Fair Value Measurement

9 Months Ended

Sep. 30, 2021

The Company utilizes FASB ASC Topic 820, Fair Value Measurement, as guidance for accounting for assets and liabilities carried at fair value. This standard defines fair value as the price that would be received, without adjustment for transaction costs, to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is a market based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The guidance in FASB ASC Topic 820 establishes a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The three levels of the fair value hierarchy are:

•Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

•Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

•Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

The following is a description of the valuation methodologies used for the Company’s assets that are measured on a recurring basis at estimated fair value:

Investment securities AFS: The Company’s AFS securities have been valued utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows.

Mutual funds: Mutual funds have been valued using unadjusted quoted prices from active markets and therefore have been classified as Level 1.

Assets measured at fair value on a recurring basis at September 30, 2021 and December 31, 2020, segregated by fair value hierarchy level, are summarized below:


	Fair Value Measurements
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2021:	(Dollars in thousands)
Debt securities AFS:
U.S. Government-sponsored enterprises	$	30,279	$	2,896	$	27,383	$	—
Agency mortgage-backed	117,401		—		117,401		—
State and political subdivisions	28,212		—		28,212		—
Corporate	8,312		—		8,312		—
Total debt securities	$	184,204	$	2,896	$	181,308	$	—


Other investments:
Mutual funds	$	1,183	$	1,183	$	—	$	—


December 31, 2020:
Debt securities AFS:
U.S. Government-sponsored enterprises	$	6,548	$	—	$	6,548	$	—
Agency mortgage-backed	62,352		—		62,352		—
State and political subdivisions	28,461		—		28,461		—
Corporate	8,402		—		8,402		—
Total debt securities	$	105,763	$	—	$	105,763	$	—


Other investments:
Mutual funds	$	1,047	$	1,047	$	—	$	—

There were no transfers in or out of Levels 1 and 2 during the three and nine months ended September 30, 2021 or the year ended December 31, 2020, nor were there any Level 3 assets at any time during either period. Certain other assets and 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). Assets and liabilities measured at fair value on a nonrecurring basis in periods after initial recognition, such as collateral-dependent impaired loans, MSRs and OREO, were not considered material at September 30, 2021 or December 31, 2020. The Company has not elected to apply the fair value method to any financial assets or liabilities other than those situations where other accounting pronouncements require fair value measurements.

FASB ASC Topic 825, Financial Instruments, requires disclosure of the estimated fair value of financial instruments. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. 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. Management’s estimates and assumptions are inherently subjective and involve uncertainties and matters of significant judgment. Changes in assumptions could dramatically affect the estimated fair values.

Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments may be excluded from disclosure requirements. Thus, the aggregate fair value amounts presented may not necessarily represent the actual underlying fair value of such instruments of the Company.

As of the balance sheet dates, the estimated fair values and related carrying amounts of the Company's significant financial instruments were as follows:


	September 30, 2021
	Fair Value Measurements
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Financial assets
Cash and cash equivalents	$	120,081	$	120,081	$	120,081	$	—	$	—
Interest bearing deposits in banks	12,201		12,203		—		12,203		—
Investment securities	185,387		185,387		4,079		181,308		—
Loans held for sale	17,821		18,124		—		18,124		—
Loans, net
Residential real estate	223,748		227,202		—		—		227,202
Construction real estate	72,848		73,098		—		—		73,098
Commercial real estate	317,211		319,836		—		—		319,836
Commercial	63,824		62,986		—		—		62,986
Consumer	2,601		2,580		—		—		2,580
Municipal	83,429		83,726		—		—		83,726
Accrued interest receivable	2,998		2,998		—		554		2,444
Nonmarketable equity securities	1,164		N/A		N/A		N/A		N/A
Financial liabilities
Deposits
Noninterest bearing	$	252,940	$	252,940	$	252,940	$	—	$	—
Interest bearing	680,438		680,438		680,438		—		—
Time	107,266		107,510		—		107,510		—
Borrowed funds

Long-term	7,000		7,276		—		7,276		—
Subordinated debentures and notes	16,164		16,164		—		16,164		—
Accrued interest payable	105		105		—		105		—


	December 31, 2020
	Fair Value Measurements
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Financial assets
Cash and cash equivalents	$	122,771	$	122,771	$	122,771	$	—	$	—
Interest bearing deposits in banks	12,699		12,699		—		12,699		—
Investment securities	106,810		106,810		1,047		105,763		—
Loans held for sale	32,188		33,437		—		33,437		—
Loans, net
Residential real estate	181,355		185,890		—		—		185,890
Construction real estate	56,643		56,882		—		—		56,882
Commercial real estate	315,522		324,085		—		—		324,085
Commercial	108,382		106,358		—		—		106,358
Consumer	2,586		2,557		—		—		2,557
Municipal	98,264		98,973		—		—		98,973
Accrued interest receivable	4,129		4,129		—		446		3,683
Nonmarketable equity securities	1,150		N/A		N/A		N/A		N/A
Financial liabilities
Deposits
Noninterest bearing	$	215,245	$	215,245	$	215,245	$	—	$	—
Interest bearing	637,369		637,369		637,369		—		—
Time	141,688		142,605		—		142,605		—
Borrowed funds

Long-term	7,164		7,585		—		7,585		—
Accrued interest payable	108		108		—		108		—

The carrying amounts in the preceding tables are included in the consolidated balance sheets under the applicable captions. Accrued interest receivable and nonmarketable equity securities are included in Other assets in the consolidated balance sheets.

- Definition

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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