Note 9 - Fair Value Measurement

3 Months Ended

Mar. 31, 2023

Notes to Financial Statements

Fair Value Disclosures [Text Block]

9. FAIR VALUE MEASUREMENT

The Company measures fair value under the fair value hierarchy described below.

Level 1: Quoted prices for identical instruments traded in active exchange markets.

Level 2: Quoted prices (unadjusted) for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data.

Level 3: Model based techniques that use one significant assumption not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use on pricing the asset or liability. Valuation techniques include management judgment and estimation which may be significant.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.

Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.

Fair Value of Financial Instruments

The carrying amounts and estimated fair values of financial instruments, at March 31, 2023 follows, in thousands:

			Fair Value Measurements at March 31, 2023, Using:
	Carrying Value		Level 1		Level 2		Level 3		Total Fair Value
Financial assets:
Cash and cash equivalents	$	105,676	$	105,676	$	-	$	-	$	105,676
Investment securities		484,416		-		484,416		-		484,416
Loans, net		906,022		-		-		888,286		888,286
FHLB stock		4,964		-		-		-		N/A
FRB Stock		1,366		-		-		-		N/A
Accrued interest receivable		7,329		86		2,673		4,570		7,329
Financial liabilities:
Deposits		1,406,745		1,357,735		49,449		-		1,407,184
Repurchase agreements		16,914		-		16,914		-		16,914
Note Payable		10,000		-		-		8,642		8,642
Accrued interest payable		87		24		50		13		87

The carrying amounts and estimated fair values of financial instruments, at December 31, 2022 follows, in thousands:

			Fair Value Measurements at December 31, 2022 Using:
	Carrying Value		Level 1		Level 2		Level 3		Total Fair Value
Financial assets:
Cash and cash equivalents	$	183,426	$	183,426	$	-	$	-	$	183,426
Investment securities		444,703		-		444,703		-		444,703
Interest rate swaps		2,002		-		2,002		-		2,002
Loans held for sale		2,301		-		2,301		-		2,301
Loans, net		903,968		-		-		884,814		884,814
FHLB stock		4,964		-		-		-		N/A
FRB Stock		1,364		-		-		-		N/A
Accrued interest receivable		7,433		63		2,309		5,061		7,433
Financial liabilities:
Deposits		1,457,809		1,408,623		49,627		-		1,458,250
Repurchase agreements		18,624		-		18,624		-		18,624
Junior subordinated deferrable interest debentures		10,310		-		-		7,770		7,770
Accrued interest payable		81		16		40		25		81

Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. Those estimates that are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision are included in Level 3. Changes in assumptions could significantly affect the fair values presented.

These estimates do not reflect any premium or discount that could result from offering the Company's entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of March 31, 2023 and December 31, 2022, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

Assets and liabilities measured at fair value on a recurring basis at March 31, 2023 are summarized below, in thousands:

			Fair Value Measurements at
			March 31, 2023 Using
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Total Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. Treasury securities	$	9,770	$	-	$	9,770	$	-
U.S. Government-sponsored agencies collateralized by mortgage obligations- residential		236,725		-		236,725		-
U.S. Government agencies collateralized by mortgage obligations-commercial		110,661		-		110,661		-
Obligations of states and political subdivisions		127,260		-		127,260		-
	$	484,416	$	-	$	484,416	$	-

Assets and liabilities measured at fair value on a recurring basis at December 31, 2022 are summarized below, in thousands:

			Fair Value Measurements at
			December 31, 2022 Using
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Total Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. Treasury securities	$	9,707	$	-	$	9,707	$	-
U.S. Government-sponsored agencies collateralized by mortgage obligations - residential		214,408		-		214,408		-
U.S. Government-agencies collateralized by mortgage obligations - commercial		99,581		-		99,581		-
Obligations of states and political subdivisions		121,007		-		121,007		-
Interest rate swaps		2,002		-		2,002		-
	$	446,705	$	-	$	446,705	$	-

The fair value of securities available-for-sale equals quoted market price, if available. If quoted market prices are not available, fair value is determined using quoted market prices for similar securities or matrix pricing. The fair value of the interest rate swap agreements was derived from discounted cash flow analysis based on the terms of the contract and the forward interest rate curve adjusted for our credit risk. There were no changes in the valuation techniques used during 2023 or 2022. Transfers between hierarchy measurement levels are recognized by the Company as of the beginning of the reporting period. Changes in fair market value are recorded in other comprehensive income.

Assets and liabilities measured at fair value on a non-recurring basis at March 31, 2023 are summarized below, in thousands:

			Fair Value Measurements at
			March 31, 2023 Using
			Quoted
			Prices in						Total
			Active		Significant				Losses
			Markets for		Other		Significant		Three Months
			Identical		Observable		Unobservable		Ended
			Assets		Inputs		Inputs		March 31,
	Total Fair Value		(Level 1)		(Level 2)		(Level 3)		2023
Assets:
Impaired loans
RE – Agricultural	$	576	$	-	$	-	$	576	$	271
Other Real Estate:
RE – Residential		83	$	-	$	-	$	83	$	-

There were no assets measured at fair value on a non-recurring basis at December 31, 2022.  The Company has no liabilities which are reported at fair value.

The following methods were used to estimate fair value.

Collateral-Dependent Impaired Loans: The Bank does not record loans at fair value on a recurring basis. However, from time to time, fair value adjustments are recorded on these loans to reflect partial write-downs, through charge-offs or specific reserve allowances, that are based on fair value estimates of the underlying collateral. The fair value estimates for collateral-dependent impaired loans are generally based on recent real estate appraisals or broker opinions, obtained from independent third parties, which are frequently adjusted by management to reflect current conditions and estimated selling costs (Level 3).  An impairment charge of $271,000 was   recognized during the three months ended March 31, 2023, related to the above impaired loan. No impairment charges were incurred during the three months ended March 31, 2022.

Other Real Estate: Nonrecurring adjustments to certain real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value, less costs to sell. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized. Fair values are generally based on third party appraisals of the property which are commonly adjusted by management to reflect current conditions and selling costs (Level 3).

Appraisals for other real estate are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Loan Administration Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On a quarterly basis, the Company compares the actual selling price of similar collateral that has been liquidated to the most recent appraised value for unsold properties to determine what additional adjustment, if any, should be made to the appraisal value to arrive at fair value. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at March 31, 2023 and December 31, 2022 (dollars in thousands): 

	Fair Value		Fair Value		Valuation		Range (Weighted Average)					Range (Weighted Average)
Description	3/31/2023		12/31/2022		Technique	Significant Unobservable Input	3/31/2023					12/31/2022
Impaired Loans:
RE – Agricultural	$	576	$	-	Third Party appraisals	Management Adjustments to Reflect Current Conditions and Selling Costs		32	%	(32%	)
Other Real Estate:
RE – Residential	$	83	$	-	Third Party appraisals	Management Adjustments to Reflect Current Conditions and Selling Costs		8	%	(8%	)