Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUE

v3.22.2
FAIR VALUE
6 Months Ended
Jun. 30, 2022
FAIR VALUE [Abstract]  
FAIR VALUE
NOTE 4 – FAIR VALUE

ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value include:


Level 1:
Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.


Level 2:
Significant other observable inputs other than Level 1 prices such as 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.


Level 3:
Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Investment Securities: The fair values of investment securities are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). The fair values of certain securities held to maturity are determined by computing discounted cash flows using observable and unobservable market inputs (Level 3 inputs).

Loans Held for Sale: The fair value of loans held for sale is based upon binding quotes from third party investors (Level 2 inputs).

Impaired Loans: Loans identified as impaired are measured using one of three methods: the loan’s observable market price, the fair value of collateral or the present value of expected future cash flows.  For each period presented, no impaired loans were measured using the loan’s observable market price. If an impaired loan has had a charge-off or if the fair value of the collateral is less than the recorded investment in the loan, we establish a specific reserve and report the loan as nonrecurring Level 3. The fair value of collateral of impaired loans is generally based on recent real estate appraisals, less costs to sell. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Other Real Estate Owned: Other real estate owned (OREO) properties are initially recorded at fair value, less estimated costs to sell when acquired, establishing a new cost basis.  Adjustments to OREO are measured at fair value, less costs to sell. Fair values are generally based on third party appraisals or realtor evaluations of the property. These appraisals and evaluations may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.  Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less estimated costs to sell, an impairment loss is recognized through a valuation allowance, and the property is reported as nonrecurring Level 3.

Interest Rate Swaps: For interest rate swap agreements, we measure fair value utilizing pricing provided by a third-party pricing source that that uses market observable inputs, such as forecasted yield curves, and other unobservable inputs and accordingly, interest rate swap agreements are classified as Level 3.

NOTE 4 – FAIR VALUE (Continued)

Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):

    
Fair
Value
   
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
   
Significant Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
June 30, 2022
                       
Available for sale securities                        
U.S. Treasury and federal agency securities
 
$
199,956
   
$
   
$
199,956
   
$
 
U.S. Agency MBS and CMOs
   
94,129
     
     
94,129
     
 
Tax-exempt state and municipal bonds
   
39,397
     
     
39,397
     
 
Taxable state and municipal bonds
   
93,664
     
     
93,664
     
 
Corporate bonds and other debt securities
   
8,482
     
     
8,482
     
 
Other equity securities
   
1,354
     
     
1,354
     
 
Loans held for sale
   
1,163
     
     
1,163
     
 
Interest rate swaps
   
4,556
     
     
     
4,556
 
Interest rate swaps
   
(4,556
)
   
     
     
(4,556
)
                                 
December 31, 2021
                               
Available for sale securities
                               
U.S. Treasury and federal agency securities
 
$
206,845
   
$
   
$
206,845
   
$
 
U.S. Agency MBS and CMOs
   
86,797
     
     
86,797
     
 
Tax-exempt state and municipal bonds
   
37,556
     
     
37,556
     
 
Taxable state and municipal bonds
   
79,561
     
     
79,561
     
 
Corporate bonds and other debt securities
   
5,304
     
     
5,304
     
 
Other equity securities
   
1,470
     
     
1,470
     
 
Loans held for sale
   
1,407
     
     
1,407
     
 
Interest rate swaps
   
3,277
     
     
     
3,277
 
Interest rate swaps
   
(3,277
)
   
     
     
(3,277
)

Assets measured at fair value on a non-recurring basis are summarized below (in thousands):

 
 
Fair
Value
   
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
   
Significant Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
June 30, 2022
                       
Impaired loans
 
$
337
   
$
   
$
   
$
337
 
                                 
December 31, 2021
                               
Impaired loans
 
$
2,903
   
$
   
$
   
$
2,903
 

NOTE 4 – FAIR VALUE (Continued)

Quantitative information about Level 3 fair value measurements measured on a non-recurring basis was as follows at period end (dollars in thousands):


 
Asset Fair
Value
 
Valuation
Technique
 
Unobservable
Inputs
 
Range (%)
June 30, 2022                  
Impaired Loans
 
$
337
 
Sales comparison approach
 
Adjustment for differences
between comparable sales
 
1.5 to 20.0
          Income approach  
Capitalization rate
  9.5 to 11.0


 
Asset Fair
Value
 
Valuation
Technique
 
Unobservable
Inputs
 
Range (%)
December 31, 2021                  
Impaired Loans
 
$
2,903
 
Sales comparison approach
 
Adjustment for differences
between comparable sales
 
1.5 to 20.0
         
Income approach
 
Capitalization rate
 
9.5 to 11.0


The carrying amounts and estimated fair values of financial instruments, not previously presented, were as follows at June 30, 2022 and December 31, 2021 (dollars in thousands):



  June 30, 2022     December 31, 2021  
 
Level in
Fair Value
Hierarchy
 
Carrying
Amount
   
Fair
Value
   
Carrying
Amount
   
Fair
Value
 
Financial assets
                         
Cash and due from banks
Level 1
 
$
38,376
   
$
38,376
   
$
23,669
   
$
23,669
 
Federal funds sold and other short-term investments
Level 1
   
721,826
     
721,826
     
1,128,119
     
1,128,119
 
Securities held to maturity
Level 3
   
352,721
     
341,274
     
137,003
     
139,272
 
FHLB stock
 Level 3
   
10,211
     
10,211
     
11,558
     
11,558
 
Loans, net
 Level 2
   
1,096,946
     
1,082,028
     
1,090,201
     
1,106,324
 
Bank owned life insurance
 Level 3
   
52,963
     
52,963
     
52,468
     
52,468
 
Accrued interest receivable
 Level 2
   
5,108
     
5,108
     
4,088
     
4,088
 
Financial liabilities
                                 
Deposits
 Level 2
   
(2,494,583
)
   
(2,494,501
)
   
(2,577,958
)
   
(2,577,885
)
Other borrowed funds
 Level 2
   
(30,000
)
   
(29,117
)
   
(85,000
)
   
(86,322
)
Accrued interest payable
 Level 2    
(35
)
   
(35
)
   
(72
)
   
(72
)
Off-balance sheet credit-related items
                                 
Loan commitments
     
     
     
     
 

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, bank owned life insurance, accrued interest receivable and payable, demand deposits, short-term borrowings and variable rate loans or deposits that reprice frequently and fully. Security fair values are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities as discussed above. For fixed rate loans, interest-bearing time deposits in other financial institutions, or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk (including consideration of widening credit spreads). Fair value of debt is based on current rates for similar financing. It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability, so fair value approximates its cost. The fair value of off-balance sheet credit-related items is not significant.

The estimated fair values of financial instruments disclosed above as follow the guidance in ASU 2016-01 which prescribes an “exit price” approach in estimating and disclosing fair value of financial instruments incorporating discounts for credit, liquidity and marketability factors.