Note 6 - Fair Value Measurements and Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2023

Notes to Financial Statements

Fair Value Disclosures [Text Block]

Note 6. Fair Value Measurements and Fair Value of Financial Instruments

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.

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

Level 2: Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (for example, supported with little or no market activity).

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022:

Investment Securities Available-for-Sale and Equity Securities: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 inputs include securities that have quoted prices in active markets for identical assets. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of instruments which would generally be classified within Level 2 of the valuation hierarchy include municipal bonds and certain agency collateralized mortgage obligations. In certain cases where there is limited activity in the market for a particular instrument, assumptions must be made to determine the fair value of the instruments and these are classified as Level 3. When measuring fair value, the valuation techniques available under the market approach, income approach and/or cost approach are used. The Company’s evaluations are based on market data and the Company employs combinations of these approaches for its valuation methods depending on the asset class.

Derivatives: The fair value of derivatives is based on valuation models using observable market data as of the measurement date (level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rate, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.

For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used as of September 30, 2023 and December 31, 2022 are as follows:

			September 30, 2023
			Fair Value Measurements at Reporting Date Using
	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
(dollars in thousands)
Recurring fair value measurements: Assets
Investment securities:
Available-for-sale:
Federal agency obligations	$	43,969	$	-	$	43,969	$	-
Residential mortgage pass-through securities		389,427		-		389,427		-
Commercial mortgage pass-through securities		19,927		-		19,927		-
Obligations of U.S. states and political subdivision		122,899		-		115,882		7,017
Corporate bonds and notes		2,961		-		2,961		-
Asset-backed securities		1,322		-		1,322		-
Other securities		1,362		1,362		-		-
Total available-for-sale		581,867		1,362		573,488		7,017
Equity securities		17,677		9,394		8,283		-
Derivatives		61,972		-		61,972		-
Total assets	$	661,516	$	10,756	$	643,743	$	7,017

			December 31, 2022
			Fair Value Measurements at Reporting Date Using
	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
(dollars in thousands)
Recurring fair value measurements: Assets
Investment securities:
Available-for-sale:
Federal agency obligations	$	44,450	$	-	$	44,450	$	-
Residential mortgage pass- through securities		417,578		-		417,578		-
Commercial mortgage pass-through securities		21,104		-		21,104		-
Obligations of U.S. states and political subdivision		142,896		-		135,547		7,349
Corporate bonds and notes		6,974		-		6,974		-
Asset-backed securities		1,640		-		1,640		-
Other securities		242		242		-		-
Total available-for-sale	$	634,884	$	242	$	627,293	$	7,349
Equity securities		15,811		9,733		6,078		-
Derivatives		56,797		-		56,797		-
Total assets	$	707,492	$	9,975	$	690,168	$	7,349

There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2023 and during the year ended December 31, 2022.

Assets Measured at Fair Value on a Nonrecurring Basis

The Company may be required periodically to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or impairment write-downs of individual assets. The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a nonrecurring basis as of September 30, 2023 and December 31, 2022.

Loans Held-for-Sale: Residential mortgage loans, originated and intended for sale in the secondary market, are carried at the lower of aggregate cost or estimated fair value as determined by outstanding commitments from investors. For these loans originated and intended for sale, gains and losses on loan sales (sale proceeds minus carrying value) are recorded in other income and direct loan origination costs and fees are deferred at origination of the loan and are recognized in other income upon sale of the loan. Management obtains quotes or bids on all or parts of these loans directly from the purchasing financial institutions (Level 2).

Other loans held-for-sale are carried at the lower of aggregate cost or estimated fair value. Fair value of these loans is determined based on the terms of the loan, such as interest rate, maturity date, reset term, as well as sales of similar assets (Level 3).

Collateral Dependent Loans: The Company may record adjustments to the carrying value of loans based on fair value measurements, generally as partial charge-offs of the uncollectible portions of these loans. These adjustments also include certain impairment amounts for collateral dependent loans calculated in accordance with GAAP. Impairment amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated impairment amount applicable to that loan does not necessarily represent the fair value of the loan. Real estate collateral is valued using independent appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable by market participants. However, due to the substantial judgment applied and limited volume of activity as compared to other assets, fair value is based on Level 3 inputs. Estimates of fair value used for collateral supporting commercial loans generally are based on assumptions not observable in the marketplace and are also based on Level 3 inputs.

For assets measured at fair value on a nonrecurring basis, the fair value measurements as of September 30, 2023 and December 31, 2022 are as follows:

			Fair Value Measurements at Reporting Date Using
Assets measured at fair value on a nonrecurring basis:	September 30, 2023		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Collateral dependent loans:	(dollars in thousands)
Commercial	$	10,659	$	-	$	-	$	10,659
Commercial real estate		7,330		-		-		7,330

			Fair Value Measurements at Reporting Date Using
Assets measured at fair value on a nonrecurring basis:	December 31, 2022		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Collateral dependent loans:	(dollars in thousands)
Commercial	$	14,550	$	-	$	-	$	14,550
Commercial real estate		17,264		-		-		17,264
Residential real estate		1,392		-		-		1,392

Collateral dependent loans – Collateral dependent loans as of September 30, 2023 that required a valuation allowance were $23.8 million with a related valuation allowance of $5.8 million compared to $43.8 million with a related valuation allowance of $10.5 million as of December 31, 2022.

Assets Measured with Significant Unobservable Level 3 Inputs

Recurring basis

The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2023 and for the year ended December 31, 2022:

	Municipal Securities
	(dollars in thousands)
Beginning balance, December 31, 2022	$	7,349
Principal paydowns		(221	)
Change in unrealized gain		(111	)
Ending balance, September 30, 2023	$	7,017

	Municipal Securities
	(dollars in thousands)
Beginning balance, December 31, 2021	$	8,565
Principal paydowns		(287	)
Changes in unrealized loss		(929	)
Ending balance, December 31, 2022	$	7,349

The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022. The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy.

September 30, 2023
	Fair Value		Valuation Techniques	Unobservable Input	Rate
Securities available-for-sale:			(dollars in thousands)
Municipal securities	$	7,017	Discounted cash flows	Discount rate		4.4	%

December 31, 2022
	Fair Value		Valuation Techniques	Unobservable Input	Rate
Securities available-for-sale:			(dollars in thousands)
Municipal securities	$	7,349	Discounted cash flows	Discount rate		4.3	%

Nonrecurring basis: The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a nonrecurring basis for the periods presented. The tables below provide quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy of collateral dependent loans.

September 30, 2023
(dollars in thousands)	Fair Value		Valuation Techniques	Unobservable Input	Range (weighted average)
Commercial	$	10,205	Market approach (100%)	Average transfer price as a price to unpaid principal balance		65% –92% (68%)
Commercial		454	Appraisals of collateral value	Adjustment for comparable sales	-7.5% to +25% (+0.1%)
Commercial real estate		7,330	Appraisals of collateral value	Adjustment for comparable sales		-15% to +5% (+4%)

December 31, 2022
(dollars in thousands)	Fair Value		Valuation Techniques	Unobservable Input	Range (weighted average)
Commercial loans	$	14,028	Market approach (100%)	Average transfer price as a price to unpaid principal balance		65% to 96% (67%)
Commercial loans		522	Appraisals of collateral value	Adjustment for comparable sales	-10% to +13% (+3%)
Commercial real estate loans		17,264	Appraisals of collateral value	Adjustment for comparable sales	-20% to +0% (-15%)
Residential real estate loans		1,392	Appraisals of collateral value	Adjustment for comparable sales	+21% to +39% (22%)

As of September 30, 2023 the fair value measurements presented are consistent with Topic 820, Fair Value Measurement, in which fair value represents exit price. The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 2023 and December 31, 2022: 

					Fair Value Measurements
	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(dollars in thousands)
September 30, 2023
Financial assets:
Cash and due from banks	$	253,298	$	253,298	$	253,298	$	-	$	-
Securities available-for-sale		581,867		581,867		1,362		573,488		7,017
Restricted investments in bank stocks		49,387		n/a		n/a		n/a		n/a
Equity securities		17,677		17,677		9,394		8,283		-
Net loans		8,092,879		7,725,439		-		-		7,725,439
Derivatives - interest rate contracts		61,972		61,972		-		61,972		-
Accrued interest receivable		46,795		46,795		-		5,160		41,635
Financial liabilities:
Noninterest-bearing deposits		1,224,125		1,224,125		1,224,125		-		-
Interest-bearing deposits		6,214,370		6,181,082		3,692,159		2,488,923		-
Borrowings		887,590		884,745		-		884,745		-
Subordinated debentures		79,313		77,588		-		77,588		-
Accrued interest payable		9,800		9,800		-		9,800		-
December 31, 2022
Financial assets:
Cash and due from banks	$	268,315	$	268,315	$	268,315	$	-	$	-
Investment securities available-for-sale		634,884		634,884		242		627,293		7,349
Restricted investment in bank stocks		46,604		n/a		n/a		n/a		n/a
Equity securities		15,811		15,811		9,733		6,078		-
Net loans		8,009,176		7,723,378		-		-		7,723,378
Derivatives - interest rate contracts		56,797		56,797		-		56,797		-
Accrued interest receivable		46,062		46,062		-		4,685		41,377
Financial liabilities:
Noninterest-bearing deposits		1,501,614		1,501,614		1,501,614		-		-
Interest-bearing deposits		5,855,008		5,811,291		3,460,818		2,350,473		-
Borrowings		857,622		854,698		.		854,698		-
Subordinated debentures		153,255		153,581		-		153,581		-
Accrued interest payable		6,925		6,925		-		6,925		-

The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. The fair value of commitments to originate loans is immaterial and not included in the tables above.

Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values.

The Company’s remaining assets and liabilities, which are not considered financial instruments, have not been valued differently than has been customary with historical cost accounting. No disclosure of the relationship value of the Company’s core deposit base is required by FASB ASC 825-10.

Fair value estimates are based on existing balance sheet financial instruments, without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, there are certain significant assets and liabilities that are not considered financial assets or liabilities, such as deferred taxes, premises and equipment, and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

Management believes that reasonable comparability between financial institutions may not be likely, due to the wide range of permitted valuation techniques and numerous estimates which must be made, given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.