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FAIR VALUE
9 Months Ended
Sep. 30, 2024
Fair Value Disclosures [Abstract]  
FAIR VALUE FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (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. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are:
Level 1 – quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access at the measurement date.
Level 2 – significant other observable inputs other than Level 1 prices such as prices for similar assets and liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active or other inputs that are observable or can be corroborated by observable market data.
Level 3 – at least one significant unobservable input that reflects a company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.
In instances in which multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
The Company used the following methods and significant assumptions to estimate fair value for instruments measured on a recurring basis:
Where quoted prices are available in an active market, investment securities are classified within Level 1 of the valuation hierarchy. Level 1 investment securities include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, investment securities are classified within Level 2 and fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or DCF. Level 2 investment securities include U.S. agency securities, MBS, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, investment securities are classified within Level 3 of the valuation hierarchy. The Company’s investment securities are classified as AFS.
The fair values of interest rate swaps, interest rate caps and risk participation derivatives are determined using models that incorporate readily observable market data into a market standard methodology. This methodology nets the discounted future cash receipts and the discounted expected cash payments. The discounted variable cash receipts and payments are based on expectations of future interest rates derived from observable market interest rate curves. In addition, fair value is adjusted for the effect of nonperformance risk by incorporating credit valuation adjustments for the Company and its counterparties. These assets and liabilities are classified as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.
The following table summarizes assets and liabilities measured at fair value on a recurring basis at September 30, 2024 and December 31, 2023:
Level 1Level 2Level 3Total Fair
Value
Measurements
September 30, 2024
Financial Assets
Investment securities:
U.S. Treasury securities$18,373 $ $ $18,373 
U.S. Government Agencies 3,372  3,372 
States and political subdivisions 199,426 6,674 206,100 
GSE residential MBSs 150,361  150,361 
GSE commercial MBSs 9,624  9,624 
GSE residential CMOs 314,125  314,125 
Non-agency CMOs 19,807 11,425 31,232 
Asset-backed 91,468  91,468 
Corporate bonds 1,975  1,975 
Other198   198 
Loans held for sale 3,561  3,561 
Derivatives 14,349 118 14,467 
Totals$18,571 $808,068 $18,217 $844,856 
Financial Liabilities
Derivatives$ $17,828 $ $17,828 
December 31, 2023
Financial Assets
Investment securities:
U.S. Treasury securities$17,840 $— $— $17,840 
U.S. Government Agencies— 4,151 — 4,151 
States and political subdivisions— 197,060 6,062 203,122 
GSE residential MBSs— 57,632 — 57,632 
GSE commercial MBSs— 4,743 — 4,743 
GSE residential CMOs— 73,102 — 73,102 
Non-agency CMOs— 22,878 21,791 44,669 
Asset-backed— 108,134 — 108,134 
Corporate bonds— — — — 
Other126 — — 126 
Loans held for sale— 5,816 — 5,816 
Derivatives— 11,328 55 11,383 
Totals$17,966 $484,844 $27,908 $530,718 
Financial Liabilities
Derivatives$— $13,464 $— $13,464 
The Company had one municipal bond and two CMOs measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at September 30, 2024 and December 31, 2023. The Level 3 valuation is based on a non-executable broker quote, which is considered a significant unobservable input. Such quotes are updated as available and may remain constant for a period of time for certain broker-quoted securities that do not move with the market or that are not interest rate sensitive as a result of their structure or overall attributes.
The Company’s residential mortgage LHFS are recorded at fair value utilizing Level 2 measurements. This fair value measurement is determined based upon third party quotes obtained on similar loans. For loans held-for-sale, for which the fair value option has been elected, the aggregate fair value was greater than the aggregate principal balance by $95 thousand as of September 30, 2024 and below the aggregate principal balance by $1.5 million as of December 31, 2023.
The determination of the fair value of interest rate lock commitments on residential mortgages is based on agreed upon pricing with the respective investor on each loan and includes a pull through percentage. The pull through percentage represents an estimate of loans in the pipeline to be delivered to an investor versus the total loans committed for delivery. Significant changes in this input could result in a significantly higher or lower fair value measurement. As the pull through percentage is a significant unobservable input, this is deemed a Level 3 valuation input. The average pull through percentage, which is based upon historical experience, was 92% as of September 30, 2024. An increase or decrease of 5% in the pull through assumption would result in a positive or negative change of $7 thousand in the fair value of interest rate lock commitments at September 30, 2024.
The following provides details of the Level 3 fair value measurement activity for the periods ended September 30, 2024 and 2023:
Investment securities:
Three Months Ended September 30,Nine Months Ended September 30,
2024202320242023
Balance, beginning of period$17,567 $27,994 $27,853 $27,193 
Unrealized gains (losses) included in OCI649 (736)731 (600)
Purchases —  871 
Net discount accretion17 19 50 42 
Principal payments and other(134)(225)(428)(454)
Calls — (10,107)— 
Balance, end of period$18,099 $27,052 $18,099 $27,052 

Interest rate lock commitments on residential mortgages:
Three Months Ended September 30,Nine Months Ended September 30,
2024202320242023
Balance, beginning of period$71 $67 $55 $35 
Total gains (losses) included in earnings47 (52)63 (20)
Balance, end of period$118 $15 $118 $15 
Certain financial assets are measured at fair value on a nonrecurring basis. Adjustments to the fair value of these assets usually result from the application of lower of cost or market accounting or write-downs of individual assets. The Company used the following methods and significant assumptions to estimate fair value for these financial assets.
There were no transfers into or out of Level 3 during the three and nine months ended September 30, 2024 and 2023.
Individually Evaluated Loans
Loans individually evaluated for credit expected losses include nonaccrual loans and other loans that do not share similar risk characteristics to loans in the CECL loan pools, which have been classified as Level 3. Individually evaluated loans with an allocation to the ACL are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for credit losses on the unaudited condensed consolidated statements of operations.
The measurement of loss associated with loans evaluated individually for all loan classes was based on either the observable market price of the loan, the fair value of the collateral or DCF. For collateral-dependent loans, fair value was measured based on the value of the collateral securing the loan, less estimated costs to sell. Collateral may be in the form of real estate or business assets including equipment, inventory and accounts receivable. The value of the real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if management adjusts the appraisal value, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal, if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3).
Changes in the fair value of individually evaluated loans still held and considered in the determination of the provision for credit losses were increases due to the acquired of $5.1 million and $4.7 million for the three and nine months ended
September 30, 2024, respectively, compared to a decline of $224 thousand and an increase of $286 thousand for the three and nine months ended September 30, 2023, respectively.
Other Real Estate Owned
OREO property acquired through foreclosure is initially recorded at the fair value of the property at the transfer date less estimated selling cost. Subsequently, OREO is carried at the lower of its carrying value or the fair value less estimated selling cost. Fair value is usually determined based upon an independent third-party appraisal of the property or occasionally upon a recent sales offer. The Company had OREO of $138 thousand at September 30, 2024 acquired in the Merger, which there have been no subsequent write-downs. The Company had no OREO balances at December 31, 2023.
Mortgage Servicing Rights
MSRs are evaluated for impairment by comparing the carrying value to the fair value, which is determined through a DCF valuation. To the extent the amortized cost of the MSRs exceeds their estimated fair values, a valuation allowance is established for such impairment. Fair value adjustments on the MSRs only occurs if there is an impairment charge. At September 30, 2024, the MSR impairment reserve was $50 thousand. There was no MSR impairment reserve at December 31, 2023. For both the three and nine months ended September 30, 2024, there was an impairment valuation allowance adjustment of $50 thousand in mortgage banking activities on the unaudited consolidated statements of operations. For the three and nine months ended September 30, 2023, there were no impairment valuation allowance adjustments in mortgage banking activities on the unaudited consolidated statements of operations.
The following table summarizes assets measured at fair value on a nonrecurring basis at September 30, 2024 and December 31, 2023:
Level 1Level 2Level 3Total
Fair Value
Measurements
September 30, 2024
Individually Evaluated Loans
Commercial real estate:
Owner occupied$ $ $1,038 $1,038 
Multi-family  762 762 
Acquisition and development:
Commercial and land development  1,236 1,236 
Commercial and industrial  846 846 
Residential mortgage:
First lien  455 455 
Home equity - lines of credit  39 39 
Installment and other loans  3 3 
Total individually evaluated loans$ $ $4,379 $4,379 
Mortgage servicing rights$ $ $305 $305 
December 31, 2023
Individually Evaluated Loans
Commercial real estate:
Owner occupied$— $— $75 $75 
Commercial and industrial— — 164 164 
Residential mortgage:
First lien— — 219 219 
Home equity - lines of credit— — 56 56 
Total individually evaluated loans
$— $— $514 $514 
The following table presents additional qualitative information about assets measured on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:
Fair Value
Estimate
Valuation
Techniques
Unobservable InputRange
September 30, 2024
Individually evaluated loans$4,379 Appraisal of collateralManagement adjustments on appraisals for property type and recent activity
10% - 25% discount
 - Management adjustments for liquidation expenses
6.78% - 12.30% discount
Mortgage servicing rights$305 Discounted cash flowsWeighted average CPR10.01%
 - Weighted average discount rate6.60%
December 31, 2023
Individually evaluated loans
$514 Appraisal of collateralManagement adjustments on appraisals for property type and recent activity
10% - 70% discount
 - Management adjustments for liquidation expenses
3.30% - 12.30% discount
Fair values of financial instruments
GAAP requires disclosure of the fair value of financial assets and liabilities, including those that are not measured and reported at fair value on a recurring or nonrecurring basis. The following table presents carrying amounts and estimated fair values of the financial assets and liabilities at September 30, 2024 and December 31, 2023:
Carrying
Amount
Fair ValueLevel 1Level 2Level 3
September 30, 2024
Financial Assets
Cash and due from banks$65,064 $65,064 $65,064 $ $ 
Interest-bearing deposits with banks171,716 171,716 171,716   
Restricted investments in bank stock20,247 n/an/an/an/a
Investment securities826,828 826,828 18,571 790,158 18,099 
Loans held for sale3,561 3,561  3,561  
Loans, net of allowance for credit losses3,931,807 3,873,542   3,873,542 
Derivatives14,467 14,467  14,349 118 
Accrued interest receivable20,562 20,562  5,391 15,171 
Financial Liabilities
Deposits4,650,853 4,649,844  4,649,844  
Securities sold under agreements to repurchase and federal funds purchased21,932 21,932  21,932  
FHLB advances and other borrowings115,378 115,286  115,286  
Subordinated notes and trust preferred debt68,510 67,364  67,364  
Derivatives17,828 17,828  17,828  
Accrued interest payable3,591 3,591  3,591  
Off-balance sheet instruments     
December 31, 2023
Financial Assets
Cash and due from banks$32,586 $32,586 $32,586 $— $— 
Interest-bearing deposits with banks32,575 32,575 32,575 — — 
Restricted investments in bank stock11,992 n/an/an/an/a
Investment securities513,519 513,519 17,966 467,700 27,853 
Loans held for sale5,816 5,816 — 5,816 — 
Loans, net of allowance for loan losses2,269,611 2,159,745 — — 2,159,745 
Derivatives11,383 11,383 — 11,328 55 
Accrued interest receivable13,630 13,630 — 4,987 8,643 
Financial Liabilities
Deposits2,558,814 2,555,904 — 2,555,904 — 
Securities sold under agreements to repurchase9,785 9,785 — 9,785 — 
FHLB advances and other borrowings137,500 137,500 — 137,500 — 
Subordinated notes32,093 29,887 — 29,887 — 
Derivatives13,464 13,464 — 13,464 — 
Accrued interest payable2,560 2,560 — 2,560 — 
Off-balance sheet instruments— — — — — 
In accordance with the Company's adoption of ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, the methods utilized to measure the fair value of financial instruments at September 30, 2024 and December 31, 2023 represent an approximation of exit price; however, an actual exit price may differ.