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Fair Value

9 Months Ended

Sep. 30, 2022

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Fair Value Disclosure

Securities AFS, loans HFS, and equity securities are recorded at fair value on a recurring basis. Additionally, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans, foreclosed assets, and other certain assets. The nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

ASC 820, Fair Value Measurements and Disclosures indicates that assets and liabilities are recorded at fair value according to a fair value hierarchy comprised of three levels:

•Level 1 pricing represents quotes on the exact financial instrument that is traded in active markets. Quoted prices on actively traded equities, for example, are in this category.

•Level 2 pricing is derived from observable data including market spreads, current and projected rates, prepayment data, and credit quality. The valuation may be based on 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 pricing is derived without the use of observable data. In such cases, mark-to-model strategies are typically employed. Often, these types of instruments have no active market, possess unique characteristics, and are thinly traded.

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

Securities AFS and Equity Securities: The fair values for securities AFS are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

Loans HFS: Residential mortgage loans originated and held for sale are carried at the lower of cost or estimated fair value on an individual basis. The fair values of mortgage loans HFS are based on commitments on hand from investors within

the secondary market for loans with similar characteristics. As such, the fair value adjustments for mortgage loans HFS are recurring Level 2.

Loans HFI: The Company does not record loans HFI at fair value on a recurring basis. However, from time to time, a loan may be considered impaired and an allowance for loan losses may be established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment using estimated fair value methodologies. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value, and discounted cash flows. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company considers the impaired 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 considers the impaired loan as nonrecurring Level 3.

Foreclosed Assets: Foreclosed assets, consisting of properties obtained through foreclosure or in satisfaction of loans, are reported at fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs (Level 2). However, foreclosed assets are considered Level 3 in the fair value hierarchy because management has qualitatively applied a discount due to the size, supply of inventory, and the incremental discounts applied to the appraisals. Management also considers other factors, including changes in absorption rates, length of time the property has been on the market, and anticipated sales values, which have resulted in adjustments to the collateral value estimates indicated in certain appraisals.

Fair Value of Assets Measured on a Recurring Basis

The table below presents the recorded amount of assets measured at fair value on a recurring basis:


(in thousands)	Fair Value		Level 1		Level 2		Level 3
September 30, 2022
Loans HFS	$	1,536	$	—	$	1,536	$	—
Securities AFS:
Mortgage-backed securities	$	257,543	$	—	$	257,543	$	—
Municipal bonds	$	175,299	$	—	$	175,299	$	—
U.S. Treasury securities	$	169,869	$	—	$	169,869	$	—
U.S. agency securities	$	7,037	$	—	$	7,037	$	—


December 31, 2021
Loans HFS	$	4,290	$	—	$	4,290	$	—
Securities AFS:
Mortgage-backed securities	$	379,526	$	—	$	379,526	$	—
Municipal bonds	$	229,971	$	—	$	229,971	$	—
U.S. Treasury securities	$	41,616	$	—	$	41,616	$	—
U.S. agency securities	$	8,065	$	—	$	8,065	$	—
Equity securities	$	7,846	$	7,846	$	—	$	—

There were no transfers between Level 1, 2, or 3 during the nine months ended September 30, 2022 or the year ended December 31, 2021.

Fair Value of Assets and Liabilities Measured on a Nonrecurring Basis

Financial Assets and Financial Liabilities: Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances. Financial assets measured at fair value on a nonrecurring basis include certain impaired collateral dependent loans reported at fair value of the underlying collateral if repayment is expected solely from the collateral. Prior to foreclosure of these loans, fair value of the collateral is estimated using Level 3 inputs based on customized discounting criteria.

The table below presents certain impaired loans that were remeasured and reported at fair value through the allowance for loan losses based upon the fair value of the underlying collateral during the reported periods:


	For the Nine Months Ended
(in thousands)	September 30, 2022		September 30, 2021
Carrying value of impaired loans before allowance for loan losses	$	3,141	$	1,833
Specific allowance for loan losses	(299)		(27)
Fair value of impaired loans	$	2,842	$	1,806

The Company had no financial liabilities measured at fair value on a nonrecurring basis for the nine months ended September 30, 2022 and September 30, 2021.

Nonfinancial Assets and Liabilities: Certain nonfinancial assets and nonfinancial liabilities are measured at fair value on a nonrecurring basis. These include certain foreclosed assets, which are remeasured and reported at fair value through a charge-off to the allowance for loan losses upon initial recognition as a foreclosed asset. Subsequent to their initial recognition, certain foreclosed assets are remeasured at fair value through an adjustment included in other noninterest income. The fair value of foreclosed assets is estimated using Level 3 inputs based on customized discounting criteria less estimated selling costs.

The following table presents foreclosed assets that were remeasured and reported at fair value during the reported periods:


	For the Nine Months Ended
(in thousands)	September 30, 2022		September 30, 2021
Foreclosed assets remeasured at initial recognition:
Carrying value of foreclosed assets prior to remeasurement	$	—	$	266
Charge-offs	—		—
Fair value of foreclosed assets	$	—	$	266

The following table presents foreclosed assets that were remeasured subsequent to initial recognition and reported at fair value during the reported periods:


	For the Nine Months Ended
(in thousands)	September 30, 2022		September 30, 2021
Foreclosed assets remeasured subsequent to initial recognition:
Carrying value of foreclosed assets prior to remeasurement	$	—	$	133
Write-downs	—		(34)
Fair value of foreclosed assets	$	—	$	99

The Company had no nonfinancial liabilities measured at fair value on a nonrecurring basis for the nine months ended September 30, 2022 and September 30, 2021.

The unobservable inputs used for the Level 3 fair value measurements on a nonrecurring basis were as follows:

(dollars in thousands)

Fair Value

Valuation Technique

Unobservable Input

Discount Ranges

Weighted Average Discount

September 30, 2022

Impaired loans

7,268

Discounted appraisals

Collateral discounts and costs to sell

0% - 100%

5.96%

Foreclosed assets

—

Discounted appraisals

Collateral discounts and costs to sell

N/A

December 31, 2021

Impaired loans

5,923

Discounted appraisals

Collateral discounts and costs to sell

0% - 100%

3.67%

Foreclosed assets

660

Discounted appraisals

Collateral discounts and costs to sell

N/A

Fair Value of Financial Instruments

The carrying amounts and estimated fair values of financial instruments as of September 30, 2022 and December 31, 2021, were as follows:


(in thousands)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
September 30, 2022
Financial assets:
Cash and due from banks	$	39,465	$	39,465	$	39,465	$	—	$	—
Interest-bearing deposits in other banks	261,608		261,608		261,608		—		—
Securities AFS	609,748		609,748		—		609,748		—
Securities HTM	154,736		133,837		—		133,837		—

Nonmarketable equity securities	3,460		3,460		—		3,460		—
Loans HFS	1,536		1,536		—		1,536		—
Loans HFI, net of allowance	1,859,716		1,787,252		—		—		1,787,252
Accrued interest receivable	7,782		7,782		—		—		7,782
Financial liabilities:
Deposits	2,796,494		2,784,940		—		2,784,940		—
Accrued interest payable	1,194		1,194		—		1,194		—

December 31, 2021
Financial assets:
Cash and due from banks	$	23,143	$	23,143	$	23,143	$	—	$	—
Interest-bearing deposits in other banks	761,721		761,721		761,721		—		—
Securities AFS	659,178		659,178		—		659,178		—

Equity securities	7,846		7,846		7,846		—		—
Nonmarketable equity securities	3,450		3,450		—		3,450		—
Loans HFS	4,290		4,290		—		4,290		—
Loans HFI, net of allowance	1,664,656		1,674,900		—		—		1,674,900
Accrued interest receivable	6,245		6,245		—		—		6,245
Financial liabilities:
Deposits	2,910,348		2,911,118		—		2,911,118		—


Accrued interest payable	1,310		1,310		—		1,310		—

- 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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