Fair Value of Financial Instruments and Fair Value Measurements

6 Months Ended

Jun. 30, 2020

Fair Value of Financial Instruments and Fair Value Measurements

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 company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

For information regarding the valuation methodologies used to measure our assets recorded at fair value (under ASC Topic 820), and for estimating fair value for financial instruments not recorded at fair value (under ASC Topic 825, as amended by ASU 2016-01 and ASU 2018-03), see Note 1. Nature of Business and Significant Accounting Policies and Note 20. Estimated Fair Value of Financial Instruments and Fair Value Measurements to the consolidated financial statements in the Company's 2019 Annual Report on Form 10-K, filed with the SEC on March 6, 2020.

The Company uses fair value to measure certain assets and liabilities on a recurring basis, primarily available for sale and derivatives. For assets measured at the lower of cost or fair value, the fair value measurement criteria may or may not be met during a reporting period and such measurements are therefore considered "nonrecurring" for purposes of disclosing our fair value measurements. Fair value is used on a nonrecurring basis to adjust carrying values for impaired loans and other real estate owned.

Recurring Basis

Assets and liabilities measured at fair value on a recurring basis comprise the following as of the dates indicated:


	Fair Value Measurement at June 30, 2020 Using
(in thousands)	Total		Level 1		Level 2		Level 3
Assets:
Available for sale debt securities:
U.S. Government agencies and corporations	$	410	$	—	$	410	$	—
State and political subdivisions	434,046		—		434,046		—
Mortgage-backed securities	79,685		—		79,685		—
Collateralized mortgage obligations	360,028		—		360,028		—
Corporate debt securities	313,286		—		313,286		—
Derivative assets	14,391		—		14,391		—

Liabilities:
Derivative liabilities	$	18,517	$	—	$	18,517	$	—


	Fair Value Measurement at December 31, 2019 Using
(in thousands)	Total		Level 1		Level 2		Level 3
Assets:
Debt securities available for sale:
U.S. Government agencies and corporations	$	441	$	—	$	441	$	—
State and political subdivisions	257,205		—		257,205		—
Mortgage-backed securities	43,530		—		43,530		—
Collateralized mortgage obligations	292,946		—		292,946		—
Corporate debt securities	191,855		—		191,855		—
Derivative assets	1,848		—		1,848		—

Liabilities:
Derivative liabilities	$	3,242	$	—	$	3,242	$	—

There were no transfers of assets between Level 3 and other levels of the fair value hierarchy during the six months ended June 30, 2020 or the year ended December 31, 2019.

Changes in the fair value of available for sale debt securities are included in other comprehensive income.

Nonrecurring Basis

The following tables present assets measured at fair value on a nonrecurring basis as of the dates indicated:


	Fair Value Measurement at June 30, 2020 Using
(in thousands)	Total		Level 1		Level 2		Level 3
Collateral dependent impaired loans	$	8,798	$	—	$	—	$	8,798
Foreclosed assets, net	965		—		—		965


	Fair Value Measurement at December 31, 2019 Using
(in thousands)	Total		Level 1		Level 2		Level 3
Collateral dependent impaired loans	$	6,749	$	—	$	—	$	6,749
Foreclosed assets, net	3,706		—		—		3,706

The following table presents the valuation technique(s), unobservable inputs, and quantitative information about the unobservable inputs used for fair value measurements of the financial instruments held by the Company and categorized within Level 3 of the fair value hierarchy as of the date indicated:


	Fair Value at
(dollars in thousands)	June 30, 2020		December 31, 2019		Valuation Techniques(s)	Unobservable Input	Range of Inputs							Weighted Average
Collateral dependent impaired loans	$	8,798	$	6,749	Fair value of collateral	Valuation adjustments	—	%	-	90	%	31	%

Foreclosed assets, net	$	965	3,706		Fair value of collateral	Valuation adjustments	8	%	-	47	%	27	%

The carrying amount and estimated fair value of financial instruments at June 30, 2020 and December 31, 2019 were as follows:


	June 30, 2020
(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	117,210	$	117,210	$	117,210	$	—	$	—
Debt securities available for sale	1,187,455		1,187,455		—		1,187,455		—
Loans held for sale	12,048		12,401		—		12,401		—
Loans held for investment, net	3,541,395		3,597,325		—		—		3,597,325
Interest receivable	21,082		21,082		—		21,082		—
Federal Home Loan Bank stock	12,858		12,858		—		12,858		—
Derivative assets	14,391		14,391		—		14,391		—
Financial liabilities:
Non-interest bearing deposits	867,637		867,637		867,637		—		—
Interest-bearing deposits	3,397,798		3,405,414		2,428,327		977,087		—
Short-term borrowings	162,224		162,224		162,224		—		—
Finance leases payable	1,162		1,162		—		1,162		—
Federal Home Loan Bank borrowings	108,246		111,902		—		111,902		—
Junior subordinated notes issued to capital trusts	41,675		34,546		—		34,546		—
Subordinated debentures	10,890		11,123		—		11,123		—
Other long-term debt	28,000		28,000		—		28,000		—
Derivative liabilities	18,517		18,517		—		18,517		—


	December 31, 2019
(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	73,484	$	73,484	$	73,484	$	—	$	—

Debt securities available for sale	785,977		785,977		—		785,977		—

Loans held for sale	5,400		5,476		—		5,476		—
Loans held for investment, net	3,422,187		3,427,952		—		—		3,427,952
Interest receivable	18,525		18,525		—		18,525		—
Federal Home Loan Bank stock	15,381		15,381		—		15,381		—
Derivative assets	1,848		1,848		—		1,848		—
Financial liabilities:
Non-interest bearing deposits	662,209		662,209		662,209		—		—
Interest-bearing deposits	3,066,446		3,066,427		2,113,000		953,427		—
Short-term borrowings	139,349		139,349		139,349		—		—
Finance leases payable	1,224		1,224		—		1,224		—
Federal Home Loan Bank borrowings	145,700		146,913		—		146,913		—
Junior subordinated notes issued to capital trusts	41,587		39,391		—		39,391		—
Subordinated debentures	10,899		11,083		—		11,083		—
Other long-term debt	32,250		32,250		—		32,250		—
Derivative liabilities	3,242		3,242		—		3,242		—

- 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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