Fair Value Measurements

9 Months Ended

Sep. 30, 2023

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes 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 include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 820, "Fair Value Measurements and Disclosures," 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:

Level 1 Quoted prices in active exchange markets for identical assets or liabilities; also includes certain U.S. treasury and other U.S. Government and agency securities actively traded in over-the-counter markets.

Level 2 Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; also includes derivative contracts whose value is determined using a pricing model with observable market inputs or inputs that can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. Government and agency securities, corporate debt securities, derivative instruments, and residential mortgage loans held for sale.

Level 3 Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for single dealer nonbinding quotes not corroborated by observable market data. This category generally includes certain private equity investments, retained interests from securitizations, and certain collateralized debt obligations.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022.


(dollars in thousands)	Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total Fair Value
September 30, 2023
Assets:
Investment securities available-for-sale:

U.S treasury bonds	$	—	$	47,050	$	—	$	47,050
U. S. agency securities	—		656,277		—		656,277
Residential mortgage-backed securities	—		714,148		—		714,148
Commercial mortgage-backed securities	—		48,004		—		48,004
Municipal bonds	—		7,802		—		7,802
Corporate bonds	—		1,664		—		1,664

Interest rate product	—		41,787		—		41,787
Credit risk participation agreements	—		1		—		1

Total assets measured at fair value on a recurring basis	$	—	$	1,516,733	$	—	$	1,516,733
Liabilities:


Interest rate product	$	—	$	41,637	$	—	$	41,637

Total liabilities measured at fair value on a recurring basis	$	—	$	41,637	$	—	$	41,637

December 31, 2022
Assets:
Investment securities available-for-sale:
U.S. treasury bonds	$	—	$	46,327	$	—	$	46,327
U. S. agency securities	—		669,728		—		669,728
Residential mortgage-backed securities	—		820,503		—		820,503
Commercial mortgage-backed securities	—		50,213		—		50,213
Municipal bonds	—		10,087		—		10,087
Corporate bonds	—		1,808		—		1,808
Loans held for sale	—		6,734		—		6,734
Interest rate product	—		31,039		—		31,039
Mortgage banking derivatives	—		—		93		93
Total assets measured at fair value on a recurring basis	$	—	$	1,636,439	$	93	$	1,636,532
Liabilities:

Credit risk participation agreements	$	—	$	2	$	—	$	2
Interest rate product	—		30,065		—		30,065
Total liabilities measured at fair value on a recurring basis	$	—	$	30,067	$	—	$	30,067

Investment securities available-for-sale: Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include certain U.S. treasury bonds, U.S. Government and agency securities that actively traded in over-the-counter markets. Level 2 securities includes certain U.S. treasury bonds, U.S. agency debt securities, mortgage-backed securities issued by Government Sponsored Entities and municipal bonds. Securities classified as Level 3 include securities in less liquid markets, for which the carrying amounts approximate the fair value.

The following is a reconciliation of activity for assets measured at fair value based on Significant Other Unobservable Inputs (Level 3):


(dollars in thousands)	Investment Securities Available-for-Sale
Assets:
Beginning balance at January 1, 2022	$	10,000

Reclassified to investment securities held-to-maturity	(10,000)


Ending balance at December 31, 2022	$	—

Loans held for sale: The Company previously carried loans held for sale at fair value. This election reduced certain timing differences in the Consolidated Statement of Income and better aligned with the management of the portfolio from a business perspective. Gains and losses on sales of residential mortgage loans are recorded as a component of noninterest income in the Consolidated Statements of Income. Gains and losses on sale of multifamily FHA securities are recorded as a component of noninterest income in the Consolidated Statements of Income. Fair value is derived from secondary market quotations for similar instruments. As such, the Company classified loans subjected to fair value adjustments as Level 2 valuation.

The following table summarizes the difference between the aggregate fair value and the aggregate unpaid principal balance for loans held for sale measured at fair value as of December 31, 2022:


(dollars in thousands)	Fair Value		Aggregate Unpaid Principal Balance		Difference


December 31, 2022
Loans held for sale	$	6,734	$	6,775	$	(41)

There were no residential mortgage loans held for sale that were 90 or more days past due or on nonaccrual status as of December 31, 2022. While the Company had loans held for sale outstanding in 2023, the Company does not have any loans held for sale as of September 30, 2023.

Credit risk participation agreements: The Company enters into RPAs with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower's performance related to interest rate derivative contracts. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers' credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities. Accordingly, RPAs fall within Level 2.

Interest rate derivatives: The Company entered into an interest rate derivative agreement with an institutional counterparty, under which the Company will receive cash if and when market rates exceed the derivatives strike rate. The fair value of the derivative is calculated by determining the total expected asset or liability exposure of the derivative. Total expected exposure incorporates both the current and potential future exposure of the derivative, derived from using observable inputs, such as yield curves and volatilities. Accordingly, the derivative falls within Level 2.

Mortgage banking derivatives for loans settled on a mandatory basis: The Company commenced the cessation of first lien residential mortgage origination for secondary sale in the first quarter of 2023. The Company completed origination and sales activities as of the end of the second quarter of 2023. While the Company had mortgage banking derivatives in 2023 and 2022, the Company does not have any of these derivatives as of September 30, 2023.

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company measures certain assets at fair value on a nonrecurring basis, and the following is a general description of the methods used to value such assets.

At September 30, 2023, substantially all of the Company's individually evaluated loans were evaluated based upon the fair value of the collateral. In accordance with ASC Topic 820, individually evaluated loans where an allowance is established based on the fair value of collateral, i.e. those that are collateral dependent, require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3.

Other real estate owned: Other real estate owned is initially recorded at fair value less estimated selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management's estimation of the value of the collateral, which the Company classifies as a Level 3 valuation.

Assets measured at fair value on a nonrecurring basis are included in the table below:


(dollars in thousands)	Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total Fair Value
September 30, 2023
Individually assessed loans:
Commercial	$	—	$	—	$	2,583	$	2,583

Income producing - commercial real estate	—		—		23,738		23,738
Owner occupied - commercial real estate	—		—		19,929		19,929
Real estate mortgage - residential	—		—		1,638		1,638
Construction - commercial and residential	—		—		39,896		39,896
Home equity	—		—		245		245
Other real estate owned	—		—		1,487		1,487
Total assets measured at fair value on a nonrecurring basis as of September 30, 2023	$	—	$	—	$	89,516	$	89,516

December 31, 2022
Individually assessed loans:
Commercial	$	—	$	—	$	1,790	$	1,790

Income producing - commercial real estate	—		—		3,131		3,131
Owner occupied - commercial real estate	—		—		19,187		19,187
Real estate mortgage - residential	—		—		1,404		1,404
Consumer	—		—		3		3

Other real estate owned	—		—		1,962		1,962
Total assets measured at fair value on a nonrecurring basis as of December 31, 2022	$	—	$	—	$	27,477	$	27,477

Fair Value of Financial Instruments

The Company discloses fair value information about financial instruments for which it is practicable to estimate the value, whether or not such financial instruments are recognized on the balance sheet. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by quoted market price, if one exists.

Quoted market prices, if available, are shown as estimates of fair value. Because no quoted market prices exist for a portion of the Company's financial instruments, the fair value of such instruments has been derived based on management's assumptions with respect to future economic conditions, the amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimates. Accordingly, the net realizable value could be materially different from the estimates presented below. In addition, the estimates are only indicative of individual financial instrument values and should not be considered an indication of the fair value of the Company taken as a whole.

The estimated fair value of the Company's financial instruments at September 30, 2023 and December 31, 2022 are as follows:


					Fair Value Measurements
(dollars in thousands)	Carrying Value		Fair Value		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
September 30, 2023
Assets
Cash and due from banks	$	8,625	$	8,625	$	8,625	$	—	$	—
Federal funds sold	13,611		13,611		—		13,611		—
Interest bearing deposits with other banks	235,819		235,819		—		235,819		—
Investment securities available-for-sale	1,474,945		1,474,945		—		1,474,945		—
Investment securities held-to-maturity	1,032,485		872,710		—		872,710		—
Federal Reserve and Federal Home Loan Bank stock	25,689		N/A		—		—		—


Loans	7,916,391		7,635,283		—		—		7,635,283
Bank owned life insurance	112,234		112,234		—		112,234		—
Annuity investment	13,088		13,088		—		13,088		—

Interest rate product	41,787		41,787		—		41,787		—
Credit risk participation agreement	1		1		—		1		—
Accrued interest receivable	53,361		53,361		53,361		—		—

Liabilities
Noninterest bearing deposits	$	2,072,665	$	2,072,665	$	—	$	2,072,665	$	—
Interest bearing deposits	4,062,552		4,062,552		—		4,062,552		—
Time deposits	2,241,089		2,225,503		—		2,225,503		—
Customer repurchase agreements	25,689		25,689		—		25,689		—
Borrowings	1,369,888		1,367,912		—		1,367,912		—


Interest rate product	41,637		41,637		—		41,637		—
Accrued interest payable	38,642		38,642		38,642		—		—

December 31, 2022
Assets
Cash and due from banks	$	12,655	$	12,655	$	12,655	$	—	$	—
Federal funds sold	33,927		33,927		—		33,927		—
Interest bearing deposits with other banks	265,272		265,272		—		265,272		—
Investment securities available-for-sale	1,598,666		1,598,666		—		1,598,666		—
Investment securities held-to-maturity	1,093,374		967,940		—		967,940		—
Federal Reserve and Federal Home Loan Bank stock	65,067		N/A		—		—		—
Loans held for sale	6,734		6,734		—		6,734		—
Loans	7,635,632		7,492,283		—		—		7,492,283
Bank owned life insurance	110,998		110,998		—		110,998		—
Annuity investment	13,869		13,869		—		13,869		—
Mortgage banking derivatives	93		93		—		—		93
Interest rate product	31,039		31,039		—		31,039		—
Accrued interest receivable	51,390		51,390		51,390		—		—

Liabilities
Noninterest bearing deposits	$	3,150,751	$	3,150,751	$	—	$	3,150,751	$	—
Interest bearing deposits	4,778,932		4,778,932		—		4,778,932		—
Time deposits	783,499		777,757		—		777,757		—
Customer repurchase agreements	35,100		35,100		—		35,100		—
Borrowings	1,044,795		1,043,083		—		1,043,083		—

Credit risk participation agreements	2		2		—		2		—
Interest rate product	30,065		30,065		—		30,065		—
Accrued interest payable	25,911		25,911		25,911		—		—