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Note 18 - Fair Value Measurements

12 Months Ended

Dec. 31, 2020

Notes to Financial Statements

Fair Value Disclosures [Text Block]

Note 18 – Fair Value Measurements

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2020 and December 31, 2019, and the valuation techniques used by the Company to determine those fair values.

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

Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

There were no liabilities measured at fair value as of December 31, 2019 or December 31, 2020. Disclosures concerning assets measured at fair value are as follows:

Assets Measured at Fair Value on a Recurring Basis

		Quoted Prices
		In Active				Significant
		Markets for				Other				Significant
		Identical				Observable				Unobservable
(Dollars in thousands)		Assets				Inputs				Inputs				Balance at
		(Level 1)				(Level 2)				(Level 3)				Date Indicated
Equity Securities Held at Fair Value - December 31, 2020
Equity securities		$	1,411			$	-			$	1,485			$	2,896

Investment Securities, Available for Sale - December 31, 2020
U. S. Government and federal agency		$	-			$	2,051			$	-			$	2,051
U. S. Treasury notes and bonds			-				2,056				-				2,056
State and municipal			-				309,945				10,423				320,368
Mortgage-backed			-				246,723				-				246,723
Corporate			-				2,589				-				2,589
Trust preferred securities			-				-				1,000				1,000
Total		$	-			$	563,364			$	11,423			$	574,787

Equity Securities Held at Fair Value - December 31, 2019
Equity securities		$	1,379			$	-			$	1,472			$	2,851

Investment Securities, Available for Sale - December 31, 2019
U. S. Government and federal agency		$	-			$	17,215			$	-			$	17,215
U. S. Treasury notes and bonds			-				2,008				-				2,008
State and municipal			-				162,557				11,367				173,924
Mortgage-backed			-				142,760				-				142,760
Corporate			-				2,672				-				2,672
Trust preferred securities			-				-				1,000				1,000
Total		$	-			$	327,212			$	12,367			$	339,579

Securities classified as available for sale are generally reported at fair value utilizing Level 2 inputs. ChoiceOne’s external investment advisor obtained fair value measurements from an independent pricing service that uses matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs). The fair value measurements considered observable data that may include dealer quotes, market spreads, cash flows and the bonds' terms and conditions, among other things. Securities classified in Level 2 included U.S. Government and federal agency securities, U.S. Treasury notes and bonds, state and municipal securities, mortgage-backed securities, corporate bonds, and asset backed securities. The Company classified certain state and municipal securities and corporate bonds, and equity securities as Level 3. Based on the lack of observable market data, estimated fair values were based on the observable data available and reasonable unobservable market data.

Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis

(Dollars in thousands)
	2020		2019
Equity Securities Held at Fair Value
Balance, January 1	$	1,472	$	886
Total realized and unrealized gains included in noninterest income		13		114
Net purchases, sales, calls, and maturities		-		-
Net transfers into Level 3		-		-
Acquired from merger with County Bank Corp.		-		472
Balance, December 31	$	1,485	$	1,472

Investment Securities, Available for Sale
Balance, January 1	$	12,367	$	8,498
Total realized and unrealized gains included in income		-		-
Total unrealized gains/(losses) included in other comprehensive income		512		210
Net purchases, sales, calls, and maturities		(1,456)		1,375
Net transfers into Level 3		-		-
Acquired from merger with County Bank Corp.		-		2,284
Balance, December 31	$	11,423	$	12,367

Of the Level 3 assets that were still held by the Company at December 31, 2020, the net unrealized gain as of December 31, 2020 was $889,000, compared to $324,000 as of December 31, 2019. The change in the net unrealized gain or loss is recognized in noninterest income or other comprehensive income in the consolidated balance sheets and income statements. Amounts recognized in noninterest income relate to changes in equity securities based on ASU 2016-01, which was implemented by ChoiceOne effective January 1, 2018. A total of $1,642,000 and $2,091,000 of Level 3 securities were purchased in 2020 and 2019, respectively. In addition, Level 3 securities totaling $2,756,000 were obtained in 2019 from the merger with County.

Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 assets and liabilities. As a result, the unrealized gains and losses for these assets and liabilities presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs.

Available for sale investment securities categorized as Level 3 assets consist of bonds issued by local municipalities and a trust-preferred security. The Company estimates the fair value of these assets based on the present value of expected future cash flows using management’s best estimate of key assumptions, including forecasted interest yield and payment rates, credit quality and a discount rate commensurate with the current market and other risks involved.

The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets are not normally measured at fair value, but can be subject to fair value adjustments in certain circumstances, such as impairment. Disclosures concerning assets measured at fair value on a non-recurring basis are as follows:

Assets Measured at Fair Value on a Non-recurring Basis

						Quoted Prices
						In Active				Significant
						Markets for				Other				Significant
		Balances at				Identical				Observable				Unobservable
(Dollars in thousands)		Dates				Assets				Inputs				Inputs
		Indicated				(Level 1)				(Level 2)				(Level 3)
Impaired Loans
December 31, 2020		$	7,851			$	-			$	-			$	7,851
December 31, 2019		$	5,922			$	-			$	-			$	5,922

Other Real Estate
December 31, 2020		$	266			$	-			$	-			$	266
December 31, 2019		$	929			$	-			$	-			$	929

Mortgage Loan Servicing Rights
December 31, 2020		$	3,967			$	-			$	3,967			$	-
December 31, 2019		$	2,131			$	-			$	2,131			$	-

Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. The Company estimates the fair value of the loans based on the present value of expected future cash flows using management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals). The changes in fair value consisted of charge-downs of impaired loans that were posted to the allowance for loan losses and write-downs of other real estate owned that were posted to a valuation account. The fair value of other real estate owned was based on appraisals or other reviews of property values, adjusted for estimated costs to sell.

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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