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Fair value estimates

9 Months Ended

Sep. 30, 2021

Fair value estimates

Fair value estimates

7. Fair value estimates:

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosure under GAAP. Fair value estimates are calculated without attempting to estimate the value of anticipated future business and the value of certain assets and liabilities that are not considered financial. Accordingly, such assets and liabilities are excluded from disclosure requirements.

In accordance with FASB ASC 820, “Fair Value Measurements and Disclosures,” fair value is the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. 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. In many cases, these values cannot be realized in immediate settlement of the instrument.

Current fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction that is not a forced liquidation or distressed sale between participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

In accordance with GAAP, the Company groups its assets and liabilities generally measured at fair value into three levels based on market information or other fair value estimates in which the assets and liabilities are traded or valued and the reliability of the assumptions used to determine fair value. These levels include:

●

Level 1: Unadjusted quoted prices of 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.

An asset’s or liability’s placement in the fair value hierarchy is based on the lowest level of input that is significant to the fair value estimate.

During the periods ended September 30, 2021 and December 31, 2020 there were no transfers in or out of Level 3.

The following methods and assumptions were used by the Company to calculate fair values and related carrying amounts of financial instruments:

Investment securities: The fair values of U.S. Treasury securities and marketable equity securities are based on quoted market prices from active exchange markets. The fair values of debt securities are based on pricing from a matrix pricing model.

Loans held for sale: The fair values of loans held for sale are based upon current delivery prices in the secondary mortgage market.

Interest rate swaps and options: The Company’s interest rate swaps and options are reported at fair value utilizing Level 2 inputs. Values of these instruments are obtained through an independent pricing source utilizing information which may include market observed quotations for interest rate, forward rates, rate volatility, and volatility surface. Derivative contracts create exposure to interest rate movements as well as risks from the potential of non-performance of the counterparty.

Assets and liabilities measured at fair value on a recurring basis at September 30, 2021 and December 31, 2020 are summarized as follows:


		Fair Value Measurement Using
					Quoted Prices in			Significant			Significant
					Active Markets for			Other Observable			Unobservable
					Identical Assets			Inputs			Inputs
September 30, 2021		Amount			(Level 1)			(Level 2)			(Level 3)
U.S. Treasury securities		$	135,397		$	135,397					$
U.S. government-sponsored enterprises			41,590					$	41,590
State and municipals:
Taxable			66,901						66,901
Tax-exempt			90,485						90,485
Mortgage-backed securities:
U.S. government agencies			2,158						2,158
U.S. government-sponsored enterprises			121,880						121,880
Corporate debt securities			2,961						2,961
Common equity securities			147			147
Total investment securities		$	461,519		$	135,544		$	325,975		$
Loan held for sale		$	997					$	997
Interest rate floor-other assets		$	1,159					$	1,159
Interest rate swap-other assets		$	9,531					$	9,531
Interest rate swap-other liabilities		$	(9,277)					$	(9,277)


		Fair Value Measurement Using
					Quoted Prices in			Significant			Significant
					Active Markets for			Other Observable			Unobservable
					Identical Assets			Inputs			Inputs
December 31, 2020		Amount			(Level 1)			(Level 2)			(Level 3)
U.S. Treasury securities		$	18,905		$	18,905					$
U.S. government-sponsored enterprises			65,188					$	65,188
State and municipals:
Taxable			55,366						55,366
Tax-exempt			56,994						56,994
Mortgage-backed securities:
U.S. government agencies			3,707						3,707
U.S. government-sponsored enterprises			94,751						94,751
Corporate debt securities			1,000						1,000
Common equity securities			138			138
Total investment securities		$	296,049		$	19,043		$	277,006		$
Loan held for sale		$	837					$	837
Interest rate floor-other assets		$	1,678					$	1,678
Interest rate swap-other assets		$	13,693					$	13,693
Interest rate swap-other liabilities		$	(14,099)					$	(14,099)

Assets and liabilities measured at fair value on a nonrecurring basis at September 30, 2021 and December 31, 2020 are summarized as follows:

Fair Value Measurement Using

Quoted Prices in

Significant

Significant

Active Markets for

Other Observable

Unobservable

Identical Assets

Inputs

Inputs

September 30, 2021

Amount

(Level 1)

(Level 2)

(Level 3)

Impaired loans

$

1,232

$

1,232

Other real estate owned

$

487

$

487

Fair Value Measurement Using

Quoted Prices in

Significant Other

Significant

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

December 31, 2020

Amount

(Level 1)

(Level 2)

(Level 3)

Impaired loans

$

2,884

$

2,884

Other real estate owned

$

527

$

527

Fair values of impaired loans are based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:


		Quantitative Information about Level 3 Fair Value Measurements
		Fair Value							Range
September 30, 2021		Estimate			Valuation Techniques		Unobservable Input		(Weighted Average)
Impaired loans		$	1,232		Appraisal of collateral		Appraisal adjustments		21.6% to 97.0% (87.0)%
							Liquidation expenses		3.0% to 6.0% (5.3)%
Other real estate owned		$	487		Appraisal of collateral		Appraisal adjustments		35.9% to 35.9% (35.9)%
							Liquidation expenses		3.0% to 6.0% (5.0)%


		Quantitative Information about Level 3 Fair Value Measurements
		Fair Value							Range
December 31, 2020		Estimate			Valuation Techniques		Unobservable Input		(Weighted Average)
Impaired loans		$	2,884		Appraisal of collateral		Appraisal adjustments		9.0% to 97.0% (28.2)%
							Liquidation expenses		3.0% to 6.0% (5.5)%
Other real estate owned		$	527		Appraisal of collateral		Appraisal adjustments		3.1% to 58.1% (29.9)%
							Liquidation expenses		3.0% to 6.0% (5.0)%

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.

Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

The carrying and fair values of the Company’s financial instruments at September 30, 2021 and December 31, 2020 and their placement within the fair value hierarchy are as follows:


								Fair Value Hierarchy
								Quoted
								Prices in
								Active			Significant
								Markets for			Other			Significant
								Identical			Observable			Unobservable
		Carrying			Fair			Assets			Inputs			Inputs
September 30, 2021		Value			Value			(level 1)			(level 2)			(Level 3)
Financial assets:
Cash and due from banks		$	360,587		$	360,587		$	360,587
Investment securities:
Available-for-sale			461,372			461,372			135,397		$	325,975
Common equity securities			147			147			147
Held-to-maturity			32,848			32,556						32,556
Loans held for sale			997			997						997
Net loans			2,178,968			2,154,145								$	2,154,145
Accrued interest receivable			8,280			8,280						8,280
Mortgage servicing rights			846			1,282						1,282
Restricted equity securities (FHLB and other)			3,916			3,916						3,916
Interest rate floor			1,159			1,159						1,159
Interest rate swaps			9,531			9,531						9,531
Total		$	3,058,651		$	3,033,972
Financial liabilities:
Deposits		$	2,840,919		$	2,842,487					$	2,842,487
Long-term debt			3,235			3,336						3,336
Subordinated debentures			33,000			32,660						32,660
Accrued interest payable			872			872						872
Interest rate swaps			9,277			9,277						9,277
Total		$	2,887,303		$	2,888,632


								Fair Value Hierarchy
								Quoted
								Prices in
								Active			Significant
								Markets for			Other			Significant
								Identical			Observable			Unobservable
		Carrying			Fair			Assets			Inputs			Inputs
December 31, 2020		Value			Value			(level 1)			(level 2)			(Level 3)
Financial assets:
Cash and due from banks		$	228,192		$	228,192		$	228,192
Investment securities:
Available-for-sale			295,911			295,911			18,905		$	277,006
Common equity securities			138			138			138
Held-to-maturity			7,225			7,513						7,513
Loans held for sale			837			837						837
Net loans			2,150,638			2,145,752								$	2,145,752
Accrued interest receivable			8,255			8,255						8,255
Mortgage servicing rights			838			1,269						1,269
Restricted equity securities (FHLB and other)			5,397			5,397						5,397
Interest rate floor			1,678			1,678						1,678
Interest rate swaps			13,693			13,693						13,693
Total		$	2,712,802		$	2,708,635
Financial liabilities:
Deposits		$	2,437,113		$	2,441,014					$	2,441,014
Long-term debt			14,769			15,073						15,073
Subordinated debentures			33,000			33,096						33,096
Accrued interest payable			736			736						736
Interest rate swaps			14,099			14,099						14,099
Total		$	2,499,717		$	2,504,018

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.

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