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FAIR VALUE
 12 Months Ended
Dec. 31, 2021
Fair Value Disclosures [Abstract]  
FAIR VALUE FAIR VALUE
Fair value is 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. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are:
Level 1 – quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access at the measurement date.
Level 2 – significant other observable inputs other than Level 1 prices such as prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – at least one significant unobservable input that reflects a company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.
In instances in which multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The Company used the following methods and significant assumptions to estimate fair value for financial instruments measured on a recurring basis:
Where quoted prices are available in an active market, investment securities are classified within Level 1 of the valuation hierarchy. Level 1 investment securities include highly liquid government bonds, mortgage products and exchange traded
equities. If quoted market prices are not available, investment securities are classified within Level 2 and fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flow. Level 2 investment securities include U.S. agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, investment securities are classified within Level 3 of the valuation hierarchy. All of the Company’s investment securities are classified as available for sale.
The fair values of interest rate swaps and risk participation derivatives are determined using models that incorporate readily observable market data into a market standard methodology. This methodology nets the discounted future cash receipts and the discounted expected cash payments. The discounted variable cash receipts and payments are based on expectations of future interest rates derived from observable market interest rate curves. In addition, fair value is adjusted for the effect of nonperformance risk by incorporating credit valuation adjustments for the Company and its counterparties. These assets and liabilities are classified as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.
The following table summarizes assets and liabilities measured at fair value on a recurring basis at December 31, 2021 or 2020.
Level 1Level 2Level 3
Total Fair
Value
Measurements
December 31, 2021
Financial Assets
Investment securities:
U.S. Treasury securities$19,702 $— $— $19,702 
States and political subdivisions— 183,171 10,199 193,370 
GSE residential MBSs— 40,726 — 40,726 
GSE residential CMOs
— 65,922 — 65,922 
Non-agency CMOs— 16,750 12,948 29,698 
Asset-backed— 122,621 — 122,621 
Other399 — — 399 
Loans held for sale— 8,868 — 8,868 
Derivatives— 764 353 1,117 
Totals$20,101 $438,822 $23,500 $482,423 
Financial Liabilities
Derivatives$— $760 $— $760 
December 31, 2020
Financial Assets
Investment securities:
States and political subdivisions$— $103,591 $9,079 $112,670 
GSE residential MBSs— 4,293 — 4,293 
GSE residential CMOs
— 58,011 — 58,011 
Non-agency CMOs— — 16,918 16,918 
Private label commercial CMOs— 56,730 5,506 62,236 
Asset-backed— 211,966 — 211,966 
Other371 — — 371 
Loans held for sale— 11,734 — 11,734 
Derivatives— 690 673 1,363 
Totals$371 $447,015 $32,176 $479,562 
Financial Liabilities
Derivatives$— $1,956 $— $1,956 
The Company had municipal bonds and CMOs measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at December 31, 2021 and 2020. The Level 3 valuation is based on a non-executable broker quote, which is considered a significant unobservable input. Such quotes are updated as available and may remain constant for a period of time for certain broker-quoted securities that do not move with the market or that are not interest rate sensitive as a result of their structure or overall attributes.
The Company’s residential mortgage loans held-for-sale were recorded at fair value utilizing Level 2 measurements. This fair value measurement is determined based upon third party quotes obtained on similar loans. The adoption of this accounting election resulted in an increase of $226 thousand in gain on sale of loans in the consolidated statements of income for the year ended December 31, 2019. For loans held-for-sale for which the fair value option has been elected, the aggregate fair value exceeded the aggregate principal balance by $150 thousand and $436 thousand as of December 31, 2021 and 2020, respectively.
The determination of the fair value of interest rate lock commitments on residential mortgages is based on agreed upon pricing with the respective investor on each loan and includes a pull through percentage. The pull through percentage represents
an estimate of loans in the pipeline to be delivered to an investor versus the total loans committed for delivery. Significant changes in this input could result in a significantly higher or lower fair value measurement. As the pull through percentage is a significant unobservable input, this is deemed a Level 3 valuation input. The average pull through percentage, which is based upon historical experience, was 89% as of December 31, 2021. An increase or decrease of 5% in the pull through assumption would result in a positive or negative change of $19 thousand in the fair value of interest rate lock commitments at December 31, 2021.
The following provides details of the Level 3 fair value measurement activity for the years ended December 31, 2021 or 2020.
Investment securities:
20212020
Balance, beginning of year$31,503 $24,279 
Unrealized gain (loss) included in OCI31 (668)
Net discount accretion— 571 
Principal payments(4,842)(10,571)
Sold(3,545)— 
Transfers into Level 3— 17,892 
Balance, end of year$23,147 $31,503 
The transfers into Level 3 for 2020 noted above relate to two CMO investment securities and one municipal bond for which trading was substantially limited during that year due to the COVID-19 pandemic. As such, older trades or trades of similar securities were utilized to approximate fair value. There were no transfers into or out of Level 3 at December 31, 2021.
Interest rate lock commitments on residential mortgages:
20212020
Balance, beginning of year$673 $103 
Total (loss) gain included in earnings(320)570 
Balance, end of year$353 $673 

Certain financial assets are measured at fair value on a nonrecurring basis. Adjustments to the fair value of these assets usually results from the application of lower-of-cost-or-market accounting or write-downs of individual assets. The Company used the following methods and significant assumptions to estimate fair value for these financial assets.
Impaired Loans
Loans are designated as impaired when, in the judgment of management and based on current information and events, it is probable that all amounts due, according to the contractual terms of the loan agreement, will not be collected. The measurement of loss associated with impaired loans for all loan classes can be based on either the observable market price of the loan, the fair value of the collateral, or discounted cash flows using the rate of return implicit in the original loan for TDRs. For collateral-dependent loans, fair value is measured based on the value of the collateral securing the loan, less estimated costs to sell. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The value of the real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction, or if management adjusts the appraisal value, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal, if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3). Impaired loans with an allocation to the ALL are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of income.
Changes in the fair value of impaired loans for those still held at December 31 considered in the determination of the provision for loan losses totaled $(247) thousand, $244 thousand and $77 thousand for the years ended December 31, 2021, 2020 and 2019, respectively.
Foreclosed Real Estate
OREO property acquired through foreclosure is initially recorded at the fair value of the property at the transfer date less estimated selling cost. Subsequently, OREO is carried at the lower of its carrying value or the fair value less estimated selling cost. Fair value is usually determined based upon an independent third-party appraisal of the property or occasionally upon a recent sales offer. The Company had no OREO balances at December 31, 2021 and 2020.
Mortgage Servicing Rights
The MSR fair value is estimated to be equal to its carrying value, unless the quarterly valuation model calculates the present value of the estimated net servicing income is less than its carrying value, in which case an impairment charge is taken. At December 31, 2021 and 2020, an impairment reserve of $79 thousand and $1.1 million, respectively, existed on the mortgage servicing right portfolio. For the years ended December 31, 2021 and 2020, an impairment valuation allowance reversal of $987 thousand and an impairment charge of $997 thousand were included, respectively, in mortgage banking activities on the consolidated statement of income. The impairment charges in 2020 resulted from rapidly declining market rates caused by the COVID-19 pandemic. The reversal for the year-ended December 31, 2021 was due to a subsequent increase in market rates.
The following table summarizes assets measured at fair value on a nonrecurring basis at December 31, 2021 and 2020.
Level 1Level 2Level 3
Total
Fair Value
Measurements
December 31, 2021
Impaired loans
Commercial real estate:
Owner-occupied$— $— $751 $751 
Non-owner occupied residential— — 24 24 
Residential mortgage:
First lien— — 545 545 
Home equity - lines of credit— — 72 72 
Total impaired loans$— $— $1,392 $1,392 
Mortgage servicing rights$— $— $322 $322 
December 31, 2020
Impaired loans
Commercial real estate:
Owner-occupied$— $— $846 $846 
Non-owner occupied residential— — 36 36 
Commercial and industrial— — 12 12 
Residential mortgage:
First lien— — 638 638 
Home equity - lines of credit— — 89 89 
Total impaired loans$— $— $1,621 $1,621 
Mortgage servicing rights$— $— $2,732 $2,732 
 The following table presents additional qualitative information about assets measured on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value.
Fair Value
Estimate
Valuation Techniques
Unobservable Input
Range
December 31, 2021
Impaired loans$1,392 Appraisal of collateralManagement adjustments on appraisals for property type and recent activity
10% - 25% discount
 - Management adjustments for liquidation expenses
6.08% - 17.93% discount
Mortgage servicing rights
322 
Discounted cash flows
Weighted average CPR
12.60%
Discount rate
9.03%
December 31, 2020
Impaired loans$1,621 Appraisal of collateralManagement adjustments on appraisals for property type and recent activity
5% - 25% discount
 - Management adjustments for liquidation expenses
6.02% - 19.32% discount
Mortgage servicing rights2,732 Discounted cash flowsWeighted average CPR18.02%
Discount rate9.56%
Fair values of financial instruments
GAAP requires disclosure of the fair value of financial assets and liabilities, including those that are not measured and reported at fair value on a recurring or nonrecurring basis. The following table presents the carrying amounts and estimated fair values of financial assets and liabilities at December 31, 2021, and 2020.
Carrying
Amount
Fair ValueLevel 1Level 2Level 3
December 31, 2021
Financial Assets
Cash and due from banks$21,217 $21,217 $21,217 $— $— 
Interest-bearing deposits with banks187,493 187,493 187,493 — — 
Restricted investments in bank stock7,252 n/an/an/an/a
Investment securities472,438 472,438 20,101 429,190 23,147 
Loans held for sale8,868 8,868 — 8,868 — 
Loans, net of allowance for loan losses1,958,806 1,946,365 — — 1,946,365 
Derivatives1,117 1,117 — 764 353 
Accrued interest receivable8,234 8,235 — 2,203 6,032 
Financial Liabilities
Deposits2,464,929 2,466,191 — 2,466,191 — 
Securities sold under agreements to repurchase23,301 23,301 — 23,301 — 
FHLB advances and other1,896 2,035 — 2,035 — 
Subordinated notes31,963 31,815 — 31,815 — 
Derivatives760 760 — 760 — 
Accrued interest payable154 154 — 154 — 
Off-balance sheet instruments— — — — — 
December 31, 2020
Financial Assets
Cash and due from banks$26,203 $26,203 $26,203 $— $— 
Interest-bearing deposits with banks99,055 99,055 99,055 — — 
Restricted investments in bank stock10,563 n/an/an/an/a
Investment securities466,465 466,465 371 434,591 31,503 
Loans held for sale11,734 11,734 — 11,734 — 
Loans, net of allowance for loan losses1,959,539 1,953,860 — — 1,953,860 
Derivatives1,363 1,363 — 690 673 
Accrued interest receivable8,927 8,927 — 1,529 7,398 
Financial Liabilities
Deposits2,356,880 2,359,317 — 2,359,317 — 
Securities sold under agreements to repurchase19,466 19,466 — 19,466 — 
FHLB advances and other58,045 58,298 — 58,298 — 
Subordinated notes31,903 31,712 — 31,712 — 
Derivatives1,956 1,956 — 1,956 — 
Accrued interest payable238 238 — 238 — 
Off-balance sheet instruments— — — — — 

In accordance with the Company's adoption of ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, the methods utilized to measure the fair value of financial instruments at December 31, 2021 and 2020 represents an approximation of exit price; however, an actual exit price may differ.