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Note 6 - Fair Value Measurements | 9 Months Ended
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Sep. 30, 2021
Notes to Financial Statements |
Fair Value Disclosures [Text Block] | Note 6: Fair Value Measurements Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. U.S. GAAP requires that valuation techniques maximize the use of the observable inputs and minimize the use of the unobservable inputs. U.S. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels. These levels are:
| Level 1 – |  | Valuation is based on quoted prices in active markets for identical assets and liabilities.
| Level 2 – |  | Valuation is based on observable inputs including: ● quoted prices in active markets for similar assets and liabilities, ● quoted prices for identical or similar assets and liabilities in less active markets, ● inputs other than quoted prices that are observable, and ● model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
| Level 3 – |  | Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.
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. Accounting guidance for fair value excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Consequently, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company as of September 30, 2021 and December 31, 2020. The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring and non-recurring basis in the financial statements: Financial Instruments Measured at Fair Value on a Recurring Basis 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). The carrying value of restricted Federal Reserve Bank of Richmond and FHLB stock approximates fair value based upon the redemption provisions of each entity and is therefore excluded from the following tables. The following tables present the balances of financial assets measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020.
|  |  |  |  |  | Fair Value Measurements at September 30, 2021 Using
Description |  | Balance as of September 30, 2021 |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
U.S. Government agencies and corporations |  | $ | 220,191 |  |  | $ | - |  |  | $ | 220,191 |  |  | $ | - |
States and political subdivisions |  |  | 199,307 |  |  |  | - |  |  |  | 199,307 |  |  |  | - |
Mortgage-backed securities |  |  | 218,752 |  |  |  | - |  |  |  | 218,752 |  |  |  | - |
Corporate debt securities |  |  | 3,236 |  |  |  | - |  |  |  | 3,236 |  |  |  | - |
Total securities available for sale |  | $ | 641,486 |  |  | $ | - |  |  | $ | 641,486 |  |  | $ | - |
|  |  |  |  |  | Fair Value Measurements at December 31, 2020 Using
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)
U.S. Government agencies and corporations |  | $ | 91,163 |  |  | $ | - |  |  | $ | 91,163 |  |  | $ | - |
States and political subdivisions |  |  | 203,961 |  |  |  | - |  |  |  | 203,961 |  |  |  | - |
Mortgage-backed securities |  |  | 249,175 |  |  |  | - |  |  |  | 249,175 |  |  |  | - |
Corporate debt securities |  |  | 2,443 |  |  |  | - |  |  |  | 2,443 |  |  |  | - |
Total securities available for sale |  | $ | 546,742 |  |  | $ | - |  |  | $ | 546,742 |  |  | $ | - |
The Company’s securities portfolio is valued using Level 2 inputs. The Company relies on a third party vendor to provide market valuations. The inputs used to determine value include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications. The third-party vendor also monitors market indicators, industry activity and economic events as part of the valuation process. Central to the final valuation is the assumption that the indicators used are representative of the fair value of securities held within the Company’s portfolio. Level 2 inputs are subject to a certain degree of uncertainty and changes in these assumptions or methodologies in the future, if any, may impact securities fair value, deferred tax assets or liabilities, or expense. Interest Rate Loan Contracts and Forward Contracts The Company originates consumer real estate loans which it intends to sell to a correspondent lender. Interest rate lock contracts and forward contracts result from originating loans held for sale and are derivatives reported at fair value. The Company enters interest rate lock commitments with customers who apply for a loan which the Company intends to sell to a correspondent lender. The interest rate lock contract ends when the loan closes or the customer withdraws their application. Fair value of the interest rate lock contracts is based upon the correspondent lender’s pricing quotes at the report date. Fair value is adjusted for the estimated probability of the loan closing with the borrower. At the time the Company enters into an interest rate lock contract with a customer, it also enters into a best efforts forward sales commitment with the correspondent lender. If the loan has been closed and funded, the best efforts commitment converts to a mandatory forward sales commitment. Fair value is based on the gain or loss that would occur if the Company were to pair-off the transaction with the investor at the measurement date. This is a level 3 input. The Company has elected to measure and report best efforts commitments at fair value. Interest rate lock contracts and forward contracts are valued based on quotes from the correspondent lender at the reporting date. Pricing changes daily and if a loan has not been sold to the correspondent by the next reporting date, the fair value may be different from that reported currently. Changes in fair value measurement impacts net income.
|  |  |  |  |  | Fair Value Measurements at September 30, 2021 Using
Description |  | Balance as of September 30, 2021 |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
Interest rate loan contracts |  | $ | (4 | ) |  | $ | - |  |  | $ | - |  |  | $ | (4 | )
Forward contracts |  | $ | 3 |  |  | $ | - |  |  | $ | - |  |  | $ | 3 |
|  |  |  |  |  | Fair Value Measurements at December 31, 2020 Using
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)
Interest rate loan contracts |  | $ | 1 |  |  | $ | - |  |  | $ | - |  |  | $ | 1 |
Forward contracts |  | $ | (11 | ) |  | $ | - |  |  | $ | - |  |  | $ | (11 | )
September 30, 2021 |  | Valuation Technique |  | Unobservable Input |  | Range (Weighted Average)
Interest rate loan contracts |  | Market approach |  | Pull-through rate |  |  |  | 85.00%(2) |  |
Forward contracts |  | Market approach |  | Pull-through rate |  |  |  | 85.00%(2) |  |
Interest rate loan contracts |  | Market approach |  | Current reference price |  |  | 100.37% | - | 101.13% | (100.73%)(1)
Forward contracts |  | Market approach |  | Current reference price |  |  | 100.37% | - | 102.67% | (101.21%)(1)
December 31, 2020 |  | Valuation Technique |  | Unobservable Input |  | Range (Weighted Average)
Interest rate loan contracts |  | Market approach |  | Pull-through rate |  |  |  | 87.02%(2) |  |
Forward contracts |  | Market approach |  | Pull-through rate |  |  |  | 87.02%(2) |  |
Interest rate loan contracts |  | Market approach |  | Current reference price |  |  | 101.91% | - | 103.02% | (102.55%)(1)
Forward contracts |  | Market approach |  | Current reference price |  |  | 101.91% | - | 103.19% | (102.67%)(1)
| (1) | Current reference prices were weighted by the relative amount of the loan.
| (2) | All contracts were valued using the same pull-through rate.
Financial Instruments Measured at Fair Value on a Non-Recurring Basis Certain financial instruments are measured at fair value on a nonrecurring basis in accordance with U.S. 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 fair 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 at September 30, 2021 or December 31, 2020. Impaired Loans Impaired loans are measured at fair value on a nonrecurring basis. If an individually evaluated impaired loan’s balance exceeds fair value, the excess amount is allocated to the allowance for loan losses. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income. The fair value of an impaired loan may be measured using one of three methods. Each method falls within a different level of the fair value hierarchy. The observable market price of a loan is categorized as a Level 1 input. The present value of projected cash flows method results in a Level 3 categorization because the calculation relies on the Company’s judgment to determine projected cash flows, which are then discounted at the current rate of the loan, or the rate prior to modification if the loan is a TDR. Loans measured using the fair value of collateral may be categorized in Level 2 or Level 3. Loans valued using the collateral method may be secured by real estate or business assets including equipment, inventory, and accounts receivable. Real estate collateral secures most loans and valuation is based upon the “as-is” value of independent appraisals or evaluations. Appraisals are used to value loans secured by residential 1-4 family properties with outstanding principal balances greater than $250 and commercial real estate loans with outstanding principal balances greater than $500. Appraisals or real estate evaluations prepared by a third party may be used to value loans with principal balances below these thresholds. Appraisals of less than 24 months of age, conducted by independent, licensed appraisers using observable market data analyzed through an income or sales valuation approach result in Level 2 categorization. If a current appraisal cannot be obtained prior to a reporting date and an existing appraisal is discounted to obtain an estimated value, or if declines in value are identified after the date of the appraisal, or if an appraisal is discounted for estimated selling costs, or if the appraisal uses unobservable market data, the valuation of real estate collateral is categorized as Level 3. Valuations based on evaluations are categorized as Level 3. The value of business equipment is based upon an outside appraisal (Level 2) if deemed significant, or the net book value on the applicable business’ financial statements (Level 3) if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). If a current appraisal uses unobservable data as part of the assessment, the value of the collateral is classified as Level 3. As of September 30, 2021, fair valuation procedures did not result in any individual allocation for impaired loans. The following table summarizes the Company’s impaired loans that were measured at fair value on a nonrecurring basis at December 31, 2020.
|  |  |  |  |  |  | Carrying Value
Date | Description |  | Balance |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
| Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
December 31, 2020 | Impaired loans net of valuation allowance |  |  | 970 |  |  |  | - |  |  |  | - |  |  |  | 970 |
The following table presents information about Level 3 Fair Value Measurements at December 31, 2020.
Impaired Loans |  | Valuation Technique |  | Unobservable Input |  | Range (Weighted Average(1))
December 31, 2020 |  | Present value of cash flows |  | Discount rate |  |  | 5.50% | – | 6.50% | (5.78%)
| (1) | Unobservable inputs were weighted by the relative fair value of the impaired loans.
At December 31, 2020, all impaired loans measured at fair value on a nonrecurring basis were measured using the present value of cash flows. The loans are TDRs and the discount rate is the contractual rate that was in effect prior to modification to TDR status. Future changes in cash flow assumptions or if the loans are charged off may result in greater losses than estimated at the reporting dates. An increase in the impairment measurement or a charge-off would increase the provision for loan losses. Other Real Estate Owned Certain assets such as other real estate owned (“OREO”) are measured at fair value less cost to sell. Valuation of OREO is determined using current appraisals from independent parties, a Level 2 input. If current appraisals cannot be obtained prior to reporting dates, or if declines in value are identified after a recent appraisal is received, appraisal values are discounted, resulting in Level 3 estimates. If the Company markets the property with a realtor, estimated selling costs reduce the fair value, resulting in a valuation based on Level 3 inputs. The following table summarizes the Company’s OREO that was measured at fair value on a nonrecurring basis.
|  |  |  |  |  |  | Carrying Value
Date | Description |  | Balance |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
| Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
September 30, 2021 | OREO, net of valuation allowance |  | $ | 957 |  |  | $ | - |  |  | $ | - |  |  | $ | 957 |
December 31, 2020 | OREO, net of valuation allowance |  |  | 1,553 |  |  |  | - |  |  |  | - |  |  |  | 1,553 |
The following tables present information about Level 3 Fair Value Measurements for September 30, 2021 and December 31, 2020.
September 30, 2021 |  | Valuation Technique |  | Unobservable Input |  | Range (Weighted Average(1))
OREO |  | Discounted appraised value |  | Selling cost |  |  | 6.20%(3) |
December 31, 2020 |  | Valuation Technique |  | Unobservable Input |  | Range (Weighted Average(1))
OREO |  | Discounted appraised value |  | Selling cost |  |  | 4.00% | – | 9.23% | (4.54%)(2)
OREO |  | Discounted appraised value |  | Discount for lack of marketability and age of appraisal |  |  | 0.00% | – | 7.66% | (0.62%)(1)
| (1) | Discounts were weighted by the relative appraised value of the OREO properties.
| (2) | The appraised value is discounted by selling costs if the OREO property is listed with a realtor and if appraised value exceeds the list price, less estimated selling costs. Selling costs do not discount appraised value if the Company markets the OREO property independently or if the OREO property is listed with a realtor and the list price less estimated selling costs exceeds appraised value.
| (3) | As of September 30, 2021, the Company held one OREO property
At September 30, 2021 and December 31, 2020, OREO properties were measured using appraised value, and if applicable, discounted by selling costs, lack of marketability and age of appraisal. Determining the discount to appraisals for selling cost and lack of marketability and age of the appraisal relies on certain key assumptions and judgements. Discounts for selling costs and in some instances, marketability, result when the Company markets OREO properties via local realtors. The Company works with the realtor to determine the list price, which may be set at appraised value or at a different amount based on the realtor’s advice and management’s judgement of marketability. Selling costs for improved land generally are estimated at 6% of the list price, and for raw land at 10% of the list price. If the final sale price is different from the list price, the amount of selling costs will also be different from those estimated. Discounts for age may be applied if current appraisals cannot be obtained prior to reporting dates. The most recent appraised value available may be discounted based upon management judgement. There is uncertainty in determining discounts to appraised value. Future changes to marketability assumptions or updated appraisals may indicate lower fair value, with a corresponding impact to net income. Fair Value Summary The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 2021 and December 31, 2020. For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For financial liabilities such as noninterest-bearing demand, interest-bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity. Fair values are estimated using the exit price notion.
|  | September 30, 2021
|  | Carrying Amount |  | Quoted Prices in Active Markets for Identical Assets Level 1 |  | Significant Other Observable Inputs Level 2 |  | Significant Unobservable Inputs Level 3
Financial Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 11,728 |  |  | $ | 11,728 |  |  | $ | - |  |  | $ | - |
Interest-bearing deposits |  |  | 118,863 |  |  |  | 118,863 |  |  |  | - |  |  |  | - |
Securities |  |  | 641,486 |  |  |  | - |  |  |  | 641,486 |  |  |  | - |
Restricted securities |  |  | 845 |  |  |  | - |  |  |  | 845 |  |  |  | - |
Loans held for sale |  |  | 235 |  |  |  | - |  |  |  | 235 |  |  |  | - |
Loans, net |  |  | 789,796 |  |  |  | - |  |  |  | - |  |  |  | 777,049 |
Accrued interest receivable |  |  | 5,161 |  |  |  | - |  |  |  | 5,161 |  |  |  | - |
Bank-owned life insurance |  |  | 42,108 |  |  |  | - |  |  |  | 42,108 |  |  |  | - |
Forward contracts |  |  | 3 |  |  |  | - |  |  |  | - |  |  |  | 3 |
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | $ | 1,432,734 |  |  | $ | - |  |  | $ | 1,350,279 |  |  | $ | 82,626 |
Accrued interest payable |  |  | 46 |  |  |  | - |  |  |  | 46 |  |  |  | - |
Interest rate loan contracts |  |  | 4 |  |  |  | - |  |  |  | - |  |  |  | 4 |
|  | December 31, 2020
|  | Carrying Amount |  | Quoted Prices in Active Markets for Identical Assets Level 1 |  | Significant Other Observable Inputs Level 2 |  | Significant Unobservable Inputs Level 3
Financial Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 13,147 |  |  | $ | 13,147 |  |  | $ | - |  |  | $ | - |
Interest-bearing deposits |  |  | 120,725 |  |  |  | 120,725 |  |  |  | - |  |  |  | - |
Securities |  |  | 546,742 |  |  |  | - |  |  |  | 546,742 |  |  |  | - |
Restricted securities |  |  | 1,279 |  |  |  | - |  |  |  | 1,279 |  |  |  | - |
Loans held for sale |  |  | 866 |  |  |  | - |  |  |  | 866 |  |  |  | - |
Loans, net |  |  | 760,318 |  |  |  | - |  |  |  | - |  |  |  | 752,624 |
Accrued interest receivable |  |  | 5,028 |  |  |  | - |  |  |  | 5,028 |  |  |  | - |
Bank-owned life insurance |  |  | 36,444 |  |  |  | - |  |  |  | 36,444 |  |  |  | - |
Interest rate loan contracts |  |  | 1 |  |  |  | - |  |  |  | - |  |  |  | 1 |
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | $ | 1,297,143 |  |  | $ | - |  |  | $ | 1,207,561 |  |  | $ | 89,681 |
Accrued interest payable |  |  | 56 |  |  |  | - |  |  |  | 56 |  |  |  | - |
Forward contracts |  |  | 11 |  |  |  | - |  |  |  | - |  |  |  | 11 |

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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=123874694&loc=d3e19207-110258 + Details
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