Quarterly report pursuant to Section 13 or 15(d)

Note 4 - Fair Value

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Note 4 - Fair Value
 3 Months Ended
Mar. 31, 2024
Notes to Financial Statements  
Fair Value Disclosures [Text Block]

NOTE 4 – FAIR VALUE

 

ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value include:

 

 

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.

 

Investment Securities: The fair values of investment securities are determined by 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 (Level 2 inputs). The fair values of certain securities held to maturity are determined by computing discounted cash flows using observable and unobservable market inputs (Level 3 inputs).

 

Loans Held for Sale: The fair value of loans held for sale is based upon binding quotes from third party investors (Level 2 inputs).

 

Collateral Dependent Loans: Loans identified as collateral dependent are measured using one of two methods: the loan’s observable market price or the fair value of collateral.  For each period presented, no collateral dependent loans were measured using the loan’s observable market price.  If a collateral dependent loan has had a charge-off or if the fair value of the collateral is less than the recorded investment in the loan, we establish a specific reserve and report the loan as nonrecurring Level 3.  The fair value of collateral for collateral dependent loans is generally based on recent real estate appraisals, less costs to sell. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

 

Interest Rate Swaps: For interest rate swap agreements, we measure fair value utilizing pricing provided by a third-party pricing source that that uses market observable inputs, such as forecasted yield curves, and other unobservable inputs and accordingly, interest rate swap agreements are classified as Level 2.

 

 

NOTE 4 – FAIR VALUE (Continued)

 

Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):

 

           

Quoted Prices in

                  
           

Active Markets

    

Significant Other

    

Significant

  
           

for Identical

    

Observable

    

Unobservable

  
   

Fair

    

Assets

    

Inputs

    

Inputs

  
   

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

  

March 31, 2024

                                

Available for sale securities

                                

U.S. Treasury and federal agency securities

   $ 235,081     $ —     $ 235,081     $ —  

Agency MBS and CMOs

     107,032       —       107,032       —  

Tax-exempt state and municipal bonds

     30,281       —       30,281       —  

Taxable state and municipal bonds

     107,501       —       107,501       —  

Corporate bonds and other debt securities

     11,319       —       11,319       —  

Other equity securities

     1,307       —       1,307       —  

Loans held for sale

     —       —       —       —  

Interest rate swaps

     5,553       —       5,553       —  

Total assets measured at fair value on recurring basis

   $ 498,074     $ —     $ 498,074     $ —  
                                 

Interest rate swaps

   $ (5,553 )   $ —     $ (5,553 )   $ —  

Total liabilities measured at fair value on recurring basis

   $ (5,553 )   $ —     $ (5,553 )   $ —  
                                 
                                 

December 31, 2023

                                

Available for sale securities

                                

U.S. Treasury and federal agency securities

   $ 245,492     $ —     $ 245,492     $ —  

Agency MBS and CMOs

     111,336       —       111,336       —  

Tax-exempt state and municipal bonds

     30,597       —       30,597       —  

Taxable state and municipal bonds

     110,076       —       110,076       —  

Corporate bonds and other debt securities

     11,297       —       11,297       —  

Other equity securities

     1,318       —       1,318       —  

Loans held for sale

     —       —       —       —  

Interest rate swaps

     4,856       —       4,856       —  

Total assets measured at fair value on recurring basis

   $ 514,972     $ —     $ 514,972     $ —  
                                 

Interest rate swaps

   $ (4,856 )   $ —     $ (4,856 )   $ —  

Total liabilities measured at fair value on recurring basis

   $ (4,856 )   $ —     $ (4,856 )   $ —  

 

 

NOTE 4 – FAIR VALUE (Continued)

 

Assets measured at fair value on a non-recurring basis are summarized below (in thousands):

 

           

Quoted Prices in

                  
           

Active Markets

    

Significant Other

    

Significant

  
           

for Identical

    

Observable

    

Unobservable

  
   

Fair

    

Assets

    

Inputs

    

Inputs

  
   

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

  

March 31, 2024

                                

Collateral dependent loans

   $ 300     $ —     $ —     $ 300  
                                 

December 31, 2023

                                

Collateral dependent loans

   $ 303     $ —     $ —     $ 303  

 

Quantitative information about Level 3 fair value measurements measured on a non-recurring basis are summarized below at period end (dollars in thousands). The weighted average for unobservable inputs for collateral-dependent loans is based on the relative fair value of the loans.

 

   

Asset Fair

  

Valuation

  

Unobservable

        
   

Value

  

Technique

  

Inputs

  

Range % (Weighted Average)

  

March 31, 2024

                      

Collateral dependent loans

   $ 300  

Sales comparison approach

  

Adjustment for differences between comparable sales

     2.0 to 41.0 (37.7)  
         

Income approach

  

Capitalization rate

     7.5 to 8.5 (8.4)  

 

   

Asset Fair

  

Valuation

  

Unobservable

        
   

Value

  

Technique

  

Inputs

  

Range % (Weighted Average)

  

December 31, 2023

                      

Collateral dependent loans

   $ 303  

Sales comparison approach

  

Adjustment for differences between comparable sales

     2.0 to 41.0 (37.5)  
         

Income approach

  

Capitalization rate

     7.5 to 8.5 (8.4)  

 

 

NOTE 4 – FAIR VALUE (Continued)

 

The carrying amounts and estimated fair values of financial instruments, not previously presented, were as follows at March 31, 2024 and  December 31, 2023 (dollars in thousands):

 

 

Level in

  

March 31, 2024

    

December 31, 2023

  
 

Fair Value

  

Carrying

    

Fair

    

Carrying

    

Fair

  
 

Hierarchy

  

Amount

    

Value

    

Amount

    

Value

  

Financial assets

                                  

Cash and due from banks

Level 1

   $ 27,081     $ 27,081     $ 32,317     $ 32,317  

Federal funds sold and other short-term investments

Level 1

     331,400       331,400       418,035       418,035  

Securities held to maturity - U.S. Treasury

Level 2

     221,211       213,266       251,229       242,709  

Securities held to maturity - tax-exempt and municipal

Level 3

     79,540       78,385       80,294       79,389  

FHLB stock

Level 3

     10,211       10,211       10,211       10,211  

Loans, net

Level 2

     1,324,768       1,299,904       1,320,641       1,308,900  

Bank owned life insurance

Level 3

     54,535       54,535       54,249       54,249  

Accrued interest receivable

Level 2

     10,266       10,266       8,976       8,976  

Financial liabilities

                                  

Deposits

Level 2

     (2,284,401 )     (2,286,250 )     (2,415,730 )     (2,417,784 )

Other borrowed funds

Level 2

     (20,000 )     (19,566 )     (30,000 )     (29,354 )

Accrued interest payable

Level 2

     (687 )     (687 )     (672 )     (672 )

Off-balance sheet credit-related items

                                  

Loan commitments

     —       —       —       —  

 

The methods and assumptions used to estimate fair value are described as follows.

 

Carrying amount is the estimated fair value for cash and cash equivalents, bank owned life insurance, accrued interest receivable and payable, demand deposits, short-term borrowings and variable rate loans or deposits that reprice frequently and fully. Security fair values are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities as discussed above. For fixed rate loans, interest-bearing time deposits in other financial institutions, or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk (including consideration of widening credit spreads). Fair value of debt is based on current rates for similar financing. It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability, so fair value approximates its cost. The fair value of off-balance sheet credit-related items is not significant.