NOTE 18 - FAIR VALUE

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. There are three levels of inputs that may be used to measure fair values:

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 company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value:

Securities Available for Sale: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2).

For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

Equity Securities: The fair values for equity securities are determined by quoted market prices, if available (Level 1). The Company has included equity securities in other asets on the Company’s Balance Sheet.

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the allowance policy.

Other Real Estate Owned: Assets acquired through, or instead of, loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.

Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Loan Servicing Rights: Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively based on a valuation model that calculates the present value of estimated future net servicing income, resulting in a Level 3 classification.

Assets and Liabilities Measured on a Recurring Basis

Available for sale investment securities and equity securities which are in included in other assets on the Company’s balance sheet are the Company’s only balance sheet item that meet the disclosure requirements for instruments measured at fair value on a recurring basis. Disclosures are as follows in the tables below.

December 31, 2019


			Quoted Prices
			In Active
			Markets for		Significant Other		Significant
			Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets
U.S. treasury notes	$	9,168	$	—	$	9,168	$	—
U. S. government agencies		23,735		—		23,735		—
States and political subdivisions		32,589		—		32,589		—
Mortgage-backed - residential		113,991		—		113,991		—
Mortgage-backed-commercial		50,351		—		50,351		—
Asset-backed		35,496		—		35,496		—
Derivatives and financial instrument assets		263		—		263		—
Other Assets		292		292		—		—
Total	$	265,885	$	292	$	265,593	$	—

Financial Liabilities
Derivatives and financial instrument liabilities	$	164	$	—	$	164	$	—

December 31, 2018


			Quoted Prices
			In Active
			Markets for		Significant Other		Significant
			Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)
U.S. treasury notes	$	3,975	$	—	$	3,975	$	—
U. S. government agencies		41,178		—		41,178		—
States and political subdivisions		64,204		—		64,204		—
Mortgage-backed - residential		147,249		—		147,249		—
Mortgage-backed - commercial		48,563		—		48,563		—
Asset-backed		10,200		—		10,200		—
Other Assets		284		284		—		—
Total	$	315,653	$	284	$	315,369	$	—

There were no transfers between level 1 and level 2 during 2019 or 2018.

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


	Fair Value Measurements at December 31, 2019 Using :
				Quoted Prices
				In Active
				Markets for		Significant Other		Significant
				Identical		Observable		Unobservable
	Carrying			Assets		Inputs		Inputs
(In thousands)	Value			(Level 1)		(Level 2)		(Level 3)
Description
Impaired loans:
Real estate mortgage:
1-4 family residential	$	200	$	—	$	—	$		200
Multi-family residential		1,242		—		—			1,242
Other real estate owned, net:
Real estate mortgage:
1-4 family residential		40		—		—			40
Commercial		246		—		—			246
Agricultural		233		—		—			233
Mortgage servicing rights		1,107		—		—			1,107


	Fair Value Measurements at December 31, 2018 Using :
				Quoted Prices
				In Active
				Markets for		Significant Other	Significant
				Identical		Observable	Unobservable
	Carrying			Assets		Inputs	Inputs
(In thousands)	Value			(Level 1)		(Level 2)	(Level 3)
Description
Impaired loans:
Real Estate Mortgage:
1-4 family residential	$	993	$	—	$	—	$	993
Other real estate owned, net:
Commercial		246		—				246
Mortgage servicing rights		430		—		—		430

Impaired loans measured for impairment using the fair value of the collateral had a net carrying amount of $1.4 million, with a valuation allowance of $52 thousand at December 31, 2019. During 2019, two new loans became impaired resulting in an additional provision for loan losses of $50 thousand. The total allowance for specific impaired loans decreased $149 thousand for the year ending December 31, 2019.

At December 31, 2018, impaired loans measured for impairment using the fair value of the collateral had a net carrying amount of $993 thousand, with a valuation allowance of $201 thousand. During 2018, eight new loans became impaired resulting in an additional provision for loan losses of $201 thousand. The total allowance for specific impaired loans increased $178 thousand for the year ending December 31, 2018.

Other real estate owned measured at fair value less costs to sell, had a net carrying amount of $519 thousand, which is made up of the outstanding balance of $980 thousand, net of a valuation allowance of $461 thousand at December 31, 2019. Fair value adjustments of other real estate were a net write-down of $54 thousand for the year ended December 31, 2019. At December 31, 2018, other real estate owned measured at fair value less costs to sell, had a net carrying amount of $246 thousand, which was made up of the outstanding balance of $653 thousand, net of a valuation allowance of $407 thousand at December 31, 2018. There were no fair value adjustments to other real estate owned for the year ended December 31, 2018.

Certain impaired loan servicing rights, which are carried at lower of cost or fair value, were carried at their fair value of $1.1 million, which is made up of the outstanding balance of $1.2 million, net of a valuation allowance of $110 thousand at December 31, 2019. Fair value adjustments for the loan servicing rights netted to net write-downs of $71 thousand for the year ended December 31, 2019. At December 31, 2018, impaired loan servicing rights were carried at their fair value of $430 thousand, which was made up of the outstanding balance of $469 thousand, net of a valuation allowance of $39 thousand at December 31, 2018. Fair value adjustments netted to a positive adjustment of $17 thousand for the year ended December 31, 2018.

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 December 31, 2019 and 2018:


					Range
December 31, 2019		Fair	Valuation	Unobservable	(Weighted
(In thousands)		Value	Technique(s)	Input(s)	Average)

Impaired loans
Real estate mortgage:
1-4 family residential	$	200	sales comparison	adjustment for differences between the comparable sales	(1)% - 21%	(1)%
Multi-family residential		1,242	income approach	capitalization rate	7% - 7%	(7)%
Other real estate owned:
Real estate mortgage:
1-4 family residential		40	sales comparison	adjustment for differences between the comparable sales	(4)% - 11%	(29)%
Commercial		246	sales comparison	adjustment for differences between the comparable sales	(6)% - 8%	(62)%
Agricultural		233	sales comparison	adjustment for differences between the comparable sales	0% - 26%	(14)%

Mortgage servicing rights		1,107	discounted cash flow	constant prepayment rates	9% - 20%	(12)%


					Range
December 31, 2018		Fair	Valuation	Unobservable	(Weighted
(In thousands)		Value	Technique(s)	Input(s)	Average)
Impaired loans
Real estate mortgage:
1-4 family residential	$	993	sales comparison	adjustment for differences between the comparable sales	(21)% - 7%	(7)%
Other real estate owned:
Commercial		246	income approach	capitalization rate	10% - 10%	(10)%
Mortgage servicing rights		430	discounted cash flow	constant prepayment rates	7% - 25%	(9)%

Fair Value of Financial Instruments

The carrying amounts and estimated fair values of financial instruments, at December 31, 2019 and December 31, 2018 are as follows:

December 31, 2019:


	Carrying
(in thousands)	Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	22,182	$	22,182	$	—	$	—	$	22,182
Interest bearing time deposits		2,375		2,375		—		—		2,375
Securities available for sale		265,330		—		265,330		—		265,330
Loans held for sale		2,144		—		2,171		—		2,171
Net Loans		735,853		—		—		735,060		735,060
Federal Home Loan Bank stock		7,034		—		—		—		N/A
Interest receivable		4,166		—		1,035		3,131		4,166
Derivative and financial instruments		263		—		263		—		263
Other assets		292		292		—		—		292

Financial liabilities
Total deposits	$	842,653	$	630,948	$	210,892	$	—	$	841,840
Repurchase agreements		5,994		—		5,993		—		5,993
Short-term Federal Home Loan Bank advances		25,000		—		25,000		—		25,000
Long-term Federal Home Loan Bank advances		91,418		—		91,397		—		91,397
Subordinated debentures		7,217		—		—		7,213		7,213
Interest payable		1,170		—		1,156		14		1,170
Derivative and financial instruments		164		—		164		—		164

December 31, 2018:


	Carrying
(in thousands)	Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	26,101	$	26,101	$	—	$	—	$	26,101
Interest bearing time deposits		2,175		2,175		—		—		2,175
Securities available for sale		315,369		—		315,369		—		315,369
Loans held for sale		1,203		—		1,224		—		1,224
Net Loans		678,017		—		—		666,942		666,942
Federal Home Loan Bank stock		7,034		—		—		—		N/A
Interest receivable		4,150		—		1,346		2,804		4,150

Financial liabilities
Total deposits	$	850,442	$	620,885	$	226,734	$	—	$	847,619
Repurchase agreements		8,077		—		8,009		—		8,009
Short-term Federal Home Loan Bank advances		11,600		—		11,592		—		11,592
Long-term Federal Home Loan Bank advances		88,852		—		84,983		—		84,983
Note payable		2,718		—		2,841		—		2,841
Subordinated debentures		7,217		—		—		7,213		7,213
Interest payable		893		—		877		16		893

The methods and assumptions, not previously presented, used to estimate fair value are described as follows: Carrying amount is the estimated fair value for cash and cash equivalents, interest bearing deposits, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. The methods for determining the fair values for securities were described previously. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk (including consideration of widening credit spreads). The methods used to determine the fair value of loans were based on the notion of exit price. Fair value of debt is based on current rates for similar financing. It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability. The fair value of off-balance sheet items is not considered material.