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Note 6 - Fair Value Measurements

9 Months Ended

Sep. 30, 2021

Notes to Financial Statements

Fair Value Disclosures [Text Block]

NOTE 6 – FAIR VALUE MEASUREMENTS

The following tables present information about assets and liabilities measured at fair value on a recurring basis and the valuation techniques used 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 ChoiceOne Bank 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. ChoiceOne Bank’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 September 30, 2021 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				Balance
(Dollars in thousands)		Assets				Inputs				Inputs				at Date
		(Level 1)				(Level 2)				(Level 3)				Indicated
Equity Securities Held at Fair Value - September 30, 2021
Equity securities		$	6,723			$	-			$	1,696			$	8,419

Investment Securities, Available for Sale - September 30, 2021
U. S. Government and federal agency		$	-			$	2,020			$	-			$	2,020
U. S. Treasury notes and bonds			-				92,786				-				92,786
State and municipal			-				478,705				18,033				496,738
Mortgage-backed			-				406,696				-				406,696
Corporate			-				12,013				1,000				13,013
Asset-backed securities			-				16,862				-				16,862
Total		$	-			$	1,009,082			$	19,033			$	1,028,115

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				1,000				3,589
Total		$	-			$	563,364			$	11,423			$	574,787

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

		Nine Months Ended
(Dollars in thousands)		September 30,
		2021				2020
Equity Securities Held at Fair Value
Balance, January 1		$	1,485			$	1,472
Total realized and unrealized gains included in noninterest income			(51	)			8
Net purchases, sales, calls, and maturities			262				-
Net transfers into Level 3			-				-
Balance, September 30		$	1,696			$	1,480

Amount of total losses for the period included in earning attributable to the
change in unrealized gains (losses) relating to assets and liabilities still held
at September 30		$	(51	)		$	8

Investment Securities, Available for Sale
Balance, January 1		$	11,423			$	12,367
Total unrealized gains included in other comprehensive income			(369	)			452
Net purchases, sales, calls, and maturities			7,979				(1,506)
Net transfers into Level 3			-				-
Balance, September 30		$	19,033			$	11,313

Amount of total losses for the period included in earning attributable to the
change in unrealized gains (losses) relating to assets and liabilities still held
at September 30		$	(366	)		$	477

Of the available for sale Level 3 assets that were held by ChoiceOne at September 30, 2021, the net unrealized gain as of September 30, 2021 was $420,000, which was recognized in accumulated other comprehensive income in the consolidated balance sheet.

Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 investment securities 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.

Securities categorized as Level 3 assets primarily consist of bonds issued by local municipalities and common and preferred equity securities of community banks. ChoiceOne estimates the fair value of these bonds and equity securities 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.

ChoiceOne 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
September 30, 2021		$	5,956			$	-			$	-			$	5,956
December 31, 2020		$	7,851			$	-			$	-			$	7,851

Other Real Estate
September 30, 2021		$	162			$	-			$	-			$	162
December 31, 2020		$	266			$	-			$	-			$	266

Mortgage Loan Servicing Rights
September 30, 2021		$	4,556			$	-			$	-			$	4,556
December 31, 2020		$	3,967			$	-			$	-			$	3,967

Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. ChoiceOne estimates the fair value of the loans based on the present value of expected future cash flows using management’s 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 that were posted to a valuation account.

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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