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FAIR VALUE OF FINANCIAL INSTRUMENTS

3 Months Ended

Mar. 31, 2024

Fair value is defined as the exchange 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 reflecting assumptions that a market participant would use when pricing an asset or liability. The hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:

•Level 1: Unadjusted quoted prices for identical assets or liabilities traded in active markets.

•Level 2: Significant other observable inputs other than Level 1, including quoted prices for similar assets and liabilities in active markets, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data.

•Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Investment securities. The fair value of investment securities available for sale are determined by quoted market prices, if available (Level 1). For investment securities available for sale where quoted prices are not available, fair values are

calculated based on market prices of similar securities (Level 2). For investment securities available for sale 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). Securities classified as Level 3 are not actively traded, and as a result, fair value is determined utilizing third-party valuation services through consensus pricing. There were no transfers between Levels 1, 2 or 3 during the period presented for assets measured at fair value on a recurring basis. The fair value of equity securities is determined using quoted prices or market prices for similar securities (Level 2).

Loans held for sale. The fair value of loans held for sale is determined using quoted prices for a similar asset, adjusted for specific attributes of that loan (Level 2).

Derivative instruments. The fair value of derivative instruments are determined based on derivative valuation models using observable market data as of the measurement date (Level 2).

Loan servicing rights. In accordance with GAAP, the Company records impairment charges on loan servicing rights on a non-recurring basis when the carrying value exceeds the estimated fair value. The fair value of our servicing rights is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration expected mortgage loan prepayment rates, discount rates, servicing costs, replacement reserves and other economic factors which are estimated based on current market conditions (Level 3).

Nonperforming loans. All of our nonaccrual loans are considered nonperforming and are reviewed individually for the amount of impairment, if any. We measure collateral dependent nonperforming loans based on the estimated fair value of such collateral. In cases where the Company has an agreed upon selling price for the collateral, the fair value is set at the selling price (Level 1). The fair value of each loan’s collateral is generally based on estimated market prices from an independently prepared appraisal, which is then adjusted for the cost related to liquidating such collateral (Level 2). When adjustments are made to an appraised value to reflect various factors such as the age of the appraisal or known changes in the market or the collateral, such valuation inputs are considered unobservable (Level 3). The nonperforming loans categorized as Level 3 also include unsecured loans and other secured loans whose fair values are based significantly on unobservable inputs such as the strength of a guarantor, cash flows discounted at the effective loan rate, and management’s judgment.

Other Real Estate Owned. OREO is initially recorded at fair value at the date of foreclosure less estimated costs of disposal, which establishes a new cost basis. After foreclosure, OREO is held for sale and is carried at the lower of cost or fair value less estimated costs of disposal. Fair value for OREO is based on an appraisal performed upon foreclosure. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between comparable sales and income data available. Property is evaluated regularly to ensure the recorded amount is supported by its fair value less estimated costs to dispose. After the initial foreclosure appraisal, fair value is generally determined by an annual appraisal unless known events warrant adjustments to the recorded value (Level 2).

Assets and liabilities measured and recorded at fair value, including financial assets for which the Company has elected the fair value option, on a recurring and nonrecurring basis at March 31, 2024 and December 31, 2023, are summarized below:


	March 31, 2024
(dollars in thousands)	Carrying amount		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets and liabilities measured at fair value on a recurring basis:
Assets
Investment securities available for sale:

U.S. government sponsored entities and U.S. agency securities	$	67,723	$	—	$	67,723	$	—
Mortgage-backed securities - agency	681,520		—		681,520		—
Mortgage-backed securities - non-agency	89,528		—		89,528		—
State and municipal securities	60,630		—		60,630		—
Collateralized loan obligations	33,614		—		33,614		—
Corporate securities	107,391		—		107,391		—
Equity securities	4,494		4,494		—		—
Loans held for sale	5,043		—		5,043		—
Derivative assets	1,585		—		1,585		—

Total	$	1,051,528	$	4,494	$	1,047,034	$	—
Liabilities
Derivative liabilities	$	9,287	$	—	$	9,287	$	—

Total	$	9,287	$	—	$	9,287	$	—

Assets measured at fair value on a non-recurring basis:


Nonperforming loans	$	20,740	$	—	$	19,115	$	1,625
Other real estate owned	8,920		—		8,920		—


	December 31, 2023
(dollars in thousands)	Carrying amount		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets and liabilities measured at fair value on a recurring basis:
Assets
Investment securities available for sale:
U.S. Treasury securities	$	1,097	$	1,097	$	—	$	—
U.S. government sponsored entities and U.S. agency securities	72,572		—		72,572		—
Mortgage-backed securities - agency	574,500		—		574,500		—
Mortgage-backed securities - non-agency	83,529		—		83,529		—
State and municipal securities	57,460		—		57,460		—
Corporate securities	99,172		—		99,172		—
Equity securities	4,501		4,501		—		—
Loans held for sale	3,811		—		3,811		—
Derivative assets	372		—		372		—

Total	$	924,579	$	5,598	$	918,981	$	—
Liabilities
Derivative liabilities	$	8,836	$	—	$	8,836	$	—

Total	$	8,836	$	—	$	8,836	$	—

Assets measured at fair value on a non-recurring basis:


Nonperforming loans	$	4,633	$	—	$	3,964	$	669
Other real estate owned	9,112		—		9,112		—

The following table presents losses recognized on assets measured on a nonrecurring basis for the three months ended March 31, 2024 and 2023:


	Three Months Ended March 31,
(dollars in thousands)	2024		2023


Nonperforming loans	$	4,834	$	1,103

The following tables present quantitative information about significant unobservable inputs used in fair value measurements of Level 3 assets measured on a nonrecurring basis at March 31, 2024 and December 31, 2023:

(dollars in thousands)

Fair value

Valuation
technique

Unobservable
input / assumptions

Range (weighted average)(1)

March 31, 2024

Nonperforming loans

1,625

Collateral based measurements

Discount to reflect current market conditions and ultimate collectability

25.80% - 100.00% (51.90%)

December 31, 2023

Nonperforming loans

669

Collateral based measurements

Discount to reflect current market conditions and ultimate collectability

24.38% - 100.00% (27.46%)

(1)Unobservable inputs were weighted by the relative fair value of the instruments.

ASC Topic 825, Financial Instruments, requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate such fair values. Additionally, certain financial instruments and all nonfinancial instruments are excluded from the applicable disclosure requirements.

The Company has elected the fair value option for newly originated residential loans held for sale. These loans are intended for sale and are hedged with derivative instruments. We have elected the fair value option to mitigate accounting mismatches in cases where hedge accounting is complex and to achieve operational simplification.

The following table presents the difference between the aggregate fair value and the aggregate remaining principal balance for loans for which the fair value option has been elected as of March 31, 2024 and December 31, 2023:


	March 31, 2024						December 31, 2023
(dollars in thousands)	Aggregate fair value		Difference		Contractual principal		Aggregate fair value		Difference		Contractual principal

Residential loans held for sale	$	5,043	$	259	$	4,784	$	3,811	$	203	$	3,608

The following table presents the amount of gains from fair value changes included in income before income taxes for financial assets carried at fair value for the three months ended March 31, 2024 and 2023:


	Three Months Ended March 31,
(dollars in thousands)	2024		2023

Residential loans held for sale	$	18	$	99

The carrying values and estimated fair value of certain financial instruments not carried at fair value at March 31, 2024 and December 31, 2023 were as follows:


	March 31, 2024
(dollars in thousands)	Carrying amount		Fair value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Cash and due from banks	$	166,471	$	166,471	$	166,471	$	—	$	—
Federal funds sold	845		845		845		—		—

Loans	5,958,462		5,888,375		—		—		5,888,375
Accrued interest receivable	25,931		25,931		—		25,931		—

Liabilities
Deposits	$	6,323,984	$	6,304,279	$	—	$	6,304,279	$	—
Short-term borrowings	214,446		214,446		207,000		7,446		—
FHLB and other borrowings	255,000		252,517		—		252,517		—
Subordinated debt	93,617		86,353		—		86,353		—
Trust preferred debentures	50,790		53,240		—		53,240		—


	December 31, 2023
(dollars in thousands)	Carrying amount		Fair value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Cash and due from banks	$	134,212	$	134,212	$	134,212	$	—	$	—
Federal funds sold	849		849		849		—		—

Loans	6,131,079		6,129,244		—		—		6,129,244
Accrued interest receivable	24,934		24,934		—		24,934		—

Liabilities
Deposits	$	6,309,529	$	6,294,979	$	—	$	6,294,979	$	—
Short-term borrowings	34,865		34,865		25,000		9,865		—
FHLB and other borrowings	476,000		475,240		—		475,240		—
Subordinated debt	93,546		90,253		—		90,253		—
Trust preferred debentures	50,616		51,626		—		51,626		—

The methods utilized to measure fair value of financial instruments at March 31, 2024 and December 31, 2023 represent an approximation of exit price; however, an actual exit price may differ.

- 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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