FAIR VALUE DISCLOSURES AND REPORTING, THE FAIR VALUE OPTION AND FAIR VALUE MEASUREMENTS

6 Months Ended

Jun. 30, 2021

FAIR VALUE DISCLOSURES AND REPORTING, THE FAIR VALUE OPTION AND FAIR VALUE MEASUREMENTS

FAIR VALUE DISCLOSURES AND REPORTING, THE FAIR VALUE OPTION AND FAIR VALUE MEASUREMENTS

NOTE 8 – FAIR VALUE DISCLOSURES AND REPORTING, THE FAIR VALUE OPTION 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 assets 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 observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and 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 factors that market participants would likely consider in pricing an asset or liability.

The following methods and assumptions were used by the Company to estimate its financial instrument fair values disclosed at June 30, 2021 and December 31, 2020:

● Investment Securities: The fair value 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, valuing 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). For securities where, quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

● Loans Held for Sale: Since loans designated by the Company as available-for-sale are typically sold shortly after making the decision to sell them, realized gains or losses are usually recognized within the same period and fluctuations in fair values are not relevant for reporting purposes. If available-for-sale loans are held on our books for an extended period of time, the fair value of those loans is determined using quoted secondary-market prices.

● Collateral Dependent 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 independent appraisers to adjust for differences between the comparable sales and income data 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 generally adjusts the appraisal down by approximately 10 percent to account for selling costs. 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 credit 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 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 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 generally adjusts the appraisal down by approximately 10 percent to account for selling costs. 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 non-interest 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 non-interest income. Other real estate owned is classified within Level 3 of the fair value hierarchy.

Estimated fair values for the Company’s financial instruments are as follows, as of the dates noted:

June 30, 2021					Fair Value Measurements
($ in thousands)
							Significant
							Other		Significant
							Observable		Unobservable
	Carrying		Estimated		Quoted Prices		Inputs		Inputs
	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
Financial Instruments:
Assets:
Cash and cash equivalents	$	762,486	$	762,486	$	762,486	$	—	$	—
Securities available-for- sale:
U.S. Treasury		36,957		36,957		36,957		—		—
Obligations of U.S. government agencies and sponsored entities		150,504		150,504		—		150,504		—
Municipal securities		531,134		531,134		—		511,030		20,104
Mortgage- backed securities		530,749		530,749		—		530,749		—
Corporate obligations		31,417		31,417		—		31,199		218
Loans, net		3,004,275		3,042,805		—		—		3,042,805
Accrued interest receivable		24,026		24,026		—		6,107		17,919
Liabilities:
Noninterest-bearing deposits	$	682,014	$	682,014	$	—	$	682,014	$	—
Interest-bearing deposits		3,991,898		3,973,535		—		3,973,535		—
Subordinated debentures		144,611		152,968		—		—		152,968
Accrued interest payable		1,827		1,827		—		1,827		—

December 31, 2020					Fair Value Measurements
($ in thousands)
							Significant
							Other		Significant
					Quoted		Observable		Unobservable
	Carrying		Estimated		Prices		Inputs		Inputs
	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:
U.S. Treasury		9,383		9,383		9,383		—		—
Obligations of U.S. government agencies and sponsored entities		100,170		100,170		—		100,170		—
Municipal securities		480,374		480,374		—		460,248		20,126
Mortgage-backed securities		401,232		401,232		—		401,232		—
Corporate obligations		31,023		31,023		—		30,788		235
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		—

Assets measured at fair value on a recurring basis are summarized below:

June 30, 2021

($ in thousands)			Fair Value Measurements Using
			Quoted Prices in
			Active Markets		Significant Other		Significant
			For		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Available-for-sale
U.S. Treasury	$	36,957	$	36,957	$	—	$	—
Obligations of U.S. Government agencies and sponsored entities		150,504		—		150,504		—
Municipal securities		531,134		—		511,030		20,104
Mortgage-backed securities		530,749		—		530,749		—
Corporate obligations		31,417		—		31,199		218
Total available-for-sale	$	1,280,761	$	36,957	$	1,223,482	$	20,322

December 31, 2020

($ in thousands)			Fair Value Measurements Using
			Quoted Prices in
			Active Markets		Significant 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

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

	Bank-Issued Trust
	Preferred Securities
($ in thousands)	2021		2020
Balance, January 1	$	235	$	408
Paydowns		(55)		(273)
Unrealized gain included in comprehensive income		38		105
Balance at June 30	$	218	$	240

	Municipal Securities
($ in thousands)	2021		2020
Balance, January 1	$	20,126	$	10,345
Purchases		4,189		7,003
Maturities, calls and paydowns		(4,185)		(302)
Transfer to level 2		—		(6,293)
Unrealized gain (loss) included in comprehensive income		(26)		131
Balance at June 30	$	20,104	$	10,884

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 June 30, 2021 and December 31, 2020. 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
June 30, 2021	$	218	Discounted cash flow	Probability of default	0.99% - 2.39%
December 31, 2020	$	235	Discounted cash flow	Probability of default	1.08% - 2.48%

				Significant Unobservable
Municipal Securities	Fair Value		Valuation Technique	Inputs	Range of Inputs
June 30, 2021	$	20,104	Discounted cash flow	Discount Rate	0.50% - 2.00%
December 31, 2020	$	20,126	Discounted cash flow	Discount Rate	0.50% - 2.45%

The following table presents the fair value measurement of assets measured at fair value on a non-recurring basis and the level within the fair value hierarchy in which the fair value measurements were classified at June 30, 2021 and December 31, 2020.

June 30, 2021

($ in thousands)			Fair Value Measurements Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			For		Observable		Unobservable
			Identical Assests		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Collateral dependent loans	$	5,176	$	—	$	—	$	5,176
Other real estate owned		3,529		—		—		3,529

December 31, 2020

($ in thousands)			Fair Value Measurements Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			For		Observable		Unobservable
			Identical Assests		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	15,107	$	—	$	—	$	15,107
Other real estate owned		5,802		—		—		5,802