Fair Value of Assets and Liabilities

12 Months Ended

Dec. 31, 2021

Fair Value of Assets and Liabilities [Abstract]

Fair Value of Assets and Liabilities

Note 17. Fair Value of Assets and Liabilities

Determination of Fair Value:

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the “Fair Value Measurements and Disclosures” ASC Topic 820, the fair value of a financial instrument is the price that would be received to sell an asset or paid to 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. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

ASC Topic 820 provides a consistent definition of fair value, which focuses on exit price in an orderly transaction between market 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 business 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.

Fair Value Hierarchy:

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured 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.

Level 1 - Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 - Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on 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 for substantially the full term of the asset or liability.

Level 3 - Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The following methodologies were used by the Company in estimating fair value disclosures for financial instruments:

Securities available-for-sale: The fair value of U.S. Treasury, U.S. Government-sponsored enterprises, municipal securities, other debt securities and mortgage-backed securities, is estimated using a third party pricing service. The third

party provider evaluates securities based on comparable investments with trades and market data and will utilize pricing models that use a variety of inputs, such as benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids and offers as needed. These securities are generally classified as Level 2.

Derivative financial instruments - The fair value for derivative financial instruments is determined based on market prices, broker-dealer quotations on similar products, or other related input parameters. The derivative financial instruments are generally classified Level 2.

Recurring Measurements of Fair Value:

The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis are as follows (in thousands):

			Quoted Prices in		Significant		Significant
			Active Markets		Other		Other
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
Description	Fair Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2021:
Assets:
Securities available-for-sale:
U.S. Treasury	$	137,758	$	—	$	137,758	$	—
U.S. Government-sponsored enterprises (GSEs)		21,801		—		21,801		—
Municipal securities		67,820		—		67,820		—
Other debt securities		27,220		—		27,220		—
Mortgage-backed securities (GSEs)		227,854		—		227,854		—
Total securities available-for-sale		482,453		—		482,453		—
Interest rate swaps agreements for customer loans		1,326		—		1,326		—
Total assets at fair value	$	483,779	$	—	$	483,779	$	—
Liabilities:
Derivative financial instruments and interest rate swap agreements	$	4,893	$	—	$	4,893	$	—
December 31, 2020:
Assets:
Securities available-for-sale:
U.S. Government-sponsored enterprises (GSEs)	$	30,530	$	—	$	30,530	$	—
Municipal securities		91,989		—		91,989		—
Other debt securities		25,118		—		25,118		—
Mortgage-backed securities (GSEs)		67,997		—		67,997		—
Total securities available-for-sale	$	215,634	$	—	$	215,634	$	—
Liabilities:
Derivative financial instruments	$	6,174	$	—	$	6,174	$	—

The Company has no assets or liabilities whose fair values are measured on a recurring basis using Level 3 inputs. Additionally, there were no transfers between Level 1 and Level 2 in the fair value hierarchy.

Assets Measured at Fair Value on a Nonrecurring Basis:

Under certain circumstances management makes adjustments to fair value for assets and liabilities although they are not measured at fair value on an ongoing basis. The following tables present the financial instruments carried on the consolidated balance sheets by caption and by level in the fair value hierarchy, for which a nonrecurring change in fair value has been recorded (in thousands):

			Quoted Prices in		Significant		Significant
			Active Markets		Other		Other
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2021:
Collateral dependent loans	$	2,280	$	—	$	—	$	2,280
Other real estate owned		367		—		—		367
December 31, 2020:
Collateral dependent loans	$	2,455	$	—	$	—	$	2,455
Other real estate owned		4,619		—		—		4,619

For Level 3 assets measured at fair value on a non-recurring basis, the significant unobservable inputs used in the fair value measurements are presented below (dollars in thousands):

					Weighted
			Valuation	Significant Other	Average of
	Fair Value		Technique	Unobservable Input	Input
December 31, 2021:
Collateral dependent loans	$	2,280	Appraisal	Appraisal discounts	25	%
Other real estate owned		367	Appraisal	Appraisal discounts	13	%
December 31, 2020:
Collateral dependent loans	$	2,455	Appraisal	Appraisal discounts	9	%
Other real estate owned		4,619	Appraisal	Appraisal discounts	22	%

Collateral dependent loans: A collateral dependent loan is measured based on the fair value of the collateral securing these loans, less selling costs. Collateral dependent loans are classified within Level 3 of the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory, and/or accounts receivable. The Company determines the value of the collateral based on independent appraisals performed by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraised values are discounted for costs to sell and may be discounted further based on management’s historical knowledge, changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts by management are subjective and are typically significant unobservable inputs for determining fair value. Colleterial dependent loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors discussed above.

Other real estate owned: Other real estate owned, consisting of properties obtained through foreclosure or in satisfaction of loans, are initially recorded at fair value less estimated costs to sell upon transfer of the loans to other real estate. Subsequently, other real estate is carried at the lower of carrying value or fair value less costs to sell. Fair values are generally based on third party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes further discounted based on management’s historical knowledge, and/or changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and

the customer’s business. Such discounts are typically significant unobservable inputs for determining fair value. In cases where the carrying amount exceeds the fair value, less estimated costs to sell, a loss is recognized in noninterest expense.

Carrying value and estimated fair value:

The carrying amount and estimated fair value of the Company’s financial instruments are as follows (in thousands):

	Fair Value Measurements Using
	Carrying								Estimated
	Amount		Level 1		Level 2		Level 3		Fair Value
December 31, 2021:
Assets:
Cash and cash equivalents	$	1,045,077	$	1,045,077	$	—	$	—	$	1,045,077
Securities available-for-sale		482,453		—		482,453		—		482,453
Securities held-to-maturity		76,969		—		76,946		—		76,946
Other investments		16,494		N/A		N/A		N/A		N/A
Loans and leases, net and loans held for sale		2,679,148		—		—		2,676,181		2,676,181
Interest rate swaps agreements for customer loans		1,326		—		1,326		—		1,326
Liabilities:
Noninterest-bearing demand deposits		1,055,125		—		1,055,125		—		1,055,125
Interest-bearing demand deposits		899,158		—		899,158		—		899,158
Money market and savings deposits		1,493,007		—		1,493,007		—		1,493,007
Time deposits		574,648		—		576,598		—		576,598
Borrowings		87,585		—		88,082		—		88,082
Subordinated debt		41,930		—		—		43,374		43,374
Derivative financial instruments and interest rate swap agreements		4,893		—		4,893		—		4,893
December 31, 2020:
Assets:
Cash and cash equivalents	$	481,719	$	481,719	$	—	$	—	$	481,719
Securities available-for-sale		215,634		—		215,634		—		215,634
Other investments		14,794		N/A		N/A		N/A		N/A
Loans and leases, net and loans held for sale		2,375,618		—		—		2,377,581		2,377,581
Liabilities:
Noninterest-bearing demand deposits		685,957		—		685,957		—		685,957
Interest-bearing demand deposits		649,129		—		649,129		—		649,129
Money market and savings deposits		919,631		—		919,631		—		919,631
Time deposits		550,498		—		554,120		—		554,120
Borrowings		81,199		—		82,892		—		82,892
Subordinated debt		39,346		—		—		40,550		40,550
Derivative financial instruments		6,174		—		6,174		—		6,174

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. 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.