Note 5 - Fair Value Measurements

9 Months Ended

Sep. 30, 2025

NOTE 5 - FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. GAAP establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following levels:

Level I:

Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II:

Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are valued using other financial instruments, the parameters of which can be directly observed.

Level III:

Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

This hierarchy requires the use of observable market data when available.

The following tables present the assets measured at fair value on a recurring basis on the Consolidated Balance Sheet by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

	September 30, 2025
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a recurring basis:
Subordinated debt	$	-	$	21,893	$	1,679	$	23,572
Obligations of states and political subdivisions		-		124,373		-		124,373
Mortgage-backed securities in government-sponsored entities		-		7,910		-		7,910
Total investment securities available for sale		-		154,176		1,679		155,855

Equity securities		743		-		-		743
Interest rate derivative assets				547				547
Liabilities measured on a recurring basis:
Interest rate derivative liabilities				547				547

	December 31, 2024
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a recurring basis:
Subordinated debt	$	-	$	25,830	$	6,639	$	32,469
Obligations of states and political subdivisions		-		124,966		-		124,966
Mortgage-backed securities in government-sponsored entities		-		8,367		-		8,367
Total investment securities available for sale		-		159,163		6,639		165,802

Equity securities		753		-		-		753

Investment Securities Available for Sale - An independent pricing service provides the Company fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, benchmarked yield curve, credit spreads and prices from market makers and live trading systems. These securities have been categorized in Level II. Level III securities are assets whose fair value cannot be determined by using observable measures. The inputs to the valuation methodology of these securities are unobservable and significant to the fair value measurement. Currently, this category includes certain subordinated debt investments that are valued based on the discounted cash flow approach assuming a yield curve of similarly structured instruments.

While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of specific financial instruments could result in a different estimate of fair value at the reporting date. Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective period-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments following the respective reporting dates may be different from the amounts reported at each period-end.

Equity Securities - Equity securities that are traded on a national securities exchange are valued at their last reported sales price as of the measurement date. Equity securities traded in the over-the-counter (“OTC”) markets and listed securities for which no sale was reported on that date are generally valued at their last reported “bid” price if held long, and last reported “ask” price if sold short. To the extent equity securities are actively traded and valuation adjustments are not applied, they are categorized in Level I of the fair value hierarchy.

Interest Rate Derivatives - An independent third-party values interest rate derivatives using pricing models based on a discounted cash flow methodology. The models take into account both Level I and Level II inputs such as swap rates, deposit rates, and other market-based rates and curves. A Level II categorization has been assigned. Interest rate derivatives are included in "accrued interest receivable and other assets" and "accrued interest payable and other liabilities" on the Consolidated Balance Sheet.

The following table presents the fair value reconciliation of Level III assets measured at fair value on a recurring basis.

	Subordinated debt
(Dollar amounts in thousands)	September 30, 2025			December 31, 2024
Beginning of year	$	6,639		$	8,801
Settlements		(5,000	)		-
Transfers out of Level III ⁽¹⁾		-			(2,250	)
Net change in unrealized loss on investment securities available-for-sale		40			88
End of year	$	1,679		$	6,639

(1)

Transfers between hierarchy levels are based on the availability of sufficient observable inputs to meet Level II versus Level III criteria. The level designation of each financial instrument is reassessed at the end of each period.

The following table presents the assets measured at fair value on a non-recurring basis on the Consolidated Balance Sheet by level within the fair value hierarchy.

	September 30, 2025
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a non-recurring basis:
Premises and equipment held for sale	$	-	$	-	$	998	$	998
Collateral-dependent loans		-		-		6,007		6,007

	December 31, 2024
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a non-recurring basis:
Collateral-dependent loans	$	-	$	-	$	3,321	$	3,321

Premises and Equipment Held for Sale - Premises and equipment held for sale consist of a branch location held for sale. The Company has measured impairment on branch locations held for sale based on the fair value of the property. Fair value is based on the listed selling price, which is predominately determined using market transactions for similar properties. In some cases, management may adjust the sales price due to changes in market conditions, length of time that the property has been on the market, or other factors that a market participant may take into account when valuing the property. Additionally, management estimates expected costs to sell the property. If the fair value of the premises and equipment held for sale is less than the carrying amount, a charge is taken to reduce the property to its fair value (less estimated selling costs), and the property is included in the above table as a Level III measurement in the period in which the adjustment is recorded. If the fair value of the property exceeds the carrying amount, then the property is not included in the above table as it is not currently being carried at its fair value. The fair values in the preceding tables include selling costs of $53,000 for September 30, 2025.

Collateral-Dependent Loans – The Company has measured expected credit loss on collateral-dependent individually analyzed loans generally based on the fair value of the loan’s collateral. Fair value is generally determined based on independent third-party appraisals of the properties. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management makes estimates about expected costs to sell the property, which are also included in the net realizable value. If the fair value of the collateral-dependent loan is less than the carrying amount of the loan, a specific reserve for the loan is made in the allowance for credit losses, or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs), and the loan is included in the above table as a Level III measurement in the period in which the adjustment is recorded. If the fair value of the collateral exceeds the carrying amount of the loan, then the loan is not included in the above table as it is not currently being carried at its fair value. The fair values in the preceding tables include selling costs of $1.8 million and $968,000 for September 30, 2025, and December 31, 2024

The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis and for which the Company uses Level III inputs to determine fair value:

	September 30, 2025
(Dollar amounts in thousands)	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)
Collateral-dependent loans	$	6,007	Appraisal of collateral	Appraisal adjustments		12.8 - 29.2% (25.2%)
Premises and equipment held for sale	$	998	Sale price	Adjustments to selling price		5.0%

	December 31, 2024
(Dollar amounts in thousands)	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)
Collateral-dependent loans	$	3,321	Appraisal of collateral	Appraisal adjustments		0 - 23.9% (23.9%)

The estimated fair value of the Company’s financial instruments not recorded at fair value on a recurring basis is as follows:

	September 30, 2025
	Carrying								Total
(Dollar amounts in thousands)	Value		Level I		Level II		Level III		Fair Value
Financial assets:
Net loans	$	1,583,995	$	-	$	-	$	1,572,635	$	1,572,635
Mortgage servicing rights		1,423		-		-		2,398		2,398

Financial liabilities:
Non-maturing deposits	$	1,351,857	$	1,351,857	$	-	$	-	$	1,351,857
Time deposits		270,445		-		-		269,408		269,408
Other borrowings		11,502		-		-		11,502		11,502

	December 31, 2024
	Carrying								Total
(Dollar amounts in thousands)	Value		Level I		Level II		Level III		Fair Value
Financial assets:
Net loans	$	1,497,167	$	-	$	-	$	1,462,650	$	1,462,650
Mortgage servicing rights		1,497		-		-		2,522		2,522

Financial liabilities:
Non-maturing deposits	$	1,197,989	$	1,197,989	$	-	$	-	$	1,197,989
Time deposits		247,704		-		-		245,999		245,999
Other borrowings		11,660		-		-		11,660		11,660

Included within other borrowings is an $8.2 million note payable, which matures in December 2037. These borrowings were used to form a special purpose entity to issue $8.0 million of floating rate, obligated mandatorily redeemable securities. The rate adjusts quarterly, equal to SOFR plus 1.67%. The borrowing is a floating rate instrument, and any difference between the cost and fair value is insignificant.

In addition to the financial instruments included in the above tables, cash and cash equivalents, bank-owned life insurance, Federal Home Loan Bank (the “FHLB”) stock, other investments, accrued interest receivable, FHLB advances, finance lease liabilities, and accrued interest payable, are carried at cost, which approximates the fair value of the instruments.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

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+ Details

MIDDLEFIELD BANC CORP 10-Q