Disclosures about Fair Value of Assets and Liabilities

6 Months Ended

Jun. 30, 2023

Disclosures about Fair Value of Assets and Liabilities

The Fair Value Measurements topic of the FASB ASC defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. There are three levels of inputs that may be used to measure fair value:

Level 1 –Quoted prices in active markets for identical assets or liabilities

Level 2 –Observable inputs other than Level 1 prices, such as 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 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 valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated financial statements, as well as the general classification of such instruments pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended June 30, 2023. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Available for sale securities

When quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Treasury and federal agency securities, state and municipal securities, federal agency collateralized mortgage obligations and mortgage–backed pools and corporate notes. Level 2 securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs. Observable inputs include dealer quotes, market spreads, cash flow analysis, the U.S. Treasury yield curve, trade execution data, market consensus prepayment spreads and available credit information and the bond’s terms and conditions. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of securities with similar characteristics and, because many fixed–income securities do not trade on a daily basis, apply available information through processes such as benchmark curves, benchmarking of like securities, sector grouping, and matrix pricing. In addition, model processes, such as an option adjusted spread model, is used to develop prepayment and interest rate scenarios for securities with prepayment features.

Hedged loans

Certain fixed rate loans have been converted to variable rate loans by entering into interest rate swap agreements. The fair value of those fixed rate loans is based on discounting the estimated cash flows using interest rates determined by the respective interest rate swap agreement. Loans are classified within Level 2 of the valuation hierarchy based on the unobservable inputs used.

Interest rate swap agreements

The fair value of the Company’s interest rate swap agreements is estimated by a third party using inputs that are primarily unobservable including a yield curve, adjusted for liquidity and credit risk, contracted terms and discounted cash flow analysis, and therefore, are classified within Level 2 of the valuation hierarchy.

The following table presents the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated financial statements measured at fair value on a recurring basis and the level within the FASB ASC fair value hierarchy in which the fair value measurements fall at the following:


	June 30, 2023
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale securities
U.S. Treasury and federal agencies	$	268,835	$	—	$	268,835	$	—
State and municipal	364,066		—		364,066		—
Federal agency collateralized mortgage obligations	22,895		—		22,895		—
Federal agency mortgage–backed pools	177,654		—		177,654		—

Corporate notes	72,363		—		72,363		—
Total available for sale securities	905,813		—		905,813		—
Interest rate swap agreements asset	39,146		—		39,146		—
Commitments to originate mortgage loans	131		—		131		—

Interest rate swap agreements liability	(39,146)		—		(39,146)		—
Mortgage loan contracts	(18)		—		(18)		—


	December 31, 2022
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale securities
U.S. Treasury and federal agencies	$	267,179	$	—	$	267,179	$	—
State and municipal	433,544		—		433,544		—
Federal agency collateralized mortgage obligations	31,215		—		31,215		—
Federal agency mortgage–backed pools	190,656		—		190,656		—

Corporate notes	74,964		—		74,964		—
Total available for sale securities	997,558		—		997,558		—
Interest rate swap agreements asset	44,595		—		44,595		—
Commitments to originate mortgage loans	284		—		284		—
Interest rate swap agreements liability	(42,619)		—		(42,619)		—
Mortgage loan contracts	(50)		—		(50)		—

Certain other assets are measured at fair value on a non-recurring basis in the ordinary course of business and are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment):


	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2023
Collateral dependent loans	$	8,114	$	—	$	—	$	8,114

December 31, 2022
Collateral dependent loans	$	8,091	$	—	$	—	$	8,091

Collateral Dependent Loans: For loans 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.

Collateral dependent loans are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

The following table presents qualitative information about unobservable inputs used in recurring and non–recurring Level 3 fair value measurements, other than goodwill.

June 30, 2023

Fair
Value

Valuation
Technique

Unobservable
Inputs

Range
(Weighted Average)

Collateral dependent loans

8,114

Collateral based measurement

Discount to reflect current market conditions and ultimate collectibility

0.0%-65.7% (10.5%)

December 31, 2022