Fair Value Measurement

12 Months Ended

Dec. 31, 2021

NOTE 16 - FAIR VALUE MEASUREMENT

U.S. generally accepted accounting principles establish a hierarchal disclosure framework associated with the level of observable pricing utilized in measuring assets and liabilities at fair value. The three broad levels defined by the hierarchy are as follows: Level 1: Quoted prices for identical assets in active markets that are identifiable on the measurement date; Level 2: Significant other observable inputs, such as quoted prices for similar assets, quoted prices in markets that are not active and other inputs that are observable or can be corroborated by observable market data; Level 3: Significant unobservable inputs that reflect the Company’s own view about the assumptions that market participants would use in pricing an asset.

Securities:

The fair values of securities available for sale are determined by matrix pricing, which is a mathematical technique widely used 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 (Level 2 inputs).

Equity securities:

The Company has two types of equity securities, one is not actively traded in an open market, while the other is listed on an exchange and is less frequently traded. The fair value of the equity security available for sale not actively traded in an open market is determined by using market data inputs for similar securities that are observable. (Level 2 inputs).

Fair value swap asset/liability:

The fair value of the swap asset and liability is based on an external derivative model using data inputs as of the valuation date and classified Level 2.

Impaired loans:

The Company generally measures impairment on impaired loans based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management makes estimates about expected costs to sell the property which are also included in the net realizable value. If the fair value of the collateral dependent loan is less than the carrying amount of the loan, a specific reserve for the loan is made in the allowance for loan losses or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included in the table below as a Level 3 measurement.

Mortgage servicing rights:

Mortgage servicing rights do not trade in an active market with readily observable market data. As a result, the Company estimates the fair value of mortgage servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income. The Company stratifies its mortgage servicing portfolio on the basis of loan type. The assumptions used in the discounted cash flow model are those that the Company believes market participants would use in estimating future net servicing income. Significant assumptions in the valuation of mortgage servicing rights include estimated loan repayment rates, the discount rate, servicing costs, and the timing of cash flows, among other factors. Mortgage servicing rights are classified as Level 3 measurements due to the use of significant unobservable inputs, as well as significant management judgment and estimation.

Other real estate owned:

OREO is carried at the lower of cost or fair value, which is measured at the date foreclosure. If the fair value of the collateral exceeds the carrying amount of the loan, no charge-off or adjustment is necessary, the loan is not considered to be carried at fair value, and is therefore not included in the table below. If the fair value of the collateral is less than the carrying amount of the loan, management will charge the loan down to its estimated realizable value. Management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. In these cases, the properties are categorized in the below table as Level 3 measurements since these adjustments are considered to be unobservable inputs. Income and expenses from operations are included in other operating expenses. Further declines in the fair value of the collateral subsequent to foreclosure are included in net gain on sale of other real estate owned.

Assets and liabilities measured at fair value are summarized below.

Fair Value Measurements at December 31, 2021 using:


	(Level 1)		(Level 2)		(Level 3)
Assets measured at fair value on a recurring basis:
Securities available for sale
U.S. Treasury securities and obligations of U.S. Government agencies	$	—	$	47,890	$	—
Obligations of states and political subdivisions		—		298,836		—
Mortgage-backed securities in government sponsored entities		—		213,148		—

Total securities available for sale		—		559,874		—
Equity securities		—		1,072		—
Swap asset		—		11,072		—
Liabilities measured at fair value on a recurring basis:
Swap liability		—		11,072		—
Assets measured at fair value on a nonrecurring basis:
Impaired Loans	$	—	$	—	$	11
Mortgage servicing rights		—		—		2,642

Fair Value Measurements at December 31, 2020 using:


	(Level 1)		(Level 2)		(Level 3)
Assets measured at fair value on a recurring basis:
Securities available for sale
U.S. Treasury securities and obligations of U.S. Government agencies	$	—	$	21,693	$	—
Obligations of states and political subdivisions		—		229,012		—
Mortgage-backed securities in government sponsored entities		—		112,759		—

Total securities available for sale		—		363,464		—
Equity securities		—		886		—
Swap asset		—		21,700		—
Liabilities measured at fair value on a recurring basis:
Swap liability		—		21,764		—
Assets measured at fair value on a nonrecurring basis:
Impaired Loans	$	—	$	—	$	1
Mortgage servicing rights		—		—		2,246
Other Real Estate Owned		—		—		31

The following tables presents quantitative information about the Level 3 significant unobservable inputs for assets and liabilities measured at fair value on a nonrecurring basis at December 31, 2021 and 2020.

Quantitative Information about Level 3 Fair Value Measurements

December 31, 2021

Fair Value

Valuation

Technique

Unobservable

Input

Range

Weighted

Average

Impaired loans

Appraisal of
collateral

Appraisal
adjustments

10%

Holding period

24 months

Quantitative Information about Level 3 Fair Value Measurements

December 31, 2020

Fair Value

Valuation

Technique

Unobservable

Input

Range

Weighted

Average

Impaired loans

Appraisal of
collateral

Appraisal
adjustments

0% - 30%

19%

Holding period

23 months

Other real estate owned

Appraisal of
collateral

Appraisal
adjustments

10%

The carrying amount and fair value of financial instruments carried at amortized cost were as follows:


December 31, 2021	Carrying Amount		Total Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from financial institutions	$	265,969	$	265,969	$	265,969		$ —	$	—
Other securities		17,011		17,011		17,011		—		—
Loans, held for sale		1,972		2,011		2,011		—		—
Loans, net of allowance for loan losses		1,971,238		1,945,638		—		—		1,945,638
Bank owned life insurance		47,176		47,176		47,176		—		—
Accrued interest receivable		7,385		7,385		7,385		—		—
Financial Liabilities:
Nonmaturing deposits		2,170,253		2,170,253		2,170,253		—		—
Time deposits		246,448		247,053		—		—		247,053
Long-term FHLB advances		75,000		75,930		—		—		75,930
Securities sold under agreement to repurchase		25,495		25,495		25,495		—		—
Subordinated debentures		102,813		111,118		—		—		111,118
Accrued interest payable		315		315		315		—		—


December 31, 2020	Carrying Amount		Total Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from financial institutions	$	139,522	$	139,522	$	139,522	$	—	$	—
Other securities		20,537		20,537		20,537		—		—
Loans, held for sale		7,001		7,141		7,141		—		—
Loans, net of allowance for loan losses		2,032,474		2,063,249		—		—		2,063,249
Bank owned life insurance		46,976		45,976		45,976		—		—
Accrued interest receivable		9,421		9,421		9,421		—		—
Financial Liabilities:
Nonmaturing deposits		1,902,560		1,902,560		1,902,560		—		—
Time deposits		286,838		288,298		—		—		288,298
Long-term FHLB advances		125,000		130,942		—		—		130,942
Securities sold under agreement to repurchase		28,914		28,914		28,914		—		—
Subordinated debentures		29,427		31,479		—		—		31,479
Accrued interest payable		204		204		204		—		—

- 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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