Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts business. The Company's balance sheet contains investment securities available for sale and derivative instruments that are recorded at fair value on a recurring basis. The three-level valuation hierarchy for disclosure of fair value is as follows:

Level 1 uses quoted market prices in active markets for identical assets or liabilities.

Level 2 uses observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3 uses unobservable inputs that are not corroborated by market data.

The Company's policy is to recognize transfers between levels at the end of each reporting period, if applicable. There were no transfers between levels of the fair value hierarchy during the three months ended March 31, 2020.

The following is a description of valuation methodologies used for financial assets and liabilities recorded at fair value on a recurring basis.

Investment securities available for sale: When available, quoted market prices are used to determine the fair value of investment securities (Level 1). If quoted market prices are not available, the Company determines fair value based on various sources and may apply matrix pricing with observable prices for similar bonds where a price for the identical bond is not observable (Level 2). The fair values of these securities are determined by pricing models that consider observable market data such as interest rate volatilities, LIBOR yield curve, credit spreads, prices from market makers and live trading systems. For the corporate bond portfolio, the Company has elected to use a matrix pricing model as a practical expedient to individual quoted market prices.

Management obtains the fair value of investment securities at the end of each reporting period via a third-party pricing service. Management reviewed the valuation process used by the third party and believed the process was valid. On a quarterly basis, management corroborates the fair values of a randomly selected sample of investment securities by obtaining pricing from an independent financial market data vendor and comparing the two sets of fair values. Any significant variances are reviewed and investigated. For a sample of securities, prices are further validated by management by obtaining details of the inputs used by the pricing service. Those inputs were independently tested, and management concluded the fair values were consistent with GAAP requirements and the investment securities were properly classified in the fair value hierarchy.

Derivative instruments: The Company's derivative instruments consist of interest rate swaps accounted for as cash flow hedges, as well as interest rate swaps which are accounted for as non-hedging derivatives. The Company's derivative positions are classified within Level 2 of the fair value hierarchy and are valued using models generally accepted in the financial services industry and that use actively quoted or observable market input values from external market data providers and/or non-binding broker-dealer quotations. The fair value of the derivatives is determined using discounted cash flow models. These models’ key assumptions include the contractual terms of the respective contract along with significant observable inputs, including interest rates, yield curves, nonperformance risk and volatility.

The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis by level as of March 31, 2020 and December 31, 2019.



	March 31, 2020
	Total		Level 1		Level 2		Level 3
Financial assets:
Investment securities available for sale:
State and political subdivisions	$	37,227	$	—	$	37,227	$	—
Collateralized mortgage obligations	192,665		—		192,665		—
Mortgage-backed securities	73,316		—		73,316		—
Asset-backed securities	16,302		—		16,302		—
Collateralized loan obligations	52,610		—		52,610		—
Corporate notes and other investments	300		—		300		—
Derivative instruments, interest rate swaps	1,055		—		1,055		—

Financial liabilities:
Derivative instruments, interest rate swaps	$	27,715	$	—	$	27,715	$	—



	December 31, 2019
	Total		Level 1		Level 2		Level 3
Financial assets:
Investment securities available for sale:
State and political subdivisions	$	47,178	$	—	$	47,178	$	—
Collateralized mortgage obligations	181,921		—		181,921		—
Mortgage-backed securities	73,030		—		73,030		—
Asset-backed securities	17,600		—		17,600		—
Collateralized loan obligations	64,832		—		64,832		—
Corporate notes and other investments	14,017		—		14,017		—
Derivative instruments, interest rate swaps	403		—		403		—

Financial liabilities:
Derivative instrument, interest rate swap	$	6,129	$	—	$	6,129	$	—

Certain assets are measured at fair value on a nonrecurring basis. That is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). As of both March 31, 2020 and December 31, 2019, there were no impaired loans that had a fair value adjustment. Impaired loans are classified within Level 3 of the fair value hierarchy and are evaluated and valued at the lower of cost or fair value when the loan is identified as impaired. Fair value is measured based on the value of the collateral securing these loans. The types of collateral vary widely and could include accounts receivables, inventory, a variety of equipment and real estate. Evaluations of the underlying assets are completed for each impaired loan with a specific reserve. Collateral evaluations are reviewed and discounted as appropriate based on knowledge of the specific type of collateral. In the case of real estate, an independent appraisal may be obtained. Types of discounts considered include aging of receivables, condition of the collateral, potential market for the collateral and estimated disposal costs. These discounts will vary from loan to loan and may be discounted based on management's opinions concerning market developments or the client's business.

GAAP requires disclosure of the fair value of financial assets and financial 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 approximate fair values of financial assets and liabilities as of March 31, 2020 and December 31, 2019.



		March 31, 2020				December 31, 2019
	Fair Value Hierarchy Level	Carrying Amount		Approximate Fair Value		Carrying Amount		Approximate Fair Value
Financial assets:
Cash and due from banks	Level 1	$	65,256	$	65,256	$	37,808	$	37,808
Federal funds sold	Level 1	1,141		1,141		15,482		15,482
Investment securities available for sale	Level 2	372,420		372,420		398,578		398,578
Federal Home Loan Bank stock	Level 1	13,739		13,739		12,491		12,491
Loans, net	Level 2	1,976,100		2,048,653		1,924,428		1,941,208
Accrued interest receivable	Level 1	7,558		7,558		7,134		7,134
Interest rate swaps	Level 2	1,055		1,055		403		403
Financial liabilities:
Deposits	Level 2	$	2,020,125	$	2,022,253	$	2,014,756	$	2,015,427
Federal funds purchased	Level 1	32,340		32,340		2,660		2,660
Subordinated notes, net	Level 2	20,442		12,454		20,438		18,568
Federal Home Loan Bank advances, net	Level 2	179,620		179,620		179,365		179,365
Long-term debt	Level 2	22,896		22,889		22,925		22,910
Accrued interest payable	Level 1	2,058		2,058		2,070		2,070
Interest rate swaps	Level 2	27,715		27,715		6,129		6,129
Off-balance-sheet financial instruments:
Commitments to extend credit	Level 3	—		—		—		—
Standby letters of credit	Level 3	—		—		—		—