Note 11 - Fair Values of Financial Instruments

3 Months Ended

Mar. 31, 2023

Notes to Financial Statements

Fair Value Disclosures [Text Block]

Note 11. Fair Value of Financial Instruments

(in thousands)

The fair value topic of the ASC establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. This topic clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. This topic also requires disclosure about how fair value was determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant levels of inputs as follows:

Level 1	Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2	Inputs other than quoted prices in active markets for identical assets and liabilities included in Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active; or
Level 3	Unobservable inputs for an asset or liability, such as discounted cash flow models or valuations.

The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The following table presents assets and liabilities that were measured at fair value on a recurring basis as of March 31, 2023:

	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Securities available-for-sale
Mortgage-backed securities	$	-	$	95,536	$	-	$	95,536
State, county and municipal		-		105,761		-		105,761
Other securities		-		443		-		443
Total	$	-	$	201,740	$	-	$	201,740

The following table presents assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2022:

	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Securities available-for-sale
Mortgage-backed securities	$	-	$	96,972	$	-	$	96,972
State, county and municipal		-		103,913		-		103,913
Other securities		-		437		-		437
Total	$	-	$	201,322	$	-	$	201,322

The Company recorded no gains or losses in earnings for the period ended March 31, 2023 or December 31, 2022 that were attributable to the change in unrealized gains or losses relating to assets still held at the reporting date.

Impaired Loans

Loans considered impaired are reserved for at the time the loan is identified as impaired taking into account the fair value of the collateral less estimated selling costs. Collateral may be real estate and/or business assets including but not limited to, equipment, inventory and accounts receivable. The fair value of real estate is determined based on appraisals by qualified licensed appraisers. The fair value of the business assets is generally based on amounts reported on the business’s financial statements. Appraised and reported values may be adjusted based on management’s historical knowledge, changes in market conditions from the time of valuation and management knowledge of the client and the client’s business. Since not all valuation inputs are observable, these nonrecurring fair value determinations are classified Level 3. The unobservable inputs may vary depending on the individual assets with the fair value of real estate based on appraised value being the predominant approach. The Company reviews the certified appraisals for appropriateness and adjusts the value downward to consider selling, closing and liquidation costs, which typically approximates 25% of the appraised value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors previously identified.

Other real estate owned

OREO is primarily comprised of real estate acquired in partial or full satisfaction of loans. OREO is recorded at its estimated fair value less estimated selling and closing costs at the date of transfer, with any excess of the related loan balance over the fair value less expected selling costs charged to the ACL. Subsequent changes in fair value are reported as adjustments to the carrying amount and are recorded against earnings. The Company outsources the valuation of OREO with material balances to third party appraisers. The Company reviews the third-party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically approximate 25% of the appraised value.

The following tables provide the fair value measurement for assets measured at fair value on a nonrecurring basis that were still held on the balance sheets as of the dates presented and the level within the fair value hierarchy each is classified:

	March 31, 2023
	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Impaired loans	$	-	$	-	$	1,950	$	1,950
Total	$	-	$	-	$	1,950	$	1,950

	December 31, 2022
	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Impaired loans	$	-	$	-	$	2,074	$	2,074
Total	$	-	$	-	$	2,074	$	2,074

Impaired loans, whose fair value was remeasured during the period, with a carrying value of $2,050 and $2,190, had an allocated ACL of $100 and $116 at March 31, 2023 and December 31, 2022, respectively. The allocated allowance is based on the carrying value of the impaired loan and the fair value of the underlying collateral less estimated costs to sell.

After monitoring the carrying amounts for subsequent declines or impairments after foreclosure, management determined that no fair value adjustment to OREO was necessary during the three-month period ended March 31, 2023 and the year ended December 31, 2022, respectively.

The financial instruments topic of the ASC requires disclosure of financial instruments’ fair values, as well as the methodology and significant assumptions used in estimating fair values. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The financial instruments topic of the ASC excludes certain financial instruments from its disclosure requirements. The following represents the carrying value and estimated fair value of the Company’s financial instruments at March 31, 2023:

		Fair Value Measurements Using:
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant		Total
	Carrying		Identical		Observable		Unobservable		Fair
March 31, 2023	Value		Assets		Inputs		Inputs		Value
			(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and due from banks	$	15,600	$	15,600	$	-	$	-	$	15,600
Interest bearing deposits with banks		606		606		-		-		606
Securities held-to-maturity		402,237		-		375,952		-		375,952
Securities available-for-sale		201,740		-		201,740		-		201,740
Net LHFI		561,223		-		-		521,259		521,259
Financial liabilities
Deposits	$	1,115,826	$	929,637	$	187,335	$	-	$	1,116,972
Securities sold under agreement to repurchase		98,532		98,532		-		-		98,532
Short-term borrowings		1,725		1,725		-		-		1,725
Borrowings on secured line of credit		18,000		18,000		-		-		18,000

The following represents the carrying value and estimated fair value of the Company’s financial instruments at December 31, 2022:

			Fair Value Measurements Using:
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant		Total
	Carrying		Identical		Observable		Unobservable		Fair
December 31, 2022	Value		Assets		Inputs		Inputs		Value
			(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and due from banks	$	26,948	$	26,948	$	-	$	-	$	26,948
Interest bearing deposits with banks		1,646		1,646		-		-		1,646
Securities held-to-maturity		406,590		-		375,292		-		375,292
Securities available-for-sale		201,322		-		201,322		-		201,322
Net LHFI		580,327		-		-		541,173		541,173
Financial liabilities
Deposits	$	1,126,402	$	947,479	$	178,902	$	-	$	1,126,381
Securities sold under agreement to repurchase		127,574		127,574		-		-		127,574
Borrowings on secured line of credit		18,000		18,000		-		-		18,000