Fair Value Measurements (Notes)

9 Months Ended

Sep. 30, 2023

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts business. The Company's balance sheet contains securities available for sale and derivative instruments that are recorded at fair value on a recurring basis. The three-level valuation hierarchy for disclosure of fair value is as follows:

Level 1 uses quoted market prices in active markets for identical assets or liabilities.

Level 2 uses observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3 uses unobservable inputs that are not corroborated by market data.

The Company's policy is to recognize transfers between levels at the end of each reporting period, if applicable. There were no transfers between levels of the fair value hierarchy during the nine months ended September 30, 2023.

The following is a description of valuation methodologies used for financial assets and liabilities recorded at fair value on a recurring basis.

Securities available for sale: When available, quoted market prices are used to determine the fair value of securities (Level 1). If quoted market prices are not available, the Company determines fair value based on various sources and may apply matrix pricing with observable prices for similar bonds where a price for the identical bond is not observable (Level 2). The fair values of these securities are determined by pricing models that consider observable market data such as interest rate volatilities, yield curves, credit spreads, prices from market makers and live trading systems.

Management obtains the fair value of securities at the end of each reporting period via a third-party pricing service. Management reviewed the valuation process used by the third party and believed the process was valid. On a quarterly basis, management corroborates the fair values of a randomly selected sample of securities by obtaining pricing from an independent financial market data vendor and comparing the two sets of fair values. Any significant variances are reviewed and investigated. For a sample of securities, prices are further validated by management by obtaining details of the inputs used by the pricing service. Those inputs were independently tested, and management concluded the fair values were consistent with GAAP requirements and the securities were properly classified in the fair value hierarchy.

Derivative instruments: The Company's derivative instruments consist of interest rate swaps accounted for as cash flow hedges, as well as interest rate swaps which are accounted for as non-hedging derivatives. The Company's derivative positions are classified within Level 2 of the fair value hierarchy and are valued using models generally accepted in the financial services industry and that use actively quoted or observable market input values from external market data providers and/or non-binding broker-dealer quotations. The fair value of the derivatives is determined using discounted cash flow models. These models’ key assumptions include the contractual terms of the respective contract along with significant observable inputs, including interest rates, yield curves, nonperformance risk and volatility.

The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis by level as of September 30, 2023 and December 31, 2022.


	September 30, 2023
	Total		Level 1		Level 2		Level 3
Financial assets:
Securities available for sale:
State and political subdivisions	$	182,007	$	—	$	182,007	$	—
Collateralized mortgage obligations	252,702		—		252,702		—
Mortgage-backed securities	126,113		—		126,113		—
Collateralized loan obligations	37,530		—		37,530		—
Corporate notes	11,013		—		11,013		—
Derivative instruments, interest rate swaps	39,238		—		39,238		—

Financial liabilities:
Derivative instruments, interest rate swaps	$	18,512	$	—	$	18,512	$	—


	December 31, 2022
	Total		Level 1		Level 2		Level 3
Financial assets:
Securities available for sale:
State and political subdivisions	$	193,355	$	—	$	193,355	$	—
Collateralized mortgage obligations	281,628		—		281,628		—
Mortgage-backed securities	140,280		—		140,280		—

Collateralized loan obligations	36,811		—		36,811		—
Corporate notes	12,041		—		12,041		—
Derivative instruments, interest rate swaps	31,593		—		31,593		—

Financial liabilities:
Derivative instruments, interest rate swaps	$	15,309	$	—	$	15,309	$	—

Certain assets are measured at fair value on a nonrecurring basis. That is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). As of both September 30, 2023 and December 31, 2022, there were no individually evaluated loans with a fair value adjustment. Individually evaluated loans are classified within Level 3 of the fair value hierarchy and are evaluated and valued at the lower of cost or fair value when the loan is individually evaluated. Fair value is based on the value of the collateral securing these loans.

In determining the estimated net realizable value of the underlying collateral of individually evaluated loans, the Company primarily uses third-party appraisals or broker opinions which 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 and include consideration of variations in location, size, and income production capacity of the property. Additionally, the appraisals are periodically further adjusted by the Company in consideration of charges that may be incurred in the event of foreclosure and are based on management’s historical knowledge, changes in business factors and changes in market conditions. Because of the high degree of judgment required in estimating the fair value of collateral underlying individually evaluated loans and because of the relationship between fair value and general economic conditions, the Company considers the fair value of individually evaluated loans to be highly sensitive to changes in market conditions.

GAAP requires disclosure of the fair value of financial assets and financial liabilities, including those that are not measured and reported at fair value on a recurring or nonrecurring basis. The following table presents the carrying amounts and approximate fair values of financial assets and liabilities as of September 30, 2023 and December 31, 2022.


	September 30, 2023
	Carrying Amount		Approximate Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	18,819	$	18,819	$	18,819	$	—	$	—
Interest-bearing deposits	1,802		1,802		1,802		—		—
Securities available for sale	609,365		609,365		—		609,365		—
Federal Home Loan Bank stock	26,691		26,691		26,691		—		—
Loans, net	2,821,630		2,680,671		—		2,680,671		—
Accrued interest receivable	13,598		13,598		13,598		—		—
Interest rate swaps	39,238		39,238		—		39,238		—
Financial liabilities:
Deposits	$	2,755,529	$	2,755,917	$	—	$	2,755,917	$	—
Federal funds purchased and other short-term borrowings	261,510		261,510		261,510		—		—
Subordinated notes, net	79,566		62,828		—		62,828		—
Federal Home Loan Bank advances	315,000		315,000		—		315,000		—
Long-term debt	48,986		48,986		—		48,986		—
Accrued interest payable	6,869		6,869		6,869		—		—
Interest rate swaps	18,512		18,512		—		18,512		—
Off-balance sheet financial instruments:
Commitments to extend credit	—		—		—		—		—
Standby letters of credit	—		—		—		—		—


	December 31, 2022
	Carrying Amount		Approximate Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	24,896	$	24,896	$	24,896	$	—	$	—
Interest-bearing deposits	1,643		1,643		1,643		—		—
Securities available for sale	664,115		664,115		—		664,115		—
Federal Home Loan Bank stock	19,336		19,336		19,336		—		—
Loans, net	2,717,363		2,582,911		—		2,582,911		—
Accrued interest receivable	11,988		11,988		11,988		—		—
Interest rate swaps	31,593		31,593		—		31,593		—
Financial liabilities:
Deposits	$	2,880,408	$	2,880,495	$	—	$	2,880,495	$	—
Federal funds purchased and other short-term borrowings	200,000		200,000		200,000		—		—
Subordinated notes, net	79,369		68,047		—		68,047		—
Federal Home Loan Bank advances	155,000		155,000		—		155,000		—
Long-term debt	51,486		51,486		—		51,486		—
Accrued interest payable	3,260		3,260		3,260		—		—
Interest rate swaps	15,309		15,309		—		15,309		—
Off-balance sheet financial instruments:
Commitments to extend credit	—		—		—		—		—
Standby letters of credit	—		—		—		—		—

- 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.

+ References + Details