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FAIR VALUE

12 Months Ended

Dec. 31, 2020

NOTE 17 – FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

When possible, the Company looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to observable market data for similar assets and liabilities. However, certain assets and liabilities are not traded in observable markets and the Company must use other valuation methods to develop a fair value.

Carrying amount is the estimated fair value for cash and due from banks, Federal funds sold, accrued interest receivable and payable, demand deposits, short-term debt, and deposits that reprice frequently and fully. Fair values of time deposits with other banks are based on current rates for similar time deposits using the remaining time to maturity. It was not practicable to determine the fair value of Federal Home Loan Bank stock due to the restrictions placed on its transferability. For deposits and variable rate deposits with infrequent repricing, fair value is based on discounted cash flows using current market rates applied to the estimated life. Fair values for loans is measured at the exit price notion by using the discounted cash flow or collateral value but also incorporates additional factors such as using economic factors, credit risk, and market rates and conditions. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of debt is based on current rates for similar financing. The fair value of commitments to extend credit and standby letters of credit is not material.

The carrying amounts and estimated fair values of financial instruments at December 31, 2020 were as follows:

			Fair Value Measurements at December 31, 2020 Using
	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and due from banks	$	199,170	$	198,820	$	350	$	-	$	199,170
Federal funds sold		11,306		11,306		-		-		11,306
Securities available for sale		421,190		-		421,190		-		421,190
Loans, net		1,200,862		-		-		1,209,579		1,209,579
Federal Home Loan Bank stock		4,166		n/a		n/a		n/a		n/a
Interest receivable		5,991		-		1,301		4,690		5,991

Financial liabilities
Deposits	$	1,633,740	$	1,308,188	$	327,448	$	-	$	1,635,636
Securities sold under agreements to repurchase		33,827		-		33,827		-		33,827
Subordinated debt		5,475		-		5,366		-		5,366
Interest payable		360		4		356		-		360

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

			Fair Value Measurements at December 31, 2019 Using
	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and due from banks	$	89,154	$	88,556	$	599	$	-	$	88,556
Federal funds sold		5,902		5,902		-		-		5,902
Securities available for sale		390,754		-		390,754		-		390,754
Loans, net		1,181,753		-		-		1,172,575		1,172,575
Federal Home Loan Bank stock		4,450		n/a		n/a		n/a		n/a
Interest receivable		4,699		4		1,110		3,585		4,699

Financial liabilities
Deposits	$	1,495,753	$	1,070,610	$	424,886	$	-	$	1,495,496
Securities sold under agreements to repurchase		20,428		-		20,428		-		20,428
FHLB advances		6,375		-		6,406		-		6,406
Subordinated debt		5,436		-		5,527		-		5,527
Interest payable		912		15		897		-		912

Assets and Liabilities Measured on a Recurring Basis

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument measured on a recurring basis:

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

Assets and liabilities measured at fair value on a recurring basis at December 31, 2020 are summarized below:

			Fair Value Measurements at December 31, 2020 Using:
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Securities available for sale
Mortgage-backed securities
U. S. agency MBS - residential	$	327,800	$	-	$	327,800	$	-
U. S. agency CMO’s		30,076		-		30,076		-
Total mortgage-backed securities of government sponsored agencies		357,876		-		357,876		-
U. S. government sponsored agency securities		2,626		-		2,626		-
Obligations of states and political subdivisions		55,000		-		55,000		-
Other securities		5,688		-		5,688		-
Total securities available for sale	$	421,190	$	-	$	421,190	$	-

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

			Fair Value Measurements at December 31, 2019 Using:
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Securities available for sale
Mortgage-backed securities
U. S. agency MBS - residential	$	279,309	$	-	$	279,309	$	-
U. S. agency CMO’s		62,644		-		62,644		-
Total mortgage-backed securities of government sponsored agencies		341,953		-		341,953		-
U. S. government sponsored agency securities		30,730		-		30,730		-
Obligations of states and political subdivisions		16,017		-		16,017		-
Other securities		2,054		-		2,054		-
Total securities available for sale	$	390,754	$	-	$	390,754	$	-

Assets and Liabilities Measured on a Non-Recurring Basis

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument measured on a non-recurring basis:

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent collateral appraisals. Real estate 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 appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and unique to each property and 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. Management periodically evaluates the appraised collateral values and will discount the collateral’s appraised value to account for a number of factors including but not limited to the cost of liquidating the collateral, the age of the appraisal, observable deterioration since the appraisal, management’s expertise and knowledge of the client and client’s business, or other factors unique to the collateral. To the extent an adjusted collateral value is lower than the carrying value of an impaired loan, a specific allocation of the allowance for loan losses is assigned to the loan.

Other real estate owned (OREO): The fair value of OREO is based on appraisals less cost to sell at the date of foreclosure. Management may obtain additional updated appraisals depending on the length of time since foreclosure. 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 appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Management periodically evaluates the appraised values and will discount a property’s appraised value to account for a number of factors including but not limited to the cost of liquidating the collateral, the age of the appraisal, observable deterioration since the appraisal, or other factors unique to the property. To the extent an adjusted appraised value is lower than the carrying value of an OREO property, a direct charge to earnings is recorded as an OREO write-down.

Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2020 are summarized below:

			Fair Value Measurements at December 31, 2020 Using
	Dec 31, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans:
Commercial real estate
Owner occupied	$	250	$	-	$	-	$	250
Non-owner occupied		1,080		-		-		1,080
Commercial and industrial		174		-		-		174
Total impaired loans	$	1,504	$	-	$	-	$	1,504

Other real estate owned:
Residential real estate	$	206	$	-	$	-	$	206
Multifamily real estate		10,838		-		-		10,838
Commercial real estate
Owner occupied		829		-		-		829
Construction and land		400		-		-		400
Total OREO	$	12,273	$	-	$	-	$	12,273

Impaired loans, which are measured for impairment using the value of the collateral for collateral dependent loans, had a recorded investment of $2,503 at December 31, 2020 with a valuation allowance of $999 resulting in a provision for loan losses of $837 for the year ended December 31, 2020.

Other real estate owned measured at fair value less costs to sell, had a net carrying amount of $12,273, which is made up of the outstanding balance of $14,320, net of a valuation allowance of $2,047 at December 31, 2020, resulting in write downs of $677 during the year ended December 31, 2020.

The significant unobservable inputs related to assets and liabilities measured at fair value on a non-recurring basis at December 31, 2020 are summarized below:

	December 31, 2020		Valuation Techniques	Unobservable Inputs	Range (Weighted Avg)
Impaired loans:
Commercial real estate
Owner occupied	$	250	sales comparison	adjustment for estimated realizable value	74%-74% (74%)
Non-owner occupied		1,080	income approach	adjustment for differences in net operating income expectations	15%-37% (25%)
Commercial and industrial		174	sales comparison	adjustment for estimated realizable value	50%-85% (62%)
Total impaired loans	$	1,504

Other real estate owned:
Residential real estate	$	206	sales comparison	adjustment for estimated realizable value	0.2%-59.8% (18.1%)
Multifamily real estate		10,838	income approach	adjustment for differences in net operating income expectations	42.0%-70.4% (45.5%)
Commercial real estate
Owner occupied		829	sales comparison	adjustment for estimated realizable value	22.1%-26.8% (25.2%)
Construction and land		400	sales comparison	adjustment for estimated realizable value	50.3%-98.6% (80.5%)
Total OREO	$	12,273

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

			Fair Value Measurements at December 31, 2019 Using
	Dec 31, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans:
Multifamily real estate	$	1,900	$	-	$	-	$	1,900
Commercial real estate
Owner occupied		509		-		-		509
Non-owner occupied		2,266		-		-		2,266
Commercial and industrial		288		-		-		288
Construction and land		380		-		-		380
Total impaired loans	$	5,343	$	-	$	-	$	5,343

Other real estate owned:
Residential real estate	$	249	$	-	$	-	$	249
Multifamily real estate		9,588		-		-		9,588
Commercial real estate
Owner occupied		288		-		-		288
Construction and land		750		-		-		750
Total OREO	$	10,875	$	-	$	-	$	10,875

Impaired loans, which are measured for impairment using the value of the collateral for collateral dependent loans, had a recorded investment of $8,445 at December 31, 2019 with a valuation allowance of $3,102 resulting in a provision for loan losses of $953 for the year ended December 31, 2019.

Other real estate owned measured at fair value less costs to sell, had a net carrying amount of $10,875, which is made up of the outstanding balance of $12,474, net of a valuation allowance of $1,599 at December 31, 2019, resulting in write downs of $1,169 during the year ended December 31, 2019.

The significant unobservable inputs related to assets and liabilities measured at fair value on a non-recurring basis at December 31, 2019 are summarized below:

	December 31, 2019		Valuation Techniques	Unobservable Inputs	Range (Weighted Avg)
Impaired loans:
Multifamily real estate	$	1,900	sales comparison	adjustment for estimated realizable value	58.9%-58.9% (58.9%)
Commercial real estate
Owner occupied		509	sales comparison	adjustment for estimated realizable value	76.1%-76.1% (76.1%)
Non-owner occupied		2,266	income approach	adjustment for differences in net operating income expectations	36.6%-67.4% (60.6%)
Commercial and industrial		288	sales comparison	adjustment for estimated realizable value	25.0%-87.0% (43.6%)
Construction and land		380	sales comparison	adjustment for estimated realizable value	56.5%-56.5% (56.5%)
Total impaired loans	$	5,343

Other real estate owned:
Residential real estate	$	249	sales comparison	adjustment for estimated realizable value	0.2%-59.8% (17.5%)
Multifamily real estate		9,588	income approach	adjustment for differences in net operating income expectations	25.6%-25.6% (25.6%)
Commercial real estate
Owner occupied		288	sales comparison	adjustment for estimated realizable value	14.6%-70.4% (34.0%)
Construction and land		750	sales comparison	adjustment for estimated realizable value	50.3%-69.9% (66.0%)
Total OREO	$	10,875

- 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.

+ References + Details