimated

  

Valuation

Range of

  

Range

  
   

Fair Value

  

Techniques

 Unobservable Inputs   

(Average)

  
                     

Loans receivable

   $ 105  

Evaluation of collateral

Estimation of value

     NM*  

 

   

2022

  
   

Estimated

  

Valuation

Range of

  

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 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, 2023 and 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

   $ 55,101     $ 55,101     $ 27,884     $ 27,884  

Interest-bearing time deposits

Level 2

     8,904       8,444       14,669       14,340  

Securities available-for-sale

See previous table

     736,389       736,389       786,438       786,438  

FHLB and FRB stock

Level 2

     3,086       3,086       4,613       4,613  

Loans receivable, net

Level 2

     1,277,812       1,224,446       1,226,011       1,170,948  

Loans held for sale

Level 2

     124       124       154       154  

Accrued income receivable

Level 1

     12,953       12,953       11,275       11,275  

Derivative financial instruments

Level 2

     1,225       1,225       1,096       1,096  

Financial liabilities:

                                  

Deposits

Level 2

   $ 1,811,831     $ 1,812,718     $ 1,897,957     $ 1,895,473  

Securities sold under agreements to repurchase

Level 1

     53,994       53,994       40,676       40,676  

Other borrowings

Level 2

     110,588       110,376       39,120       38,991  

Accrued interest payable

Level 1

     4,710       4,710       666       666  

Derivative financial instruments

Level 2

     745       745       -       -  

 

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.