Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2021

Fair Value of Financial Instruments [Abstract]

Fair Value of Financial Instruments

(6) Fair Value of Financial Instruments

FASB Topic 820, Fair Value Measurements (“ASC 820”) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity can 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 company’s own assumptions about the value that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value of assets and liabilities:

Securities Available for Sale: The fair value of securities available for sale is determined utilizing an independent pricing service for identical assets or significantly similar securities. The pricing service uses a variety of techniques to arrive at fair value including 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. This results in a Level 1 or Level 2 classification of the inputs for determining fair value. Interest and dividend income is recorded on the accrual method and is included in the Consolidated Statements of Income in the respective investment class under total interest and dividend income. The Company does not have any securities that would be designated as Level 3.

Other Real Estate Owned: Assets acquired through loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process to adjust for differences between the comparable sales and income data available. This results in a Level 3 classification of the inputs for determining fair value.

Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally have had a charge off through the allowance for loan losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process to adjust for differences between the comparable sales and income data available. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value. When obtained, non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Indications of value for both collateral-dependent impaired loans and other real estate owned are obtained from third party providers or the Company’s internal Appraisal Department. All indications of value are reviewed for reasonableness by a member of the Appraisal Department for the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value via comparison with independent data sources such as recent market data or industry-wide statistics.

Assets and liabilities measured at fair value under ASC 820 on a recurring basis are summarized below:

There were no transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2021 and 2020.

	Fair Value Measurements at
	September 30, 2021 Using:
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. government sponsored enterprises	$	59,749	$	-	$	59,749	$	-
State and political subdivisions		48		-		48		-
Mortgage backed securities and collateralized mortgage obligations - residential		293,585		-		293,585		-
Corporate bonds		45,915		-		45,915		-
Small Business Administration- guaranteed participation securities		34,569		-		34,569		-
Other securities		686		-		686		-
Total securities available for sale	$	434,552	$	-	$	434,552	$	-

	Fair Value Measurements at
	December 31, 2020 Using:
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Securities available for sale:
U.S. government sponsored enterprises	$	19,968	$	-	$	19,968	$	-
State and political subdivisions		103		-		103		-
Mortgage backed securities and collateralized mortgage obligations - residential		316,158		-		316,158		-
Corporate bonds		59,939		-		59,939		-
Small Business Administration- guaranteed participation securities		42,217		-		42,217		-
Other securities		686		-		686		-
Total securities available for sale	$	439,071	$	-	$	439,071	$	-

Assets measured at fair value on a non-recurring basis are summarized below:

	Fair Value Measurements at
	September 30, 2021 Using:
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Valuation technique	Unobservable inputs	Range (Weighted Average)
Other real estate owned	$	511	$	-	$	-	$	511	Sales comparison approach	Adjustments for differences between comparable sales		3% - 21% (10	%)
Impaired loans:
Real estate mortgage -1 to 4 family		-		-		-		-	Sales comparison	Adjustments for differences between comparable sales		N/A

	Fair Value Measurements at
	December 31, 2020 Using:
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Valuation technique	Unobservable inputs	Range (Weighted Average)
Other real estate owned	$	541	$	-	$	-	$	541	Sales comparison approach	Adjustments for differences between comparable sales		1% - 7% (2	%)
Impaired loans:
Real estate mortgage -1 to 4 family		211		-		-		211	Sales comparison	Adjustments for differences between comparable sales		11% - 12% (12	%)

Other real estate owned, that is carried at fair value less costs to sell was approximately $511 thousand at September 30, 2021 and consisted of residential real estate properties. There were no commercial real estate properties. There were valuation charges of $-0- and $121 thousand included in earnings for the three and nine months ended September 30, 2021, respectively.

Of the total impaired loans of $19.8 million at September 30, 2021, there are no impairments that are collateral dependent and are carried at fair value measured on a non-recurring basis. Due to the sufficiency of charge offs taken on these loans and the adequacy of the underlying collateral, there were no specific valuation allowances for these loans at September 30, 2021. There were no gross charge offs related to residential impaired loans included in the table above for the three and nine months ended September 30, 2021.

Other real estate owned, that is carried at fair value less costs to sell, was approximately $541 thousand at December 31, 2020 and consisted only of residential real estate properties. A valuation charge of $120 thousand is included in earnings for the year ended December 31, 2020.

Of the total impaired loans of $21.6 million at December 31, 2020, $211 thousand are collateral dependent and are carried at fair value measured on a non-recurring basis. Due to the sufficiency of charge offs taken on these loans and the adequacy of the underlying collateral, there were no specific valuation allowances for these loans at December 31, 2020. Gross charge offs related to residential impaired loans included in the table above amounted to $10 thousand at December 31, 2020.

In accordance with FASB Topic 825, Financial Instruments (“ASC 825”), the carrying amounts and estimated fair values of financial instruments, at September 30, 2021 and December 31, 2020 are as follows:

(dollars in thousands)			Fair Value Measurements at
	Carrying		September 30, 2021 Using:
	Value		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and cash equivalents	$	1,193,339		1,193,339		-		-		1,193,339
Securities available for sale		434,552		-		434,552		-		434,552
Held to maturity securities		10,701		-		11,646		-		11,646
Federal Home Loan Bank stock		5,604		N/A		N/A		N/A		N/A
Net loans		4,349,379		-		-		4,419,921		4,419,921
Accrued interest receivable		9,358		37		1,042		8,279		9,358
Financial liabilities:
Demand deposits		790,663		790,663		-		-		790,663
Interest bearing deposits		4,450,355		3,325,774		1,123,934		-		4,449,708
Short-term borrowings		230,770		-		230,770		-		230,770
Accrued interest payable		225		30		195		-		225

(dollars in thousands)			Fair Value Measurements at
	Carrying		December 31, 2020 Using:
	Value		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and cash equivalents	$	1,107,099		1,107,099		-		-		1,107,099
Securities available for sale		439,071		-		439,071		-		439,071
Held to maturity securities		13,824		-		14,988		-		14,988
Federal Reserve Bank and Federal
Home Loan Bank stock		5,506		N/A		N/A		N/A		N/A
Net loans		4,194,875		-		-		4,287,585		4,287,585
Accrued interest receivable		10,031		39		1,458		8,534		10,031
Financial liabilities:
Demand deposits		652,756		652,756		-		-		652,756
Interest bearing deposits		4,384,437		3,088,064		1,298,375		-		4,386,439
Short-term borrowings		214,755		-		214,755		-		214,755
Accrued interest payable		474		68		406		-		474