Note 17 - Fair Value Measurements and Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2024

Notes to Financial Statements

Fair Value Disclosures [Text Block]

NOTE 17 - FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

In accordance with ASC 820-10, we group financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The three levels of the fair value hierarchy are described as follows:

Fair Value Hierarchy

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, prepayment speeds, volatilities, etc.) or model-based valuation techniques where all significant assumptions are observable, either directly or indirectly, in the market.

Level 3 - Valuation is generated from model-based techniques where one or more significant inputs are not observable, either directly or indirectly, in the market. These unobservable assumptions reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques may include use of matrix pricing, discounted cash flow models, and similar techniques.

Assets and Liabilities Measured at Fair Value on a Recurring Basis 

Securities:

The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1) or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2).

Interest Rate Lock Contracts and Forward Mortgage Loan Sale Contracts:

The fair values of interest rate lock contracts and forward mortgage loan sale contracts are determined by loan lock-in rate, loan funded rate, market interest rate, fees to be collected from the borrower, fees and costs associated with the origination of the loan, expiration timing, sale price, and the value of the retained servicing. We classified these derivatives as level 3 due to management’s estimate of market rate, cost and expiration timing on these contracts.

Assets and Liabilities Measured on a Non-Recurring Basis 

Collateral-dependent individually evaluated loans:

Collateral-dependent individually evaluated loans are carried at fair value when it is probable that we will be unable to collect all amounts due according to the contractual terms of the original loan agreement and the loan has been written down to the fair value of its underlying collateral, net of expected selling costs.

The fair value of collateral-dependent individually evaluated loans is based on third party appraisals of the property, less management’s estimate of selling costs. Third party appraisals generally use a sales comparison or income capitalization approach to derive the appraised value based on market transactions involving similar or comparable properties. Adjustments are routinely made by the third party appraisers to adjust for differences between the comparable sales and income data used in the appraisal. Adjustments may also result from the consideration of relevant economic and demographic factors which may affect property values. Positive adjustments in the appraisal represent increases to the sales comparisons and negative adjustments represent decreases.

Other Real Estate Owned ("OREO"):

OREO is initially recorded at fair value less estimated selling costs at the date of transfer. This amount becomes the property's new basis. In cases where the carrying amount exceeds the fair value less estimated selling costs at the time of transfer, the difference is charged to the ACL. Fair values are generally based on third party appraisals of the property and discounted by management to reflect an expectation of the amount to be ultimately collected after foreclosure and selling costs (Level 3).

Appraisals for OREO and collateral-dependent loans are performed by state licensed appraisers (for commercial properties) or state certified appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by us. A member of the credit administration department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison to independent data sources such as recent market data or industry wide statistics for residential appraisals. We also compare the actual selling price of collateral that has been sold to the most recently appraised value to determine what additional adjustments, if any, should be made to the appraisal values on any remaining OREO to arrive at fair value. In determining the net realizable value of the underlying collateral for individually evaluated loans and OREO, we discount the valuation to cover both market price fluctuations and selling costs, typically ranging from 6% to 10% of the collateral value, that may be incurred in the event of foreclosure. If the existing appraisal is older than twelve months for OREO or collateral-dependent loans, a new appraisal report is ordered.

The following table presents our financial assets and liabilities measured at fair value on a recurring basis or on a non-recurring basis as of the dates indicated: 

	Fair Value Measurements Using:
September 30, 2024	Level 1		Level 2		Level 3		Total
Assets measured at fair value:	(dollars in thousands)
On a recurring basis:
Securities available for sale
Government agency securities	$	—	$	6,459	$	—	$	6,459
SBA agency securities		—		26,930		—		26,930
Mortgage-backed securities		—		36,444		—		36,444
Collateralized mortgage obligations		—		170,110		—		170,110
Commercial paper		—		24,513		—		24,513
Corporate debt securities		—		31,732		—		31,732
Municipal securities		—		9,478		—		9,478
Equity securities (1)		—		—		23,161		23,161
Interest rate lock contracts (1)		—		—		23		23
Forward mortgage loan sale contracts (1)		—		—		10		10
	$	—	$	305,666	$	23,194	$	328,860
On a non-recurring basis:
Collateral dependent individually evaluated loans:
Construction and land development loans	$	—	$	—	$	8,996	$	8,996
Commercial real estate loans (2)		—		—		16,772		16,772
	$	—	$	—	$	25,768	$	25,768

(1) Included in “Accrued interest and other assets” on the consolidated balance sheets.

(2) Collateral includes CRE and a SFR.

December 31, 2023	Level 1		Level 2		Level 3		Total
Assets measured at fair value:
On a recurring basis:
Securities available for sale
Government agency securities	$	—	$	8,161	$	—	$	8,161
SBA agency securities		—		13,217		—		13,217
Mortgage-backed securities		—		34,652		—		34,652
Collateralized mortgage obligations		—		149,626		—		149,626
Commercial paper		—		73,105		—		73,105
Corporate debt securities		—		30,691		—		30,691
Municipal securities		—		9,509		—		9,509
Equity securities (1)		—		—		23,392		23,392
Interest rate lock contracts (1)		—		—		32		32
Forward mortgage loan sale contracts (1)		—		—		14		14
	$	—	$	318,961	$	23,438	$	342,399
On a non-recurring basis:
Collateral dependent individually evaluated loans:
Commercial real estate loans	$	—	$	—	$	10,209	$	10,209
SBA loans		—		—		1,148		1,148
	$	—	$	—	$	11,357	$	11,357

(1) Included in “Accrued interest and other assets” on the consolidated balance sheets.

During the three months ended September 30, 2024, there were partial charge-offs of $1.2 million, and specific reserves of $2.5 million and partial charge-offs of $1.8 million, and specific reserves of $2.5 million for the nine months ended September 30, 2024 for collateral-dependent individually evaluated loans. These loans had an aggregate fair value of $25.8 million as of September 30, 2024. The fair value is based on third party appraisals, including adjustments to comparable market data as summarized in the table below.

September 30, 2024	Fair Value	Valuation Techniques	Unobservable Input(s)	Range
	(dollars in thousands)
Collateral dependent loans:
Construction and land development loans	$ 8,996	Market approach	Adjustments	(19%) to 5%
Commercial real estate loans (1)	16,772	Market approach	Adjustments	(41%) to 28%
Total	$ 25,768

(1) Collateral includes CRE and an SFR. Adjustment range was (41%) to 28% for CRE and (20%) to 20% for the SFR.

During the year ended December 31, 2023, there were write-downs of $521,000 on collateral-dependent individually evaluated loans with an aggregate fair value of $11.4 million as of December 31, 2023.

There was no OREO outstanding as of September 30, 2024 and  December 31, 2023. For the nine months ended September 30, 2024, the Company foreclosed on and sold three properties, recognized a gain on the transfer from loans to OREO of $560,000 and a gain on sale of $456,000. There was no similar activity for the nine months ended September 30, 2023. 

The following table presents the gains recognized on assets measured at fair value on a non-recurring basis for the periods indicated:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2024		2023		2024		2023
	(dollars in thousands)
Other real estate owned - Single family residential	$	—	$	—	$	560	$	—

No write-downs to OREO were recorded for the three months or nine months ended September 30, 2024 or September 30, 2023. 

The fair value measurement of Interest Rate Lock Contracts (IRLCs) and Forward Mortgage Loan Sale Contracts (FMLSCs) were primarily based on the buy price from borrowers ranging from 99 to 100, the sale price to Fannie Mae ranging from 102 to 103, and the significant unobservable inputs using a margin cost rate of 1.13%.

The fair value hierarchy level and estimated fair value of significant financial instruments as of the dates indicated are summarized as follows:

		September 30, 2024				December 31, 2023
	Fair Value	Carrying		Fair		Carrying		Fair
	Hierarchy	Value		Value		Value		Value
Financial Assets:	(dollars in thousands)
Cash and due from banks	Level 1	$	349,390	$	349,390	$	431,373	$	431,373
Interest-earning deposits in other financial institutions	Level 1		600		600		600		600
Investment securities - AFS	Level 2		305,666		305,666		318,961		318,961
Investment securities - HTM	Level 2		5,195		5,087		5,209		5,097
Mortgage loans held for sale	Level 1		812		812		1,911		1,845
Loans, net	Level 3		3,048,211		2,988,088		2,989,958		2,918,296
Equity securities (1)	Level 3		23,161		23,161		23,392		23,392
Servicing assets	Level 3		7,256		13,451		8,110		14,883
Accrued interest receivable (1)	Level 1/2/3		14,683		14,683		13,743		13,743
		Notional		Fair		Notional		Fair
Derivative assets:		Value		Value		Value		Value
Interest rate lock contracts (1)	Level 3	$	1,822	$	23	$	1,255	$	32
Forward mortgage loan sale contracts (1)	Level 3		747		10		1,104		14
		Carrying		Fair		Carrying		Fair
Financial Liabilities:		Value		Value		Value		Value
Deposits	Level 2	$	3,092,184	$	3,091,475	$	3,174,760	$	3,181,495
FHLB advances	Level 3		200,000		197,240		150,000		144,891
Long-term debt	Level 3		119,433		112,506		119,147		83,864
Subordinated debentures	Level 3		15,102		15,099		14,938		14,566
Accrued interest payable	Level 2/3		5,986		5,986		11,671		11,671

(1) Included in “Accrued interest and other assets” on the consolidated balance sheets.