Note 7 - Fair Value

6 Months Ended

Jun. 30, 2024

Notes to Financial Statements

Fair Value Disclosures [Text Block]

NOTE 7 - FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (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. There are three levels of inputs that may be used to measure fair values:

• 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 company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Securities: The fair value for investment securities is determined by quoted market prices, if available (Level 1).  The fair values of debt securities are generally 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).

Loans Evaluated Individually: The Company does not record portfolio loans at fair value on a recurring basis. However, periodically, a loan is evaluated individually and is reported at the fair value of the underlying collateral, less estimated costs to sell, if repayment is expected solely from the collateral. If the collateral value is not sufficient, a specific reserve is recorded. Collateral values are estimated using a combination of observable inputs, including recent appraisals, and unobservable inputs based on customized discounting criteria. Due to the significance of unobservable inputs, fair values of individually evaluated collateral dependent loans have
been classified as Level 3.

Foreclosed assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach with data from comparable properties. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Foreclosed assets are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Premises held-for-sale: At the time of transfer to held-for sale, these assets are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. These assets are evaluated on a quarterly basis for additional impairment and adjusted accordingly. During 2023, we recorded a valuation adjustment of $553,000 at the time of transfer of two of our retail branches to premises held-for-sale.  During the second quarter of 2023, we recorded an additional valuation adjustment of $32,000 on our Hazel Crest office based on the purchase price of the pending sale agreement for the facility.

The following table sets forth the Company’s financial assets that were accounted for at fair value and are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

	Fair Value Measurements Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value
June 30, 2024
Securities:
Municipal securities	$	—	$	925	$	—	$	925
U.S. Treasury Notes		75,059		—		—		75,059
U.S. government-sponsored agencies		—		142,816		—		142,816
Mortgage-backed securities – residential		—		3,184		—		3,184
Collateralized mortgage obligations – residential		—		922		—		922
	$	75,059	$	147,847	$	—	$	222,906
December 31, 2023
Securities:
Municipal securities	$	—	$	934	$	—	$	934
U.S. Treasury Notes		112,508		—		—		112,508
U.S. government-sponsored agencies		—		35,391		—		35,391
Mortgage-backed securities – residential		—		3,367		—		3,367
Collateralized mortgage obligations – residential		—		1,003		—		1,003
	$	112,508	$	40,695	$	—	$	153,203

The following table sets forth the Company’s assets that were measured at fair value on a non-recurring basis:

	Fair Value Measurement Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value
December 31, 2023
Other real estate owned	$	—	$	—	$	405	$	405
Other foreclosed assets		—		—		387		387

At  June 30, 2024 and  December 31, 2023, there were no individually evaluated loans that were measured using the fair value of the collateral for collateral–dependent loans and which had specific valuation allowances.

Foreclosed assets are carried at the lower of cost or fair value less costs to sell.  At  June 30, 2024, there were no foreclosed assets with valuation allowances.  At  December 31, 2023 other real estate owned had a carrying value of $472,000 less a valuation allowance of $67,000, or $405,000, and other foreclosed assets had a carrying value of $431,000 less a valuation allowance of $44,000, or $387,000. There were no valuation adjustments of foreclosed assets recorded for the three and six months ended  June 30, 2024 and 2023. 

The following table presents quantitative information, based on certain empirical data with respect to Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis:

	Fair Value		Valuation Technique(s)	Significant Unobservable Input(s)	Range (Weighted Average)
December 31, 2023
Other real estate owned	$	405	Sales comparison	Discount applied to valuation		10.0	%
Other foreclosed assets		387	Sales comparison	Discount applied to valuation		6.2	%

The carrying amount and estimated fair value of financial instruments are as follows:

			Fair Value Measurements at June 30, 2024 Using:
	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents and time deposits in other financial institutions	$	186,691	$	132,385	$	54,306	$	—	$	186,691
Securities		222,906		75,059		147,847		—		222,906
Loans receivable, net of allowance for credit losses		987,745		—		—		941,656		941,656
FHLB and FRB stock		7,490		—		—		—		N /A
Accrued interest receivable		9,343		304		2,549		6,490		9,343
Financial liabilities
Certificates of deposit		223,494		—		221,386		—		221,386
Borrowings		25,000		—		24,812		—		24,812
Subordinated notes		18,715		—		16,910		—		16,910

			Fair Value Measurements at December 31, 2023 Using:
	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents and time deposits in other financial institutions	$	207,997	$	177,169	$	30,828	$	—	$	207,997
Securities		153,203		112,508		40,695		—		153,203
Loans receivable, net of allowance for credit losses		1,050,761		—		—		997,897		997,897
FHLB and FRB stock		7,490		—		—		—		N /A
Accrued interest receivable		7,542		475		500		6,567		7,542
Financial liabilities
Certificates of deposit		222,391		—		220,222		—		220,222
Borrowings		25,000		—		24,960		—		24,960
Subordinated notes		19,678		—		17,698		.		17,698

Loans: The exit price observations are obtained from an independent third-party using its proprietary valuation model and methodology and may not reflect actual or prospective market valuations. The valuation is based on the probability of default, loss given default, recovery delay, prepayment, and discount rate assumptions.

While the above estimates are based on management’s judgment of the most appropriate factors, as of the balance sheet date, there is no assurance that the estimated fair values would have been realized if the assets were disposed of or the liabilities settled at that date, since market values may differ depending on the various circumstances. The estimated fair values would also not apply to subsequent dates.

In addition, other assets and liabilities that are not financial instruments, such as premises and equipment, are not included in the above disclosures.