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Fair Value Measurement | 9 Months Ended
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Sep. 30, 2023
Fair Value Disclosures [Abstract] |
Fair Value Measurement | Fair Value Measurement The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, income approach, and/or the cost approach. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance. Marketable equity securities, debt securities available-for-sale, loans held for sale, and mortgage servicing rights are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application impairment write-downs of individual assets. The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observable nature of the assumptions used to determine fair value. These levels are: Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets. Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques. Marketable equity securities and debt securities available for sale - Marketable equity securities and debt securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. The Company had no securities classified as Level 3 during any of the periods covered in these financial statements. Loans held for sale - Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is based on what secondary markets are currently offering for loans with similar characteristics. As such, we classify those loans subjected to recurring fair value adjustments as Level 2. Individually evaluated loans - Loans are not recorded at fair value on a recurring basis. However, from time to time, certain loans have individual risk characteristics not consistent with a pool of loans and is individually evaluated for credit reserves. Loans for which it is probable that payment of interest and principal will not be made in accordance with the original contractual terms of the loan agreement are typically individually evaluated. The fair value of these loans are estimated using one of several methods, including collateral value, fair value of similar debt, enterprise value, liquidation value and discounted cash flows. Those loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value which uses substantially observable data, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value, or the appraised value contains a significant unobservable assumption, such as deviations from comparable sales, and there is no observable market price, the Company records the loan as nonrecurring Level 3. Foreclosed assets - Foreclosed assets include assets acquired through, or in lieu of, loan foreclosure. Foreclosed assets are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, management periodically performs valuations and the assets are carried at the lower of carrying amount or fair value less cost to sell. When the fair value of foreclosed assets is based on an observable market price or a current appraised value which uses substantially observable data, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value, or the appraised value contains a significant unobservable assumption, such as deviations from comparable sales, and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3. Revenue and expenses from operations and changes in the valuation allowance are included in other non-interest expense. Mortgage servicing rights - Mortgage servicing rights are carried at fair value. A valuation model, which utilizes a discounted cash flow analysis using a discount rate and prepayment speed assumptions is used in the computation of the fair value measurement. While the prepayment speed assumption is currently quoted for comparable instruments, the discount rate assumption currently requires a significant degree of management judgment and is therefore considered an unobservable input. As such, the Company classifies mortgage servicing rights subjected to recurring fair value adjustments as Level 3. The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis (in thousands):
Fair value at September 30, 2023 | Total |  | Level 1 |  | Level 2 |  | Level 3
Marketable equity securities | $ | 2,517 |  |  | $ | 2,517 |  |  |  |  |
Debt securities available for sale: |  |  |  |  |  |  |
Obligations of U.S. government corporations and agencies | 1,207,172 |  |  |  |  | 1,207,172 |  |  |
Obligations of states and political subdivisions | 258,669 |  |  |  |  | 258,669 |  |  |
Corporate bonds | 5,505 |  |  |  |  | 5,505 |  |  |
Asset backed securities | 369,729 |  |  |  |  | 369,729 |  |  |
Non-agency mortgage backed securities | 333,262 |  |  |  |  | 333,262 |  |  |
Loans held for sale | 644 |  |  |  |  | 644 |  |  |
Mortgage servicing rights | 6,792 |  |  |  |  |  |  | 6,792 |
Total assets measured at fair value | $ | 2,184,290 |  |  | $ | 2,517 |  |  | $ | 2,174,981 |  |  | $ | 6,792 |
Fair value at December 31, 2022 | Total |  | Level 1 |  | Level 2 |  | Level 3
Marketable equity securities | $ | 2,598 |  |  | $ | 2,598 |  |  | $ | — |  |  | $ | — |
Debt securities available for sale: |  |  |  |  |  |  |
Obligations of U.S. government corporations and agencies | 1,372,769 |  |  | — |  |  | 1,372,769 |  |  | — |
Obligations of states and political subdivisions | 293,205 |  |  | — |  |  | 293,205 |  |  | — |
Corporate bonds | 5,751 |  |  | — |  |  | 5,751 |  |  | — |
Asset backed securities | 439,767 |  |  | — |  |  | 439,767 |  |  | — |
Non-agency mortgage backed securities | 340,946 |  |  |  |  | 340,946 |  |  |
Loans held for sale | 1,846 |  |  | — |  |  | 1,846 |  |  | — |
Mortgage servicing rights | 6,712 |  |  | — |  |  | — |  |  | 6,712 |
Total assets measured at fair value | $ | 2,463,594 |  |  | $ | 2,598 |  |  | $ | 2,454,284 |  |  | $ | 6,712 |
Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally corresponds with the Company’s quarterly valuation process. There were no transfers between any levels during the nine months ended September 30, 2023 or the year ended December 31, 2022. The following table provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the time periods indicated. Had there been any transfer into or out of Level 3 during the time periods indicated, the amount included in the “Transfers into (out of) Level 3” column would represent the beginning balance of an item in the period (interim quarter) during which it was transferred (in thousands):
Three months ended September 30, | Beginning Balance |  | Transfers into (out of) Level 3 |  | Change Included in Earnings |  | Issuances |  | Ending Balance
2023: Mortgage servicing rights | $ | 6,741 |  |  | — |  |  | $ | (91) |  |  | $ | 142 |  |  | $ | 6,792 |
2022: Mortgage servicing rights | $ | 6,667 |  |  | — |  |  | $ | 33 |  |  | $ | 98 |  |  | $ | 6,798 |
Nine months ended September 30, | Beginning Balance |  | Transfers into (out of) Level 3 |  | Change Included in Earnings |  | Issuances |  | Ending Balance
2023: Mortgage servicing rights | $ | 6,712 |  |  |  |  | $ | (215) |  |  | $ | 295 |  |  | $ | 6,792 |
2022: Mortgage servicing rights | $ | 5,874 |  |  | — |  |  | $ | 443 |  |  | $ | 481 |  |  | $ | 6,798 |
The key unobservable inputs used in determining the fair value of mortgage servicing rights are mortgage prepayment speeds and the discount rate used to discount cash projected cash flows. Generally, any significant increases in the mortgage prepayment speed and discount rate utilized in the fair value measurement of the mortgage servicing rights will result in a negative fair value adjustments (and decrease in the fair value measurement). Conversely, a decrease in the mortgage prepayment speed and discount rate will result in a positive fair value adjustment (and increase in the fair value measurement). The following table presents quantitative information about recurring Level 3 fair value measurements at September 30, 2023 and December 31, 2022:
As of September 30, 2023: | Fair Value (in thousands) |  | Valuation Technique |  | Unobservable Inputs |  | Range, Weighted Average
Mortgage Servicing Rights | $ | 6,792 |  |  | Discounted cash flow |  | Constant prepayment rate |  | 6% - 12%; 7.0%
|  |  |  |  | Discount rate |  | 10% - 14%; 12%
As of December 31, 2022: |  |  |  |  |  |  |
Mortgage Servicing Rights | $ | 6,712 |  |  | Discounted cash flow |  | Constant prepayment rate |  | 7% - 13.6%; 7.6%
|  |  |  |  | Discount rate |  | 10% - 14%; 12%
The tables below present the recorded investment in assets and liabilities measured at fair value on a nonrecurring basis, as of the dates indicated, that had a write-down or an additional allowance provided during the periods indicated (in thousands):
September 30, 2023 | Total |  | Level 1 |  | Level 2 |  | Level 3
Fair value: |  |  |  |  |  |  |
Individually evaluated loans | $ | 5,619 |  |  | — |  |  | — |  |  | $ | 5,619 |
Foreclosed assets | 175 |  |  | — |  |  | — |  |  | 175 |
Total assets measured at fair value | $ | 5,794 |  |  | $ | — |  |  | $ | — |  |  | $ | 5,794 |
December 31, 2022 | Total |  | Level 1 |  | Level 2 |  | Level 3
Fair value: |  |  |  |  |  |  |
Individually evaluated loans | $ | 5,719 |  |  | — |  |  | — |  |  | $ | 5,719 |
Foreclosed assets | 311 |  |  | — |  |  | — |  |  | 311 |
Total assets measured at fair value | $ | 6,030 |  |  | — |  |  | — |  |  | $ | 6,030 |
The tables below present the (losses) gains resulting from non-recurring fair value adjustments of assets and liabilities for the periods indicated (in thousands):
| Three months ended September 30, |  | Nine months ended September 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Individually evaluated loans | $ | 4,749 |  |  | $ | (1,567) |  |  | $ | (2,281) |  |  | $ | (2,182) |
Foreclosed assets | (41) |  |  | 13 |  |  | (233) |  |  | 111 |
Total losses from non-recurring measurements | $ | 4,708 |  |  | $ | (1,554) |  |  | $ | (2,514) |  |  | $ | (2,071) |
The individually evaluated loan amounts above represent collateral dependent loans that have been adjusted to fair value. When the Company identifies a collateral dependent loan with unique risk characteristics, the Company evaluates the need for an allowance using the current fair value of the collateral, less selling costs. Depending on the characteristics of a loan, the fair value of collateral is generally estimated by obtaining external appraisals. If the Company determines that the value of the loan is less than the recorded investment in the loan, the Company recognizes this impairment and adjust the carrying value of the loan to fair value through the allowance for credit losses. The loss represents charge-offs or impairments on collateral dependent loans for fair value adjustments based on the fair value of collateral. The carrying value of loans fully charged-off is zero. The foreclosed assets amount above represents impaired real estate that has been adjusted to fair value. Foreclosed assets represent real estate which the Company has taken control of in partial or full satisfaction of loans. At the time of foreclosure, other real estate owned is recorded at fair value less costs to sell, which becomes the property’s new basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for credit losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Fair value adjustments on other real estate owned are recognized within net loss on real estate owned. The loss represents impairments on real estate owned for fair value adjustments based on the fair value of the real estate. The Company’s property appraisals are primarily based on the sales comparison approach and income approach methodologies, which consider recent sales of comparable properties, including their income generating characteristics, and then make adjustments to reflect the general assumptions that a market participant would make when analyzing the property for purchase. These adjustments may increase or decrease an appraised value and can vary significantly depending on the location, physical characteristics and income producing potential of each property. Additionally, the quality and volume of market information available at the time of the appraisal can vary from period to period and cause significant changes to the nature and magnitude of comparable sale adjustments. Given these variations, comparable sale adjustments are generally not a reliable indicator for how fair value will increase or decrease from period to period. Under certain circumstances, management discounts are applied based on specific characteristics of an individual property. The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at September 30, 2023:
September 30, 2023 | Fair Value (in thousands) |  | Valuation Technique |  | Unobservable Inputs |  | Range, Weighted Average
Individually evaluated loans | $ | 5,619 |  |  | Sales comparison approach Income approach |  | Adjustment for differences between comparable sales; Capitalization rate |  | Not meaningful N/A
Foreclosed assets (Commerical real estate) | $ | 175 |  |  | Income Approach |  | Capitalization rate |  | Not meaningful N/A
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at December 31, 2022:
December 31, 2022 | Fair Value (in thousands) |  | Valuation Technique |  | Unobservable Inputs |  | Range, Weighted Average
Individually evaluated loans | $ | 5,719 |  |  | Sales comparison approach Income approach |  | Adjustment for differences between comparable sales; Capitalization rate |  | Not meaningful N/A
Foreclosed assets (Residential real estate) | $ | 311 |  |  | Sales comparison approach |  | Adjustment for differences between comparable sales |  | Not meaningful N/A
Fair values for financial instruments are management’s estimates of the values at which the instruments could be exchanged in a transaction between willing parties. The Company uses the exit price notion when measuring the fair value of financial instruments. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, other significant assets are not considered financial assets including, any mortgage banking operations, deferred tax assets, and premises and equipment. Further, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered in any of these estimates.
| September 30, 2023 |  | December 31, 2022
(in thousands) | Carrying Amount |  | Fair Value |  | Carrying Amount |  | Fair Value
Financial assets: |  |  |  |  |  |  |
Level 1 inputs: |  |  |  |  |  |  |
Cash and due from banks | $ | 75,332 |  |  | $ | 75,332 |  |  | $ | 96,323 |  |  | $ | 96,323 |
Cash at Federal Reserve and other banks | 35,767 |  |  | 35,767 |  |  | 10,907 |  |  | 10,907 |
Level 2 inputs: |  |  |  |  |  |  |
Securities held to maturity | 139,058 |  |  | 124,058 |  |  | 160,983 |  |  | 149,938 |
Restricted equity securities | 17,250 |  |  | N/A |  | 17,250 |  |  | N/A
Level 3 inputs: |  |  |  |  |  |  |
Loans, net | 6,592,854 |  |  | 6,230,247 |  |  | 6,344,767 |  |  | 6,153,155 |
Financial liabilities: |  |  |  |  |  |  |
Level 2 inputs: |  |  |  |  |  |  |
Deposits | 8,009,643 |  |  | 8,001,633 |  |  | 8,329,013 |  |  | 8,321,517 |
Other borrowings | 537,975 |  |  | 537,975 |  |  | 264,605 |  |  | 264,605 |
Level 3 inputs: |  |  |  |  |  |  |
Junior subordinated debt | 101,080 |  |  | 93,600 |  |  | 101,040 |  |  | 92,613 |
(in thousands) | Contract Amount |  | Fair Value |  | Contract Amount |  | Fair Value
Off-balance sheet: |  |  |  |  |  |  |
Level 3 inputs: |  |  |  |  |  |  |
Commitments | $ | 2,268,288 |  |  | $ | 22,683 |  |  | $ | 2,188,560 |  |  | $ | 21,886 |
Standby letters of credit | 38,730 |  |  | 387 |  |  | 26,599 |  |  | 266 |
Overdraft privilege commitments | 124,392 |  |  | 1,244 |  |  | 126,634 |  |  | 1,266 |

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2 -Publisher FASB -URI https://asc.fasb.org//1943274/2147482106/820-10-50-2 + Details
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