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Note 13 - Fair Value | 3 Months Ended
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Mar. 31, 2022
Notes to Financial Statements |
Fair Value Disclosures [Text Block] | Note 13 - Fair Value The Fair Value Measurements Topic establishes a hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Topic describes three levels of inputs that may be used to measure fair value: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. The fair values of securities available-for-sale are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges or pricing models utilizing significant observable inputs such as matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Different judgments and assumptions used in pricing could result in different estimates of value. In certain cases where market data is not readily available because of a lack of market activity or little public disclosure, values may be based on unobservable inputs and classified in Level 3 of the fair value hierarchy. At the end of each reporting period, securities held in the investment portfolio are evaluated on an individual security level for other-than-temporary impairment in accordance with GAAP. Impairment is other-than-temporary if the decline in the fair value is below its amortized cost and it is probable that all amounts due according to the contractual terms of a debt security will not be received. Significant judgments are required in determining impairment, which include making assumptions regarding the estimated prepayments, loss assumptions and the change in interest rates. The Bancorp considers the following factors when determining an other-than-temporary impairment for a security: the length of time and the extent to which the market value has been less than amortized cost; the financial condition and near-term prospects of the issuer; the underlying fundamentals of the relevant market and the outlook for such market for the near future; an assessment of whether the Bancorp (1) has the intent to sell the debt securities or (2) more likely than not will be required to sell the debt securities before their anticipated market recovery. If either of these conditions is met, management will recognize other-than-temporary impairment. If, in management’s judgment, an other-than-temporary impairment exists, the cost basis of the security will be written down for the credit loss, and the unrealized loss will be transferred from accumulated other comprehensive loss as an immediate reduction of current earnings. The Bancorp’s management utilizes a specialist to perform an other-than-temporary impairment analysis for each of its pooled trust preferred securities. The analysis is performed annually during December and utilizes analytical models used to project future cash flows for the pooled trust preferred securities based on current assumptions for prepayments, default and deferral rates, and recoveries. The projected cash flows are then tested for impairment consistent with GAAP. The other-than-temporary impairment testing compares the present value of the cash flows from quarter to quarter to determine if there is a “favorable” or “adverse” change. Other-than-temporary impairment is recorded if the projected present value of cash flows is lower than the book value of the security. To perform the annual other-than-temporary impairment analysis, management utilizes current reports issued by the trustee, which contain principal and interest tests, waterfall distributions, note valuations, collection detail and credit ratings for each pooled trust preferred security. In addition, a detailed review of the performing collateral was performed. Based on current market conditions and a review of the trustee reports, management performed an analysis of the pooled trust preferred securities and no additional impairment was taken at December 31, 2021. A specialist will be used to review all pooled trust preferred securities again at December 31, 2022. The table below shows the credit loss roll forward on a year-to-date basis for the Bancorp’s pooled trust preferred securities that have been classified with other-than-temporary impairment:
|  | (Dollars in thousands) |
|  | Collateralized debt obligations |
|  | other-than-temporary impairment |
Ending balance, December 31, 2021 |  | $ | 173 |
Additions not previously recognized |  |  | - |
Ending balance,March 31, 2022 |  | $ | 173 |
At March 31, 2022, trust preferred securities with a cost basis of $2.2 million continue to be in “payment in kind” status. These trust preferred securities classified as “payment in kind” are a result of not receiving the scheduled quarterly interest payments. For these trust preferred securities in “payment in kind” status, management anticipates to receive the unpaid contractual interest payments from the issuer, because of the self-correcting cash flow waterfall provisions within the structure of the securities. When a tranche senior to the Bancorp’s position fails the coverage test, the Bancorp’s interest cash flows are paid to the senior tranche and recorded as a reduction of principal. The coverage test represents an over collateralization target by stating the balance of the performing collateral as a percentage of the balance of the Bancorp’s tranche, plus the balance of all senior tranches. The principal reduction in the senior tranche continues until the appropriate coverage test is passed. As a result of the principal reduction in the senior tranche, more cash is available for future payments to the Bancorp’s tranche. Consistent with GAAP, management considered the failure of the issuer of the security to make scheduled interest payments in determining whether a credit loss existed. Management will not capitalize the “payment in kind” interest payments to the book value of the securities and will keep these securities in non-accrual status until the quarterly interest payments resume on a consistent basis. Assets and Liabilities Measured at Fair Value on a Recurring Basis There were no transfers to or from Levels 1 and 2 during the three months ended March 31, 2022. Assets measured at fair value on a recurring basis are summarized below:
|  |  |  |  |  | (Dollars in thousands) |
|  |  |  |  |  | Fair Value Measurements at March 31, 2022 Using |
(Dollars in thousands) |  | Estimated Fair Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap contracts |  | $ | 4,990 |  |  | $ | - |  |  | $ | 4,990 |  |  | $ | - |
Interest rate lock commitments |  |  | 166 |  |  |  | - |  |  |  | 166 |  |  |  | - |
Available-for-sale debt securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government sponsored entities |  |  | 8,202 |  |  |  | - |  |  |  | 8,202 |  |  |  | - |
U.S. treasury securities |  |  | 199 |  |  |  | - |  |  |  | 199 |  |  |  | - |
Collateralized mortgage obligations and residential mortgage-backed securities |  |  | 164,123 |  |  |  | - |  |  |  | 164,123 |  |  |  | - |
Municipal securities |  |  | 290,824 |  |  |  | - |  |  |  | 290,824 |  |  |  | - |
Collateralized debt obligations |  |  | 972 |  |  |  | - |  |  |  | - |  |  |  | 972 |
Total securities available-for-sale |  | $ | 464,320 |  |  | $ | - |  |  | $ | 463,348 |  |  | $ | 972 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap contracts |  | $ | 4,990 |  |  | $ | - |  |  | $ | 4,990 |  |  | $ | - |
|  |  |  |  |  | (Dollars in thousands) |
|  |  |  |  |  | Fair Value Measurements at December 31, 2021 Using |
(Dollars in thousands) |  | Estimated Fair Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap contracts |  | $ | 2,686 |  |  | $ | - |  |  | $ | 2,686 |  |  | $ | - |
Interest rate lock commitments |  |  | 141 |  |  |  | - |  |  |  | 141 |  |  |  | - |
Available-for-sale debt securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government sponsored entities |  |  | 8,669 |  |  |  | - |  |  |  | 8,669 |  |  |  | - |
U.S. treasury securities |  |  | 400 |  |  |  | - |  |  |  | 400 |  |  |  | - |
Collateralized mortgage obligations and residential mortgage-backed securities |  |  | 184,701 |  |  |  | - |  |  |  | 184,701 |  |  |  | - |
Municipal securities |  |  | 332,127 |  |  |  | - |  |  |  | 332,127 |  |  |  | - |
Collateralized debt obligations |  |  | 992 |  |  |  | - |  |  |  | - |  |  |  | 992 |
Total securities available-for-sale |  | $ | 526,889 |  |  | $ | - |  |  | $ | 525,897 |  |  | $ | 992 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap contracts |  | $ | 2,686 |  |  | $ | - |  |  | $ | 2,686 |  |  | $ | - |
A roll forward of available-for-sale securities, which require significant adjustment based on unobservable data, are presented in the following table:
|  | (Dollars in thousands) |
|  | Estimated Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
|  | Available-for- sale securities |
Beginning balance, January 1, 2021 |  | $ | 929 |
Principal payments |  |  | (5 | )
Total unrealized losses, included in other comprehensive income |  |  | 20 |
Ending balance, March 31, 2021 |  | $ | 944 |
Beginning balance, January 1, 2022 |  | $ | 992 |
Principal payments |  |  | - |
Total unrealized gains, included in other comprehensive income |  |  | (20 | )
Ending balance, March 31, 2022 |  | $ | 972 |
Assets measured at fair value on a non-recurring basis are summarized below:
|  |  |  |  |  | (Dollars in thousands) |
|  |  |  |  |  | Fair Value Measurements at March 31, 2022 Using |
(Dollars in thousands) |  | Estimated Fair Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Impaired loans |  | $ | 151 |  |  | $ | - |  |  | $ | - |  |  | $ | 151 |
|  |  |  |  |  | (Dollars in thousands) |
|  |  |  |  |  | Fair Value Measurements at December 31, 2021 Using |
(Dollars in thousands) |  | Estimated Fair Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Impaired loans |  | $ | 896 |  |  | $ | - |  |  | $ | - |  |  | $ | 896 |
Fair value is determined, where possible, using market prices derived from an appraisal or evaluation, which are considered to be Level 2 inputs. However, certain assumptions and unobservable inputs are often used by the appraiser, therefore, qualifying the assets as Level 3 in the fair value hierarchy. The fair value of foreclosed real estate is similarly determined by using the results of recent real estate appraisals. The numerical range of unobservable inputs for these valuation assumptions is not meaningful to this presentation. The following table shows carrying values and related estimated fair values of financial instruments as of the dates indicated. Estimated fair values are further categorized by the inputs used to measure fair value. Items that are not financial instruments are not included.
|  | March 31, 2022 |  |  | Estimated Fair Value Measurements at March 31, 2022 Using |
(Dollars in thousands) |  | Carrying Value |  |  | Estimated Fair Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 54,501 |  |  | $ | 54,501 |  |  | $ | 54,501 |  |  | $ | - |  |  | $ | - |
Certificates of deposit in other financial institutions |  |  | 1,731 |  |  |  | 1,650 |  |  |  | - |  |  |  | 1,650 |  |  |  | - |
Loans held-for-sale |  |  | 1,420 |  |  |  | 1,445 |  |  |  | - |  |  |  | 1,445 |  |  |  | - |
Loans receivable, net |  |  | 1,426,341 |  |  |  | 1,382,030 |  |  |  | - |  |  |  | - |  |  |  | 1,382,030 |
Federal Home Loan Bank stock |  |  | 3,038 |  |  |  | 3,038 |  |  |  | - |  |  |  | 3,038 |  |  |  | - |
Accrued interest receivable |  |  | 7,427 |  |  |  | 7,427 |  |  |  | - |  |  |  | 7,427 |  |  |  | - |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non-interest bearing deposits |  |  | 380,515 |  |  |  | 380,515 |  |  |  | 380,515 |  |  |  | - |  |  |  | - |
Interest bearing deposits |  |  | 1,514,696 |  |  |  | 1,513,699 |  |  |  | 1,084,309 |  |  |  | 429,390 |  |  |  | - |
Repurchase agreements |  |  | 23,239 |  |  |  | 23,150 |  |  |  | 12,939 |  |  |  | 10,211 |  |  |  | - |
Borrowed funds |  |  | 5 |  |  |  | 5 |  |  |  | 5 |  |  |  | - |  |  |  | - |
Accrued interest payable |  |  | 42 |  |  |  | 42 |  |  |  | - |  |  |  | 42 |  |  |  | - |
|  | December 31, 2021 |  |  | Estimated Fair Value Measurements at December 31, 2021 Using |
(Dollars in thousands) |  | Carrying Value |  |  | Estimated Fair Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 33,176 |  |  | $ | 33,176 |  |  | $ | 33,176 |  |  | $ | - |  |  | $ | - |
Certificates of deposit in other financial institutions |  |  | 1,709 |  |  |  | 1,737 |  |  |  | - |  |  |  | 1,737 |  |  |  | - |
Loans held-for-sale |  |  | 4,987 |  |  |  | 5,065 |  |  |  | - |  |  |  | 5,065 |  |  |  | - |
Loans receivable, net |  |  | 953,377 |  |  |  | 951,744 |  |  |  | - |  |  |  | - |  |  |  | 951,744 |
Federal Home Loan Bank stock |  |  | 3,247 |  |  |  | 3,247 |  |  |  | - |  |  |  | 3,247 |  |  |  | - |
Accrued interest receivable |  |  | 5,444 |  |  |  | 5,444 |  |  |  | - |  |  |  | 5,444 |  |  |  | - |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non-interest bearing deposits |  |  | 295,294 |  |  |  | 295,294 |  |  |  | 295,294 |  |  |  | - |  |  |  | - |
Interest bearing deposits |  |  | 1,138,907 |  |  |  | 1,139,126 |  |  |  | 899,690 |  |  |  | 239,436 |  |  |  | - |
Repurchase agreements |  |  | 14,581 |  |  |  | 14,579 |  |  |  | 12,842 |  |  |  | 1,737 |  |  |  | - |
Borrowed funds |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Accrued interest payable |  |  | 22 |  |  |  | 22 |  |  |  | - |  |  |  | 22 |  |  |  | - |
The following methods were used to estimate the fair value of financial instruments presented in the preceding table for the periods ended March 31, 2022, and December 31, 2021: Cash and cash equivalent carrying amounts approximate fair value. Certificates of deposits in other financial institutions carrying amounts approximate fair value (Level 2). The fair values of securities available-for-sale are obtained from broker pricing (Level 2), with the exception of collateralized debt obligations, which are valued by a third-party specialist (Level 3). Loans held-for-sale comprise residential mortgages and are priced based on values established by the secondary mortgage markets (Level 1). The estimated fair value for net loans receivable is based on the exit price notion which is the exchange price that would be received to transfer the loans at the most advantageous market price in an orderly transaction between market participants on the measurement date (Level 3). Federal Home Loan Bank stock is estimated at book value due to restrictions that limit the sale or transfer of the security. Interest rate swap agreements, both assets and liabilities, are valued by a third-party pricing agent using an income approach (Level 2). Fair values of accrued interest receivable and payable approximate book value, as the carrying values are determined using the observable interest rate, balance, and last payment date. Non-interest and interest bearing deposits, which include checking, savings, and money market deposits, are estimated to have fair values based on the amount payable as of the reporting date (Level 1). The fair value of fixed-maturity certificates of deposit (included in interest bearing deposits) are based on estimates of the rate the Bancorp would pay on similar deposits, applied for the time period until maturity (Level 2). Estimated fair values for short-term repurchase agreements, which represent sweeps from demand deposits to accounts secured by pledged securities, are estimated based on the amount payable as of the reporting date (Level 1). Longer-term repurchase agreements, with contractual maturity dates of three months or more, are based on estimates of the rate the Bancorp would pay on similar deposits, applied for the time period until maturity (Level 2). Short-term borrowings are generally only held overnight, therefore, their carrying amount is a reasonable estimate of fair value (Level 1). The fair value of FHLB Advances are estimated by discounting the future cash flows using quoted rates from the FHLB for similar advances with similar maturities (Level 2). The estimated fair value of other financial instruments, and off-balance sheet loan commitments, approximate cost and are not considered significant to this presentation.

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- Definition 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. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI https://asc.fasb.org/extlink&oid=126976982&loc=d3e19207-110258 + Details
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