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6. Fair Value
 3 Months Ended
Mar. 31, 2021
Fair Value Disclosures [Abstract]  
6. Fair Value

The Company is required to disclose fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate that value. The assumptions used in the estimation of the fair value of the Company’s financial instruments are detailed below. Where quoted prices are not available, fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather a good faith estimate of the increase or decrease in the value of financial instruments held by the Company since purchase, origination or issuance. The methods of determining the fair value of assets and liabilities presented in this note are consistent with methodologies disclosed in Note 16 of the Company’s 2020 Form 10-K, except for the valuation of loans which was impacted by the adoption of ASU No. 2016-01.

 

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

 

● Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.

 

● Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

 

● Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

 

Cash and Cash Equivalents

For cash, due from banks and interest-bearing deposits, the carrying amount is a reasonable estimate of fair value. Cash and cash equivalents are reported in the Level 1 fair value category.

 

Investment Securities Available for Sale

Fair values of investment securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges when available. If quoted prices are not available, fair value is determined using matrix pricing, which is a mathematical technique used widely 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. Fair values for investment securities with quoted market prices are reported in the Level 1 fair value category. Fair value measurements obtained from independent pricing services are reported in the Level 2 fair value category. All other fair value measurements are reported in the Level 3 fair value category.

 

Other Investments

For other investments, the carrying value is a reasonable estimate of fair value. Other investments are reported in the Level 3 fair value category.

 

Mortgage Loans Held for Sale

Mortgage loans held for sale are carried at the lower of aggregate cost or market value. The cost of mortgage loans held for sale approximates the market value. Mortgage loans held for sale are reported in the Level 3 fair value category.

 

Loans

In accordance with ASU No. 2016-01, the fair value of loans, excluding previously presented impaired loans measured at fair value on a non-recurring basis, is estimated using discounted cash flow analyses. The discount rates used to determine fair value use interest rate spreads that reflect factors such as liquidity, credit, and nonperformance risk of the loans. Loans are reported in the Level 3 fair value category, as the pricing of loans is more subjective than the pricing of other financial instruments.

 

Mutual Funds

For mutual funds held in the deferred compensation trust, the carrying value is a reasonable estimate of fair value. Mutual funds held in the deferred compensation trust are included in other assets on balance sheet and reported in the Level 2 fair value category. 

 

Deposits

The fair value of demand deposits, interest-bearing demand deposits and savings is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. Deposits are reported in the Level 3 fair value category.

 

Securities Sold Under Agreements to Repurchase

For securities sold under agreements to repurchase, the carrying value is a reasonable estimate of fair value. Securities sold under agreements to repurchase are reported in the Level 2 fair value category.

 

FHLB Borrowings

The fair value of FHLB borrowings is estimated based upon discounted future cash flows using a discount rate comparable to the current market rate for such borrowings. FHLB borrowings are reported in the Level 3 fair value category.

 

Junior Subordinated Debentures

Because the Company’s junior subordinated debentures were issued at a floating rate, the carrying amount is a reasonable estimate of fair value. Junior subordinated debentures are reported in the Level 2 fair value category.

 

Commitments to Extend Credit and Standby Letters of Credit

Commitments to extend credit and standby letters of credit are generally short-term and at variable interest rates. Therefore, both the carrying value and estimated fair value associated with these instruments are immaterial.

 

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

 

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include deferred income taxes and premises and equipment. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

 

The tables below present the balance of securities available for sale, which are measured at fair value on a recurring basis by level within the fair value hierarchy, as of March 31, 2021 and December 31, 2020.

 

(Dollars in thousands)            
   March 31, 2021         
   Fair Value Measurements  Level 1 Valuation  Level 2 Valuation  Level 3 Valuation
U. S Treasuries  $7,960        $7,960      
U.S. Government                    
sponsored enterprises   13,019         13,019      
Mortgage-backed securities   185,703    —      185,703    —   
State and political subdivisions   118,835    —      118,835    —   

 

 

(Dollars in thousands)            
   December 31, 2020
   Fair Value Measurements  Level 1 Valuation  Level 2 Valuation  Level 3 Valuation
U.S. Government                    
sponsored enterprises  $7,507    —      7,507    —   
Mortgage-backed securities   145,314    —      145,314    —   
State and political subdivisions   92,428    —      92,428    —   

 

The tables below present the balance of mutual funds held in the deferred compensation trust, which are measured at fair value on a recurring basis by level within the fair value hierarchy, as of March 31, 2021 and December 31, 2020.

 

(Dollars in thousands)        
  March 31, 2021
  Fair Value Measurements Level 1 Valuation Level 2 Valuation Level 3 Valuation
Mutual funds held in deferred compensation trust   $                    1,372                -              1,372                  -

 

(Dollars in thousands)        
  December 31, 2020
  Fair Value Measurements Level 1 Valuation Level 2 Valuation Level 3 Valuation
Mutual funds held in deferred compensation trust   $                    1,320                -              1,320                  -

 

The fair value measurements for mortgage loans held for sale, impaired loans and other real estate on a non-recurring basis at March 31, 2021 and December 31, 2020 are presented below. The fair value measurement process uses certified appraisals and other market-based information; however, in many cases, it also requires significant input based on management’s knowledge of, and judgment about, current market conditions, specific issues relating to the collateral and other matters. As a result, all fair value measurements for impaired loans and other real estate are considered Level 3.

 

  

Fair Value Measurements

March 31, 2021

  Level 1 Valuation  Level 2 Valuation  Level 3 Valuation
Mortgage loans held for sale  $4,236    —      —      4,236 
Impaired loans   19,752    —      —      19,752 
Other real estate   128    —      —      128 

 

(Dollars in thousands)            
   Fair Value Measurements December 31, 2020  Level 1 Valuation  Level 2 Valuation  Level 3 Valuation
Mortgage loans held for sale  $9,139    —      —      9,139 
Impaired loans   20,369    —      —      20,369 
Other real estate  128    —      —      128 

 

(Dollars in thousands)                  
   Fair Value March 31, 2021  Fair Value December 31, 2020  Valuation Technique  Significant Unobservable Inputs  General Range of Significant Unobservable Input Values
Mortgage loans held for sale  $4,236    9,139   Rate lock commitment      N/A   N/A
Impaired loans   19,752    20,369    Appraised value and discounted cash flows  Discounts to reflect current market conditions and ultimate collectability       0 - 25  %
Other real estate   128    128    Appraised value  Discounts to reflect current market conditions and estimated costs to sell       0 - 25  %

 

The carrying amount and estimated fair value of financial instruments at March 31, 2021 and December 31, 2020 are as follows:

 

(Dollars in thousands)               
      Fair Value Measurements at March 31, 2021
   Carrying Amount  Level 1  Level 2  Level 3  Total
Assets:               
Cash and cash equivalents  $209,037    209,037    —      —      209,037 
Investment securities available for sale   325,517    —      325,517    —      325,517 
Other investments   3,791    —      —      3,791    3,791 
Mortgage loans held for sale   4,236    —      —      4,236    4,236 
Loans, net   936,965    —      —      921,096    921,096 
Mutual funds held in deferred compensation trust   1,372     —     1,372    —    1,372
                          
Liabilities:                         
Deposits  $1,334,465    —      —      1,330,015    1,330,015 
Securities sold under agreements                         
to repurchase   31,916    —      31,916    —      31,916 
Junior subordinated debentures   15,464    —      15,464    —      15,464 

 

          Fair Value Measurements at December 31, 2020  
     Carrying Amount      Level 1      Level 2      Level 3      Total  
Assets:                              
Cash and cash equivalents   $ 161,580       161,580       -       -       161,580  
Investment securities available for sale     245,249       -       245,249       -       245,249  
Other investments     4,155       -       -       4,155       4,155  
Mortgage loans held for sale     9,139       -       -       9,139       9,139  
Loans, net     938,731       -       -       924,845       924,845  
Mutual funds held in deferred compensation trust     1,320          -       1,320        -       1,320   
                                         
Liabilities:                                        
Deposits   $ 1,221,086       -       -       1,216,503       1,216,503  
Securities sold under agreements                                        
to repurchase     26,201       -       26,201       -       26,201  
Junior subordinated debentures     15,464       -       15,464       -       15,464