Note 14 - Fair Value

9 Months Ended

Sep. 30, 2023

Notes to Financial Statements

Fair Value Disclosures [Text Block]

Note 14 - 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. Interest rate swap agreements, both assets and liabilities, are valued by a third-party pricing agent using an income approach (Level 2).

Assets and Liabilities Measured at Fair Value on a Recurring Basis

There were no transfers to or from Levels 1 and 2 during the nine months ended September 30, 2023. Assets measured at fair value on a recurring basis are summarized below:

			(Dollars in thousands)
			Fair Value Measurements at September 30, 2023 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	$	9,834	$	-	$	9,834	$	-
Interest rate lock commitments		51		-		51		-
Available-for-sale debt securities:
U.S. government sponsored entities		7,550		-		7,550		-
U.S. treasury securities		-		-		-		-
Collateralized mortgage obligations and residential mortgage-backed securities		119,096		-		119,096		-
Municipal securities		211,479		-		211,479		-
Collateralized debt obligations		1,155		-		-		1,155
Total securities available-for-sale	$	339,280	$	-	$	338,125	$	1,155
Liabilities:
Interest rate swap contracts	$	9,834	$	-	$	9,834	$	-

			(Dollars in thousands)
			Fair Value Measurements at December 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	$	8,972	$	-	$	8,972	$	-
Interest rate lock commitments		38		-		38		-
Available-for-sale debt securities:
U.S. government sponsored entities		7,625		-		7,625		-
U.S. treasury securities		389		-		389		-
Collateralized mortgage obligations and residential mortgage-backed securities		134,116		-		134,116		-
Municipal securities		227,718		-		227,718		-
Collateralized debt obligations		1,048		-		-		1,048
Total securities available-for-sale	$	370,896	$	-	$	369,848	$	1,048
Liabilities:
Interest rate swap contracts	$	8,972	$	-	$	8,972	$	-

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, June 30, 2022	$	972
Principal payments		-
Total unrealized gains, included in other comprehensive income		55
Ending balance, September 30, 2022	$	1,027
Beginning balance, June 30, 2023	$	1,075
Principal payments		-
Total unrealized gains, included in other comprehensive loss		80
Ending balance, September 30, 2023	$	1,155

	(Dollars in thousands)
	Estimated Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Available-for- sale securities
Beginning balance, January 1, 2022	$	992
Principal payments		-
Total unrealized gains, included in other comprehensive income		35
Ending balance, September 30, 2022	$	1,027
Beginning balance, January 1, 2023	$	1,048
Principal payments		-
Total unrealized gains, included in other comprehensive loss		107
Ending balance, September 30, 2023	$	1,155

Assets measured at fair value on a non-recurring basis are summarized below:

			(Dollars in thousands)
			Fair Value Measurements at September 30, 2023 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)
Collateral dependent loans	$	6,132	$	-	$	-	$	6,132

			(Dollars in thousands)
			Fair Value Measurements at December 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	$	2,620	$	-	$	-	$	2,620

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.

	September 30, 2023				Estimated Fair Value Measurements at September 30, 2023 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	$	71,648	$	71,648	$	71,648	$	-	$	-
Loans held-for-sale		2,057		2,080		-		2,080		-
Loans receivable, net		1,506,230		1,400,946		-		-		1,400,946
Federal Home Loan Bank stock		6,547		6,547		-		6,547		-
Accrued interest receivable		7,864		7,864		-		7,864		-
Financial liabilities:
Non-interest bearing deposits		312,635		312,635		312,635		-		-
Interest bearing deposits		1,471,402		1,468,670		928,390		540,280		-
Repurchase agreements		48,310		48,274		39,420		8,854		-
Borrowed funds		100,000		99,394		-		99,394		-
Accrued interest payable		3,035		3,035		-		3,035		-

	December 31, 2022				Estimated Fair Value Measurements at December 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	$	31,282	$	31,282	$	31,282	$	-	$	-
Certificates of deposit in other financial institutions		2,456		2,404		-		2,404		-
Loans held-for-sale		1,543		1,555		-		1,555		-
Loans receivable, net		1,500,734		1,437,496		-		-		1,437,496
Federal Home Loan Bank stock		6,547		6,547		-		6,547		-
Accrued interest receivable		7,421		7,421		-		7,421		-
Financial liabilities:
Non-interest bearing deposits		359,092		359,092		359,092		-		-
Interest bearing deposits		1,415,925		1,414,738		1,052,807		361,931		-
Repurchase agreements		15,503		15,361		7,975		7,386		-
Borrowed funds		120,000		119,689		-		119,689		-
Accrued interest payable		336		336		-		336		-

The following methods were used to estimate the fair value of financial instruments presented in the preceding table for the periods ended September 30, 2023 and December 31, 2022:

Cash and cash equivalent carrying amounts approximate fair value. Certificates of deposits in other financial institutions carrying amounts approximate fair value (Level 2). 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 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.