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FAIR VALUE

12 Months Ended

Dec. 31, 2019

NOTE 18 - 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. There are 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 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.

Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Company has elected the fair value option, are summarized below:


	Fair Value Measurements at December 31, 2019 Using:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Mortgage-backed securities: residential	$	—	$	375,943	$	—
Mortgage-backed securities: commercial	—		17,780		—
Corporate Notes	—		33,361		—
State and political subdivisions	—		225,048		—
Total securities available for sale	$	—	$	652,132	$	—
Loans held for sale	$	—	$	43,162	$	—
Other assets	$	—	$	225	$	—
Liabilities
Other liabilities	$	—	$	73	$	—


	Fair Value Measurements at December 31, 2018 Using:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
U.S. Treasury	$	253,014	$	—	$	—
U.S. government sponsored entities and agencies	—		21,888		—
Mortgage-backed securities: residential	—		580,699		—
Mortgage-backed securities: commercial	—		24,844		—
Corporate Notes	—		12,424		—
State and political subdivisions	—		137,799		—
Total securities available for sale	$	253,014	$	777,654	$	—
Loans held for sale	$	—	$	11,103	$	—
Other assets	$	—	$	206	$	—
Liabilities
Other liabilities	$	—	$	129	$	—

The Company used the following methods and significant assumptions to estimate the fair value of financial instruments that are measured at fair value on a recurring basis:

Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded, values 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).

Other assets: Included in other assets are certain assets carried at fair value and interest rate locks associated with the mortgage loan pipeline. The fair value of the mortgage loan pipeline rate locks is based upon the projected sales price of the underlying loans, taking into account market interest rates and other market factors at the measurement date, net of the projected fallout rate. These assets are valued using similar observable data that occurs in the market (Level 2)

Loans Held For Sale: These loans are typically sold to an investor following loan origination and the fair value of such accounts are readily available based on direct quotes from investors or similar transactions experienced in the secondary loan market. Fair value adjustments, as well as realized gains and losses are recorded in current earnings. Fair value is determined by market prices or similar transactions adjusted for specific attributes of that loan (Level 2).

Other Liabilities: The Company has certain liabilities carried at fair value including certain interest rate swap agreements to facilitate customer transactions, and the cash flow hedge and interest rate locks associated with the funding for its mortgage loan originations. The fair value of these liabilities is based on pricing models that utilize observable market inputs (Level 2).

There were no transfers between levels for the years ended December 31, 2019 and 2018.

The following table presents assets measured at fair value on a non-recurring basis. There were no liabilities measured at fair value on a non-recurring basis as December 31, 2019 and 2018.


	Total carrying value in the consolidated balance sheet		Quoted market prices in an active market (Level 1)		Models with significant observable market parameters (Level 2)		Models with significant unobservable market parameters (Level 3)		Total losses for the period ended
December 31, 2019
Impaired loans, net: ⁽¹⁾
Residential real estate:
Closed-end 1-4 family	$	626	$	—	$	—	$	626	$	—
Commercial and industrial	3,763		—		3,650		113		—
Total	$	4,389	$	—	$	3,650	$	739	$	—

December 31, 2018
Impaired loans, net⁽¹⁾
Commercial and industrial	$	150	$	—	$	—	$	150	$	—

⁽¹⁾ Amount is net of a valuation allowance of $20,771 and $17 at December 31, 2019 and 2018, respectively, as required by ASC 310-10, "Receivables."

As of December 31, 2019 and 2018, the only Level 3 assets with material unobservable inputs are associated with impaired loans. The table above includes those loans that are impaired and have a carrying balance as of December 31, 2019, and 2018.

Impaired Loans: A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due pursuant to the contractual terms of the loan agreement. Impairment is measured by estimating the fair value of the loan based on the present value of expected cash flows, the market price of the loan, or the underlying fair value of the loan's collateral. For real estate loans, fair value of the impaired loan's collateral is determined by third party appraisals, which are then adjusted for the estimated selling and closing costs related to liquidation of the collateral. For this asset class, the actual valuation methods (income, sales comparable, or cost) vary based on the status of the project or property. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. The Company reviews the third party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically is 10% of the appraised value. For non-real estate collateral loans, the unobservable inputs will vary depending on the credit. The fair value of the impaired loan's collateral may be determined using a third party appraisal, transactional values, discounted cash flows (DCF), sales comparisons, asset value, or aging reports, adjusted or discounted. As of December 31, 2019 the fair value of the non-real estate collateral loans was determined primarily based on the transactional value, resulting in a Level 2 fair value classification.

Foreclosed Assets: Assets acquired through or instead of 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 which are updated no less frequently than annually. 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 by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Foreclosed assets are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Appraisals for both collateral-dependent impaired loans and real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the credit administration department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value.

The Company measures certain assets at fair value on a non-recurring basis including impaired loans (excluding PCI loans), loans held for sale, and OREO. These fair value adjustments result from impairments recognized during the period, application of the lower of cost or fair value on loans held for sale, and the application of fair value less cost to sell on OREO. The following tables present valuation techniques and unobservable inputs for assets measured at fair value on a non-recurring basis for which the Company has utilized Level 3 inputs to determine fair values at December 31, 2019 and 2018:

Financial Instruments Recorded Using Fair Value Option

At December 31, 2019, the unpaid principal balance of loans held for sale was $42,152, resulting in an unrealized gain of $1,010 included in gains on sale of loans. None of these loans are 90 days or more past due or on nonaccrual as of December 31, 2019. At December 31, 2018, the unpaid principal balance of loans held for sale was $10,722, resulting in an unrealized gain of $381 included in mortgage banking revenue.


	Carrying Amount		Level 1		Fair Value Measurements at December 31, 2019 Using:						Total
							Level 2		Level 3
Assets
Cash and cash equivalents	$	234,991	$	234,991	$	—	$	—	$	234,991
Securities available for sale	652,132		—		652,132		—		652,132
Certificates of deposit held at other financial institutions	3,590		—		3,590		—		3,590
Loans held for sale	43,162		—		43,162		—		43,162
Net loans	2,767,008		—		—		2,753,761		2,753,761
Servicing rights, net	3,246		—		—		3,922		3,922
Other assets	225		—		225		—		225
Accrued interest receivable	12,362		96		3,775		8,491		12,362
Liabilities
Deposits	$	3,207,584	$	2,458,555	$	749,656	$	—	$	3,208,211

Federal Home Loan Bank advances	155,000		—		155,090		—		155,090
Subordinated notes	58,872		—		—		60,922		60,922
Other liabilities	73		—		73		—		73
Accrued interest payable	4,201		154		687		3,360		4,201


	Carrying Amount		Level 1		Fair Value Measurements at December 31, 2018 Using:						Total
							Level 2		Level 3
Assets
Cash and cash equivalents	$	280,212	$	280,212	$	—	$	—	$	280,212
Securities available for sale	1,030,668		253,014		777,654		—		1,030,668
Certificates of deposit held at other financial institutions	3,594		—		3,594		—		3,594
Securities held to maturity	121,617		—		118,955		—		118,955
Loans held for sale	11,103		—		11,103		—		11,103
Net loans	2,648,948		—		—		2,622,386		2,622,386
Servicing rights, net	3,403		—		—		4,836		4,836
Other assets	206		—		206		—		206
Accrued interest receivable	13,337		71		5,539		7,727		13,337
Liabilities
Deposits	$	3,431,807	$	2,105,951	$	1,319,326	$	—	$	3,425,277

Federal Home Loan Bank advances	368,500		—		366,786		—		366,786
Subordinated notes	58,693		—		—		59,852		59,852
Other liabilities	129		—		129		—		129
Accrued interest payable	4,700		146		3,866		688		4,700

At December 31, 2019 there were ten collateral-dependent impaired loans carried at fair value of $739 resulting in an additional provision for loan losses of $20,771 recorded related to impaired loans recorded at fair value of collateral. At December 31 2018, there was one collateral dependent impaired loan carried at fair value of $150 resulting in an additional provision for loan losses of $17 recorded related to impaired loans recorded at fair value of collateral.

There were no foreclosed assets as of December 31, 2019 and 2018, and accordingly, there were no properties at December 31, 2019 and 2018 that required write-downs to fair value resulting in no write downs for the years ended December 31, 2019 and 2018.

The Company measures certain assets at fair value on a non-recurring basis including impaired loans (excluding PCI loans), loans held for sale, and OREO. These fair value adjustments result from impairments recognized during the period, and the application of fair value less cost to sell on OREO. The following tables present valuation techniques and unobservable inputs for assets measured at fair value on a non-recurring basis for which the Company has utilized Level 3 inputs to determine fair values at December 31, 2019 and 2018:

The carrying amounts and estimated fair values of financial instruments, at December 31, 2019 and 2018 are as in the tables below. The methods and assumptions not previously described used to estimate fair values are described as follows:

(a) Cash and Cash Equivalents: The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

(b) Loans: Fair values of loans, excluding loans held for sale, are estimated as follows: In accordance with ASU 2016-01, the fair value of loans held for investment, is estimated using a cash flow projection methodology that relies on three primary assumptions: (1) the expected prepayment rate of loans; (2) the magnitude of future net losses based on expected default rate and severity of loss; and (3) the discount rate applicable to the expected cash flows of the loan portfolio. Loans are considered a Level 3 classification.

(c) Mortgage Servicing Rights: Fair value of mortgage servicing rights is based on valuation models that calculate the present value of estimated net cash flows based on industry market data. The valuation model incorporates assumptions that market participants would use in estimating future net cash flows resulting in a Level 3 classification.

(d) Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. The carrying amounts of fixed-term money market accounts approximate their fair values at the reporting date resulting in a Level 1 classification. Fair values for certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

(e) Federal Funds Purchased and Repurchase Agreements: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification.

(f) Federal Home Loan Bank Advances: The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

(g) Subordinated Notes: The fair values of the Company's subordinated notes are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

(h) Accrued Interest Receivable/Payable: The carrying amounts of accrued interest approximate fair value resulting in a Level 1, Level 2 or Level 3 classification based on the asset/liability with which they are associated.

(i) Off-balance Sheet Instruments: Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

- 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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