Note 8 - Fair Value Measurements

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Fair Value Disclosures [Text Block]

8. Fair Value Measurements

FASB ASC Topic 820, Fair Value Measurements, provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC Topic 820 are described as follows:

Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted market price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

Level 2: Inputs to the valuation methodology include quoted market prices for similar assets or liabilities in active markets; quoted market prices for identical or similar assets or liabilities in markets that are not active; or inputs that are derived principally from or can be corroborated by observable market data by correlation or other means.

Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth on the following page. These valuation methodologies were applied to all of the Company’s financial and nonfinancial assets carried at fair value or the lower of cost or fair value. The table below presents the balances of assets measured at fair value on a recurring and nonrecurring basis as of June 30, 2020 and December 31, 2019. The Company had no liabilities measured at fair value as of June 30, 2020 or December 31, 2019.

	Carrying Value
(In thousands)	Level 1		Level 2		Level 3		Total
June 30, 2020
Assets Measured on a Recurring Basis
Securities available for sale:
Agency mortgage-backed securities	$	-	$	69,876	$	-	$	69,876
Agency CMO		-		35,191		-		35,191
Agency notes and bonds		-		58,247		-		58,247
Municipal obligations		-		93,785		-		93,785
Total securities available for sale	$	-	$	257,099	$	-	$	257,099
Equity securities	$	1,575	$	-	$	-		1,575
Assets Measured on a Nonrecurring Basis
Impaired loans:
Residential real estate	$	-	$	-	$	1,691	$	1,691
Land		-		-		82		82
Commercial real estate		-		-		1,318		1,318
Commercial business		-		-		313		313
Home equity and second mortgage		-		-		352		352
Other consumer		-		-		7		7
Total impaired loans	$	-	$	-	$	3,763	$	3,763
Loans held for sale	$	-	$	7,211	$	-	$	7,211
Foreclosed real estate:
Residential real estate	$	-	$	-	$	58	$	58
Total foreclosed real estate	$	-	$	-	$	58	$	58
December 31, 2019
Assets Measured on a Recurring Basis
Securities available for sale:
Agency mortgage-backed securities	$	-	$	69,498	$	-	$	69,498
Agency CMO		-		43,084		-		43,084
Agency notes and bonds		-		64,556		-		64,556
Municipal obligations		-		77,424		-		77,424
Total securities available for sale	$	-	$	254,562	$	-	$	254,562
Equity securities	$	1,746	$	-	$	-		1,746
Assets Measured on a Nonrecurring Basis
Impaired loans:
Residential real estate	$	-	$	-	$	1,910	$	1,910
Land		-		-		115		115
Commercial real estate		-		-		353		353
Commercial business		-		-		249		249
Home equity and second mortgage		-		-		56		56
Other consumer		-		-		48		48
Total impaired loans	$	-	$	-	$	2,731	$	2,731
Loans held for sale	$	-	$	4,176	$	-	$	4,176
Foreclosed real estate:
Residential real estate	$	-	$	-	$	170	$	170
Total foreclosed real estate	$	-	$	-	$	170	$	170

Fair value is based upon quoted market prices, where available. If quoted market prices are not available, fair value is based on internally developed models or obtained from third parties that primarily use, as inputs, observable market-based parameters or a matrix pricing model that employs the Bond Market Association’s standard calculations for cash flow and price/yield analysis and observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value, or the lower of cost or fair value. These adjustments may include unobservable parameters. Any such valuation adjustments have been applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Securities Available for Sale and Equity Securities. Securities classified as available for sale and equity securities are reported at fair value on a recurring basis.  These securities are classified as Level 1 of the valuation hierarchy where quoted market prices from reputable third-party brokers are available in an active market. If quoted market prices are not available, the Company obtains fair value measurements from an independent pricing service.  These securities are reported using Level 2 inputs and the fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors. For securities where quoted market prices, market prices of similar securities or prices from an independent third party pricing service are not available, fair values are calculated using discounted cash flows or other market indicators and are classified within Level 3 of the fair value hierarchy. Changes in fair value of securities available for sale are recorded in other comprehensive income, net of income tax effect. Changes in fair value of equity securities are recorded in noninterest income on the consolidated statements of income.

Impaired Loans. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. The fair value of impaired loans is classified as Level 3 in the fair value hierarchy.

Impaired loans are carried at the present value of estimated future cash flows using the loan's effective interest rate or the fair value of collateral less estimated costs to sell if the loan is collateral dependent. At June 30, 2020 and December 31, 2019, all impaired loans were considered to be collateral dependent for the purpose of determining fair value. Collateral may be real estate and/or business assets, including equipment, inventory and/or accounts receivable. The fair value of the collateral is generally determined based on real estate appraisals or other independent evaluations by qualified professionals, adjusted for estimated costs to sell the property, costs to complete or repair the property and other factors to reflect management’s estimate of the fair value of the collateral given the current market conditions and the condition of the collateral.

At June 30, 2020, the significant unobservable inputs used in the fair value measurement of impaired loans included a discount from appraised value for estimates of changes in market conditions, the condition of the collateral and estimated costs to sell the collateral ranging from 47% to 100%, with a weighted average discount of 91%. At December 31, 2019, the significant unobservable inputs used in the fair value measurement of impaired loans included a discount from appraised value for estimates of changes in market conditions, the condition of the collateral and estimated costs to sell the collateral ranging from 40% to 66%, with a weighted average discount of 47%. The Company recognized provisions for loan losses of $167,000 and $12,000 for the six months ended June 30, 2020 and 2019, respectively, for impaired loans. The Company recognized provisions for loan losses of $168,000 for the three months ended June 30, 2020 and a reduction to the provision for loan losses of $8,000 for the three months ended June 30, 2019.

Loans Held for Sale. Loans held for sale are carried at the lower of cost or market value. The portfolio is comprised of residential real estate loans and fair value is based on specific prices of underlying contracts for sales to investors.  These measurements are classified as Level 2.

Foreclosed Real Estate. Foreclosed real estate is reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. The fair value of foreclosed real estate is classified as Level 3 in the fair value hierarchy.

Foreclosed real estate is reported at fair value less estimated costs to dispose of the property. The fair values are determined by real estate appraisals which are then discounted to reflect management’s estimate of the fair value of the property given current market conditions and the condition of the collateral. At June 30, 2020 and December 31, 2019, the discount from appraised value was 10% and 38%, respectively. There were no charges to write down foreclosed real estate recognized in income for the three months or six months ended June 30, 2020. The Company recognized losses of $354,000 to write down foreclosed real estate for the six months ended June 30, 2019 and $217,000 to write down foreclosed real estate for the three months ended June 30, 2019.

There have been no changes in the valuation techniques and related inputs used for assets measured at fair value on a recurring and nonrecurring basis during the three month periods ended June 30, 2020 and 2019. There were no transfers into or out of the Company’s Level 3 financial assets for the three month periods ended June 30, 2020 and 2019.

GAAP requires disclosure of the fair value of financial assets and financial liabilities, whether or not recognized in the balance sheet. 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. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The estimated fair values of the Company's financial instruments are as follows:

	Carrying		Fair		Fair Value Measurements Using
(In thousands)	Value		Value		Level 1		Level 2		Level 3
June 30, 2020
Financial assets:
Cash and cash equivalents	$	106,421	$	106,421	$	106,421	$	-	$	-
Interest-bearing time deposits		6,534		6,880		-		6,880		-
Securities available for sale		257,099		257,099		-		257,099		-
Loans held for sale		7,211		7,343		-		7,343		-
Loans, net		498,792		510,949		-		-		510,949
FHLB and other restricted stock		1,988		N/A		N/A		N/A		N/A
Accrued interest receivable		3,303		3,303		-		3,303		-
Equity securities (included in other assets)		1,575		1,575		1,575		-		-
Financial liabilities:
Deposits		807,636		808,398		-		-		808,398
Accrued interest payable		187		187		-		187		-
December 31, 2019:
Financial assets:
Cash and cash equivalents	$	51,360	$	51,360	$	51,360	$	-	$	-
Interest-bearing time deposits		6,490		6,654		-		6,654		-
Securities available for sale		254,562		254,562		-		254,562		-
Loans held for sale		4,176		4,243		-		4,243		-
Loans, net		466,694		482,119		-		-		482,119
FHLB and other restricted stock		1,988		N/A		N/A		N/A		N/A
Accrued interest receivable		3,076		3,076		-		3,076		-
Equity securities (included in other assets)		1,746		1,746		1,746		-		-
Financial liabilities:
Deposits		722,177		721,729		-		-		721,729
Accrued interest payable		210		210		-		210		-