Fair Value Measurements

9 Months Ended

Sep. 30, 2023

Fair value represents the estimated price at which an orderly transaction to sell an asset or transfer a liability would take place between market participants at the measurement date under current market conditions (i.e., an exit price concept), and is a market-based measurement versus an entity-specific measurement. The Company records and/or discloses certain financial instruments on a fair value basis. These financial assets and financial liabilities are measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the assumptions used to determine fair value. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect assumptions of the reporting entity about how market participants would price the asset or liability based on the best information available under the circumstances. The three fair value levels are:

•Level 1 – quoted market prices in active markets for identical assets or liabilities that a company has the ability to access at the measurement date

•Level 2 – inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly

•Level 3 – significant unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity

In instances where the fair value measurement is based on inputs from different levels, the level within which the entire fair value measurement will be categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. This assessment of the significance of an input requires management judgment.

Recurring basis fair value measurements:

The following table presents the balances of assets and liabilities measured at fair value on a recurring basis for the periods presented.


(in thousands)			Fair Value Measurements Using
Measured at Fair Value on a Recurring Basis:	Total		Level 1		Level 2		Level 3
September 30, 2023
U.S. Treasury securities	$	37,504	$	—	$	37,504	$	—
U.S. government agency securities	8,221		—		8,221		—
State, county and municipals	341,330		—		339,949		1,381
Mortgage-backed securities	306,409		—		305,438		971
Corporate debt securities	100,362		—		97,064		3,298
Securities AFS	$	793,826	$	—	$	788,176	$	5,650
Other investments (equity securities)	$	3,893	$	3,893	$	—	$	—
Derivative assets	$	186	$	—	$	—	$	186
Derivative liabilities	$	—	$	—	$	—	$	—
December 31, 2022
U.S. Treasury securities	$	183,830	$	—	$	183,830	$	—
U.S. government agency securities	2,100		—		2,100		—
State, county and municipals	398,188		—		396,315		1,873
Mortgage-backed securities	200,932		—		199,951		981
Corporate debt securities	132,568		—		127,269		5,299
Securities AFS	$	917,618	$	—	$	909,465	$	8,153
Other investments (equity securities)	$	4,376	$	4,376	$	—	$	—
Derivative assets	$	60	$	—	$	—	$	60
Derivative liabilities	$	10	$	—	$	—	$	10

The following is a description of the valuation methodologies used by the Company for the assets and liabilities measured at fair value on a recurring basis, noted in the tables above.

Securities AFS: Where quoted market prices on securities exchanges are available, the investments are classified as Level 1. Level 1 investments primarily include exchange-traded equity securities. If quoted market prices are not available, fair value is generally determined using prices obtained from independent pricing vendors who use pricing models (with typical inputs including benchmark yields, reported trades for similar securities, issuer spreads or relationship to other benchmark quoted securities), or discounted cash flows, and are classified as Level 2. Examples of these investments include U.S. Treasury securities, U.S. government agency securities, mortgage-backed securities, obligations of state, county and municipals, and certain corporate debt securities. Finally, in certain cases where there is limited activity or less transparency around inputs to the estimated fair value, investments are classified within Level 3 of the hierarchy. Examples of these include private corporate debt securities, which are primarily trust preferred security investments, as well as certain municipal bonds and mortgage-backed securities. At September 30, 2023 and December 31, 2022, it was determined that carrying value was the best approximation of fair value for these Level 3 securities, based primarily on the internal analysis on these securities.

Derivatives: The derivative assets and liabilities include interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans held for sale, which are considered derivative instruments (“mortgage derivatives”). The fair value of interest rate lock commitments are determined using the projected sale price of individual loans based on changes in the market interest rates, projected pull-through rates (the probability that an interest rate lock commitment will ultimately result in an originated loan), the reduction in the value of the applicant’s option due to the passage of time, and the remaining origination costs to be incurred based on management’s estimate of market costs. The fair value of forward commitments are determined using quoted prices of to-be-announced securities in active markets, or benchmarked to such securities. The derivative assets and liabilities are classified with Level 3 of the hierarchy.

The following table presents the changes in Level 3 securities AFS measured at fair value on a recurring basis.


(in thousands)	Nine Months Ended		Year Ended
Level 3 Fair Value Measurements:	September 30, 2023		December 31, 2022
Balance at beginning of year	$	8,153	$	8,065
Acquired balance	—		750
Maturities / Paydowns	(2,469)		(451)
Unrealized gain / (loss)	(34)		(211)
Balance at end of period	$	5,650	$	8,153

Nonrecurring basis fair value measurements:

The following table presents the Company’s assets measured at fair value on a nonrecurring basis, aggregated by level in the fair value hierarchy within which those measurements fall.


(in thousands)			Fair Value Measurements Using
Measured at Fair Value on a Nonrecurring Basis:	Total		Level 1		Level 2		Level 3
September 30, 2023
Collateral dependent loans	$	22,925	$	—	$	—	$	22,925
Other real estate owned (“OREO”)	2,031		—		—		2,031
MSR asset	11,936		—		—		11,936
December 31, 2022
Collateral dependent loans	$	30,951	$	—	$	—	$	30,951
OREO	1,975		—		—		1,975
MSR asset	12,580		—		—		12,580

The following is a description of the valuation methodologies used by the Company for the items noted in the table above. For collateral dependent loans, the estimated fair value is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, the estimated fair value of the underlying collateral with consideration for estimated selling costs if satisfaction of the loan depends on the sale of the collateral, or the estimated liquidity of the note. For OREO, the fair value is based upon the estimated fair value of the underlying collateral adjusted for the expected costs to sell. To estimate the fair value of the MSR asset, the underlying serviced loan pools are stratified by interest rate tranche and term of the loan, and a valuation model is used to calculate the present value of the expected future cash flows for each stratum. The servicing valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as costs to service, a discount rate, ancillary income, default rates and losses, and prepayment speeds. Although some of these assumptions are based on observable market data, other assumptions are based on unobservable estimates of what market participants would use to measure fair value.

Financial instruments:

The carrying amounts and estimated fair values of the Company’s financial instruments are shown below.


September 30, 2023
(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	545,880	$	545,880	$	545,880	$	—	$	—
Certificates of deposit in other banks	7,598		7,519		—		7,519		—
Securities AFS	793,826		793,826		—		788,176		5,650

Other investments, including equity securities	58,367		58,367		3,893		43,973		10,501
Loans held for sale	6,500		6,641		—		6,641		—
Loans, net	6,176,097		5,908,160		—		—		5,908,160
MSR asset	11,936		15,847		—		—		15,847
LSR asset	9,383		9,383		—		—		9,383
Accrued interest receivable	24,166		24,166		24,166		—		—
Financial liabilities:
Deposits	$	7,182,388	$	7,164,174	$	—	$	—	$	7,164,174
Short-term borrowings	—		—		—		—		—
Long-term borrowings	197,754		190,738		—		4,736		186,002
Accrued interest payable	7,028		7,028		7,028		—		—


December 31, 2022
(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	154,723	$	154,723	$	154,723	$	—	$	—
Certificates of deposit in other banks	12,518		12,407		—		12,407		—
Securities AFS	917,618		917,618		—		909,465		8,153
Securities HTM	679,128		623,352		—		623,352		—
Other investments, including equity securities	65,286		65,286		4,376		52,093		8,817
Loans held for sale	1,482		1,529		—		1,529		—
Loans, net	6,118,670		5,863,570		—		—		5,863,570
MSR asset	12,580		17,215		—		—		17,215
LSR asset	11,039		11,039		—		—		11,039
Accrued interest receivable	21,275		21,275		21,275		—		—
Financial liabilities:
Deposits	$	7,178,921	$	7,172,779	$	—	$	—	$	7,172,779
Short-term borrowings	317,000		317,000		317,000		—		—
Long-term borrowings	225,342		220,513		—		33,001		187,512
Accrued interest payable	4,265		4,265		4,265		—		—

The valuation methodologies for the financial instruments disclosed in the above table are described in Note 18, Fair Value Measurements, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

- 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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