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Note 12 - Fair Value Measurements

9 Months Ended

Sep. 30, 2021

Notes to Financial Statements

Fair Value Disclosures [Text Block]

Note 12 – Fair Value Measurements

Determination of Fair Value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the fair value measurements and disclosures topic of ASC 820, Fair Value Measurement, fair value is the price that would be received to sell 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 at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market for the asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Fair Value Hierarchy

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally 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.

Level 1 –	Valuation is based on quoted prices in active markets for identical assets and liabilities.
Level 2 –	Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
Level 3 –	Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

The following describes the valuation techniques used by the Company to measure certain financial assets and financial liabilities recorded at fair value on a recurring basis in the financial statements:

Securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). If no observable market data is available, valuations are based upon third party model based techniques (Level 3). There were no securities recorded with a Level 3 valuation at September 30, 2021 or December 31, 2020.

Loans held for sale: Loans held for sale are carried at fair value. These loans currently consist of residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data, which is not materially different than cost due to the short duration between origination and sale (Level 2). Gains and losses on the sale of loans are recorded in current period earnings as a component of mortgage banking income on the Company's consolidated statements of income.

Derivative asset (liability) - cash flow hedges: Cash flow hedges are recorded at fair value on a recurring basis. Cash flow hedges are valued by a third party using significant assumptions that are observable in the market and can be corroborated by market data. All of the Company's cash flow hedges are classified as Level 2.

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis at the dates indicated (dollars in thousands):

		*Fair Value Measurements at September 30, 2021 Using*
		*Balance at September 30,*				*Quoted Prices in Active Markets for Identical Assets*				*Significant Other Observable Inputs*				*Significant Unobservable Inputs*
Description		*2021*				*Level 1*				*Level 2*				*Level 3*
Assets:
Securities available for sale:
U.S. Treasury		$	110,041			$	—			$	110,041			$	—
Federal agencies and GSEs			90,496				—				90,496				—
Mortgage-backed and CMOs			360,408				—				360,408				—
State and municipal			63,866				—				63,866				—
Corporate			19,138				—				19,138				—
Total securities available for sale		$	643,949			$	—			$	643,949			$	—
Loans held for sale		$	9,518			$	—			$	9,518			$	—
Liabilities:
Derivative - cash flow hedges		$	3,265			$	—			$	3,265			$	—

		*Fair Value Measurements at December 31, 2020 Using*
		*Balance at December 31,*				*Quoted Prices in Active Markets for Identical Assets*				*Significant Other Observable Inputs*				*Significant Unobservable Inputs*
Description		*2020*				*Level 1*				*Level 2*				*Level 3*
Assets:
Securities available for sale:
U.S. Treasury		$	34,998			$	—			$	34,998			$	—
Federal agencies and GSEs			106,023				—				106,023				—
Mortgage-backed and CMOs			252,782				—				252,782				—
State and municipal			59,099				—				59,099				—
Corporate			13,189				—				13,189				—
Total securities available for sale		$	466,091			$	—			$	466,091			$	—
Loans held for sale		$	15,591			$	—			$	15,591			$	—
Liabilities:
Derivative - cash flow hedges		$	4,868			$	—			$	4,868			$	—

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:

Impaired loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreements will not be collected when due. The measurement of the loss associated with impaired loans can be based on either the observable market price of the loan, the present value of projected cash flows, or the fair value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Company's collateral is real estate. The value of real estate collateral is determined utilizing a market valuation approach based on an appraisal, of one year or less, conducted by an independent, licensed appraiser using observable market data (Level 2). The present value of projected cash flows method results in a Level 3 categorization because the calculation relies on the Company's judgment to determine projected cash flows, which are then discounted at the current rate of the loan, or the rate prior to modification if the loan is a TDR. However, if the collateral is a house or building in the process of construction or if an appraisal of the property is more than one year old and not solely based on observable market comparables or management determines the fair value of the collateral is further impaired below the appraised value, then a Level 3 valuation is considered to measure the fair value. The value of business equipment is based upon an outside appraisal, of one year or less, if deemed significant, or the net book value on the applicable business's financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of income.

Other real estate owned: Measurement for fair values for OREO are the same as impaired loans. Any fair value adjustments are recorded in the period incurred as a valuation allowance against OREO with the associated expense included in OREO expense, net on the consolidated statements of income.

The following table summarizes the Company's assets that were measured at fair value on a nonrecurring basis at the dates indicated (dollars in thousands):

		*Fair Value Measurements at September 30, 2021 Using*
		*Balance at September 30,*				*Quoted Prices in Active Markets for Identical Assets*				*Significant Other Observable Inputs*				*Significant Unobservable Inputs*
Description		*2021*				*Level 1*				*Level 2*				*Level 3*
Assets:
Impaired loans, net of valuation allowance		$	22			$	—			$	—			$	22
Other real estate owned, net			213				—				—				213

		*Fair Value Measurements at December 31, 2020 Using*
		*Balance at December 31,*				*Quoted Prices in Active Markets for Identical Assets*				*Significant Other Observable Inputs*				*Significant Unobservable Inputs*
Description		*2020*				*Level 1*				*Level 2*				*Level 3*
Assets:
Impaired loans, net of valuation allowance		$	268			$	—			$	—			$	268
Other real estate owned, net			958				—				—				958

Quantitative Information about Level 3 Fair Value Measurements as of September 30, 2021 and December 31, 2020:

Assets		*Valuation Technique*		*Unobservable Input*		*Range; Weighted Average (1)*

Impaired loans		Discounted appraised value		Selling cost		8.00%
		Discounted cash flow analysis		Market rate for borrower (discount rate)		4.13% - 7.20%; 5.21%

Other real estate owned, net		Discounted appraised value		Selling cost		8.00%

__________________________

(1) Unobservable inputs were weighted by the relative fair value of the impaired loans.

ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The carrying values and the exit pricing concept fair values of the Company's financial instruments at September 30, 2021 are as follows (dollars in thousands):

		*Fair Value Measurements at September 30, 2021 Using*
		*Carrying*				*Quoted Prices in Active Markets for Identical Assets*				*Significant Other Observable Inputs*				*Significant Unobservable Inputs*				*Fair Value*
		*Value*				*Level 1*				*Level 2*				*Level 3*				*Balance*
Financial Assets:
Cash and cash equivalents		$	518,401			$	518,401			$	—			$	—			$	518,401
Securities available for sale			643,949				—				643,949				—				643,949
Restricted stock			8,046				—				8,046				—				8,046
Loans held for sale			9,518				—				9,518				—				9,518
Loans, net of allowance			1,919,702				—				—				1,904,320				1,904,320
Bank owned life insurance			28,950				—				28,950				—				28,950
Accrued interest receivable			5,829				—				5,829				—				5,829

Financial Liabilities:
Deposits		$	2,862,081			$	—			$	2,864,242			$	—			$	2,864,242
Repurchase agreements			26,595				—				26,595				—				26,595
Junior subordinated debt			28,207				—				—				26,037				26,037
Accrued interest payable			424				—				424				—				424
Derivative - cash flow hedges			3,265				—				3,265				—				3,265

The carrying values and the exit pricing concept fair values of the Company's financial instruments at December 31, 2020 are as follows (dollars in thousands):

		*Fair Value Measurements at December 31, 2020 Using*
		*Carrying*				*Quoted Prices in Active Markets for Identical Assets*				*Significant Other Observable Inputs*				*Significant Unobservable Inputs*				*Fair Value*
		*Value*				*Level 1*				*Level 2*				*Level 3*				*Balance*
Financial Assets:
Cash and cash equivalents		$	374,370			$	374,370			$	—			$	—			$	374,370
Securities available for sale			466,091				—				466,091				—				466,091
Restricted stock			8,715				—				8,715				—				8,715
Loans held for sale			15,591				—				15,591				—				15,591
Loans, net of allowance			1,993,653				—				—				1,992,326				1,992,326
Bank owned life insurance			28,482				—				28,482				—				28,482
Accrued interest receivable			7,193				—				7,193				—				7,193

Financial Liabilities:
Deposits		$	2,611,330			$	—			$	2,615,157			$	—			$	2,615,157
Repurchase agreements			42,551				—				42,551				—				42,551
Subordinated debt			7,500				—				7,522				—				7,522
Junior subordinated debt			28,130				—				—				21,696				21,696
Accrued interest payable			778				—				778				—				778
Derivative - cash flow hedges			4,868				—				4,868				—				4,868

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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