FAIR VALUES OF ASSETS AND LIABILITIES

12 Months Ended

Dec. 31, 2020

FAIR VALUES OF ASSETS AND LIABILITIES

FAIR VALUES OF ASSETS AND LIABILITIES

NOTE R - FAIR VALUES OF ASSETS AND LIABILITIES

The Company follows the guidance of ASC Topic 820, Fair Value Measurements and Disclosures, that establishes a framework for measuring fair value and expands disclosures about fair value measurements.

The guidance defines the fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It 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.

In accordance with the guidance, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1:        Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2:        Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use 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 for substantially the full term of the assets and liabilities.

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.

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets.

Securities

The fair value of available-for-sale securities is determined by various valuation methodologies. Where quoted market prices are available in an active market, securities are classified within Level 1. If quoted market prices are not available, then fair values are estimated by using pricing models or quoted prices of securities with similar characteristics. Level 2 securities include obligations of U.S. government corporations and agencies, obligations of states and political subdivisions, mortgage-backed securities and collateralized mortgage obligations. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using the discounted cash flow or other market indicators (Level 3).

The following table presents the Company’s securities that are measured at fair value on a recurring basis and the level within the hierarchy in which the fair value measurements fell as of December 31, 2020 and 2019 ($ in thousands):

December 31, 2020	Fair Value Measurements
($ in thousands)			Quoted Prices in		Significant
			Active Markets		Other		Significant
			For		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Available-for-sale
U.S. Treasury	$	9,383	$	9,383	$	—	$	—
Obligations of U.S. government agencies and sponsored entities		100,170		—		100,170		—
Municipal securities		480,374		—		460,248		20,126
Mortgage-backed securities		401,232		—		401,232		—
Corporate obligations		31,023		—		30,788		235
Total available for sale	$	1,022,182	$	9,383	$	992,438	$	20,361

December 31, 2019	Fair Value Measurements
($ in thousands)			Quoted Prices in		Significant
			Active Markets		Other		Significant
			For		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Available-for-sale
U.S. Treasury	$	4,894	$	4,894	$	—	$	—
Obligations of U.S. government agencies and sponsored entities		77,950		—		77,950		—
Municipal securities		258,982		—		248,637		10,345
Mortgage-backed securities		395,315		—		395,315		—
Corporate obligations		27,946		—		27,538		408
Total available for sale	$	765,087	$	4,894	$	749,440	$	10,753

The following is a reconciliation of activity for assets measured at fair value based on significant unobservable (Level 3) information:

	Bank-Issued
	Trust
	Preferred
	Securities
($ in thousands)	2020		2019
Balance, January 1	$	408	$	874
Unrealized loss included in comprehensive income		(173)		(466)
Balance, December 31	$	235	$	408

	Municipal Securities
($ in thousands)	2020		2019
Balance, January 1	$	10,345	$	7,574
Purchases		19,397		5,600
Sales		(3,334)		(3,116)
Transfer to level 2		(6,294)		—
Unrealized gain included in comprehensive income		12		287
Balance, December 31	$	20,126	$	10,345

The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis at December 31, 2020 and 2019. The following tables present quantitative information about recurring Level 3 fair value measurements ($ in thousands):

				Significant Unobservable
Trust Preferred Securities	Fair Value		Valuation Technique	Inputs	Range of Inputs
December 31, 2020	$	235	Discounted cash flow	Discount rate	1.08% - 2.48%
December 31, 2019	$	408	Discounted cash flow	Discount rate	2.73% - 4.15%

				Significant Unobservable
Municipal Securities	Fair Value		Valuation Technique	Inputs	Range of Inputs
December 31, 2020	$	20,126	Discounted cash flow	Discount rate	0.50% - 2.45%
December 31, 2019	$	10,345	Discounted cash flow	Discount rate	1.50% - 4.40%

Following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a non-recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.

Impaired Loans

Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral. 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 date available for similar loans and collateral underlying such loans. Such adjustments, if any, result in a Level 3 classification of the inputs for determining fair value. The Company adjust the appraisal 10 percent. 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 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.

Other Real Estate Owned

Other real estate owned consists of properties obtained through foreclosure. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Fair value of other real estate owned is based on current independent appraisals of the collateral less costs to sell when acquired, establishing a new costs 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 with data from comparable properties. 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, if any, result in a Level 3 classification of the inputs for determining fair value. In the determination of fair value subsequent to foreclosure, Management also considers other factors or recent developments, such as changes in market conditions from the time of valuation and anticipated sales values considering plans for disposition, which could result in an adjustment to lower the collateral value estimates indicated in the appraisals. The Company adjust the appraisal 10 percent. Periodic revaluations are classified as Level 3 in the fair value hierarchy since assumptions are used that may not be observable in the market. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined the fair value declines subsequent to foreclosure, a valuation allowance is recorded through other income. Operating costs associated with the assets after acquisition are also recorded as non-interest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and recorded in other income. Other real estate measured at fair value on a non-recurring basis at December 31, 2020, amounted to $5.8 million. Other real estate owned is classified within Level 3 of the fair value hierarchy.

The following table presents the fair value measurement of assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements were reported at December 31, 2020 and 2019:

	Fair Value Measurements Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			For		Observable		Unobservable
			Identical Assets		Inputs		Inputs
($ in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2020
Impaired loans	$	15,107	$	—	$	—	$	15,107
Other real estate owned		5,802		—		—		5,802
December 31, 2019
Impaired loans	$	11,337	$	—	$	—	$	11,337
Other real estate owned		7,299		—		—		7,299

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value:

Cash and Cash Equivalents – For such short-term instruments, the carrying amount is a reasonable estimate of fair value.

Investment in securities available-for-sale and held-to-maturity – The fair value measurement for securities available-for-sale was discussed earlier. The same measurement approach was used for securities held-to-maturity and other securities.

Loans – The fair value of loans was estimated by discounting the expected future cash flows using the current interest rates at which similar loans would be made for the same remaining maturities, in accordance with the exit price notion as defined by FASB ASC 820, Fair Value Measurement ("ASC 820"). Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments and as a result of the adoption of ASU 2016-01, which also included credit risk and other market factors to calculate the exit price fair value in accordance with ASC 820.

Bank-owned Life Insurance – The fair value of bank-owned life insurance approximates the carrying amount, because upon liquidation of these investments, the Company would receive the cash surrender value which equals the carrying amount.

Accrued Interest Receivable – The carrying amount of accrued interest receivable approximates fair value and is classified as level 2 for accrued interest receivable related to investments securities and Level 3 for accrued interest receivable related to loans.

Deposits – The fair values of demand deposits are, as required by ASC Topic 825, equal to the carrying value of such deposits. Demand deposits include non-interest-bearing demand deposits, savings accounts, NOW accounts, and money market demand accounts. The fair value of variable rate term deposits, those repricing within six months or less, approximates the carrying value of these deposits. Discounted cash flows have been used to value fixed rate term deposits and variable rate term deposits repricing after six months. The discount rate used is based on interest rates currently being offered on comparable deposits as to amount and term.

Short-Term Borrowings – The carrying value of any federal funds purchased and other short-term borrowings approximates their fair values.

FHLB and Other Borrowings – The fair value of the fixed rate borrowings are estimated using discounted cash flows, based on current incremental borrowing rates for similar types of borrowing arrangements. The carrying amount of any variable rate borrowing approximates its fair value.

Subordinated Debentures – Fair values are determined based on the current market value of like instruments of a similar maturity and structure.

Accrued Interest Payable – The carrying amount of accrued interest payable approximates fair value resulting in a Level 2 classification.

Off-Balance Sheet Instruments – Fair values of off-balance sheet financial instruments are based on fees charged to enter into similar agreements. However, commitments to extend credit do not represent a significant value until such commitments are funded or closed. Management has determined that these instruments do not have a distinguishable fair value and no fair value has been assigned.

	Fair Value Measurements
							Significant		Significant
					Quoted		Other  Observable		Unobservable
December 31, 2020	Carrying		Estimated		Prices		Inputs		Inputs
($ in thousands)	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
Financial Instruments:
Assets:
Cash and cash equivalents	$	562,554	$	562,554	$	562,554	$	—	$	—
Securities available-for-sale		1,022,182		1,022,182		9,383		992,438		20,361
Loans, net		3,087,858		3,089,318		—		—		3,089,318
Accrued interest receivable		26,344		26,344		—		5,690		20,654
Liabilities:
Non-interest-bearing deposits	$	571,079	$	571,079	$	—	$	571,079	$	—
Interest-bearing deposits		3,644,201		3,647,845		—		3,647,845		—
Subordinated debentures		144,592		145,289		—		—		145,289
FHLB and other borrowings		114,647		114,647		—		114,647		—
Accrued interest payable		2,134		2,134		—		2,134		—

	Fair Value Measurements
							Significant		Significant
					Quoted		Other  Observable		Unobservable
December 31, 2019	Carrying		Estimated		Prices		Inputs		Inputs
($ in thousands)	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
Financial Instruments:
Assets:
Cash and cash equivalents	$	168,864	$	168,864	$	168,864	$	—	$	—
Securities available-for-sale		765,087		765,087		4,894		749,440		10,753
Loans, net		2,597,260		2,560,668		—		—		2,560,668
Accrued interest receivable		14,802		14,802		—		4,246		10,556
Liabilities:
Non-interest-bearing deposits	$	723,208	$	723,208	$	—	$	723,208	$	—
Interest-bearing deposits		2,353,325		2,339,537		—		2,339,537		—
Subordinated debentures		80,678		80,330		—		—		80,330
FHLB and other borrowings		214,319		214,319		—		214,319		—
Accrued interest payable		2,508		2,508		—		2,508		—