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Note 11 - Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2023

Fair Value Measurement and Measurement Inputs, Recurring and Nonrecurring [Text Block]

NOTE 11. 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.

Assets and liabilities that are measured at fair value are grouped in three levels within the fair value hierarchy based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

The fair value hierarchy is as follows:

■	Level 1 Inputs – Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.

■

Level 2 Inputs – Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations for which all significant assumptions are observable or can be corroborated by observable market data.

■	Level 3 Inputs – Valuations are based on unobservable inputs that may include significant management judgment and estimation.

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy at the reporting date, is set forth below.

Available-for-Sale Securities – Securities classified as available-for-sale are reported at fair value utilizing Level 1 (nationally recognized securities exchanges) and Level 2 inputs. For level 2 securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include but is not limited to dealer quotes, market spreads, cash flows, the U. S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the bond’s terms and conditions.

Loans Held-for-Sale – These loans are reported at fair value. Fair value is determined based on expected proceeds based on committed sales contracts and commitments of similar loans if not already committed and are considered Level 2 inputs.

Derivative Instruments – The fair value of the interest rate lock commitments, forward TBA mortgage-backed securities and mandatory forward commitments are estimated using quoted or published market prices for similar instruments and adjusted for factors such as pull-through rate assumptions based on historical information, where appropriate. Interest rate lock commitments are considered Level 3 inputs and forward TBA mortgage-backed securities and mandatory forward commitments are considered Level 2 inputs.

Collateral-Dependent Loans – Individually reviewed collateral-dependent loans are reported at the fair value of the underlying collateral less costs to sell. Collateral-dependent loans are considered Level 3 inputs. Collateral values are estimated using Level 3 inputs based on internally customized discounting criteria.

Real Estate and Other Repossessed Assets – Fair values are determined at the time the loan is foreclosed upon and the asset is transferred from loans. The value is based primarily on third party appraisals, less costs to sell and are considered Level 3 inputs for determining fair value. Repossessed assets are reviewed and evaluated periodically for additional impairment and adjusted accordingly.

Mortgage Servicing Rights – The fair value of mortgage servicing rights are estimated using net present value of expected cash flows based on a third party model that incorporates industry assumptions and is adjusted for factors such as prepayment speeds and are considered Level 3 inputs.

The following tables summarize financial assets and financial liabilities measured at fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.

	June 30, 2023
	Level 1		Level 2		Level 3		Total Fair
	Inputs		Inputs		Inputs		Value
	(In Thousands)
Financial assets:
Available-for-sale securities
U.S. government and agency obligations	$	-	$	7,374	$	-	$	7,374
U.S. Treasury obligations		46,058		-		-		46,058
Municipal obligations		-		139,192		-		139,192
Corporate obligations		-		3,831		-		3,831
Mortgage-backed securities		-		28,787		-		28,787
Collateralized mortgage obligations		-		88,112		-		88,112
Asset-backed securities		-		12,610		-		12,610
Loans held-for-sale		-		22,381		-		22,381
Forward TBA mortgage-backed securities		-		81		-		81
Financial liabilities:
Interest rate lock commitments		-		-		57		57

	December 31, 2022
	Level 1		Level 2		Level 3		Total Fair
	Inputs		Inputs		Inputs		Value
	(In Thousands)
Financial assets:
Available-for-sale securities
U.S. government and agency obligations	$	-	$	2,390	$	-	$	2,390
U.S. Treasury obligations		51,951		-		-		51,951
Municipal obligations		-		172,849		-		172,849
Corporate obligations		-		6,990		-		6,990
Mortgage-backed securities		-		29,653		-		29,653
Collateralized mortgage obligations		-		82,131		-		82,131
Asset-backed securities		-		3,531		-		3,531
Loans held-for-sale		-		8,250		-		8,250
Forward TBA mortgage-backed securities		-		11		-		11
Financial liabilities:
Interest rate lock commitments		-		-		81		81

Certain financial assets may be measured at fair value on a nonrecurring basis. These assets are subject to fair value adjustments that result from the application of lower of cost or fair value accounting or write-downs of individual assets, such as impaired loans that are collateral-dependent, real estate and other repossessed assets and mortgage servicing rights.

The following table summarizes financial assets measured at fair value on a nonrecurring basis for which a nonrecurring change in fair value has been recorded during the reporting periods presented:

	June 30, 2023
	Level 1		Level 2		Level 3		Total Fair
	Inputs		Inputs		Inputs		Value
	(In Thousands)
Collateral-dependent loans individually evaluated, net of ACL⁽¹⁾	$	-	$	-	$	2,677	$	2,677
Mortgage servicing rights		-		-		-		-

	December 31, 2022
	Level 1		Level 2		Level 3		Total Fair
	Inputs		Inputs		Inputs		Value
	(In Thousands)
Impaired loans⁽¹⁾	$	-	$	-	$	281	$	281
Mortgage servicing rights		-		-		1,346	$	1,346

⁽¹⁾The Company adopted ASC 326 as of January 1, 2023, under which the concept of impaired loans went away. The comparable period presents impaired loans under previously applicable GAAP.

The following table represents the Banks’s Level 3 financial assets and liabilities, the valuation techniques used to measure the fair value of those financial assets and liabilities, and the significant unobservable inputs and the ranges of values for those inputs.

	Principal	Significant	Range of
	Valuation	Unobservable	Significant Input
Instrument	Technique	Inputs	Values

Collerateral-dependent loans individually evaluated	Fair value of underlying collateral	Discount applied to the obtained appraisal	10-30%
Real estate and other repossessed assets	Fair value of collateral	Discount applied to the obtained appraisal	10-30%
Interest rate lock commitments	Internal pricing model	Pull-through expectations	80-90%

The following tables provide a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three months and six months ended June 30, 2023.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2023			2022			2023			2022
	Interest Rate Lock Commitments						Interest Rate Lock Commitments
	(In Thousands)						(In Thousands)
Beginning balance	$	130		$	91		$	(81	)	$	1,218
Purchases and issuances		(186	)		448			(150	)		735
Sales and settlements		(1	)		(205	)		174			(1,619	)
Ending balance	$	(57	)	$	334		$	(57	)	$	334
Unrealized (losses) gains related to items held at end of period	$	(187	)	$	243		$	24		$	(884	)

The tables below summarize the estimated fair values of financial instruments of the Company, whether or not recognized at fair value on the condensed consolidated statements of condition. The tables are followed by methods and assumptions that were used by the Company in estimating the fair value of the classes of financial instruments.

	June 30, 2023
							Total
	Level 1		Level 2		Level 3		Estimated		Carrying
	Inputs		Inputs		Inputs		Fair Value		Amount
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	22,994	$	-	$	-	$	22,994	$	22,994
FHLB stock		-		10,099		-		10,099		10,099
FRB stock		-		4,131		-		4,131		4,131
Loans receivable, gross		-		-		1,362,776		1,362,776		1,421,483
Accrued interest and dividends receivable		11,194		-		-		11,194		11,194
Mortgage servicing rights		-		-		20,199		20,199		15,501
Financial liabilities:
Non-maturing interest-bearing deposits		-		790,367		-		790,367		790,367
Noninterest-bearing deposits		432,463		-		-		432,463		432,463
Time certificates of deposit		-		-		351,199		351,199		355,537
Accrued expenses and other liabilities		31,945		-		-		31,945		31,945
FHLB advances and other borrowings		-		-		191,107		191,107		191,260
Other long-term debt		-		-		56,864		56,864		60,155

	December 31, 2022
							Total
	Level 1		Level 2		Level 3		Estimated		Carrying
	Inputs		Inputs		Inputs		Fair Value		Amount
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	21,811	$	-	$	-	$	21,811	$	21,811
FHLB stock		-		5,089		-		5,089		5,089
FRB stock		-		4,131		-		4,131		4,131
Loans receivable, gross		-		-		1,322,814		1,322,814		1,353,678
Accrued interest and dividends receivable		11,284		-		-		11,284		11,284
Mortgage servicing rights		-		-		19,288		19,288		15,412
Financial liabilities:
Non-maturing interest-bearing deposits		-		914,659		-		914,659		914,659
Noninterest-bearing deposits		468,955		-		-		468,955		468,955
Time certificates of deposit		-		-		246,348		246,348		251,658
Accrued expenses and other liabilities		26,377		-		-		26,377		26,377
FHLB advances and other borrowings		-		-		69,373		69,373		69,394
Other long-term debt		-		-		56,721		56,721		60,155