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Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2021

NOTE 6 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 March 31, 2021 and December 31, 2020 are reflected below.

	(In Thousands)
	March 31, 2021
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	175,500	$	175,500	$	175,500	$	-	$	-
Interest-bearing time deposits		4,405		4,451		-		4,451		-
Securities - available-for-sale		352,974		352,974		43,325		308,110		1,539
Other securities		5,939		5,939		-		-		5,939
Loans held for sale		7,511		7,511		-		-		7,511
Loans, net		1,327,254		1,295,821		-		-		1,295,821
Interest receivable		6,568		6,568		-		-		6,568

Financial Liabilities:
Interest bearing deposits	$	1,056,576	$	1,056,600	$	-	$	-	$	1,056,600
Non-interest bearing deposits		384,558		384,558		-		384,558		-
Time deposits		242,717		244,235		-		-		244,235
Total Deposits		1,683,851		1,685,393		-		384,558		1,300,835

Federal funds purchased and securities sold under agreement to repurchase		30,072		30,072		-		-		30,072
Federal Home Loan Bank advances		17,840		17,845		-		-		17,845
Interest payable		357		357		-		-		357

	(In Thousands)
	December 31, 2020
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	175,706	$	175,706	$	175,706	$	-	$	-
Interest-bearing time deposits		4,653		4,677		-		4,677		-
Securities - available-for-sale		307,812		307,812		-		306,250		1,562
Other securities		5,939		5,939		-		-		5,939
Loans held for sale		7,740		7,740		-		-		7,740
Loans, net		1,289,318		1,261,440		-		-		1,261,440
Interest receivable		6,188		6,188		-		-		6,188

Financial Liabilities:
Interest bearing deposits	$	997,462	$	1,004,608	$	-	$	-	$	1,004,608
Non-interest bearing deposits		351,147		351,147		-		351,147		-
Time deposits		247,553		250,135		-		-		250,135
Total Deposits		1,596,162		1,605,890		-		351,147		1,254,743

Federal funds purchased and securities sold under agreement to repurchase		30,239		30,239		-		-		30,239
Federal Home Loan Bank advances		17,861		17,872		-		-		17,872
Interest payable		338		338		-		-		338

Fair Value Measurements

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.

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 some 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 summarizes financial assets measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020, 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)
March 31, 2021	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets - (Securities Available-for-Sale)
U.S. Treasury	$	43,325	$	-	$	-
U.S. Government agencies		-		130,799		-
Mortgage-backed securities		-		116,363		-
State and local governments		-		60,948		1,539
Total Securities Available-for-Sale	$	43,325	$	308,110	$	1,539

December 31, 2020	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (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

The following tables represent the changes in the Level 3 fair-value category of which unobservable inputs are relied upon as of the three month periods ended March 31, 2021 and March 31, 2020.

	(In Thousands)
	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	State and Local Governments Tax-Exempt		State and Local Governments Taxable			State and Local Governments Total
Balance at January 1, 2021	$	-	$	1,562		$	1,562

Change in Market Value		-		(23	)		(23	)

Payments & Maturities		-		-			-

Balance at March 31, 2021	$	-	$	1,539		$	1,539

	(In Thousands)
	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	State and Local Governments Tax-Exempt		State and Local Governments Taxable		State and Local Governments Total
Balance at January 1, 2020	$	-	$	1,490	$	1,490

Change in Market Value		-		47		47

Payments & Maturities		-		-		-

Balance at March 31, 2020	$	-	$	1,537	$	1,537

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.

The Company also has assets that, under certain conditions, are subject to measurement at fair value on a non-recurring basis. At March 31, 2021 and December 31, 2020, 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 March 31, 2021 and December 31, 2020, fair value of collateral dependent impaired loans categorized as Level 3 was $4.1 million and $7.7 million, respectively. The specific allocation for impaired loans was $1.1 million and $1.7 million as of March 31, 2021 and December 31, 2020, respectively, which are accounted for in the allowance for loan losses (see Note 4).

Other real estate is reported at either the lower of the fair value of the real estate minus the estimated costs to sell the asset or the cost of the asset. The determination of 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 quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements:

	(In Thousands)				Range
	Fair Value at				(Weighted
	March 31, 2021		Valuation Technique	Unobservable Inputs	Average)
State and local government	$	1,539	Discounted Cash Flow	Credit strength of underlying project or entity / Discount rate	1.32-1.32% (1.32%)

Collateral dependent impaired loans		4,130	Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	20.00-41.61% (40.35%)

	(In Thousands)				Range
	Fair Value at				(Weighted
	December 31, 2020		Valuation Technique	Unobservable Inputs	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%)

The following table presents impaired loans as recorded at fair value on March 31, 2021 and December 31, 2020:

	Assets Measured at Fair Value on a Nonrecurring Basis at March 31, 2021
	(In Thousands)
	Balance at March 31, 2021		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Collateral dependent impaired loans	$	4,130	$	-	$	-	$	4,130

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

- 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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