Fair Value Measurement

3 Months Ended

Mar. 31, 2020

(13) Fair Value Measurement

The Company uses a fair value hierarchy to measure fair value. This hierarchy describes three levels of inputs that may be used to measure fair value. Level 1: Quoted prices for identical assets in active markets that are identifiable on the measurement date; Level 2: Significant other observable inputs, such as quoted prices for similar assets, 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 the Company’s own view about the assumptions that market participants would use in pricing an asset.

Debt securities: The fair values of securities available for sale are determined by 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 by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

Equity securities: The Company has two types of equity securities, one is not actively traded in an open market, while the other is listed on an exchange and is less frequently traded. The fair value of the equity security available for sale not actively traded in an open market is determined by using market data inputs for similar securities that are observable (Level 2 inputs). The fair value of the other equity security is determined from third-party pricing services or a computerized pricing model and classified Level 2.

The fair value of the swap asset/liability: The fair value of the swap asset and liability is based on an external derivative model using data inputs based on similar transactions as of the valuation date and classified Level 2. The changes in fair value of these assets/liabilities had no impact on net income or comprehensive income.

Impaired loans: The Company has measured impairment on impaired loans based on the discounted cash flows of the loan or the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management makes estimates about expected costs to sell the property which are also included in the net realizable value. If the fair value of the collateral dependent loan is less than the carrying amount of the loan, a specific reserve for the loan is made in the allowance for loan losses or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included as a Level 3 measurement. If the fair value of the collateral exceeds the carrying amount of the loan, then the loan is not included in the table below as it is not currently being carried at its fair value. The fair values in the table below exclude estimated selling costs of $9 as of March 31, 2020.

Assets and liabilities measured at fair value are summarized in the table below.

	Fair Value Measurements at March 31, 2020 Using:
Assets:	(Level 1)		(Level 2)		(Level 3)
Assets measured at fair value on a recurring basis:
Securities available for sale
U.S. Treasury securities and obligations of U.S. Government agencies	$	—	$	19,611	$	—
Obligations of states and political subdivisions		—		212,149		—
Mortgage-backed securities in government sponsored entities		—		134,126		—
Total securities available for sale		—		365,886		—
Equity securities		—		803		—
Swap asset		—		23,003		—
Liabilities measured at fair value on a recurring basis:
Swap liability		—		23,003		—
Assets measured at fair value on a nonrecurring basis:
Impaired loans	$	—	$	—	$	1

	Fair Value Measurements at December 31, 2019 Using:
Assets:	(Level 1)		(Level 2)		(Level 3)
Assets measured at fair value on a recurring basis:
Securities available for sale
U.S. Treasury securities and obligations of U.S. Government agencies	$	—	$	19,601	$	—
Obligations of states and political subdivisions		—		206,034		—
Mortgage-backed securities in government sponsored entities		—		132,864		—
Total securities available for sale		—		358,499		—
Equity securities		—		1,191		—
Swap asset		—		8,918		—
Liabilities measured at fair value on a recurring basis:
Swap liability		—		8,918		—
Assets measured at fair value on a nonrecurring basis:
Impaired loans	$	—	$	—	$	1

The following table presents quantitative information about the Level 3 significant unobservable inputs for assets and liabilities measured at fair value on a nonrecurring basis at March 31, 2020.

Quantitative Information about Level 3 Fair Value Measurements

March 31, 2020

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted Average

Impaired loans

Appraisal of collateral

Appraisal adjustments

30%

Holding period

22 Months

The following table presents quantitative information about the Level 3 significant unobservable inputs for assets and liabilities measured at fair value on a nonrecurring basis at December 31, 2019.

Quantitative Information about Level 3 Fair Value Measurements

December 31, 2019

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted Average

Impaired loans

Appraisal of collateral

Appraisal adjustments

30%

Holding period

22 months

The carrying amount and fair values of financial instruments not measured at fair value on a recurring or nonrecurring basis at March 31, 2020 are as follows:

March 31, 2020	Carrying Amount		Total Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from financial institutions	$	256,023	$	256,023	$	256,023	$	—	$	—
Other securities		20,280		20,280		20,280		—		—
Loans, held for sale		7,632		7,785		7,785		—		—
Loans, net of allowance		1,726,177		1,760,613		—		—		1,760,613
Bank owned life insurance		45,249		45,249		45,249		—		—
Accrued interest receivable		7,220		7,220		7,220		—		—
Financial Liabilities:
Nonmaturing deposits		1,703,668		1,703,235		1,703,235		—		—
Time deposits		288,271		290,726		—		—		290,726
Short-term FHLB advances		17,000		17,000		17,000		—		—
Long-term FHLB advances		125,000		129,992		—		—		129,992
Securities sold under agreement to repurchase		22,699		22,699		22,699		—		—
Subordinated debentures		29,427		31,460		—		—		31,460
Accrued interest payable		279		279		279		—		—

The carrying amount and fair values of financial instruments not measured at fair value on a recurring or nonrecurring basis at December 31, 2019 are as follows:

December 31, 2019	Carrying Amount		Total Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from financial institutions	$	48,535	$	48,535	$	48,535	$	—	$	—
Other securities		20,280		20,280		20,280		—		—
Loans, held for sale		2,285		2,331		2,331		—		—
Loans, net of allowance		1,694,203		1,713,863		—		—		1,713,863
Bank owned life insurance		44,999		44,999		44,999		—		—
Accrued interest receivable		7,093		7,093		7,093		—		—
Financial Liabilities:
Nonmaturing deposits		1,402,924		1,402,924		1,402,924		—		—
Time deposits		275,840		276,616		—		—		276,616
Short-term FHLB advances		101,500		101,500		101,500		—		—
Long-term FHLB advances		125,000		123,893		—		—		123,893
Securities sold under agreement to repurchase		18,674		18,674		18,674		—		—
Subordinated debentures		29,427		34,452		—		—		34,452
Accrued interest payable		277		277		277		—		—

- 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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