Note 8 - Fair Values of Financial Instruments

3 Months Ended

Mar. 31, 2021

Notes to Financial Statements

Fair Value Disclosures [Text Block]

In accordance with ASC 820, disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, is required. 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 under current market conditions. Fair value is best determined based upon quoted market prices, or exit 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, and the fair value estimates may not be realized in an immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

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 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 ASC 820, the Company groups its financial assets and financial liabilities 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 upon quoted prices for identical assets or liabilities traded in active markets.

Level 2 – Valuation is based upon observable inputs other than quoted prices included in level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Valuation is based upon unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.

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 methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

Cash and Due from Banks – For these short-term instruments, fair value is the carrying value. Cash and due from banks is classified in level 1 of the fair value hierarchy.

Federal Funds Sold – The fair value is the carrying value. The Company classifies these assets in level 1 of the fair value hierarchy.

Investment Securities and Equity Securities – Where quoted prices are available in an active market, the Company classifies the securities within level 1 of the valuation hierarchy. Securities are defined as both long and short positions. Level 1 securities include exchange-traded equity securities.

If quoted market prices are not available, the Company estimates fair values using pricing models and discounted cash flows that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, and credit spreads. Examples of such instruments, which would generally be classified within level 2 of the valuation hierarchy if observable inputs are available, include obligations of U.S. government agencies and corporations, obligations of state and political subdivisions, corporate bonds, residential mortgage-backed securities, commercial mortgage-backed securities, and other equity securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, the Company classifies those securities in level 3.

Based on market reference data, which may include reported trades; bids, offers or broker/dealer quotes; benchmark yields and spreads; as well as other reference data, management monitors the current placement of securities in the fair value hierarchy to determine whether transfers between levels may be warranted. At March 31, 2021, all of our level 3 investments were obligations of state and political subdivisions. The Company estimated the fair value of these level 3 investments using discounted cash flow models, the key inputs of which are the coupon rate, current spreads to the yield curves, and expected repayment dates, adjusted for illiquidity of the local municipal market and sinking funds, if applicable. Option-adjusted models may be used for structured or callable notes, as appropriate.

Loans – The fair value of portfolio loans, net is determined using an exit price methodology. The exit price methodology continues to be based on a discounted cash flow analysis, in which projected cash flows are based on contractual cash flows adjusted for prepayments for certain loan types (e.g. residential mortgage loans and multifamily loans) and the use of a discount rate based on expected relative risk of the cash flows. The discount rate selected considers loan type, maturity date, a liquidity premium, cost to service, and cost of capital, which is a level 3 fair value estimate.

Deposit Liabilities – The fair values disclosed for noninterest-bearing demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). These noninterest-bearing deposits are classified in level 2 of the fair value hierarchy. All interest-bearing deposits are classified in level 3 of the fair value hierarchy. The carrying amounts of variable-rate (for example interest-bearing checking, savings, and money market accounts), fixed-term money market accounts, and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates on comparable instruments to a schedule of aggregated expected monthly maturities on time deposits.

Short-Term Borrowings – The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings approximate their fair values. The Company classifies these borrowings in level 2 of the fair value hierarchy.

Long-Term Borrowings, including Junior Subordinated Debt Securities – The fair values of long-term borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. The fair value of the Company’s long-term debt is therefore classified in level 3 in the fair value hierarchy.

Subordinated Debt Securities – The fair value of subordinated debt is estimated based on current market rates on similar debt in the market. The Company classifies this debt in level 2 of the fair value hierarchy.

Derivative Financial Instruments – The fair value for interest rate swap agreements is based upon the amounts required to settle the contracts. These derivative instruments are classified in level 2 of the fair value hierarchy.

Fair Value of Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized in the table below as of the dates indicated (dollars in thousands).

			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
	Estimated		Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
March 31, 2021
Assets:
Obligations of U.S. government agencies and corporations	$	38,336	$	—	$	38,336	$	—
Obligations of state and political subdivisions		22,711		—		4,762		17,949
Corporate bonds		29,508		—		29,508		—
Residential mortgage-backed securities		139,366		—		139,366		—
Commercial mortgage-backed securities		71,512		—		71,512		—
Equity securities		1,800		1,800		—		—
Derivative financial instruments		5,461		—		5,461		—
Total assets	$	308,694	$	1,800	$	288,945	$	17,949
December 31, 2020
Assets:
Obligations of U.S. government agencies and corporations	$	36,821	$	—	$	36,821	$	—
Obligations of state and political subdivisions		22,137		—		3,621		18,516
Corporate bonds		27,708		—		27,708		—
Residential mortgage-backed securities		122,598		—		122,598		—
Commercial mortgage-backed securities		59,146		—		59,146		—
Equity securities		1,670		1,670		—		—
Total assets	$	270,080	$	1,670	$	249,894	$	18,516
Liabilities:
Derivative financial instruments	$	2,216	$	—	$	2,216	$	—

The Company reviews fair value hierarchy classifications on a quarterly basis. Changes in the Company’s ability to observe inputs to the valuation may cause reclassification of certain assets or liabilities within the fair value hierarchy. The tables below provide a reconciliation for assets measured at fair value on a recurring basis using significant unobservable inputs, or level 3 inputs, for the three months ended March 31, 2021 and 2020 (dollars in thousands).

	Obligations of State and
	Political Subdivisions
Balance at December 31, 2020	$	18,516
Realized gains (losses) included in earnings		—
Unrealized losses included in other comprehensive income (loss)		(567	)
Purchases		—
Sales		—
Maturities, prepayments, and calls		—
Transfers into level 3		—
Transfers out of level 3		—
Balance at March 31, 2021	$	17,949

	Obligations of State and
	Political Subdivisions
Balance at December 31, 2019	$	19,375
Realized gains (losses) included in earnings		—
Unrealized losses included in other comprehensive income (loss)		(2,502	)
Purchases		—
Sales		—
Maturities, prepayments, and calls		—
Transfers into level 3		—
Transfers out of level 3		—
Balance at March 31, 2020	$	16,873

There were no liabilities measured at fair value on a recurring basis using level 3 inputs at March 31, 2021 and  December 31, 2020. For the three months ended March 31, 2021 and 2020, there were no gains or losses included in earnings related to the change in fair value of the assets measured on a recurring basis using significant unobservable inputs held at the end of the period.

The following table provides quantitative information about significant unobservable inputs used in fair value measurements of Level 3 assets measured at fair value on a recurring basis at March 31, 2021 or December 31, 2020 (dollars in thousands):

	Estimated
	Fair Value		Valuation Technique	Unobservable Inputs	Range of Discounts
March 31, 2021
Obligations of State and Political Subdivisions	$	17,949	Option-adjusted discounted cash flow model; present value of expected future cash flow model	Bond Appraisal Adjustment(1)	0%
December 31, 2020
Obligations of State and Political Subdivisions	$	18,516	Option-adjusted discounted cash flow model; present value of expected future cash flow model	Bond Appraisal Adjustment(1)	0% - 0.4%

⁽¹⁾ Fair values determined through valuation analysis using coupon, yield (discount margin), liquidity and expected repayment dates.

Fair Value of Assets and Liabilities Measured on a Nonrecurring Basis

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Quantitative information about assets measured at fair value on a nonrecurring basis based on significant unobservable inputs (level 3) is summarized below as of the dates indicated; there were no liabilities measured on a nonrecurring basis at March 31, 2021 or December 31, 2020 (dollars in thousands).

	Estimated					Weighted Average
	Fair Value		Valuation Technique	Unobservable Inputs	Range of Discounts	Discount
March 31, 2021
Impaired loans	$	1,146	Discounted cash flows, Underlying collateral value	Collateral discounts and estimated costs to sell	5% - 13%	13%
December 31, 2020
Impaired loans	$	259	Discounted cash flows, Underlying collateral value	Collateral discounts and estimated costs to sell	2% - 100%	34%
Other real estate owned		635	Underlying collateral value, Third party appraisals	Collateral discounts and discount rates	4%	4%

The estimated fair values of the Company’s financial instruments are summarized in the table below as of the dates indicated (dollars in thousands).

	March 31, 2021
	Carrying		Estimated
	Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	99,370	$	99,370	$	99,370	$	—	$	—
Federal funds sold		97		97		97		—		—
Investment securities		313,399		313,774		—		287,502		26,272
Equity securities		16,763		16,763		1,800		14,963		—
Loans, net of allowance		1,825,547		1,848,567		—		1,848,567		—
Derivative financial instruments		5,461		5,461		—		5,461		—
Financial liabilities:
Deposits, noninterest-bearing	$	515,487	$	515,487	$	—	$	515,487	$	—
Deposits, interest-bearing		1,494,393		1,520,587		—		—		1,520,587
FHLB short-term advances and repurchase agreements		8,274		8,274		—		8,274		—
FHLB long-term advances		78,500		78,353		—		—		78,353
Junior subordinated debt		5,962		2,556		—		—		2,556
Subordinated debt		43,600		39,937		—		39,937		—

	December 31, 2020
	Carrying		Estimated
	Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	35,368	$	35,368	$	35,368	$	—	$	—
Investment securities		280,844		281,059		—		254,306		26,753
Equity securities		16,599		16,599		1,670		14,929		—
Loans, net of allowance		1,839,955		1,861,971		—		—		1,861,971
Financial liabilities:
Deposits, noninterest-bearing	$	448,230	$	448,230	$	—	$	448,230	$	—
Deposits, interest-bearing		1,439,594		1,504,644		—		—		1,504,644
FHLB short-term advances and repurchase agreements		47,653		47,653		—		47,653		—
FHLB long-term advances		78,500		82,101		—		—		82,101
Junior subordinated debt		5,949		5,299		—		—		5,299
Subordinated debt		43,600		42,336		—		42,336		—
Derivative financial instruments		2,216		2,216		—		2,216		—