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Note 5 - Fair Value Measurements
 3 Months Ended
Mar. 31, 2025
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  March 31, 2025 and  December 31, 2024 (in thousands):

 

Description

 

Total

  

Level 1

  

Level 2

  

Level 3

 
                 

2025

                

Assets

                

Securities available-for-sale

                

U.S. government treasuries

 $158,963  $158,963  $-  $- 

U.S. government agencies

  86,624   -   86,624   - 

U.S. government mortgage-backed securities

  89,240   -   89,240   - 

State and political subdivisions

  245,561   -   245,561   - 

Corporate bonds

  60,028   -   60,028   - 

Loans receivable

  7,990   -   7,990   - 

Derivative financial instruments

  876   -   876   - 
                 

Liabilities

                

Derivative financial instruments

 $351  $-  $351  $- 
                 

2024

                

Assets

                

Securities available-for-sale

                

U.S. government treasuries

 $167,715  $167,715  $-  $- 

U.S. government agencies

  83,433   -   83,433   - 

U.S. government mortgage-backed securities

  91,050   -   91,050   - 

State and political subdivisions

  245,562   -   245,562   - 

Corporate bonds

  60,753   -   60,753   - 

Loans receivable

  7,923   -   7,923   - 

Derivative financial instruments

  996   -   996   - 
                 

Liabilities

                

Derivative financial instruments

 $248  $-  $248  $- 

 

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 March 31, 2025 and  December 31, 2024 (in thousands):

 

Description

 

Total

  

Level 1

  

Level 2

  

Level 3

 
                 

2025

                
                 

Collateral dependent loans

 $-  $-  $-  $- 
                 

2024

                
                 

Collateral dependent loans

 $385  $-  $-  $385 

 

 

As of March 31, 2025, individually analyzed collateral dependent loans with a carrying value of $1.2 million were reduced by a specific reserve of $1.2 million, resulting in no reported fair value. As of December 31, 2024, individually analyzed collateral dependent loans with a carrying value of $483 thousand were reduced by a specific reserve of $98 thousand resulting in a reporting fair value of $385 thousand.

 

 

The significant inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis as of March 31, 2025 and  December 31, 2024 are as follows (in thousands):

 

  

2025

 
  

Estimated

 

Valuation

Unobservable

   
  

Fair Value

 

Techniques

Inputs

 

Range

 
           

Collateral dependent loans

 $- 

Fair value of collateral

Valuation adjustments

  0% - 20% 

 

  

2024

 
  

Estimated

 

Valuation

Unobservable

   
  

Fair Value

 

Techniques

Inputs

 

Range

 
           

Collateral dependent loans

 $385 

Fair value of collateral

Valuation adjustments

  0% - 25% 

 

Evaluations of the underlying assets are completed for each 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 and could include cost approach, sales comparison approach, or income approach. 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.

 

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 March 31, 2025 and  December 31, 2024 (in thousands):

 

   

2025

  

2024

 
 

Fair Value

     

Estimated

      

Estimated

 
 

Hierarchy

 

Carrying

  

Fair

  

Carrying

  

Fair

 
 

Level

 

Amount

  

Value

  

Amount

  

Value

 
                  

Financial assets:

                 

Cash and cash equivalents

Level 1

 $163,391  $163,391  $101,227  $101,227 

Interest-bearing time deposits

Level 1

  5,166   5,034   6,166   5,938 

Securities available-for-sale

See previous table

  640,416   640,416   648,513   648,513 

FHLB and FRB stock

Level 2

  3,384   3,384   3,883   3,883 

Loans receivable, net

Level 3

  1,306,230   1,268,007   1,303,917   1,261,703 

Loans held for sale

Level 2

  540   540   342   342 

Accrued income receivable

Level 1

  12,240   12,240   13,864   13,864 

Derivative financial instruments

Level 2

  876   876   996   996 

Financial liabilities:

                 

Deposits

Level 2

 $1,906,384  $1,906,459  $1,846,682  $1,848,472 

Securities sold under agreements to repurchase

Level 1

  45,774   45,774   52,412   52,412 

Other borrowings

Level 2

  35,802   35,508   46,952   46,543 

Accrued interest payable

Level 1

  2,555   2,555   3,208   3,208 

Derivative financial instruments

Level 2

  351   351   248   248 

 

The methodologies used to determine fair value as of  March 31, 2025 did not change from the methodologies described in the December 31, 2024 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.