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Note 12 - Fair Value Measurements and Fair Values of Financial Instruments

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Fair Value Disclosures [Text Block]

1

2

.

FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS

The Corporation measures certain assets at fair value. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. FASB Accounting Standards Codification (ASC) topic

820,

“Fair Value Measurements and Disclosures” establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs used in determining valuations into

three

levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

Level

1

– Fair value is based on unadjusted quoted prices in active markets that are accessible to the Corporation for identical assets. These generally provide the most reliable evidence and are used to measure fair value whenever available.

Level

2

– Fair value is based on significant inputs, other than Level

1

inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data. Level

2

inputs include quoted market prices in active markets for similar assets, quoted market prices in markets that are

not

active for identical or similar assets and other observable inputs.

Level

3

– Fair value is based on significant unobservable inputs. Examples of valuation methodologies that would result in Level

3

classification include option pricing models, discounted cash flows and other similar techniques.

The Corporation monitors and evaluates available data relating to fair value measurements on an ongoing basis and recognizes transfers among the levels of the fair value hierarchy as of the date of an event or change in circumstances that affects the valuation method chosen. Examples of such changes

may

include the market for a particular asset becoming active or inactive, changes in the availability of quoted prices, or changes in the availability of other market data.

At

March 31, 2020

and

December 31, 2019,

assets measured at fair value and the valuation methods used are as follows:

(In Thousands)
						March 31, 2020
		Quoted Prices				Other
		in Active				Observable				Unobservable				Total
		Markets				Inputs				Inputs				Fair
		(Level 1)				(Level 2)				(Level 3)				Value
Recurring fair value measurements
AVAILABLE-FOR-SALE DEBT SECURITIES:
Obligations of U.S. Government agencies		$	0			$	16,408			$	0			$	16,408
Obligations of states and political subdivisions:
Tax-exempt			0				81,072				0				81,072
Taxable			0				37,074				0				37,074
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities			0				55,752				0				55,752
Residential collateralized mortgage obligations			0				103,556				0				103,556
Commercial mortgage-backed securities			0				48,554				0				48,554
Total available for sale debt Securities			0				342,416				0				342,416
Marketable equity security			994				0				0				994
Servicing rights			0				0				1,226				1,226
Total recurring fair value measurements		$	994			$	342,416			$	1,226			$	344,636
Nonrecurring fair value measurements
Impaired loans with a valuation allowance		$	0			$	0			$	6,709			$	6,709
Valuation allowance			0				0				(2,227	)			(2,227	)
Impaired loans, net			0				0				4,482				4,482
Foreclosed assets held for sale			0				0				1,685				1,685
Total nonrecurring fair value measurements		$	0			$	0			$	6,167			$	6,167

(In Thousands)
						December 31, 2019
		Quoted Prices				Other
		in Active				Observable				Unobservable				Total
		Markets				Inputs				Inputs				Fair
		(Level 1)				(Level 2)				(Level 3)				Value
Recurring fair value measurements
AVAILABLE-FOR-SALE DEBT SECURITIES:
Obligations of U.S. Government agencies		$	0			$	17,000			$	0			$	17,000
Obligations of states and political subdivisions:
Tax-exempt			0				70,760				0				70,760
Taxable			0				36,303				0				36,303
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities			0				59,210				0				59,210
Residential collateralized mortgage obligations			0				114,723				0				114,723
Commercial mortgage-backed securities			0				48,727				0				48,727
Total available-for-sale debt securities			0				346,723				0				346,723
Marketable equity security			979				0				0				979
Servicing rights			0				0				1,277				1,277
Total recurring fair value measurements		$	979			$	346,723			$	1,277			$	348,979
Nonrecurring fair value measurements
Impaired loans with a valuation allowance		$	0			$	0			$	3,375			$	3,375
Valuation allowance			0				0				(1,051	)			(1,051	)
Impaired loans, net			0				0				2,324				2,324
Foreclosed assets held for sale			0				0				2,886				2,886
Total nonrecurring fair value measurements		$	0			$	0			$	5,210			$	5,210

Management’s evaluation and selection of valuation techniques and the unobservable inputs used in determining the fair values of assets valued using Level

3

methodologies include sensitive assumptions. Other market participants might use substantially different assumptions, which could result in calculations of fair values that would be substantially different than the amount calculated by management.

At

March 31, 2020

and

December 31, 2019,

quantitative information regarding valuation techniques and the significant unobservable inputs used for assets measured on a recurring basis using unobservable inputs Level

3

methodologies are as follows:

			Fair Value at
			3/31/20				Valuation		Unobservable			Method or Value As of
Asset			(In Thousands)				Technique		Input(s)			3/31/20
Servicing rights			$	1,226			Discounted cash flow		Discount rate				12.50	%		Rate used through modeling period
									Loan prepayment speeds				213.00	%		Weighted-average PSA
									Servicing fees				0.25	%		of loan balances
													4.00	%		of payments are late
													5.00	%		late fees assessed
												$	1.94			Miscellaneous fees per account per month
									Servicing costs			$	6.00			Monthly servicing cost per account
												$	24.00			Additional monthly servicing cost per loan on loans more than 30 days delinquent
													1.50	%		of loans more than 30 days delinquent
													3.00	%		annual increase in servicing costs

			Fair Value at
			12/31/19				Valuation		Unobservable			Method or Value As of
Asset			(In Thousands)				Technique		Input(s)			12/31/19
Servicing rights			$	1,277			Discounted cash flow		Discount rate				12.50	%		Rate used through modeling period
									Loan prepayment speeds				183.00	%		Weighted-average PSA
									Servicing fees				0.25	%		of loan balances
													4.00	%		of payments are late
													5.00	%		late fees assessed
												$	1.94			Miscellaneous fees per account per month
									Servicing costs			$	6.00			Monthly servicing cost per account
												$	24.00			Additional monthly servicing cost per loan on loans more than 30 days delinquent
													1.50	%		of loans more than 30 days delinquent
													3.00	%		annual increase in servicing costs

The fair value of servicing rights is affected by expected future interest rates. Increases (decreases) in future expected interest rates tend to increase (decrease) the fair value of the Corporation’s servicing rights because of changes in expected prepayment behavior by the borrowers on the underlying loans. Unrealized gains (losses) in fair value of servicing rights are included in Loan servicing fees, net, in the unaudited consolidated statements of income.

Following is a reconciliation of activity for Level

3

assets measured at fair value on a recurring basis:

(In Thousands)
		3 Months Ended March 31,
		2020				2019
Servicing rights balance, beginning of period		$	1,277			$	1,404
Issuances of servicing rights			75				20
Unrealized losses included in earnings			(126	)			(77	)
Servicing rights balance, end of period		$	1,226			$	1,347

Loans are classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Foreclosed assets held for sale consist of real estate acquired by foreclosure. For impaired commercial loans secured by real estate and foreclosed assets held for sale, estimated fair values are determined primarily using values from

third

-party appraisals. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property. For commercial and industrial and agricultural loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging data or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

At

March 31, 2020

and

December 31, 2019,

quantitative information regarding valuation techniques and the significant unobservable inputs used for nonrecurring fair value measurements using Level

3

methodologies are as follows:

(In Thousands, Except

Percentages

																	Weighte d
						Valuation											Average
		Balance at				Allowance at				Fair Value at			Valuation		Unobservable		Discount at
Asset		3 /31/ 20				3 /31/ 20				3 /31/ 20			Technique		Inputs		3 /31/ 20
Impaired loans:
Residential mortgage loans - first and junior liens		$	730			$	194			$	536		Sales comparison		Discount to appraised value			32	%
Commercial:
Commercial and industrial			3,572				1,265				2,307		Liquidation of assets		Discount to appraised value			35	%
Commercial and industrial			815				60				755		Liquidation of accounts receivable		Discount to borrower's financial statement value			16	%
Commercial construction and land			1,255				674				581		Sales comparison		Discount to appraised value			48	%
Loans secured by farmland			337				34				303		Sales comparison		Discount to appraised value			42	%
Total impaired loans		$	6,709			$	2,227			$	4,482
Foreclosed assets held for sale - real estate:
Residential (1-4 family)		$	130			$	0			$	130		Sales comparison		Discount to appraised value			61	%
Land			70				0				70		Sales comparison		Discount to appraised value			53	%
Commercial real estate			1,485				0				1,485		Sales comparison		Discount to appraised value			34	%
Total foreclosed assets held for sale		$	1,685			$	0			$	1,685

(In Thousands, Except

Percentages)

																	Weighted
						Valuation											Average
		Balance at				Allowance at				Fair Value at			Valuation		Unobservable		Discount at
Asset		12/31/19				12/31/19				12/31/19			Technique		Inputs		12/31/19
Impaired loans:
Residential mortgage loans - first and junior liens		$	732			$	176			$	556		Sales comparison		Discount to appraised value			30	%
Commercial:
Commercial and industrial			106				89				17		Sales comparison		Discount to appraised value			69	%
Commercial and industrial			798				60				738		Liquidation of accounts receivable		Discount to borrower's financial statement value			15	%
Commercial construction and land			1,261				678				583		Sales comparison		Discount to appraised value			47	%
Loans secured by farmland			478				48				430		Sales comparison		Discount to appraised value			46	%
Total impaired loans		$	3,375			$	1,051			$	2,324
Foreclosed assets held for sale - real estate:
Residential (1-4 family)		$	292			$	0			$	292		Sales comparison		Discount to appraised value			46	%
Land			70				0				70		Sales comparison		Discount to appraised value			53	%
Commercial real estate			2,524				0				2,524		Sales comparison		Discount to appraised value			39	%
Total foreclosed assets held for sale		$	2,886			$	0			$	2,886

Certain of the Corporation’s financial instruments are

not

measured at fair value in the consolidated financial statements. In cases where quoted market prices are

not

available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates

may

not

be realized in an immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from disclosure requirements. Therefore, the aggregate fair value amounts presented

may

not

represent the underlying fair value of the Corporation.

The estimated fair values, and related carrying amounts, of the Corporation’s financial instruments that are

not

recorded at fair value are as follows:

(In Thousands)
		Fair Value		March 31, 2020								December 31, 2019
		Hierarchy		Carrying				Fair				Carrying				Fair
		Level		Amount				Value				Amount				Value
Financial assets:
Cash and cash equivalents		Level 1		$	28,598			$	28,598			$	31,122			$	31,122
Certificates of deposit		Level 2			4,080				4,249				4,080				4,227
Restricted equity securities (included in Other Assets)		Level 2			9,396				9,396				10,321				10,321
Loans, net		Level 3			1,156,143				1,172,452				1,172,386				1,181,000
Accrued interest receivable		Level 2			5,192				5,192				5,001				5,001
Financial liabilities:
Deposits with no stated maturity		Level 2			893,596				893,596				877,965				877,965
Time deposits		Level 2			356,316				358,248				374,695				376,738
Short-term borrowings		Level 2			37,607				37,540				86,220				86,166
Long-term borrowings		Level 2			72,944				72,797				52,127				52,040
Accrued interest payable		Level 2			369				369				311				311

The Corporation has commitments to extend credit and has issued standby letters of credit. Standby letters of credit are conditional guarantees of performance by a customer to a

third

party. Estimates of the fair value of these off-balance sheet items were

not

made because of the short-term nature of these arrangements and the credit standing of the counterparties.

X

- References

No definition available.

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- 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

Reference 1: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 820
-SubTopic 10
-Section 50
-Paragraph 2
-URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258

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