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Note 19 - Fair Value Measurements
 12 Months Ended
Dec. 31, 2020
Notes to Financial Statements  
Fair Value Disclosures [Text Block]

Note 19. Fair Value Measurements

 

Determination of Fair Value

 

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the “Fair Value Measurement and Disclosures” topic of FASB ASC, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. 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.

 

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

 

Fair Value Hierarchy

 

In accordance with this guidance, the Company groups its assets and liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

 

 

Level 1 –

Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

   
 

Level 2 –

Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

   
 

Level 3 –

Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires a significant management judgment or estimation.

 

An instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a recurring basis in the financial statements:

 

Securities available for sale

 

Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2).

 

Derivative asset/liability - cash flow hedges

 

Cash flow hedges are recorded at fair value on a recurring basis. The fair value of the Company's cash flow hedges is determined by a third party vendor using the discounted cash flow method (Level 2).

 

The following tables present the balances of assets measured at fair value on a recurring basis as of December 31, 2020 and 2019 (in thousands).

 

 

      

Fair Value Measurements at December 31, 2020

 

Description

 Balance as of December 31, 2020  Quoted Prices in Active Markets for Identical Assets (Level 1)  Significant Other Observable Inputs (Level 2)  Significant Unobservable Inputs (Level 3) 
Assets:                

Securities available for sale

                

U.S. agency and mortgage-backed securities

 $101,598  $—  $101,598  $— 

Obligations of states and political subdivisions

  38,627   —   38,627   — 
Total securities available for sale $140,225  $—  $140,225  $— 
Derivatives - cash flow hedges  431   —   431   — 
Total assets $140,656  $—  $140,656  $— 

 

      

Fair Value Measurements at December 31, 2019

 

Description

 Balance as of December 31, 2019  Quoted Prices in Active Markets for Identical Assets (Level 1)  Significant Other Observable Inputs (Level 2)  Significant Unobservable Inputs (Level 3) 
Assets:                

Securities available for sale

                

U.S. agency and mortgage-backed securities

 $94,905  $—  $94,905  $— 

Obligations of states and political subdivisions

  26,078   —   26,078   — 
Total assets $120,983  $—  $120,983  $— 

 

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

 

The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:

 

Loans held for sale

 

Loans held for sale are carried at the lower of cost or market value. These loans currently consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). As such, the Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the years ended December 31, 2020 and 2019.

 

Impaired Loans

 

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreements will not be collected. The measurement of loss associated with impaired loans can be based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the observable market price of the loan, or the fair value of the collateral less estimated costs to sell. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Company’s collateral is real estate. The value of real estate collateral is determined utilizing a market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data (Level 2) within the last twelve months. However, if the collateral is a house or building in the process of construction or if an appraisal of the property is more than one year old and not solely based on observable market comparables or management determines the fair value of the collateral is further impaired below the appraised value, then a Level 3 valuation is considered to measure the fair value. The value of business equipment is based upon an outside appraisal, of one year or less, if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

 

The following tables summarize the Company’s assets that were measured at fair value on a nonrecurring basis as of December 31, 2020 and 2019 (dollars in thousands).

 

      

Fair Value Measurements at December 31, 2020

 

Description

 Balance as of December 31, 2020  Quoted Prices in Active Markets for Identical Assets (Level 1)  Significant Other Observable Inputs (Level 2)  Significant Unobservable Inputs (Level 3) 

Impaired loans, net

 $3,595  $—  $—  $3,595 

 

      

Fair Value Measurements at December 31, 2019

 

Description

 Balance as of December 31, 2019  Quoted Prices in Active Markets for Identical Assets (Level 1)  Significant Other Observable Inputs(Level 2)  Significant Unobservable Inputs (Level 3) 

Impaired loans, net

 $406  $—  $—  $406 

 

 

  

Quantitative information about Level 3 Fair Value Measurements for December 31, 2020

 
  

Fair Value

 

Valuation Technique

 

Unobservable Input

 Range (Weighted Average) (1) 

Impaired loans, net

 $2,205 

Property appraisals

 

Selling cost

  10.00%
Impaired loans, net  1,390 Present value of cash flows Discount rate  6.50%

 

 

  

Quantitative information about Level 3 Fair Value Measurements for December 31, 2019

 
  

Fair Value

 

Valuation Technique

 

Unobservable Input

 Range (Weighted Average) (1) 

Impaired loans, net

 $406 

Property appraisals

 

Selling cost

  10.00%

 

(1)

Unobservable inputs were weighted by the relative fair value of the instruments.

 

Accounting guidance requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The carrying values and estimated fair values of the Company’s financial instruments at December 31, 2020 and 2019 are as follows (in thousands):

 

 

      

Fair Value Measurements at December 31, 2020 Using

 
  Carrying Amount  Quoted Prices in Active Markets for Identical Assets Level 1  Significant Other Observable Inputs Level 2  Significant Unobservable Inputs Level 3  

Fair Value

 

Financial Assets

                    

Cash and short-term investments

 $127,297  $127,297  $—  $—  $127,297 

Securities available for sale

  140,225   —   140,225   —   140,225 

Securities held to maturity

  14,234   —   13,138   1,605   14,743 

Restricted securities

  1,875   —   1,875   —   1,875 

Loans held for sale

  245   —   245   —   245 

Loans, net

  622,429   —   —   633,638   633,638 

Bank owned life insurance

  17,916   —   17,916   —   17,916 

Accrued interest receivable

  2,717   —   2,717   —   2,717 
Derivatives - cash flow hedges  431   —   431   —   431 

Financial Liabilities

                    

Deposits

 $842,461  $—  $742,264  $101,154  $843,418 

Subordinated debt

  9,991   —   —   10,304   10,304 

Junior subordinated debt

  9,279   —   —   10,364   10,364 

Accrued interest payable

  134   —   134   —   134 

 

 

      

Fair Value Measurements at December 31, 2019 Using

 
  Carrying Amount  Quoted Prices in Active Markets for Identical Assets Level 1  Significant Other Observable Inputs Level 2  Significant Unobservable Inputs Level 3  

Fair Value

 

Financial Assets

                    

Cash and short-term investments

 $45,785  $45,785  $—  $—  $45,785 

Securities available for sale

  120,983   —   120,983   —   120,983 

Securities held to maturity

  17,627   —   16,134   1,512   17,646 

Restricted securities

  1,806   —   1,806   —   1,806 

Loans held for sale

  167   —   167   —   167 

Loans, net

  569,412   —   —   572,910   572,910 

Bank owned life insurance

  17,447   —   17,447   —   17,447 

Accrued interest receivable

  2,065   —   2,065   —   2,065 

Financial Liabilities

                    

Deposits

 $706,442  $—  $588,878  $117,071  $705,949 

Subordinated debt

  4,983   —   —   5,023   5,023 

Junior subordinated debt

  9,279   —   —   9,724   9,724 

Accrued interest payable

  184   —   184   —   184 

 

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.