Note 7 - Fair Value

6 Months Ended

Jun. 30, 2021

Notes to Financial Statements

Fair Value Disclosures [Text Block]

7. Fair Value

Management uses its best judgment in estimating the fair value of the Corporation’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Corporation could have realized in a sale transaction or exit price on the date indicated. The estimated fair value amounts have been measured as of their respective period ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported.

Assets measured at fair value on a recurring basis. The Corporation used the following methods and significant assumptions to estimate the fair value of the following assets:

Debt securities available-for-sale, equity securities – The fair value of all investment securities are based upon the assumptions market participants would use in pricing the security. If available, investment securities are determined by quoted market prices (Level 1). Level 1 includes U.S. Treasury, federal agency securities and certain equity securities. For investment securities where quoted market prices are not available, fair values are calculated based on market prices on similar securities (Level 2). Level 2 includes U.S. Government sponsored entities and agencies, mortgage-backed securities, collateralized mortgage obligations, state and political subdivision securities and certain corporate debt securities. For investment securities where quoted prices or market prices of similar securities are not available, fair values are calculated by using unobservable inputs (Level 3) and may include certain corporate debt and equity securities held by the Corporation.

For assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy are as follows:

(Dollar amounts in thousands)			(Level 1)		(Level 2)		(Level 3)
Description	Total		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
June 30, 2021:
Securities available-for-sale
U.S. government sponsored entities and agencies	$	8,209	$	—	$	8,209	$	—
U.S. agency mortgage-backed securities: residential		20,343		—		20,343		—
U.S. agency collateralized mortgage obligations: residential		43,855		—		43,855		—
State and political subdivision		87,163		—		87,163		—
Corporate debt securities		24,105		—		22,099		2,006
Total available-for-sale securities	$	183,675	$	—	$	181,669	$	2,006
Equity securities	$	9	$	9	$	—	$	—
December 31, 2020:
Securities available-for-sale
U.S. government sponsored entities and agencies	$	3,007	$	—	$	3,007	$	—
U.S. agency mortgage-backed securities: residential		16,581		—		16,581		—
U.S. agency collateralized mortgage obligations: residential		15,911		—		15,911		—
State and political subdivisions		55,577		—		55,577		—
Corporate debt securities		21,965		—		19,959		2,006
Total available-for-sale securities	$	113,041	$	—	$	111,035	$	2,006
Equity securities	$	15	$	15	$	—	$	—

The Corporation’s policy is to transfer assets or liabilities from one level to another when the methodology to obtain the fair value changes such that there are more or fewer unobservable inputs as of the end of the reporting period. During the three and six month periods ended June 30, 2021 and 2020, the Corporation had no transfers between levels.

The following table presents changes in Level 3 assets measured on a recurring basis for the three and six month periods ended  June 30, 2021 and 2020:

(Dollar amounts in thousands)	Three months ended June 30,				Six months ended June 30,
	2021		2020		2021		2020
Balance at the beginning of the period	$	2,006	$	4,022	$	2,006	$	4,022
Total gains or losses (realized/unrealized):
Included in earnings		—		—		—		—
Included in other comprehensive income		—		—		—		—
Purchased into Level 3		—		—		—		—
Transfers in and/or out of Level 3		—		—		—		—
Balance at the end of the period	$	2,006	$	4,022	$	2,006	$	4,022

Assets measured at fair value on a non-recurring basis. The Corporation used the following methods and significant assumptions to estimate the fair value of the following assets:

Impaired loans – At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive a specific allowance for loan losses. For collateral dependent loans, fair value is commonly based on 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 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. 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 classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. As of June 30, 2021, the Corporation had one impaired commercial real estate loan carried at a fair value of $288,000, which consisted of the outstanding balance of $315,000 less a specific reserve of $27,000. As of  December 31, 2020, the Corporation had two impaired commercial real estate loans carried at a fair value of $340,000, which consisted of the outstanding balance of $380,000 less a specific reserve of $40,000 and three impaired commercial business loans carried at a fair value of $58,000, which consisted of the outstanding balance of $78,000, less a specific reserve of $20,000. During the three and six month periods ended  June 30, 2021, there was additional provision for loans losses recorded for impaired loans of $1,000, compared to $7,000 and $31,000, respectively, for the three and six month periods ended June 30, 2020.

Other real estate owned(OREO) – Assets acquired through or instead of 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. Management’s ongoing review of appraisal information may result in additional discounts or adjustments to the valuation based upon more recent market sales activity or more current appraisal information derived from properties of similar type and/or locale. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. As of  June 30, 2021, the Corporation did not have any OREO measured at fair value less costs to sell. As of December 31, 2020, OREO measured at fair value less costs to sell had a net carrying amount of $9,000, which consisted of the outstanding balance of $18,000, less write-downs of $9,000.  This property was sold during the second quarter of 2021.  During the three and six month periods ended  June 30, 2021, there was no expense recorded associated with the write-down of OREO. During the three and six month periods ended June 30, 2020, there was $32,000 of expense recorded associated with the write-down of OREO.

Appraisals for both collateral-dependent impaired loans and OREO are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed by the Corporation. Once received, management 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 an annual basis, the Corporation compares the actual selling price of OREO that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value. The most recent analysis performed indicated that a discount of 10% should be applied.

For assets measured at fair value on a non-recurring basis, the fair value measurements by level within the fair value hierarchy are as follows:

(Dollar amounts in thousands)			(Level 1)		(Level 2)		(Level 3)
Description	Total		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
June 30, 2021:
Impaired commercial real estate loan	$	288	$	—	$	—	$	288
December 31, 2020:
Impaired commercial business loans	$	58	$	—	$	—	$	58
Impaired commercial real estate loans		340		—		—		340
Other real estate owned		9		—		—		9
Total	$	407	$	—	$	—	$	407

The following table presents quantitative information about Level 3 fair value measurements for assets measured at fair value on a non-recurring basis:

(Dollar amounts in thousands)			Valuation	Unobservable	Weighted
			Techniques(s)	Input(s)	Average
June 30, 2021:
Impaired commercial real estate loan	$	288	Sales comparison approach	Adjustment for differences between comparable sales		10	%
December 31, 2020:
Impaired commercial business loans	$	58	Sales comparison approach	Adjustment for differences between comparable sales		10	%
Impaired commercial real estate loans		340	Sales comparison approach	Adjustment for differences between comparable sales		10	%
Other real estate owned		9	Sales comparison approach	Adjustment for differences between comparable sales		10	%

Excluded from the tables above at  June 30, 2021 was one $4,000 unsecured commercial business loan.  Excluded from the tables above at  December 31, 2020 were two unsecured commercial business loans totaling $4,000.  At June 30, 2021, there were no impaired loans which were classified as TDRs and measured using a discounted cash flow methodology.

The following table sets forth the carrying amount and fair value of the Corporation’s financial instruments included in the consolidated balance sheet: 

(Dollar amounts in thousands)
	Carrying		Fair Value Measurements using:
Description	Amount		Total		Level 1		Level 2		Level 3
June 30, 2021:
Financial Assets:
Cash and cash equivalents	$	50,518	$	50,518	$	50,518	$	—	$	—
Interest earning time deposits		3,480		3,480		—		3,480		—
Securities - available-for-sale		183,675		183,675		—		181,669		2,006
Securities - equities		9		9		9		—		—
Loans held for sale		—		—		—		—		—
Loans, net		794,291		794,221		—		—		794,221
Federal bank stock		5,846		N/A		N/A		N/A		N/A
Accrued interest receivable		4,140		4,140		38		766		3,336
Financial Liabilities:
Deposits		959,319		963,294		780,222		183,072		—
Borrowed funds		32,050		32,484		—		32,484		—
Accrued interest payable		448		448		9		439		—

December 31, 2020:
Financial Assets:
Cash and cash equivalents	$	37,439	$	37,439	$	37,439	$	—	$	—
Interest earning time deposits		5,718		5,718		—		5,718		—
Securities - available-for-sale		113,041		113,041		—		111,035		2,006
Securities - equities		15		15		15		—		—
Loans held for sale		75		75		—		75		—
Loans, net		800,338		807,170		—		—		807,170
Federal bank stock		5,635		N/A		N/A		N/A		N/A
Accrued interest receivable		3,786		3,786		52		513		3,221
Financial Liabilities:
Deposits		893,627		899,446		705,680		193,766		—
Borrowed funds		32,050		33,256		—		33,256		—
Accrued interest payable		474		474		19		455		—

This information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation's assets and liabilities.  Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation's disclosures and those of other companies may not be meaningful.