FAIR VALUE

9 Months Ended

Sep. 30, 2023

Fair Value Disclosures [Abstract]

FAIR VALUE

FAIR VALUE

Fair Value Measurement

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

The following three levels of inputs are used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other 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.

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 Corporation used the following methods and significant assumptions to estimate fair value:

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded, values debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities 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).

Loans Held for Sale: Loans held for sale are carried at the lower of cost or fair value, which is evaluated on a loan-level basis. The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors (Level 2).

Derivatives: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). The Corporation's derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices, and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions, and third-party pricing services.

Individually Evaluated Loans: The fair value of individually evaluated loans with specific allocations of the allowance for credit losses is generally based on recent real estate appraisals prepared by third-parties. These appraisals 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. Management also adjusts appraised values based on the length of time that has passed since the appraisal date and other factors. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower's financial statements, or aging reports, adjusted or discounted based on management's historical knowledge, changes in market conditions from the time of the valuation, and management's expertise and knowledge of the client and client's business, resulting in a Level 3 fair value classification. Individually evaluated loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the allowance policy.

Assets and liabilities measured at fair value on a recurring basis are as follows at September 30, 2023 and December 31, 2022:

			Fair Value Measurements at September 30, 2023 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Securities Available-For-Sale:
U.S. Government sponsored entities	$	3,825	$	—	$	3,825	$	—
States and political subdivisions	88,436		—		88,436		—
Residential and multi-family mortgage	189,109		—		189,109		—
Corporate notes and bonds	42,906		—		42,906		—
Pooled SBA	10,846		—		10,846		—
Total Securities Available-For-Sale	$	335,122	$	—	$	335,122	$	—
Interest Rate swaps	$	1,726	$	—	$	1,726	$	—
Equity Securities:
Corporate equity securities	$	5,327	$	5,327	$	—	$	—
Mutual funds	2,086		2,086		—		—
Money market funds	865		865		—		—
Corporate notes	670		—		670		—
Total Equity Securities	$	8,948	$	8,278	$	670	$	—
Liabilities:
Interest Rate Swaps	$	(1,726)	$	—	$	(1,726)	$	—

			Fair Value Measurements at December 31, 2022 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Securities Available-For-Sale:
U.S. Government sponsored entities	$	3,129	$	—	$	3,129	$	—
States and political subdivisions	95,663		—		95,663		—
Residential and multi-family mortgage	217,547		—		217,547		—
Corporate notes and bonds	42,391		—		42,391		—
Pooled SBA	12,679		—		12,679		—
Total Securities Available-For-Sale	$	371,409	$	—	$	371,409	$	—
Interest Rate swaps	$	1,850	$	—	$	1,850	$	—
Equity Securities:
Corporate equity securities	$	6,973	$	6,973	$	—	$	—
Mutual funds	1,406		1,406		—		—
Money market funds	479		479		—		—
Corporate notes	757		757		—		—
Total Equity Securities	$	9,615	$	9,615	$	—	$	—
Liabilities:
Interest Rate Swaps	$	(1,700)	$	—	$	(1,700)	$	—

Assets and liabilities measured at fair value on a non-recurring basis are as follows at September 30, 2023 and December 31, 2022:

			Fair Value Measurements at September 30, 2023 Using
Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Collateral-dependent loans receivable:
Farmland	$	763	$	—	$	—	$	763
Owner-occupied, nonfarm nonresidential properties	5,593		—		—		5,593
Commercial and industrial	6,457		—		—		6,457
Other construction loans and all land development loans and other land loans	1,299		—		—		1,299
Multifamily (5 or more) residential properties	305		—		—		305
Non-owner occupied, nonfarm nonresidential	7,279		—		—		7,279
Home equity lines of credit	317		—		—		317
Residential Mortgages secured by first liens	889		—		—		889

			Fair Value Measurements at December 31, 2022 Using
Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Collateral-dependent loans receivable:
Farmland	$	829	$	—	$	—	$	829
Owner-occupied, nonfarm nonresidential properties	1,071		—		—		1,071
Commercial and industrial	1,631		—		—		1,631
Other construction loans and all land development loans and other land loans	501		—		—		501
Multifamily (5 or more) residential properties	613		—		—		613
Non-owner occupied, nonfarm nonresidential	3,867		—		—		3,867
Home equity lines of credit	335		—		—		335
Residential mortgages secured by first liens	944		—		—		944

A loan is considered to be a collateral dependent loan when, based on current information and events, the Corporation expects repayment of the financial assets to be provided substantially through the operation or sale of the collateral and the Corporation has determined that the borrower is experiencing financial difficulty as of the measurement date. The allowance for credit losses is measured by estimating the fair value of the loan based on the present value of expected cash flows, the market price of the loan, or the underlying fair value of the loan’s collateral. For real estate loans, fair value of the loan’s collateral is determined by third-party appraisals, which are then adjusted for the estimated selling and closing costs related to liquidation of the collateral. For this asset class, the actual valuation methods (income, sales comparable, or cost) vary based on the status of the project or property. For example, land is generally based on the sales comparable method while construction is based on the income and/or sales comparable methods. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. The Corporation reviews the third-party appraisal for appropriateness and may adjust the value downward to consider selling and closing costs. For non-real estate loans, fair value of the loan’s collateral may be determined using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30, 2023:

	Fair value		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Collateral-dependent loans receivable:
Farmland	$	763	Valuation of third party appraisal on underlying collateral	Loss severity rates	27%-29% (28%)
Owner-occupied, nonfarm nonresidential properties	5,593		Valuation of third party appraisal on underlying collateral	Loss severity rates	9%-100% (13%)
Commercial and industrial	6,457		Valuation of third party appraisal on underlying collateral	Loss severity rates	3%-50% (14%)
Other construction loans and all land development loans and other land loans	1,299		Valuation of third party appraisal on underlying collateral	Loss severity rates	32% (32%)
Multifamily (5 or more) residential properties	305		Valuation of third party appraisal on underlying collateral	Loss severity rates	26% (26%)
Non-owner occupied, nonfarm nonresidential	7,279		Valuation of third party appraisal on underlying collateral	Loss severity rates	32%-34% (33%)
Home equity lines of credit	317		Valuation of third party appraisal on underlying collateral	Loss severity rates	15% (15%)
Residential Mortgages secured by first liens	889		Valuation of third party appraisal on underlying collateral	Loss severity rates	15%-40% (29%)

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2022:

	Fair value		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Collateral-dependent loans receivable:
Farmland	$	829	Valuation of third party appraisal on underlying collateral	Loss severity rates	20% (20%)
Owner-occupied, nonfarm nonresidential properties	1,071		Valuation of third party appraisal on underlying collateral	Loss severity rates	25%-100% (29%)
Commercial and industrial	1,631		Valuation of third party appraisal on underlying collateral	Loss severity rates	3%-49% (23%)
Other construction loans and all land development loans and other land loans	501		Valuation of third party appraisal on underlying collateral	Loss severity rates	33% (33%)
Multifamily (5 or more) residential properties	613		Valuation of third party appraisal on underlying collateral	Loss severity rates	19%-25% (23%)
Non-owner occupied, nonfarm nonresidential	3,867		Valuation of third party appraisal on underlying collateral	Loss severity rates	15%-53% (35%)
Home equity lines of credit	335		Valuation of third party appraisal on underlying collateral	Loss severity rates	15% (15%)
Residential mortgages secured by first liens	944		Valuation of third party appraisal on underlying collateral	Loss severity rates	15%-27% (21%)

Fair Value of Financial Instruments

The following table presents the carrying amount and fair value of financial instruments at September 30, 2023:

	Carrying		Fair Value Measurement Using:						Total
	Amount		Level 1		Level 2		Level 3		Fair Value
ASSETS
Cash and cash equivalents	$	182,585	$	182,585	$	—	$	—	$	182,585
Debt securities available-for-sale	335,122		—		335,122		—		335,122
Debt securities held-to-maturity	391,301		—		352,069		—		352,069
Equity securities	8,948		8,278		670		—		8,948
Loans held for sale	464		—		465		—		465
Net loans receivable	4,446,342		—		—		4,302,890		4,302,890
FHLB and other restricted stock holdings and investments	28,329		n/a		n/a		n/a		n/a
Interest rate swaps	1,726		—		1,726		—		1,726
Accrued interest receivable	22,329		—		2,778		19,551		22,329
LIABILITIES
Deposits	$	(5,002,781)	$	(4,448,041)	$	(555,737)	$	—	$	(5,003,778)
Subordinated notes and debentures	(104,811)		—		(128,112)		—		(128,112)
Interest rate swaps	(1,726)		—		(1,726)		—		(1,726)
Accrued interest payable	(3,185)		—		(3,185)		—		(3,185)

The following table presents the carrying amount and fair value of financial instruments at December 31, 2022:

	Carrying		Fair Value Measurement Using:						Total
	Amount		Level 1		Level 2		Level 3		Fair Value
ASSETS
Cash and cash equivalents	$	106,285	$	106,285	$	—	$	—	$	106,285
Debt securities available-for-sale	371,409		—		371,409		—		371,409
Debt securities held-to-maturity	404,765		—		367,388		—		367,388
Equity securities	9,615		9,615		—		—		9,615
Loans held for sale	231		—		231		—		231
Net loans receivable	4,231,742		—		—		4,157,843		4,157,843
FHLB and other restricted stock holdings and investments	30,715		n/a		n/a		n/a		n/a
Interest rate swaps	1,850		—		1,850		—		1,850
Accrued interest receivable	20,194		—		2,867		17,327		20,194
LIABILITIES
Deposits	$	(4,622,437)	$	(4,175,976)	$	(445,788)	$	—	$	(4,621,764)
Short-term borrowings	(132,396)		—		(132,396)		—		(132,396)
Subordinated notes and debentures	(104,584)		—		(117,378)		—		(117,378)
Interest rate swaps	(1,700)		—		(1,700)		—		(1,700)
Accrued interest payable	(1,839)		—		(1,839)		—		(1,839)

While estimates of fair value are based on management’s judgment of the most appropriate factors as of the balance sheet dates, there is no assurance that the estimated fair values would have been realized if the assets had been disposed of or the liabilities settled at that date, since market values may differ depending on various circumstances. The estimated fair values would also not apply to subsequent dates. The fair value of other equity interests is based on the net asset values provided by the underlying investment partnership. ASU 2015-7 removes the requirement to categorize within the fair value hierarchy all investments measured using the net asset value per share practical expedient and related disclosures. In addition, other assets and liabilities that are not financial instruments, such as premises and equipment, are not included in the disclosures.

Also, non-financial assets such as, among other things, the estimated earnings power of core deposits, the earnings potential of trust accounts, the trained workforce, and customer goodwill, which typically are not recognized on the balance sheet, may have value but are not included in the fair value disclosures.