FAIR VALUE DISCLOSURES

3 Months Ended

Mar. 31, 2021

FAIR VALUE DISCLOSURES

FAIR VALUE DISCLOSURES

NOTE 13: FAIR VALUE DISCLOSURES

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction occurring in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. In estimating fair value, the Company uses valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques refer to the assumptions used in pricing the asset or liability. Valuation inputs are categorized in a three-level hierarchy, that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 Inputs—Unadjusted quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs—Other observable inputs that may include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs that are observable for the asset or liability such as interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates or inputs that are observable or can be corroborated by observable market data.

Level 3 Inputs—Unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities.

During the three months ended March 31, 2021 and the year ended December 31, 2020, there were no transfers of assets or liabilities within the levels of the fair value hierarchy.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon models that primarily use observable market-based parameters as inputs. Valuation adjustments may be made to ensure that assets and liabilities are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time.

The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value could result in different estimates of fair value. Fair value estimates are based on judgments regarding current economic conditions, risk characteristics of the various instruments and other factors. These estimates

are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.

Financial Instruments Measured at Fair Value on a Recurring Basis

The Company’s assets and liabilities measured at fair value on a recurring basis include the following:

Debt Securities Available for Sale—Debt securities classified as available for sale are recorded at fair value. For those debt securities classified as Level 1 and Level 2, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the security’s terms and conditions, among other things. The Company reviews the prices supplied by the independent pricing service, as well as their underlying pricing methodologies for reasonableness.

Equity Securities Available for Sale—Equity securities are classified as available for sale and are recorded at fair value. The fair value measurements are based on observable data obtained from a third-party pricing service. The Company reviews the prices supplied by the service against publicly available information. The equity securities are mutual funds publicly traded on the National Association of Securities Dealers Automated Quotations and the fair value is determined by using unadjusted quoted market prices which are considered Level 1 inputs.

Interest Rate Swaps—The Company obtains fair value measurements for its interest rate swaps from an independent pricing service which uses the income approach. The income approach calls for the utilization of valuation techniques to convert future cash flows as due to be exchanged per the terms of the financial instrument, into a single present value amount. Measurement is based on the value indicated by the market expectations about those future amounts as of the measurement date. The proprietary curves of the independent pricing service utilize pricing models derived from industry standard analytic tools, considering both Level 1 and Level 2 inputs. Interest rate swaps are classified as Level 2.

Financial assets and financial liabilities measured at fair value on a recurring basis as of the dates shown below were as follows:

	March 31,		December 31,
(Dollars in thousands)	2021		2020
Fair value of financial assets:
Level 1 inputs:
Equity securities	$	1,176	$	1,193
Debt securities available for sale - U.S. Treasury securities		11,821		—
Level 2 inputs:
Debt securities available for sale:
State and municipal securities		106,185		93,037
U.S. agency securities:
Callable debentures		2,951		—
Collateralized mortgage obligations		33,994		35,402
Mortgage-backed securities		132,964		107,649
Interest rate swaps		5,902		8,618
Level 3 inputs:
Credit risk participation agreement		11		40
Total fair value of financial assets	$	295,004	$	245,939
Fair value of financial liabilities:
Level 2 inputs:
Interest rate swaps	$	5,902	$	8,618
Total fair value of financial liabilities	$	5,902	$	8,618

Financial Instruments Measured at Fair Value on a Non-recurring Basis

A portion of financial instruments are measured at fair value on a non-recurring basis and are subject to fair value adjustments in certain circumstances. Financial assets measured at fair value on a non-recurring basis during the dates shown below include certain loans reported at the fair value of the underlying collateral if repayment is expected solely

from the collateral or a discounted cash flow method if not. Prior to foreclosure, estimated fair values for collateral is estimated based on Level 3 inputs based on customized discounting criteria. The Company’s financial assets measured at fair value on a non-recurring basis are certain individually evaluated loans and as of the dates shown below were as follows:

	March 31, 2021						December 31, 2020
(Dollars in thousands)	Recorded Investment		Specific ACL		Net		Recorded Investment		Specific ACL		Net
Level 3 inputs:
Loans evaluated individually
Commercial and industrial	$	10,373	$	5,476	$	4,897	$	10,509	$	5,004	$	5,505
Commercial real estate		5,727		274		5,453		5,727		323		5,404
Consumer		90		6		84		—		—		—
Other		—		—		—		1,232		205		1,027
Total	$	16,190	$	5,756	$	10,434	$	17,468	$	5,532	$	11,936

Non-Financial Assets and Non-Financial Liabilities Measured at Fair Value on a Non-recurring Basis

The Company’s non-financial assets measured at fair value on a non-recurring basis for the periods reported are foreclosed assets (upon initial recognition or subsequent impairment). The Company’s other non-financial assets whose fair value may be measured on a non-recurring basis when there is evidence of impairment and may be subject to impairment adjustments include goodwill and intangible assets, among other assets.

The fair value of foreclosed assets may be estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria less estimated selling costs. There were no write-downs of foreclosed assets for fair value remeasurement subsequent to initial foreclosure during the three months ended March 31, 2021 or during 2020.  Foreclosed assets were $106,000 at March 31, 2021 and there were no outstanding foreclosed assets at December 31, 2020.

Financial Instruments Reported at Amortized Cost

Fair market values and carrying amounts of financial instruments that are reported at cost as of the dates shown below were as follows:

	March 31, 2021				December 31, 2020
			Carrying				Carrying
(Dollars in thousands)	Fair Value		Amount		Fair Value		Amount
Financial assets:
Level 1 inputs:
Cash and due from banks	$	604,671	$	604,671	$	538,007	$	538,007
Level 2 inputs:
Bank-owned life insurance		72,728		72,728		72,338		72,338
Accrued interest receivable		12,719		12,719		13,350		13,350
Servicing asset		188		188		190		190
Level 3 inputs:
Loans, including held for sale, net		2,889,936		2,851,763		2,919,854		2,886,153
Other investments		18,786		18,786		18,652		18,652
Total financial assets	$	3,599,028	$	3,560,855	$	3,562,391	$	3,528,690
Financial liabilities:
Level 1 inputs:
Noninterest-bearing deposits	$	1,621,408	$	1,621,408	$	1,476,425	$	1,476,425
Level 2 inputs:
Interest-bearing deposits		1,775,351		1,763,339		1,894,558		1,825,369
Federal Home Loan Bank advances		51,390		50,000		51,726		50,000
Accrued interest payable		281		281		398		398
Total financial liabilities	$	3,448,430	$	3,435,028	$	3,423,107	$	3,352,192

The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value and as such the fair values shown above are not necessarily indicative of the amounts the Company will realize. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.