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Note 8 - Fair Value Measurements

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Fair Value Disclosures [Text Block]

8. Fair Value Measurements

FASB ASC Topic

820

, Fair Value Measurements,

provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level

1

measurements) and the lowest priority to unobservable inputs (Level

3

measurements). The

three

levels of the fair value hierarchy under FASB ASC Topic

820

are described as follows:

Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted market price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

	Level 2:		Inputs to the valuation methodology include quoted market prices for similar assets or liabilities in active markets; quoted market prices for identical or similar assets or liabilities in markets that are not active; or inputs that are derived principally from or can be corroborated by observable market data by correlation or other means.
	Level 3:		Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth on the following page. These valuation methodologies were applied to all of the Company’s financial and nonfinancial assets carried at fair value or the lower of cost or fair value. The table below presents the balances of assets measured at fair value on a recurring and nonrecurring basis as of

March 31, 2020

and

December 31, 2019.

The Company had

no

liabilities measured at fair value as of

March 31, 2020

or

December 31, 2019.

		Carrying Value
(In thousands)		Level 1				Level 2				Level 3				Total
March 31, 2020
Assets Measured on a Recurring Basis
Securities available for sale:
Agency mortgage-backed securities		$	-			$	70,069			$	-			$	70,069
Agency CMO			-				41,609				-				41,609
Agency notes and bonds			-				60,569				-				60,569
Municipal obligations			-				80,935				-				80,935
Total securities available for sale		$	-			$	253,182			$	-			$	253,182
Equity securities		$	1,352			$	-			$	-				1,352
Assets Measured on a Nonrecurring Basis
Impaired loans:
Residential real estate		$	-			$	-			$	1,825			$	1,825
Land			-				-				115				115
Commercial real estate			-				-				447				447
Commercial business			-				-				247				247
Home equity and second mortgage			-				-				56				56
Other consumer			-				-				42				42
Total impaired loans		$	-			$	-			$	2,732			$	2,732
Loans held for sale		$	-			$	3,085			$	-			$	3,085
December 31, 2019
Assets Measured on a Recurring Basis
Securities available for sale:
Agency mortgage-backed securities		$	-			$	69,498			$	-			$	69,498
Agency CMO			-				43,084				-				43,084
Agency notes and bonds			-				64,556				-				64,556
Municipal obligations			-				77,424				-				77,424
Total securities available for sale		$	-			$	254,562			$	-			$	254,562
Equity securities		$	1,746			$	-			$	-				1,746
Assets Measured on a Nonrecurring Basis
Impaired loans:
Residential real estate		$	-			$	-			$	1,910			$	1,910
Land			-				-				115				115
Commercial real estate			-				-				353				353
Commercial business			-				-				249				249
Home equity and second mortgage			-				-				56				56
Other consumer			-				-				48				48
Total impaired loans		$	-			$	-			$	2,731			$	2,731
Loans held for sale		$	-			$	4,176			$	-			$	4,176
Foreclosed real estate:
Residential real estate		$	-			$	-			$	170			$	170
Total foreclosed real estate		$	-			$	-			$	170			$	170

Fair value is based upon quoted market prices, where available. If quoted market prices are

not

available, fair value is based on internally developed models or obtained from

third

parties that primarily use, as inputs, observable market-based parameters or a matrix pricing model that employs the Bond Market Association’s standard calculations for cash flow and price/yield analysis and observable market-based parameters. Valuation adjustments

may

be made to ensure that financial instruments are recorded at fair value, or the lower of cost or fair value. These adjustments

may

include unobservable parameters. Any such valuation adjustments have been applied consistently over time. The Company’s valuation methodologies

may

produce a fair value calculation that

may

not

be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Securities Available for Sale and Equity Securities

.

Securities classified as available for sale and equity securities are reported at fair value on a recurring basis.  These securities are classified as Level

1

of the valuation hierarchy where quoted market prices from reputable

third

-party brokers are available in an active market. If quoted market prices are

not

available, the Company obtains fair value measurements from an independent pricing service.  These securities are reported using Level

2

inputs and the fair value measurements consider observable data that

may

include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors. For securities where quoted market prices, market prices of similar securities or prices from an independent

third

party pricing service are

not

available, fair values are calculated using discounted cash flows or other market indicators and are classified within Level

3

of the fair value hierarchy. Changes in fair value of securities available for sale are recorded in other comprehensive income, net of income tax effect. Changes in fair value of equity securities are recorded in noninterest income on the consolidated statements of income.

Impaired Loans

. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. The fair value of impaired loans is classified as Level

3

in the fair value hierarchy.

Impaired loans are carried at the present value of estimated future cash flows using the loan's effective interest rate or the fair value of collateral less estimated costs to sell if the loan is collateral dependent. At

March 31, 2020

and

December 31, 2019,

all impaired loans were considered to be collateral dependent for the purpose of determining fair value. Collateral

may

be real estate and/or business assets, including equipment, inventory and/or accounts receivable. The fair value of the collateral is generally determined based on real estate appraisals or other independent evaluations by qualified professionals, adjusted for estimated costs to sell the property, costs to complete or repair the property and other factors to reflect management’s estimate of the fair value of the collateral given the current market conditions and the condition of the collateral.

At

March 31, 2020,

the significant unobservable inputs used in the fair value measurement of impaired loans included a discount from appraised value for estimates of changes in market conditions, the condition of the collateral and estimated costs to sell the collateral ranging from

40%

to

47%,

with a weighted average discount of

45%.

At

December 31, 2019,

the significant unobservable inputs used in the fair value measurement of impaired loans included a discount from appraised value for estimates of changes in market conditions, the condition of the collateral and estimated costs to sell the collateral ranging from

40%

to

66%,

with a weighted average discount of

47%.

The Company recognized a reduction in provisions for loan losses for impaired loans for the

three

months ended

March 31, 2020

of

$1,000

and provisions for loan losses for impaired loans for the

three

months ended

March 31, 2019

of

$20,000.

Loans Held for Sale

. Loans held for sale are carried at the lower of cost or market value. The portfolio is comprised of residential real estate loans and fair value is based on specific prices of underlying contracts for sales to investors.  These measurements are classified as Level

2.

Foreclosed Real Estate

. Foreclosed real estate is reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. The fair value of foreclosed real estate is classified as Level

3

in the fair value hierarchy.

Foreclosed real estate is reported at fair value less estimated costs to dispose of the property. The fair values are determined by real estate appraisals which are then discounted to reflect management’s estimate of the fair value of the property given current market conditions and the condition of the collateral. At

March 31, 2020,

the Company had

no

foreclosed real estate. At

December 31, 2019,

the discount from appraised value was

38%.

There were

no

charges to write down foreclosed real estate recognized in income for the

three

months ended

March 31, 2020.

The Company recognized losses of

$137,000

to write down foreclosed real estate for the

three

months ended

March 31, 2019.

There have been

no

changes in the valuation techniques and related inputs used for assets measured at fair value on a recurring and nonrecurring basis during the

three

month periods ended

March 31, 2020

and

2019.

There were

no

transfers into or out of the Company’s Level

3

financial assets for the

three

month periods ended

March 31, 2020

and

2019.

GAAP requires disclosure of the fair value of financial assets and financial liabilities, whether or

not

recognized in the balance sheet. 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. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could

not

be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do

not

represent the underlying value of the Company. The estimated fair values of the Company's financial instruments are as follows:

		Carrying				Fair				Fair Value Measurements Using
(In thousands)		Value				Value				Level 1				Level 2				Level 3
March 31, 2020
Financial assets:
Cash and cash equivalents		$	59,722			$	59,722			$	59,722			$	-			$	-
Interest-bearing time deposits			6,490				6,835				-				6,835				-
Securities available for sale			253,182				253,182				-				253,182				-
Loans held for sale			3,085				3,142				-				3,142				-
Loans, net			465,292				476,293				-				-				476,293
FHLB and other restricted stock			1,988				N/A				N/A				N/A				N/A
Accrued interest receivable			2,863				2,863				-				2,863				-
Equity securities (included in other assets)			1,352				1,352				1,352				-				-
Financial liabilities:
Deposits			722,618				723,217				-				-				723,217
Accrued interest payable			219				219				-				219				-
December 31, 2019:
Financial assets:
Cash and cash equivalents		$	51,360			$	51,360			$	51,360			$	-			$	-
Interest-bearing time deposits			6,490				6,654				-				6,654				-
Securities available for sale			254,562				254,562				-				254,562				-
Loans held for sale			4,176				4,243				-				4,243				-
Loans, net			466,694				482,119				-				-				482,119
FHLB and other restricted stock			1,988				N/A				N/A				N/A				N/A
Accrued interest receivable			3,076				3,076				-				3,076				-
Equity securities (included in other assets)			1,746				1,746				1,746				-				-
Financial liabilities:
Deposits			722,177				721,729				-				-				721,729
Accrued interest payable			210				210				-				210				-

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- 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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