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Note 9 - Fair Values

6 Months Ended

Jun. 30, 2021

Notes to Financial Statements

Fair Value Disclosures [Text Block]

NOTE 9. FAIR VALUES

The following tables present estimated fair values of our financial instruments as of June 30, 2021 and December 31, 2020, whether or not recognized or recorded at fair value in the Consolidated Balance Sheets. The table indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value. Non-financial assets and non-financial liabilities defined by the FASB ASC 820, Fair Value Measurement, such as Bank premises and equipment, deferred taxes and other liabilities are excluded from the table. In addition, we have not disclosed the fair value of financial instruments specifically excluded from disclosure requirements of FASB ASC 825, Financial Instruments, such as bank-owned life insurance policies.

		Carrying				Fair Value Measurements Using
(Amounts in thousands)		Amounts				Level 1				Level 2				Level 3
June 30, 2021
Financial assets
Cash and cash equivalents		$	177,118			$	177,118			$	—			$	—
Securities available-for-sale		$	579,664			$	—			$	579,664			$	—
Net loans		$	1,074,102			$	—			$	—			$	1,090,134
FHLB stock		$	7,463			$	7,463			$	—			$	—
Financial liabilities
Deposits		$	1,697,338			$	—			$	1,697,887			$	—
Term debt		$	10,000			$	—			$	10,043			$	—
Junior subordinated debenture		$	10,310			$	—			$	10,152			$	—

		Carrying				Fair Value Measurements Using
(Amounts in thousands)		Amounts				Level 1				Level 2				Level 3
December 31, 2020
Financial assets
Cash and cash equivalents		$	106,986			$	106,986			$	—			$	—
Securities available-for-sale		$	446,880			$	—			$	446,880			$	—
Net loans		$	1,123,051			$	—			$	—			$	1,138,095
FHLB stock		$	7,380			$	7,380			$	—			$	—
Financial liabilities
Deposits		$	1,542,779			$	—			$	1,544,009			$	—
Term debt		$	15,000			$	—			$	15,536			$	—
Junior subordinated debenture		$	10,310			$	—			$	10,552			$	—

Fair Value Hierarchy

Level 1 valuations utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access.

Level 2 valuations utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 valuations include quoted prices for similar assets and liabilities in active markets, 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 valuations are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques.

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.

We maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. Our 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. The following table presents the quantitative information used to fair value our net loans at June 30, 2021.

Quantitative Information about Level 3 Fair Value Measurements
Unobservable Inputs		Range (Weighted Average)
Probability of Default (PD)		0%	-	100%	-	(2.46%)
Loss Given Default (LGD)		0%	-	75.53%	-	(12.45%)
Prepayment Rate		0%	-	27.77%	-	(11.14%)
Discount Rate		1%	-	8.57%	-	(4.01%)

Recurring Items

Debt Securities – The available-for-sale securities amount in the recurring fair value table above represents securities that have been adjusted to their fair values. For these securities, we obtain fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions among other things. We have determined that the source of these fair values falls within Level 2 of the fair value hierarchy.

The following tables present information about our assets and liabilities measured at fair value on a recurring basis, and indicate the fair value hierarchy of the valuation techniques we utilized to determine such fair value, as of June 30, 2021 and December 31, 2020.

(Amounts in thousands)		Fair Value at June 30, 2021
Recurring Basis		Total				Level 1				Level 2				Level 3
Available-for-sale securities:
U.S. government and agencies		$	29,691			$	—			$	29,691			$	—
Obligations of state and political subdivisions			136,467				—				136,467				—
Residential mortgage-backed securities and collateralized mortgage obligations			317,842				—				317,842				—
Commercial mortgage-backed securities			52,718				—				52,718				—
Other asset-backed securities			42,946				—				42,946				—
Total assets measured at fair value		$	579,664			$	—			$	579,664			$	—

(Amounts in thousands)		Fair Value at December 31, 2020
Recurring Basis		Total				Level 1				Level 2				Level 3
Available-for-sale securities:
U.S. government and agencies		$	32,994			$	—			$	32,994			$	—
Obligations of state and political subdivisions			108,366				—				108,366				—
Residential mortgage-backed securities and collateralized mortgage obligations			240,478				—				240,478				—
Commercial mortgage-backed securities			28,074				—				28,074				—
Other asset-backed securities			36,968				—				36,968				—
Total assets measured at fair value		$	446,880			$	—			$	446,880			$	—

Transfers Between Fair Value Hierarchy Levels

Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstance that caused the transfer. There were no transfers between levels of the fair value hierarchy during the three and six months ended June 30, 2021 or the year ended December 31, 2020.

Nonrecurring items

We may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These adjustments to fair value generally result from the application of lower of cost or fair value accounting or write-downs of individual assets due to impairment.

Collateral Dependent Loans - The loan amounts below represent impaired, collateral dependent loans that have been adjusted to fair value during the respective reporting period. When we identify a collateral dependent loan as impaired, we measure the impairment using the current fair value of the collateral, less selling costs. Depending on the characteristics of a loan, the fair value of collateral is generally estimated by obtaining external appraisals. If we determine that the value of the impaired loan is less than the recorded investment in the loan, we recognize this impairment and adjust the carrying value of the loan to fair value through the ALLL. When the fair value of the collateral is based on an appraisal or other estimate and there is no observable market price, we record the impaired loan as nonrecurring Level 3 fair value. Impaired loan valuations are adjusted for estimated selling costs ranging from 8% to 10% based off the adjusted fair value of the property.

OREO - The OREO amounts below represent impaired real estate that has been adjusted to fair value during the respective reporting period. The loss represents impairments on OREO for fair value adjustments based on the fair value of the real estate. The determination of fair value is based on recent appraisals of the foreclosed properties, which take into account recent sales prices adjusted for unobservable inputs, such as opinions provided by local real estate brokers and other real estate experts. OREO fair values are adjusted for estimated selling costs of 25% based off the adjusted fair value of the property. We record OREO as a nonrecurring Level 3 fair value.

The following tables present information about our assets and liabilities at June 30, 2021 and December 31, 2020 for which a nonrecurring change in fair value has been recorded during the reporting period. In addition, the tables reflect the losses resulting from nonrecurring fair value adjustments for the three and six months ended June 30, 2021 and 2020 related to assets outstanding at June 30, 2021 and 2020.

						For the Three Months Ended				For the Six Months Ended
		At June 30, 2021				June 30, 2021				June 30, 2021
(Amounts in thousands)		Fair Value ⁽¹⁾				Fair Value Adjustments
Other real estate owned		$	—			$	—			$	8
Total assets measured at fair value		$	—			$	—			$	8

⁽¹⁾Fair value is presented on a nonrecurring basis - Level 3.

						For the Three Months Ended				For the Six Months Ended
		At December 31, 2020				June 30, 2020				June 30, 2020
(Amounts in thousands)		Fair Value ⁽¹⁾				Fair Value Adjustments
Collateral dependent impaired loans		$	2,755			$	145			$	145
Other real estate owned			8				—				6
Total assets measured at fair value		$	2,763			$	145			$	151

⁽¹⁾Fair value is presented on a nonrecurring basis - Level 3.

During the six months ended June 30, 2020, collateral dependent impaired loans with a carrying value of $2.5 million were written down to their fair value of $2.4 million resulting in a $145 thousand adjustment to the ALLL.

During the six months ended June 30, 2020, one loan with an aggregate carrying value of $14 thousand was written down to its fair value of $8 thousand, resulting in a $6 thousand adjustment to the ALLL when the underlying property was transferred to OREO. The property was reevaluated during the three months ended March 31, 2021 and sold in April 2021, resulting in an $8 thousand write-down of OREO.

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and other information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time, our entire holdings of a particular financial instrument. Because no market exists for a significant portion of our 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, involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based only on current on and off-balance sheet financial instruments. Our fair value estimates do not include any adjustment for anticipated future business. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.

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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