Fair value estimates

6 Months Ended

Jun. 30, 2022

Fair value estimates

Fair value estimates

7. Fair value estimates:

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosure under GAAP. Fair value estimates are calculated without attempting to estimate the value of anticipated future business and the value of certain assets and liabilities that are not considered financial. Accordingly, such assets and liabilities are excluded from disclosure requirements.

In accordance with FASB ASC 820, “Fair Value Measurements and Disclosures,” fair value is the price that would be received to sell an asset or 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. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets. In many cases, these values cannot be realized in immediate settlement of the instrument.

Current fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction that is not a forced liquidation or distressed sale between 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 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.

In accordance with GAAP, the Company groups its assets and liabilities generally measured at fair value into three levels based on market information or other fair value estimates in which the assets and liabilities are traded or valued and the reliability of the assumptions used to determine fair value. These levels include:

● Level 1: Unadjusted quoted prices of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

● Level 2: Significant other observable inputs other than Level 1 prices such as 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.

● Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

An asset’s or liability’s placement in the fair value hierarchy is based on the lowest level of input that is significant to the fair value estimate.

During the periods ended June 30, 2022 and December 31, 2021 there were no transfers in or out of Level 3.

The following methods and assumptions were used by the Company to calculate fair values and related carrying amounts of financial instruments:

Investment securities: The fair values of U.S. Treasury securities and marketable equity securities are based on quoted market prices from active exchange markets. The fair values of debt securities are based on pricing from a matrix pricing model.

Loans held for sale: The fair values of loans held for sale are based upon current delivery prices in the secondary mortgage market.

Interest rate swaps and options:  The Company’s interest rate swaps and options are reported at fair value utilizing Level 2 inputs. Values of these instruments are obtained through an independent pricing source utilizing information which may include market observed quotations for interest rate, forward rates, rate volatility, and volatility surface. Derivative contracts create exposure to interest rate movements as well as risks from the potential of non-performance of the counterparty.

Assets and liabilities measured at fair value on a recurring basis at June 30, 2022 and December 31, 2021 are summarized as follows:

	Fair Value Measurement Using
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
June 30, 2022	Amount		(Level 1)		(Level 2)		(Level 3)
U.S. Treasury securities	$	236,458	$	236,458	$		$
U.S. government-sponsored enterprises		23,165				23,165
State and municipals:
Taxable		59,972				59,972
Tax-exempt		89,272				89,272
Mortgage-backed securities:
U.S. government agencies		1,276				1,276
U.S. government-sponsored enterprises		100,058				100,058
Corporate debt securities		3,710				3,710
Common equity securities		121		121
Total investment securities	$	514,032	$	236,579	$	277,453	$
Loan held for sale	$	681			$	681
Interest rate floor-other assets	$	97			$	97
Interest rate swap-other assets	$	14,720			$	14,720
Interest rate swap-other liabilities	$	(13,982)			$	(13,982)

	Fair Value Measurement Using
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
December 31, 2021	Amount		(Level 1)		(Level 2)		(Level 3)
U.S. Treasury securities	$	191,574	$	191,574			$
U.S. government-sponsored enterprises		33,778			$	33,778
State and municipals:
Taxable		68,978				68,978
Tax-exempt		98,250				98,250
Mortgage-backed securities:
U.S. government agencies		1,843				1,843
U.S. government-sponsored enterprises		119,980				119,980
Corporate debt securities		2,918				2,918
Common equity securities		140		140
Total investment securities	$	517,461	$	191,714	$	325,747	$
Loan held for sale	$	408			$	408
Interest rate floor-other assets	$	844			$	844
Interest rate swap-other assets	$	9,026			$	9,026
Interest rate swap-other liabilities	$	(8,811)			$	(8,811)

Assets and liabilities measured at fair value on a nonrecurring basis at March 31, 2022 and December 31, 2021 are summarized as follows:

	Fair Value Measurement Using
			Quoted Prices in	Significant	Significant
			Active Markets for	Other Observable	Unobservable
			Identical Assets	Inputs	Inputs
June 30, 2022	Amount		(Level 1)	(Level 2)	(Level 3)
Impaired loans	$	638			$	638

	Fair Value Measurement Using
			Quoted Prices in	Significant Other	Significant
			Active Markets for	Observable	Unobservable
			Identical Assets	Inputs	Inputs
December 31, 2021	Amount		(Level 1)	(Level 2)	(Level 3)
Impaired loans	$	780			$	780
Other real estate owned	$	487			$	487

Fair values of impaired loans are based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:

	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value				Range
June 30, 2022	Estimate		Valuation Techniques	Unobservable Input	(Weighted Average)
Impaired loans	$	638	Appraisal of collateral	Appraisal adjustments	19.8% to 97.0%  (70.5)%
				Liquidation expenses	3.0% to 6.0% (5.2)%

	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value				Range
December 31, 2021	Estimate		Valuation Techniques	Unobservable Input	(Weighted Average)
Impaired loans	$	780	Appraisal of collateral	Appraisal adjustments	6.4% to 97.0%  (65.2)%
				Liquidation expenses	3.0% to 6.0% (5.1)%
Other real estate owned	$	487	Appraisal of collateral	Appraisal adjustments	35.9% to 35.9%  (35.9)%
				Liquidation expenses	3.0% to 6.0% (5.0)%

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.

Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

The carrying and fair values of the Company’s financial instruments at June 30, 2022 and December 31, 2021 and their placement within the fair value hierarchy are as follows:

					Fair Value Hierarchy
					Quoted
					Prices in
					Active		Significant
					Markets for		Other		Significant
					Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
June 30, 2022	Value		Value		(level 1)		(level 2)		(Level 3)
Financial assets:
Cash and due from banks	$	47,733	$	47,733	$	47,733
Investment securities:
Available-for-sale		513,911		513,911		236,458	$	277,453
Common equity securities		121		121		121
Held-to-maturity		94,446		84,076				84,076
Loans held for sale		681		681				681
Net loans		2,536,205		2,507,034					$	2,507,034
Accrued interest receivable		9,303		9,303				9,303
Mortgage servicing rights		919		1,414				1,414
Restricted equity securities (FHLB and other)		8,537		8,537				8,537
Interest rate floor		97		97				97
Interest rate swaps		14,720		14,720				14,720
Total	$	3,226,673	$	3,187,627
Financial liabilities:
Deposits	$	2,911,283	$	2,903,800			$	2,903,800
Short-term borrowings		129,170		129,083				129,083
Long-term debt		1,646		1,657				1,657
Subordinated debentures		33,000		33,286				33,286
Accrued interest payable		1,269		1,269				1,269
Interest rate swaps		13,982		13,982				13,982
Total	$	3,090,350	$	3,083,077

					Fair Value Hierarchy
					Quoted
					Prices in
					Active		Significant
					Markets for		Other		Significant
					Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
December 31, 2021	Value		Value		(level 1)		(level 2)		(Level 3)
Financial assets:
Cash and due from banks	$	279,933	$	279,933	$	279,933
Investment securities:
Available-for-sale		517,321		517,321		191,574	$	325,747
Common equity securities		140		140		140
Held-to-maturity		71,213		70,446				70,446
Loans held for sale		408		408				408
Net loans		2,300,790		2,261,586					$	2,261,586
Accrued interest receivable		8,528		8,528				8,528
Mortgage servicing rights		882		1,357				1,357
Restricted equity securities (FHLB and other)		4,045		4,045				4,045
Interest rate floor		844		844				844
Interest rate swaps		9,026		9,026				9,026
Total	$	3,193,130	$	3,153,634
Financial liabilities:
Deposits	$	2,963,397	$	2,963,547			$	2,963,547
Long-term debt		2,711		2,778				2,778
Subordinated debentures		33,000		32,337				32,337
Accrued interest payable		408		408				408
Interest rate swaps		8,811		8,811				8,811
Total	$	3,008,327	$	3,007,881