XML 26 R15.htm IDEA: XBRL DOCUMENT v3.21.2
Note 8 - Fair Value Measurements
 9 Months Ended
Sep. 30, 2021
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 page 37 hereof.  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 September 30, 2021 and December 31, 2020.  The Company had no liabilities measured at fair value as of September 30, 2021 or December 31, 2020.

 

 

  

Carrying Value

 

(In thousands)

 

Level 1

  

Level 2

  

Level 3

  

Total

 
                 

September 30, 2021

                

Assets Measured on a Recurring Basis

                

Securities available for sale:

                

Agency mortgage-backed securities

 $-  $96,953  $-  $96,953 

Agency CMO

  -   9,562   -   9,562 

Agency notes and bonds

  -   124,845   -   124,845 

Treasury notes and bonds

  -   40,528   -   40,528 

Municipal obligations

  -   147,046   -   147,046 

Total securities available for sale

 $-  $418,934  $-  $418,934 
                 

Equity securities

 $1,913  $-  $-   1,913 
                 

Assets Measured on a Nonrecurring Basis

             

Impaired loans:

                

Residential real estate

 $-  $-  $1,347  $1,347 

Land

  -   -   100   100 

Commercial real estate

  -   -   719   719 

Commercial business

  -   -   181   181 

Home equity and second mortgage

  -   -   297   297 

Total impaired loans

 $-  $-  $2,644  $2,644 
                 

Loans held for sale

 $-  $4,087  $-  $4,087 
                 

Foreclosed real estate:

                

Residential real estate

 $-  $-  $64  $64 

Total foreclosed real estate

 $-  $-  $64  $64 
                 

December 31, 2020

                

Assets Measured on a Recurring Basis

                

Securities available for sale:

                

Agency mortgage-backed securities

 $-  $61,359  $-  $61,359 

Agency CMO

  -   21,030   -   21,030 

Agency notes and bonds

  -   81,531   -   81,531 

Municipal obligations

  -   119,582   -   119,582 

Total securities available for sale

 $-  $283,502  $-  $283,502 
                 

Equity securities

 $1,553  $-  $-   1,553 
                 

Assets Measured on a Nonrecurring Basis

             

Impaired loans:

                

Residential real estate

 $-  $-  $1,728  $1,728 

Land

  -   -   97   97 

Commercial real estate

  -   -   779   779 

Commercial business

  -   -   211   211 

Home equity and second mortgage

  -   -   353   353 

Total impaired loans

 $-  $-  $3,168  $3,168 
                 

Loans held for sale

 $-  $7,941  $-  $7,941 

 

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 September 30, 2021 and December 31, 2020, 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 September 30, 2021, 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 10% to 57%, with a weighted average discount of 22%.  At December 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 10% to 66%, with a weighted average discount of 27%.  The Company recognized provisions for loan losses of $12,000 and $138,000 for the nine months ended September 30, 2021 and 2020, respectively, for impaired loans.  The Company recognized reductions to the provision for loan losses of $1,000 and $29,000 for the three months ended September 30, 2021 and 2020, respectively, for impaired loans.    

 

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 September 30, 2021 the discount from appraised value was 54%.  At December 31, 2020, the Company had no foreclosed real estate.  There were no charges to write down foreclosed real estate recognized in income for the three months or nine months ended September 30, 2021 or 2020.        

 

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 September 30, 2021 and 2020.  There were no transfers into or out of the Company’s Level 3 financial assets for the three month periods ended September 30, 2021 and 2020. 

 

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

 
                     

September 30, 2021:

                    

Financial assets:

                    

Cash and cash equivalents

 $164,300  $164,300  $164,300  $-  $- 

Interest-bearing time deposits

  4,851   5,019   -   5,019   - 

Securities available for sale

  418,934   418,934   -   418,934   - 

Securities held to maturity

  2,000   2,037   -   2,037   - 

Loans held for sale

  4,087   4,172   -   4,172   - 

Loans, net

  485,505   487,796   -   -   487,796 

FHLB and other restricted stock

  1,988   N/A   N/A   N/A   N/A 

Accrued interest receivable

  3,204   3,204   -   3,204   - 

Equity securities (included in other assets)

  1,913   1,913   1,913   -   - 
                     

Financial liabilities:

                    

Deposits

  1,002,294   1,002,469   -   -   1,002,469 

Accrued interest payable

  101   101   -   101   - 
                     

December 31, 2020:

                    

Financial assets:

                    

Cash and cash equivalents

 $175,888  $175,888  $175,888  $-  $- 

Interest-bearing time deposits

  6,396   6,687   -   6,687   - 

Securities available for sale

  283,502   283,502   -   283,502   - 

Loans held for sale

  7,941   8,101   -   8,101   - 

Loans, net

  500,331   506,207   -   -   506,207 

FHLB and other restricted stock

  1,988   N/A   N/A   N/A   N/A 

Accrued interest receivable

  3,434   3,434   -   3,434   - 

Equity securities (included in other assets)

  1,553   1,553   1,553   -   - 
                     

Financial liabilities:

                    

Deposits

  900,461   901,073   -   -   901,073 

Accrued interest payable

  153   153   -   153   - 

 

The methods and assumptions used to estimate fair value are described as follows:

 

Carrying amount is the estimated fair value for cash and cash equivalents, accrued interest receivable and payable, demand deposits and other transactions accounts.  The fair value of investment securities is based on quoted market prices (where available) or values obtained from an independent pricing service.  The fair value of loans (excluding loans held for sale), interest-bearing time deposits in other financial institutions, and fixed-maturity certificates of deposit is based on discounted cash flows using current market rates applied to the estimated life and credit risk of the instrument.  The fair value of loans held for sale is based on specific prices of underlying contracts for sales to investors.  It is not practicable to determine the fair value of FHLB and other restricted stock due to restrictions placed on its transferability.  The methods utilized to measure the fair value of financial instruments at September 30, 2021 and December 31, 2020 represent an approximation of exit price, but an actual exit price may differ.