Note 10 - Fair Value Disclosures

The authoritative accounting guidance for fair value measurements defines 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. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs 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. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.

The authoritative accounting guidance requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the authoritative guidance establishes a fair value hierarchy for valuation inputs 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:

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

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Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These 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, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

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

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

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 internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. 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 of certain financial instruments could result in a different estimate of fair value at the reporting date.

Securities classified as available-for-sale and trading are reported at fair value utilizing Level 1 and Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include market spreads, cash flows, the United States Treasury yield curve, live trading levels, trade execution data, dealer quotes, market consensus prepayments speeds, credit information and the security’s terms and conditions, among other items.

There were no transfers between Level 1 and Level 2 or Level 2 and Level 3 during the three and six months ended June 30, 2017 and 2016, and the year ended December 31, 2016.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2017 and 2016, and December 31, 2016, respectively, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):


June 30, 2017
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
Available-for-sale investment securities:
U.S. Treasury securities	$	10,573	$	—	$	—	$	10,573
Obligations of U. S. government sponsored enterprises and agencies		—		73,705		—		73,705
Obligations of states and political subdivisions		—		1,531,873		—		1,531,873
Corporate bonds		—		25,788		—		25,788
Residential mortgage-backed securities		—		975,082		—		975,082
Commercial mortgage-backed securities		—		343,040		—		343,040
Other securities		4,452		—		—		4,452

Total	$	15,025	$	2,949,488	$	—	$	2,964,513


June 30, 2016
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
Available-for-sale investment securities:
U.S. Treasury securities	$	10,811	$	—	$	—	$	10,811
Obligations of U. S. government sponsored enterprises and agencies		—		122,352		—		122,352
Obligations of states and political subdivisions		—		1,516,312		—		1,516,312
Corporate bonds		—		65,550		—		65,550
Residential mortgage-backed securities		—		805,773		—		805,773
Commercial mortgage-backed securities		—		266,698		—		266,698
Other securities		7,860		—		—		7,860

Total	$	18,671	$	2,776,685	$	—	$	2,795,356


December 31, 2016
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
Available-for-sale investment securities:
U.S. Treasury securities	$	10,668	$	—	$	—	$	10,668
Obligations of U. S. government sponsored enterprises and agencies		—		113,703		—		113,703
Obligations of states and political subdivisions		—		1,564,276		—		1,564,276
Corporate bonds		—		47,965		—		47,965
Residential mortgage-backed securities		—		851,361		—		851,361
Commercial mortgage-backed securities		—		268,436		—		268,436
Other securities		4,428		—		—		4,428

Total	$	15,096	$	2,845,741	$	—	$	2,860,837

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis, that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets and financial liabilities measured at fair value on a non-recurring basis include the following at June 30, 2017:

Impaired Loans – Impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 inputs based on observable market data. At June 30, 2017, impaired loans with a carrying value of $21,489,000 were reduced by specific valuation reserves totaling $4,543,000 resulting in a net fair value of $16,946,000.

Loans Held-for-Sale – Loans held-for-sale are reported at the lower of cost or fair value. In determining whether the fair value of loans held-for-sale is less than cost when quoted market prices are not available, the Company considers investor commitments/contracts. These loans are considered Level 2 of the fair value hierarchy. At June 30, 2017, the Company’s mortgage loans held-for-sale were recorded at cost as fair value exceeded cost.

Certain non-financial assets and non-financial liabilities measured at fair value on a non-recurring basis include other real estate owned, goodwill and other intangible assets and other non-financial long-lived assets. Non-financial assets measured at fair value on a non-recurring basis during the three months and six months ended June 30, 2017 and 2016 include other real estate owned which, subsequent to their initial transfer to other real estate owned from loans, were re-measured at fair value through a write-down included in gain (loss) on sale of foreclosed assets. During the reported periods, all fair value measurements for foreclosed assets utilized Level 2 inputs based on observable market data, generally third-party appraisals, or Level 3 inputs based on customized discounting criteria. These appraisals are evaluated individually and discounted as necessary due to the age of the appraisal, lack of comparable sales, expected holding periods of property or special use type of the property. Such discounts vary by appraisal based on the above factors but generally range from 5% to 25% of the appraised value. Re-evaluation of other real estate owned is performed at least annually as required by regulatory guidelines or more often if particular circumstances arise. The following table presents other real estate owned that were re-measured subsequent to their initial transfer to other real estate owned (dollars in thousands):


	Three Months Ended June 30,
	2017			2016
Carrying value of other real estate owned prior to re-measurement	$	88		$	—
Write-downs included in gain (loss) on sale of other real estate owned		(8	)		—

Fair value	$	80		$	—


	Six Months Ended June 30,
	2017			2016
Carrying value of other real estate owned prior to re-measurement	$	88		$	—
Write-downs included in gain (loss) on sale of other real estate owned		(8	)		—

Fair value	$	80		$	—

At June 30, 2017 and 2016, and December 31, 2016, other real estate owned totaled $2,023,000, $124,000, and $413,000, respectively.

The Company is required under current authoritative accounting guidance to disclose the estimated fair value of their financial instrument assets and liabilities including those subject to the requirements discussed above. For the Company, as for most financial institutions, substantially all of its assets and liabilities are considered financial instruments. Many of the Company’s financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction.

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. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.

Cash and due from banks, federal funds sold, interest-bearing deposits and time deposits in banks and accrued interest receivable and payable are liquid in nature and considered Levels 1 or 2 of the fair value hierarchy.

Financial instruments with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating current market for similar assets and liabilities and are considered Levels 2 and 3 of the fair value hierarchy. Financial instrument liabilities with no stated maturities have an estimated fair value equal to both the amount payable on demand and the carrying value and are considered Level 1 of the fair value hierarchy.

The carrying value and the estimated fair value of the Company’s contractual off-balance-sheet unfunded lines of credit, loan commitments and letters of credit, which are generally priced at market at the time of funding, are not material.

The estimated fair values and carrying values of all financial instruments under current authoritative guidance at June 30, 2017 and 2016, and December 31, 2016, were as follows (in thousands):


	June 30,								December 31,
	2017				2016				2016
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value		Fair Value Hierarchy
Cash and due from banks	$	163,435	$	163,435	$	135,092	$	135,092	$	204,782	$	204,782	Level 1
Federal funds sold		3,740		3,740		2,960		2,960		3,130		3,130	Level 1
Interest-bearing deposits in banks		53,336		53,336		67,746		67,746		48,574		48,574	Level 1
Interest-bearing time deposits in banks		1,458		1,458		2,427		2,429		1,707		1,709	Level 2
Available-for-sale Securities		2,964,513		2,964,513		2,795,356		2,795,356		2,860,837		2,860,837	Levels 1 and 2
Held-to-maturity securities		105		107		137		141		121		124	Level 2
Loans		3,410,269		3,466,431		3,264,328		3,269,221		3,338,426		3,361,735	Level 3
Accrued interest receivable		35,600		35,600		33,516		33,516		36,469		36,469	Level 2
Deposits with stated maturities		477,441		478,393		554,753		556,224		508,996		510,304	Level 2
Deposits with no stated maturities		5,149,168		5,149,168		4,501,536		4,501,536		4,969,543		4,969,543	Level 1
Borrowings		379,324		379,324		556,924		556,924		445,770		445,770	Level 2
Accrued interest Payable		164		164		283		283		225		225	Level 2