Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUE

v3.21.2
FAIR VALUE
6 Months Ended
Jun. 30, 2021
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. 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, 2021
                       
U.S. Treasury and federal agency securities
 
$
67,392
   
$
   
$
67,392
   
$
 
U.S. Agency MBS and CMOs
   
64,247
     
     
64,247
     
 
Tax-exempt state and municipal bonds
   
40,725
     
     
40,725
     
 
Taxable state and municipal bonds
   
63,132
     
     
63,132
     
 
Corporate bonds and other debt securities
   
4,459
     
     
4,459
     
 
Other equity securities
   
1,491
     
     
1,491
     
 
Loans held for sale
   
4,752
     
     
4,752
     
 
Interest rate swaps
   
3,586
     
     
     
3,586
 
Interest rate swaps
   
(3,586
)
   
     
     
(3,586
)
                                 
December 31, 2020
                               
Available for sale securities
                               
U.S. Treasury and federal agency securities
 
$
64,110
   
$
   
$
64,110
   
$
 
U.S. Agency MBS and CMOs
   
64,983
     
     
64,983
     
 
Tax-exempt state and municipal bonds
   
45,642
     
     
45,642
     
 
Taxable state and municipal bonds
   
57,177
     
     
57,177
     
 
Corporate bonds and other debt securities
   
4,920
     
     
4,920
     
 
Other equity securities
   
1,513
     
     
1,513
     
 
Loans held for sale
   
5,422
     
     
5,422
     
 
Interest rate swaps
   
4,217
     
     
     
4,217
 
Interest rate swaps
   
(4,217
)
   
     
     
(4,217
)

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, 2021
                       
Impaired loans
 
$
1,665
   
$
   
$
   
$
1,665
 
Other real estate owned
   
     
     
     
 
                                 
December 31, 2020
                               
Impaired loans
 
$
4,686
   
$
   
$
   
$
4,686
 
Other real estate owned
   
194
     
     
     
194
 

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, 2021
                      
Impaired Loans
 
$
1,665
 
Sales comparison approach
 
Adjustment for differences between comparable sales
 
1.0 to 30.0
         
Income approach
 
Capitalization rate
 
9.5 to 11.0

   
Asset Fair
Value
 
Valuation
Technique
 
Unobservable
Inputs
 
Range (%)
December 31, 2020
                      
Impaired Loans
 
$
4,686
 
Sales comparison approach
 
Adjustment for differences between comparable sales
 
1.5 to 20.0
         
Income approach
 
Capitalization rate
 
9.5 to 11.0
Other real estate owned
   
194
 
Sales comparison approach
 
Adjustment for differences between comparable sales
 
3.0 to 20.0
         
Income approach
 
Capitalization rate
 
9.5 to 11.0


NOTE 4 – FAIR VALUE (Continued)

The carrying amounts and estimated fair values of financial instruments, not previously presented, were as follows at June 30, 2021 and December 31, 2020 (dollars in thousands):


Level in   June 30, 2021     December 31, 2020  

Fair Value
Hierarchy
 
Carrying
Amount
   
Fair
Value
   
Carrying
Amount
   
Fair
Value
 
Financial assets
                         
Cash and due from banks
Level 1
 
$
31,051
   
$
31,051
   
$
31,480
   
$
31,480
 
Cash equivalents
Level 2
   
1,189,266
     
1,189,266
     
752,256
     
752,256
 
Securities held to maturity
Level 3
   
121,867
     
124,972
     
79,468
     
83,246
 
FHLB stock
     
11,558
   
NA
     
11,558
   
NA
 
Loans, net
Level 2
   
1,219,857
     
1,251,865
     
1,407,236
     
1,448,874
 
Bank owned life insurance
Level 3
   
52,507
     
52,507
     
42,516
     
42,516
 
Accrued interest receivable
Level 2
   
4,539
     
4,539
     
5,625
     
5,625
 
Financial liabilities
                                 
Deposits
Level 2
   
(2,600,076
)
   
(2,600,122
)
   
(2,298,587
)
   
(2,298,867
)
Other borrowed funds
Level 2
   
(60,000
)
   
(62,198
)
   
(70,000
)
   
(73,010
)
Long-term debt
Level 2
   
(20,619
)
   
(18,126
)
   
(20,619
)
   
(18,011
)
Accrued interest payable
Level 2
   
(217
)
   
(217
)
   
(242
)
   
(242
)
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. 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.