7.FAIR VALUE MEASUREMENTS

ASC Topic 820, “Fair Value Measurements and Disclosures”, defines fair value, establishes a framework for measuring fair value, and sets forth disclosures about fair value measurements. ASC Topic 825, “Financial Instruments”, allows entities to choose to measure certain financial assets and liabilities at fair value. The Company has not elected the fair value option for any financial assets or liabilities.

ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This Topic describes three levels of inputs that may be used to measure fair value:

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:

Investment Securities: The fair values for available for sale 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).

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent third party 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 for similar loans and collateral underlying such loans.

Net adjustments totaled $23 thousand the first three months of 2020 and $(182) thousand for the first three months of 2019 and resulted 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.

Mortgage 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.

Derivatives and Financial Instruments: The fair values of derivative financial instruments are based on derivative valuation models using market data inputs as of the valuation date (Level 2).

Assets and Liabilities Measured on a Recurring Basis:

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

Fair Value Measurements at March 31, 2020 (in thousands):


			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	$	9,336	$	—	$	9,336	$	—
U. S. government agencies		17,920		—		17,920		—
States and political subdivisions		28,876		—		28,876		—
Mortgage-backed - residential		109,990		—		109,990		—
Mortgage-backed-commercial		48,243		—		48,243		—
Asset-backed		32,822		—		32,822		—
Derivatives and financial instrument assets		237		—		237		—
Other Assets		296		296		—		—
Total	$	247,720	$	296	$	247,424	$	—

Financial Liabilities
Derivatives and financial instrument liabilities	$	3,525	$	—	$	3,525	$	—

Fair Value Measurements at December 31, 2019 (in thousands):


			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	$	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		94				94
Other Assets		292		292		—		—
Total	$	265,716	$	292	$	265,424	$	—

Financial Liabilities
Derivatives and financial instrument liabilities	$	212	$	—	$	212	$	—

There were no transfers between level 1 and level 2 during 2020 or 2019.

Assets measured at fair value on a non-recurring basis are summarized below (in thousands):


	Fair Value Measurements at March 31, 2020 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:
Multi-family residential	$	1,217	$	—	$	—	$		1,217
Other real estate owned, net:
Real estate mortgage:
1-4 family residential		132		—		—			132
Commercial		246		—		—			246
Agricultural		233		—		—			233
Mortgage servicing rights		1,023		—		—			1,023


	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
Agriculturual		233		—		—		233
Mortgage servicing rights		1,107		—		—		1,107

Impaired loans measured for impairment using the fair value of the collateral for collateral dependent loans had a net carrying amount of $1.2 million, which includes a valuation allowance of $75 thousand as of March 31, 2020. Impaired loans measured for impairment using the fair value of the collateral for collateral dependent loans had a net carrying amount of $1.4 million, with a valuation allowance of $52 thousand at December 31, 2019.

No additional loans were impaired at March 31, 2020 when compared to December 31, 2019. One loan relationship which was impaired at December 31, 2019 required additional provision for loan loss expense of $25 thousand for the three months ended March 31, 2020.

Other real estate owned measured at fair value less costs to sell had a net carrying amount of $611 thousand, which is made up of the outstanding balance of $1.1 million, net of a valuation allowance of $500 thousand as of March 31, 2020. Other real estate owned which was measured at fair value less costs to sell, had a net carrying amount of $519 thousand, which was made up of the outstanding balance of $980 thousand, net of a valuation allowance of $461 thousand at December 31, 2019. The Company recorded $38 thousand in write-downs of other real estate owned properties for the three months ended both March 31, 2020 and March 31, 2019.

Impaired mortgage servicing rights are carried at the lower of cost or fair value. At March 31 2020, impaired mortgage servicing rights totaled $1.3 million, less a valuation allowance of $252 thousand, resulting in a net carrying value of $1.0 million.

At December 31, 2019, impaired mortgage servicing rights totaled $1.2 million, less a valuation allowance of $110 thousand, resulting in a carrying value of $1.1 million. For the three months ended March 31, 2020, the Company recorded net writedowns of $142 thousand. For the three months ended March 31,019, the Company recorded net write-downs of $6 thousand.

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis as of March 31, 2020 and December 31, 2019:


					Range
March 31, 2020		Fair	Valuation	Unobservable	(Weighted
(In thousands)		Value	Technique(s)	Input(s)	Average)
Impaired loans
Real estate mortgage:
Multi-family residential	$	1,217	income approach	capitalization rate	7% - 7%	(7)%
Other real estate owned:
Real estate mortgage:
1-4 family residential		132	sales comparison	adjustment for differences between the comparable sales	(23)% - (28)%	(30)%
Commercial		246	income approach	capitalization rate	(6)% - 8%	(62)%
Agricultural		233	sales comparison	adjustment for differences between the comparable sales	(0)% - 26%	(14)%
Mortgage servicing rights		1,023	discounted cash flow	constant prepayment rates	(8)% - (23)%	(13)%


					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	$	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:
1-4 family residential		40	sales comparison	adjustment for differences between the comparable sales	(4%) - 11%	(29%)
Commercial		246	sales comparison	capitalization rate	(6%) - 8%	(62)%
Agriculturual		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)%

Fair Value of Financial Instruments

The carrying amounts and estimated fair values of financial instruments, as of March 31, 2020 and December 31, 2019 are as follows:

March 31, 2020


	Carrying
(in thousands)	Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	37,766	$	37,766	$	—	$	—	$	37,766
Interest bearing time deposits		2,375		2,375		—		—		2,375
Securities available for sale		247,187		—		247,187		—		247,187
Loans held for sale		4,990		—		5,065		—		5,065
Net Loans		768,411		—		—		742,213		742,213
Federal Home Loan Bank stock		7,034		—		—		—		N/A
Interest receivable		4,010		—		894		3,116		4,010
Derivative and financial instruments		237		—		237		—		237
Other assets		296		296		—		—		296

Financial liabilities
Total deposits	$	853,217	$	637,199	$	217,638	$	—	$	854,837
Repurchase agreements		5,410		—		5,410		—		5,410
Short-term Federal Home Loan Bank advances		54,000		—		54,000		—		54,000
Long-term Federal Home Loan Bank advances		84,925		—		87,678		—		87,678
Subordinated debentures		7,217		—		—		6,785		6,785
Interest payable		1,217		—		1,205		12		1,217
Derivative and financial instruments		3,525		—		3,525		—		3,525

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
Derivatives and financial instruments		94		—		94		—		94
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
Derivatives and financial instruments		212		—		212		—		212