Fair Value of Assets and Liabilities

9 Months Ended

Sep. 30, 2023

Fair Value Disclosures [Abstract]

Fair Value of Assets and Liabilities

Note 7 -- Fair Value of Assets and Liabilities

Fair value 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 measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:

Level 1 Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Following is a description of the inputs and valuation methodologies used for assets measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

Available-for-Sale Securities. The fair value of available-for-sale securities is determined by various valuation methodologies. Where quoted market prices are available in an active market, securities are classified within Level 1. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independent sources of market parameters, including but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

Fair value determinations for Level 3 measurements of securities are the responsibility of the Treasury function of the Company. The Company contracts with a pricing specialist to generate fair value estimates on a monthly basis. The Treasury function of the Company challenges the reasonableness of the assumptions used and reviews the methodology to ensure the estimated fair value complies with accounting standards generally accepted in the United States, analyzes the changes in fair value and compares these changes to internally developed expectations and monitors these changes for appropriateness.

Loans Held for Sale. The fair value of loans held for sale is based on independent asset pricing services which use observable market data as of the measurement date and are therefore classified in Level 2 of the valuation hierarchy.

Derivatives. The fair value of derivatives is based on models using observable market data as of the measurement date and are therefore classified in Level 2 of the valuation hierarchy.

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall as of September 30, 2023 and December 31, 2022 (in thousands):

	Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2023
Available-for-sale securities:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	211,929	$	—	$	211,929	$	—
Obligations of states and political subdivisions		266,473		—		266,473		—
Mortgage-backed securities		672,522		—		672,522		—
Other securities		67,671		—		61,911		5,760
Total available-for-sale securities		1,218,595		—		1,212,835		5,760
Equity securities		3,932		3,932		—		—
Loans held for sale		6,233		—		6,233		—
Derivative assets: interest rate swaps		4,349		—		4,349		—
Total assets	$	1,233,109	$	3,932	$	1,223,417	$	5,760
Derivative liabilities: interest rate swaps	$	2,932	$	—	$	2,932	$	—
December 31, 2022
Available-for-sale securities:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	220,527	$	—	$	220,527	$	—
Obligations of states and political subdivisions		287,698		—		287,698		—
Mortgage-backed securities		627,880		—		627,880		—
Other securities		82,880		—		73,630		9,250
Total available-for-sale securities		1,218,985		—		1,209,735		9,250
Equity securities		311		311		—		—
Loans held for sale		338		—		338		—
Derivative assets: interest rate swaps		4,253		—		4,253		—
Total assets	$	1,223,887	$	311	$	1,214,326	$	9,250
Derivative liabilities: interest rate swaps	$	3,100	$	—	$	3,100	$	—

The change in fair value of assets measured on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2023 and 2022 is summarized as follows (in thousands):

	Three months ended September 30, 2023						Nine months ended September 30, 2023
	Obligation of State and Political Subdivisions		Other		Total		Obligation of State and Political Subdivisions			Other			Total
Beginning balance	$	—	$	5,760	$	5,760	$	—		$	10,000		$	10,000
Transfers into Level 3		—		—		—		—			10			10
Transfers out of Level 3		—		—		—		—			(4,250	)		(4,250	)
Total gains or losses:
Included in net income		—		—		—		—			—			—
Included in other comprehensive income (loss)		—		—		—		—			—			—
Purchases, issuances, sales and settlements:
Purchases		—		—		—		—			—			—
Issuances		—		—		—		—			—			—
Sales		—		—		—		—			—			—
Settlements		—		—		—		—			—			—
Ending balance	$	—	$	5,760	$	5,760	$	—		$	5,760		$	5,760
Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets and liabilities still held at the reporting date	$	—	$	—	$	—	$	—		$	—		$	—
	Three months ended September 30, 2022						Nine months ended September 30, 2022
	Obligation of State and Political Subdivisions		Other		Total		Obligation of State and Political Subdivisions			Other			Total
Beginning balance	$	—	$	—	$	—	$	99		$	—		$	99
Transfers into Level 3		—		—		—		—			—			—
Transfers out of Level 3		—		—		—		—			—			—
Total gains or losses:
Included in net income		—		—		—		—			—			—
Included in other comprehensive income (loss)		—		—		—		—			—			—
Purchases, issuances, sales and settlements:
Purchases		—		—		—		—			—			—
Issuances		—		—		—		—			—			—
Sales		—		—		—		—			—			—
Settlements		—		—		—		(99	)		—			(99	)
Ending balance	$	—	$	—	$	—	$	—		$	—		$	—
Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets and liabilities still held at the reporting date	$	—	$	—	$	—	$	—		$	—		$	—

Following is a description of the valuation methodologies used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

Collateral Dependent Loans. Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment and estimating fair value include using the fair value of the collateral for collateral dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value, which includes selling costs. Individually evaluated loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

Management establishes a specific allowance for individually evaluated loans that have an estimated fair value that is below the carrying value. The total carrying amount of loans for which a change in specific allowance has occurred as of September 30, 2023 was $2.1 million and a fair value of $1.7 million resulting in specific loss exposures of $0.4 million.

When there is little prospect of collecting principal or interest, loans, or portions of loans, may be charged-off to the allowance for credit losses. Losses are recognized in the period an obligation becomes uncollectible. The recognition of a loss does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan even though partial recovery may be affected in the future.

Foreclosed Assets Held For Sale. Other real estate owned acquired through loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for credit losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned, or foreclosed asset could differ from the original estimate. If it is determined that fair value declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Operating costs associated with the assets after acquisition are also recorded as noninterest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other noninterest expense. The total carrying amount of other real estate owned as of September 30, 2023 was $2.3 million. Other real estate owned included in the total carrying amount and measured at fair value on a nonrecurring basis during the period amounted to $942,000.

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2023 and December 31, 2022 (in thousands):

	Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2023
Collateral dependent loans	$	1,669	$	—	$	—	$	1,669
Foreclosed assets held for sale		942		—		—		942
December 31, 2022
Collateral dependent loans	$	2,548	$	—	$	—	$	2,548
Foreclosed assets held for sale		—		—		—		—

Sensitivity of Significant Unobservable Inputs

The following table presents quantitative information about unobservable inputs used in Level 3 fair value measurements other than goodwill at September 30, 2023 and December 31, 2022.

September 30, 2023	Fair Value		Valuation Technique	Unobservable Inputs	Range	Weighted Average
Collateral dependent loans	$	1,669	Third party valuations	Discount to reflect realizable value less estimated selling costs	0% - 40%	20%
Foreclosed assets held for sale		942	Third party valuations	Discount to reflect realizable value less estimated selling costs	0% - 40%	35%

December 31, 2022	Fair Value		Valuation Technique	Unobservable Inputs	Range	Weighted Average
Collateral dependent loans	$	2,548	Third party valuations	Discount to reflect realizable value	0% - 40%	20%

The following tables present estimated fair values of the Company’s financial instruments at September 30, 2023 and December 31, 2022 in accordance with ASC 825 (in thousands):

	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
September 30, 2023
Financial assets
Cash and due from banks	$	374,783	$	374,783	$	374,783	$	—	$	—
Federal funds sold		8,454		8,454		8,454		—		—
Certificates of deposit investments		1,960		1,960		—		1,960		—
Available-for-sale securities		1,218,595		1,218,595		—		1,212,835		5,760
Held-to-maturity securities		2,259		2,259		2,259		—		—
Equity securities		3,932		3,932		3,932		—		—
Loans held for sale		6,233		6,233		—		6,233		—
Loans net of allowance for credit losses		5,465,591		5,141,708		—		—		5,141,708
Interest receivable		36,476		36,476		—		36,476		—
Federal Reserve Bank stock		17,050		17,050		—		17,050		—
Federal Home Loan Bank stock		12,648		12,648		—		12,648		—
Financial liabilities
Deposits	$	6,346,324	$	6,253,912	$	—	$	5,225,518	$	1,028,394
Securities sold under agreements to repurchase		214,978		214,984		—		214,984		—
Interest payable		6,727		6,727		—		6,727		—
Federal Home Loan Bank borrowings		364,953		358,031		—		358,031		—
Subordinated debt, net		106,648		99,498		—		99,498		—
Junior subordinated debentures, net		24,003		21,605		—		21,605		—
December 31, 2022
Financial assets
Cash and due from banks	$	144,806	$	144,806	$	144,806	$	—	$	—
Federal funds sold		7,627		7,627		7,627		—		—
Certificates of deposit investments		1,470		1,470		—		1,470		—
Available-for-sale securities		1,218,986		1,218,986		—		1,209,736		9,250
Held-to-maturity securities		2,953		2,953		2,953		—		—
Equity securities		311		311		311		—		—
Loans held for sale		338		338		—		338		—
Loans net of allowance for credit losses		4,766,780		4,460,661		—		—		4,460,661
Interest receivable		28,357		28,357		—		28,357		—
Federal Reserve Bank stock		17,050		17,050		—		17,050		—
Federal Home Loan Bank stock		18,440		18,440		—		18,440		—
Financial liabilities
Deposits	$	5,257,001	$	5,257,748	$	—	$	4,550,222	$	707,526
Federal funds purchased		—		—		—		—		—
Securities sold under agreements to repurchase		221,414		221,260		—		221,260		—
Interest payable		3,346		3,346		—		3,346		—
Federal Home Loan Bank borrowings		465,071		459,327		—		459,327		—
Other borrowings		—		—		—		—		—
Subordinated debt, net		94,553		87,977		—		87,977		—
Junior subordinated debentures, net		19,364		17,164		—		17,164		—