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Fair Value Measurements

9 Months Ended

Sep. 30, 2020

NOTE 12 – FAIR VALUE MEASUREMENTS

ASC Topic 820,

Fair Value Measurements and Disclosures

defines fair values, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This accounting standard applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements. The standard also emphasizes that fair value (i.e., the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date), among other things, is based on exit price versus entry price, should include assumptions about risk such as nonperformance risk in liability fair values, and is a market-based measurement, not an entity-specific measurement. When considering the assumptions that market participants would use in pricing an asset or liability, this accounting standard establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

The fair value hierarchy prioritizes inputs used to measure fair value into three broad levels.

Level 1 inputs – In general, fair values determined by Level 1 inputs use quoted market prices in active markets for identical assets or liabilities that we have the ability to access.

Level 2 inputs – Fair values determined by Level 2 inputs use inputs other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets where there are few transactions and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs – Level 3 inputs are unobservable inputs for the asset or liability and include situations where there is little, if any, market activity for the asset or liability.

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is 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.

Some assets and liabilities, such as securities

available-for-sale,

are measured at fair value on a recurring basis under accounting principles generally accepted in the United States. Other assets and liabilities, such as impaired loans, may be measured at fair value on a nonrecurring basis.

Following is a description of the Company’s valuation methodology and significant inputs used for each asset and liability measured at fair value on a recurring or nonrecurring basis.

Securities

– Marketable equity securities and securities

available-for-sale

may be classified as Level 1 or Level 2 measurements within the fair value hierarchy. Level 1 securities include equity securities traded on a national exchange. The fair value measurements of Level 1 securities are based on the quoted market price of those securities. Level 2 securities include U.S. government and agency securities, obligations of states and political subdivisions, corporate debt securities and mortgage-related securities. The fair value measurements of Level 2 securities are obtained from independent pricing services and are based on recent sales of similar securities and other observable market data.

Impaired loans

– Loans are not measured at fair value on a recurring basis. However, loans determined to be impaired may be measured at fair value on a nonrecurring basis. The fair value measurements of collateral-dependent impaired loans are based on the fair values of the underlying collateral. Independent appraisals are obtained to determine the fair values of underlying collateral, and generally utilize one or more valuation methodologies, typically includes comparable sales and income approaches. Management routinely evaluates the fair value measurements of independent appraisers and adjusts those valuations based on differences noted between actual selling prices of collateral and the most recently appraised value. Such adjustments are usually significant, which results in a Level 3 classification. All other impaired loan measurements are based on the present value of expected future cash flows discounted at the applicable effective interest rate and are not considered fair value measurements.

Mortgage servicing rights

– The Company utilizes an independent valuation from a third party which uses a discounted cash flow model to estimate the fair value of mortgage servicing rights. The model utilizes prepayment assumptions to project cash flows related to the mortgage servicing rights based upon the current interest rate environment, which is then discounted to estimate an expected fair value of the mortgage servicing rights. The model considers characteristics specific to the underlying mortgage portfolio, such as: contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges and costs to service. Given the significance of the unobservable inputs utilized in the estimation process, mortgage servicing rights are classified as Level 3 within the fair value hierarchy. The Company records the mortgage servicing rights at the lower of amortized cost or fair value.

Assets measured at fair value on a recurring basis are summarized below, along with the level of the fair value hierarchy of the inputs utilized to determine such fair value.


			Recurring Fair Value Measurements Using
	September 30, 2020		Level 1		Level 2		Level 3
	(in thousands)
Marketable equity securities:	$	2,693	$	2,693	$	—	$	—
Securities available-for-sale:
Obligations of states and political subdivisions		7,909		—		7,909		—
Government-sponsored mortgage-backed securities		41,319		—		41,319		—
Corporate collateralized mortgage obligations		235		—		235		—
Asset-backed securities		7,378		—		7,378		—
Certificates of deposit		1,587		—		1,587		—

Total	$	61,121	$	2,693	$	58,428	$	—


			Recurring Fair Value Measurements Using
	December 31, 2019		Level 1		Level 2		Level 3
	(in thousands)
Marketable equity securities:	$	2,553	$	2,553	$	—	$	—
Securities available-for-sale:
Obligations of states and political subdivisions		9,826		—		9,826		—
Government-sponsored mortgage-backed securities		57,034		—		57,034		—
Corporate collateralized mortgage obligations		289		—		289		—
Asset-backed securities		2,465		—		2,465		—
Certificates of deposit		1,761		—		1,761		—

Total	$	73,928	$	2,553	$	71,375	$	—

Impaired loans are measured at fair value on a

non-recurring

basis. Loans with a carrying amount of $5,000 and $67,000, respectively, were considered impaired and written down to their estimated fair value of $0 and $0 as of September 30, 2020 and December 31, 2019, respectively. As a result, the Company recognized a specific valuation allowance against these impaired loans totaling $5,000 and $67,000 as of September 30, 2020 and December 31, 2019, respectively.

Mortgage servicing rights are measured at fair value on a

non-recurring

basis. At September 30, 2020, mortgage servicing rights with a carrying value of $2.2 million were considered impaired and written down to their estimated fair value of $1.6 million. There was no impairment on mortgage servicing rights as of December 31, 2019.

There were no foreclosed assets as of September 30, 2020 and December 31, 2019.

The carrying values and estimated fair values of financial instruments are presented below:


	September 30, 2020
	Carrying Value		Level 1		Level 2		Level 3
	(in thousands)
Financial assets:
Cash and cash equivalents	$	78,898	$	78,898	$	—	$	—
Available for sale securities		58,428		—		58,428		—
Marketable equity securities stated at fair value		2,693		2,693		—		—
Loans held for sale		5,062		—		5,062		—
Loans		328,820		—		—		333,541
Accrued interest receivable		997		997		—		—
Federal Home Loan Bank stock		3,032		—		—		3,032
Cash value of life insurance		13,384		—		—		13,384
Financial liabilities:
Deposits		354,985		264,255		—		91,043
Advance payments by borrowers for taxes and insurance		11,428		11,428		—		—
Federal Home Loan Bank advances		68,884		—		70,854		—
Accrued interest payable		208		208		—		—


	December 31, 2019
	Carrying Value		Level 1		Level 2		Level 3
	(in thousands)
Financial assets:
Cash and cash equivalents	$	11,707	$	11,707	$	—	$	—
Available for sale securities		71,375		—		71,375		—
Marketable equity securities stated at fair value		2,553		2,553		—		—
Loans held for sale		685		—		685		—
Loans		310,674		—		—		310,993
Accrued interest receivable		963		963		—		—
Federal Home Loan Bank stock		913		—		—		913
Cash value of life insurance		13,085		—		—		13,085
Financial liabilities:
Deposits		344,596		202,180		—		142,708
Advance payments by borrowers for taxes and insurance		1,681		1,681		—		—
Federal Home Loan Bank advances		17,623		—		17,976		—
Accrued interest payable		385		385		—		—

The fair value of a financial instrument is the current amount that would be exchanged between market participants, other than in a forced liquidation. Fair value is best determined based on quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Consequently, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters that could affect the estimates. Fair value estimates are based on existing

on-

and

off-balance-sheet

financial instruments without attempting to estimate the value of anticipated future business.

Deposits with no stated maturities are defined as having a fair value equivalent to the amount payable on demand. This prohibits adjusting fair value derived from retaining those deposits for an expected future period of time. This component, commonly referred to as a deposit base intangible, is neither considered in the above amounts, nor is it recorded as an intangible assets on the balance sheets. 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 the estimates.

- 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.

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