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Fair Value

6 Months Ended

Jun. 30, 2021

FAIR VALUE

Fair Value Measurement

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an 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. The following three levels of inputs are used to measure fair value:

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.

The Corporation used the following methods and significant assumptions to estimate fair value:

Investment Securities: The fair values of most trading securities and debt securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather relying on the securities’ relationship to other benchmark quoted securities (Level 2). These models utilize the market approach with standard inputs that include, but are not limited to benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. For certain securities that observable inputs about the specific issuer are not available, fair values are estimated using observable data from other securities presumed to be similar or other market data on other similar securities (Level 3).

Derivatives: The Corporation’s derivative instruments are interest rate swaps that are similar to those that trade in liquid markets. As such, significant fair value inputs can generally be verified and do not typically involve significant management judgments (Level 2).

Individually Evaluated Loans: The fair value of individually evaluated loans with specific allocations of the allowance for credit losses is generally based on recent real estate appraisals prepared by third-parties. 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 appraisers to adjust for differences between the comparable sales and income data available. Management also adjusts appraised values based on the length of time that has passed since the appraisal date and other factors. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. 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 historical knowledge, changes in market conditions from the time of the valuation, and management's expertise and knowledge of the client and client's business, resulting in a Level 3 fair value classification. Individually evaluated loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the allowance policy.

Assets and liabilities measured at fair value on a recurring basis are as follows at June 30, 2021 and December 31, 2020:


			Fair Value Measurements at June 30, 2021 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Securities Available For Sale:
U.S. Government sponsored entities	$	151,435	$	0	$	151,435	$	0
States and political subdivisions	90,557		0		90,557		0
Residential and multi-family mortgage	388,225		0		388,225		0
Corporate notes and bonds	22,334		0		12,508		9,826
Pooled SBA	22,549		0		22,549		0

Total Securities Available For Sale	$	675,100	$	0	$	665,274	$	9,826
Interest Rate swaps	$	2,856	$	0	$	2,856	$	0
Trading Securities:
Corporate equity securities	$	6,550	$	6,550	$	0	$	0
Mutual funds	2,638		2,638		0		0
Certificates of deposit	181		181		0		0
Corporate notes and bonds	591		591		0		0

Total Trading Securities	$	9,960	$	9,960	$	0	$	0
Liabilities:
Interest rate swaps	$	(3,454)	$	0	$	(3,454)	$	0

























			Fair Value Measurements at December 31, 2020 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Securities Available For Sale:
U.S. Government sponsored entities	$	157,042	$	0	$	157,042	$	0
States and political subdivisions	70,883		0		70,819		64
Residential and multi-family mortgage	315,192		15,039		300,153		0
Corporate notes and bonds	14,926		0		14,926		0
Pooled SBA	25,886		0		25,886		0
Other	979		979		0		0
Total Securities Available For Sale	$	584,908	$	16,018	$	568,826	$	64
Interest Rate swaps	$	4,017	$	0	$	4,017	$	0
Trading Securities:
Corporate equity securities	$	4,343	$	4,343	$	0	$	0
Mutual funds	1,283		1,283		0		0
Certificates of deposit	404		404		0		0
Corporate notes and bonds	569		569		0		0
U.S. Government sponsored entities	50		0		50		0
Total Trading Securities	$	6,649	$	6,599	$	50	$	0
Liabilities:
Interest rate swaps	$	(4,785)	$	0	$	(4,785)	$	0

The table below presents a reconciliation of the fair value of securities available for sale measured on a recurring basis using significant unobservable inputs (Level 3) for the three months ended June 30, 2021:


	Corporate Notes and Bonds
Balance, April 1, 2021	$	2,250
Purchases	6,000
Total gains or (losses):
Included in other comprehensive income (loss)	76
Settlements	0
Transfers into Level 3	1,500
Transfers out of Level 3	$	0
Balance, June 30, 2021	$	9,826

The Corporation's corporate notes and bonds with a fair value of $1,500 for the three months ended June 30, 2021 were transferred out of Level 2 and into Level 3 because of a lack of observable market data for these investments due to a decrease in the market activity for these securities.


	States and Political Subdivisions		Corporate Notes and Bonds
Balance, January 1, 2021	$	64	$	0
Purchases	0		6,750
Total gains or (losses):
Included in other comprehensive income (loss)	0		76
Settlements	64		0
Transfers into Level 3	0		3,000
Transfers out of Level 3	0		$	0
Balance, June 30, 2021	$	0	$	9,826

The Corporation's corporate notes and bonds with a fair value of $3,000 for the six and six months ended June 30, 2021 were transferred out of Level 2 and into Level 3 because of a lack of observable market data for these investments due to a decrease in the market activity for these securities.

Assets and liabilities measured at fair value on a non-recurring basis are as follows at June 30, 2021 and December 31, 2020:


			Fair Value Measurements at June 30, 2021 Using
Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Assets:
Collateral-dependent loans:
Farmland	$	634	0	0	$	634
Owner-occupied, nonfarm nonresidential properties	253		0	0	253
Commercial and industrial	1,543		0	0	1,543
Other construction loans and all land development loans and other land loans	1,426		0	0	1,426
Multifamily (5 or more) residential properties	500		0	0	500
Non-owner occupied, nonfarm nonresidential	3,222		0	0	3,222
Obligations (other than securities and leases) of states and political subdivisions	430		0	0	430


			Fair Value Measurements at December 31, 2020 Using
Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Assets:
Collateral-dependent loans:
Farmland	$	659	0	0	$	659
Owner-occupied, nonfarm nonresidential properties	329		0	0	329
Commercial and industrial	3,680		0	0	3,680
Other construction loans and all land development loans and other land loans	1,790		0	0	1,790

Non-owner occupied, nonfarm nonresidential	9,622		0	0	9,622
Residential mortgages secured by first liens	659		0	0	659

A loan is considered to be a collateral dependent loan when, based on current information and events, the Corporation expects repayment of the financial assets to be provided substantially through the operation or sale of the collateral and the Corporation has determined that the borrower is experiencing financial difficulty as of the measurement date. The allowance for credit losses is measured by estimating the fair value of the loan based on the present value of expected cash flows, the market price of the loan, or the underlying fair value of the loan’s collateral. For real estate loans, fair value of the loan’s collateral is determined by third-party appraisals, which are then adjusted for the estimated selling and closing costs related to liquidation of the collateral. For this asset class, the actual valuation methods (income, sales comparable, or cost) vary based on the status of the project or property. For example, land is generally based on the sales comparable method while construction is based on the income and/or sales comparable methods. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. The Corporation reviews the third-party appraisal for appropriateness and may adjust the value downward to consider selling and closing costs. For non-real estate loans, fair value of the loan’s collateral may be determined using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at June 30, 2021:

Fair
value

Valuation
Technique

Unobservable Inputs

Range
(Weighted
Average)

Collateral-dependent loans:

Farmland

634

Valuation of third party appraisal on underlying collateral

Loss severity rates

60% (60%)

Owner-occupied, nonfarm nonresidential properties

253

Valuation of third party appraisal on underlying collateral

Loss severity rates

0%-60% (56%)

Commercial and industrial

1,543

Valuation of third party appraisal on underlying collateral

Loss severity rates

0%-50% (31%)

Other construction loans and all land development loans and other land loans

1,426

Valuation of third party appraisal on underlying collateral

Loss severity rates

25%-39% (29%)

Multifamily (5 or more) residential properties

500

Valuation of third party appraisal on underlying collateral

Loss severity rates

0%-58% (16%)

Non-owner occupied, nonfarm nonresidential

3,222

Valuation of third party appraisal on underlying collateral

Loss severity rates

25%-60% (38%)

Obligations (other than securities and leases) of states and political subdivisions

430

Valuation of third party appraisal on underlying collateral

Loss severity rates

0% (0%)

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2020:

Fair
value

Valuation
Technique

Unobservable Inputs

Range
(Weighted
Average)

Collateral-dependent loans:

Farmland

659

Valuation of third party appraisal on underlying collateral

Loss severity rates

45%-54% (47%)

Owner-occupied, nonfarm nonresidential properties

329

Valuation of third party appraisal on underlying collateral

Loss severity rates

60%-90% (80%)

Commercial and industrial

3,680

Valuation of third party appraisal on underlying collateral

Loss severity rates

0%-100% (39%)

Other construction loans and all land development loans and other land loans

1,790

Valuation of third party appraisal on underlying collateral

Loss severity rates

25%-41% (28%)

Non-owner occupied, nonfarm nonresidential

9,622

Valuation of third party appraisal on underlying collateral

Loss severity rates

25%-100% (29%)

Residential mortgages secured by first liens

659

Valuation of third party appraisal on underlying collateral

Loss severity rates

31% (31%)

Fair Value of Financial Instruments

The following table presents the carrying amount and fair value of financial instruments at June 30, 2021:


	Carrying		Fair Value Measurement Using:						Total
	Amount		Level 1		Level 2		Level 3		Fair Value
ASSETS
Cash and cash equivalents	$	737,673	$	737,673	$	0	$	0	$	737,673
Securities available for sale	$	675,100	$	0	$	665,274	$	9,826	$	675,100
Trading securities	$	9,960	$	9,960	$	0	$	0	$	9,960
Loans held for sale	$	10,528	$	0	$	10,716	$	0	$	10,716
Net loans	$	3,432,937	$	0	$	0	$	3,428,379	$	3,428,379
FHLB and other restricted interests	$	21,478	n/a		n/a		n/a		n/a

Interest rate swaps	$	2,856	$	0	$	2,856	$	0	$	2,856
Accrued interest receivable	$	18,119	$	0	$	2,293	$	15,792	$	18,085
LIABILITIES
Deposits	$	(4,504,765)	$	(4,060,507)	$	(451,714)	$	0	$	(4,512,221)

Subordinated notes and debentures	$	(154,136)	$	0	$	(141,611)	$	0	$	(141,611)
Interest rate swaps	$	(3,454)	$	0	$	(3,454)	$	0	$	(3,454)
Accrued interest payable	$	(1,200)	$	0	$	(1,200)	$	0	$	(1,200)

The following table presents the carrying amount and fair value of financial instruments at December 31, 2020:


	Carrying		Fair Value Measurement Using:						Total
	Amount		Level 1		Level 2		Level 3		Fair Value
ASSETS
Cash and cash equivalents	$	532,694	$	532,694	$	0	$	0	$	532,694
Securities available for sale	584,908		16,018		568,826		64		584,908
Trading securities	6,649		6,599		50		0		6,649
Loans held for sale	8,514		0		8,617		0		8,617
Net loans	3,337,449		0		0		3,339,482		3,339,482
FHLB and other restricted interests	21,018		n/a		n/a		n/a		n/a

Interest rate swaps	4,017		0		4,017		0		4,017
Accrued interest receivable	17,659		61		2,152		15,446		17,659
LIABILITIES
Deposits	$	(4,181,744)	$	(3,705,200)	$	(488,000)	$	0	$	(4,193,200)

Subordinated notes and debentures	(70,620)		0		(62,583)		0		(62,583)
Interest rate swaps	(4,785)		0		(4,785)		0		(4,785)
Accrued interest payable	(1,096)		0		(1,096)		0		(1,096)

While estimates of fair value are based on management’s judgment of the most appropriate factors as of the balance sheet date, there is no assurance that the estimated fair values would have been realized if the assets had been disposed of or the liabilities settled at that date, since market values may differ depending on various circumstances. The estimated fair values would also not apply to subsequent dates. The fair value of other equity interests is based on the net asset values provided by the underlying investment partnership. ASU 2015-7 removes the requirement to categorize within the fair value hierarchy all investments measured using the net asset value per share practical expedient and related disclosures. In addition, other assets and liabilities that are not financial instruments, such as premises and equipment, are not included in the disclosures.

Also, non-financial assets such as, among other things, the estimated earnings power of core deposits, the earnings potential of trust accounts, the trained workforce, and customer goodwill, which typically are not recognized on the balance sheet, may have value but are not included in the fair value disclosures.

- 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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