Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2019

Note 17 - Fair Value of Financial Instruments

Fair values of financial instruments are management’s estimate of the values at which the instruments could be exchanged in a transaction between willing parties. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, other significant assets are not considered financial assets including deferred tax assets, premises, equipment and intangibles. Further, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered in any of the estimates.

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The estimated fair values, and related carrying or notional amounts, for on and off-balance sheet financial instruments as of December 31, 2020 and 2019, are reflected below. The aggregate fair values in the table below do not represent the total market value of the Bank’s assets and liabilities. The table excludes the following: Bank Premises and Equipment, Goodwill, Mortgage Servicing Rights, Other Real Estate Owned, Other Assets, Other Liabilities and Accrued Expenses.

	(In Thousands)
	December 31, 2020										December 31, 2019
	Carrying		Fair								Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3		Amount		Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	175,706	$	175,706	$	175,706	$	-	$	-	$	51,296	$	51,296	$	51,296	$	-	$	-
Interest-bearing time deposits		4,653		4,677		-		4,677		-		4,309		4,331		-		4,331		-
Securities - available-for-sale		307,812		307,812		-		306,250		1,562		222,293		222,293		10,021		210,782		1,490
Other securities		5,939		5,939		-		-		5,939		5,810		5,810		-		-		5,810
Loans held for sale		7,740		7,740		-		-		7,740		4,248		4,248		-		-		4,248
Loans, net		1,289,318		1,261,440		-		-		1,261,440		1,211,771		1,188,014		-		-		1,188,014
Interest receivable		6,188		6,188		-		-		6,188		6,769		6,769		-		-		6,769

Financial Liabilities:
Interest bearing deposits	$	997,462	$	1,004,608	$	-	$	-	$	1,004,608	$	746,628	$	746,628	$	-	$	-	$	746,628
Noninterest bearing deposits		351,147		351,147		-		351,147		-		265,156		265,156		-		265,156		-
Time deposits		247,553		250,135		-		-		250,135		276,563		277,008		-		-		277,008
Total Deposits		1,596,162		1,605,890		-		351,147		1,254,743		1,288,347		1,288,792		-		265,156		1,023,636
Fed funds purchased and securities sold under agreement to repurchase		30,239		30,239		-		-		30,239		48,073		48,073		-		-		48,073
Federal Home Loan Bank advances		17,861		17,872		-		-		17,872		24,806		24,811		-		-		24,811
Interest payable		338		338		-		-		338		754		754		-		-		754

Fair Value Measurements

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2020 and 2019, and the valuation techniques used by the Company to determine those fair values. There were no changes to valuation techniques during 2020.

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

Available-for-sale securities - When quoted prices are available in an active market, securities are valued using the quoted price and are classified as Level 1. The quoted prices are not adjusted.

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.

Available-for-sale securities classified as Level 2 are valued using the prices obtained from an independent pricing service. The prices are not adjusted. Securities of obligations of state and political subdivisions are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating. Substantially all assumptions used by the independent pricing service are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace.

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. The Bank holds two local municipals that the Bank evaluates based on the credit strength of the underlying project. The fair value is determined by valuing similar credit payment streams at similar rates.

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.

The following table summarizes financial assets measured at fair value on a recurring basis as of December 31, 2020 and December 31, 2019 segregated by level or the valuation inputs within the fair value hierarchy utilized to measure fair value.

Assets and Liabilities Measured at Fair Value on a Recurring Basis (in Thousands)

	Quoted Prices in		Significant		Significant
	Active Markets		Observable		Observable
	for Identical		Inputs		Inputs
December 31, 2020	Assets (Level 1)		(Level 2)		(Level 3)
Assets-(Securities Available-for-Sale)
U.S. Treasury	$	-	$	-	$	-
U.S. Government agencies		-		124,241		-
Mortgage-backed securities		-		113,056		-
State and local governments		-		68,953		1,562
Total Securities Available-for-Sale	$	-	$	306,250	$	1,562

	Quoted Prices in		Significant		Significant
	Active Markets		Observable		Observable
	for Identical		Inputs		Inputs
December 31, 2019	Assets (Level 1)		(Level 2)		(Level 3)
Assets-(Securities Available-for-Sale)
U.S. Treasury	$	10,021	$	-	$	-
U.S. Government agencies		-		62,445		-
Mortgage-backed securities		-		95,197		-
State and local governments		-		53,140		1,490
Total Securities Available-for-Sale	$	10,021	$	210,782	$	1,490

	(In Thousands)
	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	State and Local		State and Local		State and Local
	Governments		Governments		Governments
	Tax-Exempt		Taxable		Total
Balance at January 1, 2020	$	-	$	1,490	$	1,490
Change in Market Value		-		72		72
Purchases		-		-		-
Sales		-		-		-
Payments & Maturities		-		-		-
Balance at December 31, 2020	$	-	$	1,562	$	1,562

	(In Thousands)
	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	State and Local		State and Local		State and Local
	Governments		Governments		Governments
	Tax-Exempt		Taxable		Total
Balance at January 1, 2019	$	-	$	1,427	$	1,427
Change in Market Value		-		63		63
Purchases		-		-		-
Sales		-		-		-
Payments & Maturities		-		-		-
Balance at December 31, 2019	$	-	$	1,490	$	1,490

Most of the Company’s available for sale securities, including any bonds issued by local municipalities, have CUSIP numbers or have similar characteristics of those in the municipal markets, making them marketable and comparable as Level 2.

There have been no transfers into or out of Level 3 during 2020 and 2019.

The Company also has assets that, under certain conditions, are subject to measurement at fair value on a non-recurring basis. At December 31, 2020 and 2019, such assets consist primarily of collateral dependent impaired loans. Collateral dependent 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).

At December 31, 2020 and 2019, collateral dependent impaired loans categorized as Level 3 were $7,703 and $444 thousand, respectively. The specific allocation for collateral dependent impaired loans was $1,657 thousand as of December 31, 2020 and $197 thousand as of December 31, 2019, respectively, which are accounted for in the allowance for loan losses (see Note 4).

Other real estate is reported at the lower of either the fair value of the real estate, minus the estimated costs to sell the asset, or the cost of the asset. The determination of the fair value of the real estate relies primarily on appraisals from third parties. If the fair value of the real estate, minus the estimated costs to sell the asset, is less than the asset’s cost, the deficiency is recognized as a valuation allowance against the asset through a charge to expense. The valuation allowance is therefore increased or decreased, through charges or credits to expense, for changes in the asset’s fair value or estimated selling costs.

The following table presents collateral dependent impaired loans and other real estate owned as recorded at fair value:

	($ in Thousands)
	Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2020
			Quoted Prices in
			Markets for		Significant		Significant
	Balance at		Identical		Observable Inputs		Unobservable Inputs
	December 31, 2020		Assets (Level 1)		(Level 2)		(Level 3)
Collateral dependent impaired loans	$	7,703	$	-	$	-	$	7,703
Other real estate owned - commercial		-		-		-		-

	($ in Thousands)
	Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2019
			Quoted Prices in
			Markets for		Significant		Significant
	Balance at		Identical		Observable Inputs		Unobservable Inputs
	December 31, 2019		Assets (Level 1)		(Level 2)		(Level 3)
Collateral dependent impaired loans	$	444	$	-	$	-	$	444
Other real estate owned - commercial		164		-		-		164

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements:

	(In Thousands)
	Fair Value at December 31, 2020		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
State and local government	$	1,562	Discounted Cash Flow	Credit strength of underlying project or entity / Discount rate	1.19-1.19% (1.19%)
Collateral dependent impaired loans		7,703	Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	0.71-100% (17.71%)
Other real estate owned - commercial		-	Appraisals	Discount to reflect current market	— % ( — )

	(In Thousands)
	Fair Value at December 31, 2019		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
State and local government	$	1,490	Discounted Cash Flow	Credit strength of underlying project or entity / Discount rate	0-5% (2.52%)
Collateral dependent impaired loans		444	Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	0-50% (30.73%)
Other real estate owned - commercial		164	Appraisals	Discount to reflect current market	0-20 % ( 23.31%)

The Company also has other assets, which under certain conditions, are subject to measurement at fair value. These assets include loans held for sale and mortgage servicing rights. The Company estimated the fair values of these assets utilizing Level 3 inputs, including, the discounted present value of expected future cash flows. At December 31, 2020, the Company estimates that there is no impairment of these assets and therefore, no impairment charge to other expense was required to adjust these assets to their estimated fair values.

- 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.

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