Note 9 - Fair Value Measurement

9 Months Ended

Sep. 30, 2020

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 September 30, 2020 follows, in thousands:

			Fair Value Measurements at September 30, 2020, Using:
	Carrying Value		Level 1		Level 2		Level 3		Total Fair Value
Financial assets:
Cash and cash equivalents	$	175,531	$	175,531	$	-	$	-	$	175,531
Investment securities		158,002		-		158,002		-		158,002
Loans, net		737,650		-		-		769,605		769,605
FHLB stock		3,667		-		-		-		N/A
Accrued interest receivable		5,421		8		564		4,849		5,421
Financial liabilities:
Deposits		977,529		938,651		40,459		-		979,110
Interest rate swaps		43				43				43
Repurchase agreements		15,159		-		15,159		-		15,159
FHLB advances		10,000		-		9,992		-		9,992
Junior subordinated deferrable interest debentures		10,310		-		-		7,249		7,249
Accrued interest payable		71		8		48		15		71

The carrying amounts and estimated fair values of financial instruments, at December 31, 2019 follows, in thousands:

			Fair Value Measurements at December 31, 2019 Using:
	Carrying Value		Level 1		Level 2		Level 3		Total Fair Value
Financial assets:
Cash and cash equivalents	$	46,942	$	46,942	$	-	$	-	$	46,942
Investment securities		159,320		-		159,320		-		159,320
Loans, net		616,036		-		-		626,795		626,795
FHLB stock		3,517		-		-		-		N/A
Accrued interest receivable		3,398		15		574		2,809		3,398
Financial liabilities:
Deposits		747,324		709,130		38,202		-		747,332
Repurchase agreements		16,013		-		16,013		-		16,013
Junior subordinated deferrable interest debentures		10,310		-		-		7,661		7,661
Accrued interest payable		96		13		60		23		96

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 September 30, 2020 and December 31, 2019, and indicates 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 September 30, 2020 are summarized below, in thousands:

			Fair Value Measurements at
			September 30, 2020 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. Government-sponsored agencies collateralized by mortgage obligations- residential	$	110,009	$	-	$	110,009	$	-
U.S. Government-agencies collateralized by mortgage obligations-commercial		5,416		-		5,416		-
Obligations of states and political subdivisions		42,577				42,577
	$	158,002	$	-	$	158,002	$	-
Liabilities:
Interest rate swaps	$	43	$	-	$	43	$	-

 Assets and liabilities measured at fair value on a recurring basis at December 31, 2019 are summarized below, in thousands:

			Fair Value Measurements at
			December 31, 2019 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. Government-sponsored agencies collateralized by mortgage obligations- residential	$	125,678	$	-	$	125,678	$	-
Obligations of states and political subdivisions		33,642				33,642
	$	159,320	$	-	$	159,320	$	-

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 2020 or 2019. 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 September 30, 2020 are summarized below, in thousands:

			Fair Value Measurements at
			September 30, 2020 Using
			Quoted
			Prices in						Total
			Active		Significant				Losses
			Markets for		Other		Significant		Nine Months
			Identical		Observable		Unobservable		Ended
			Assets		Inputs		Inputs		September 30,
	Total Fair Value		(Level 1)		(Level 2)		(Level 3)		2020
Assets:
Impaired loans:
Real estate – commercial	$	130	$	-	$	-	$	130	$	-
Other real estate:
Real estate – commercial		347		-		-		347		-
Real estate – residential		56		-		-		56		-
Real estate - construction and land		360		-		-		360		-
Total other real estate		763		-		-		763		-
Total	$	893	$	-	$	-	$	893	$	-

Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2019 are summarized below, in thousands:

			Fair Value Measurements at
			December 31, 2019 Using
			Quoted
			Prices in						Total
			Active		Significant				Losses
			Markets for		Other		Significant		Nine Months
			Identical		Observable		Unobservable		Ended
			Assets		Inputs		Inputs		September 30,
	Total Fair Value		(Level 1)		(Level 2)		(Level 3)		2019
Assets:
Impaired loans:
Real estate – commercial	$	130	$	-	$	-	$	130	$	118
Other real estate:
Real estate – commercial		347		-		-		347		-
Real estate - construction and land		360		-		-		360		-
Total other real estate		707		-		-		707		-
Total	$	837	$	-	$	-	$	837	$	118

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).  Net losses of $0 and $118,000 represent impairment charges recognized during the nine months ended September 30, 2020 and 2019, respectively, related to the above impaired loans. 

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 both collateral-dependent impaired loans and 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 September 30, 2020 and December 31, 2019 (dollars in thousands): 

							Range		Range
	Fair Value		Fair Value		Valuation		(Weighted Average)		(Weighted Average)
Description	9/30/2020		12/31/2019		Technique	Significant Unobservable Input	9/30/2020		12/31/2019
Impaired Loans:
RE – Commercial	$	130	$	130	Third Party appraisals	Management Adjustments to Reflect Current Conditions and Selling Costs	10%	(10.0)%	10%	(10.0)%
Other Real Estate:
RE – Commercial	$	347	$	347	Third Party appraisals	Management Adjustments to Reflect Current Conditions and Selling Costs	16% - 17%	(16.0)%	16% - 17%	(16.0)%
RE – Residential	$	56	$	-	Third Party appraisals	Management Adjustments to Reflect Current Conditions and Selling Costs	47.0%	(47.0)%	N/A
RE -Construction and Land	$	360	$	360	Third Party appraisals	Management Adjustments to Reflect Current Conditions and Selling Costs	10%	(10.0)%	10%	(10.0)%