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FAIR VALUE OF FINANCIAL INSTRUMENTS
 9 Months Ended
Sep. 30, 2023
Fair Value Disclosures [Abstract]  
FAIR VALUE OF FINANCIAL INSTRUMENTS FAIR VALUE OF FINANCIAL INSTRUMENTS
Recurring Basis
The Company uses fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Additional information on fair value measurements is summarized in Note 1 to the Company’s annual consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 8, 2023. There were no transfers between levels during the three and nine months ended September 30, 2023 and 2022. The Company’s policy for determining transfers between levels occurs at the end of the reporting period when circumstances in the underlying valuation criteria change and result in transfer between levels.
The following tables present the balances of the assets measured at fair value on a recurring basis:
September 30, 2023
(dollars in thousands)Level 1
Inputs		Level 2
Inputs		Level 3
Inputs		Total
Fair Value
Debt securities available-for-sale:
U.S. Treasury$154,394 $— $— $154,394 
U.S. government agency— 50,715 — 50,715 
Municipal— 195,201 — 195,201 
Mortgage-backed:
Agency residential— 177,050 — 177,050 
Agency commercial— 124,329 — 124,329 
Corporate— 51,474 — 51,474 
Equity securities with readily determinable fair values3,106 — — 3,106 
Mortgage servicing rights— — 20,156 20,156 
Derivative financial assets— 10,188 — 10,188 
Derivative financial liabilities— 9,674 — 9,674 
December 31, 2022
(dollars in thousands)Level 1
Inputs		Level 2
Inputs		Level 3
Inputs		Total
Fair Value
Debt securities available-for-sale:
U.S. Treasury$154,515 $— $— $154,515 
U.S. government agency— 55,157 — 55,157 
Municipal— 243,829 — 243,829 
Mortgage-backed:
Agency residential— 195,441 — 195,441 
Agency commercial— 132,888 — 132,888 
Corporate— 61,694 — 61,694 
Equity securities with readily determinable fair values3,029 — — 3,029 
Mortgage servicing rights— — 10,147 10,147 
Derivative financial assets— 7,610 — 7,610 
Derivative financial liabilities— 6,981 — 6,981 
The following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy. There were no changes to the valuation techniques from December 31, 2022 to September 30, 2023.
Investment Securities
When available, the Company uses quoted market prices to determine the fair value of securities; such items are classified in Level 1 of the fair value hierarchy. For the Company’s securities where quoted prices are not available for identical securities in an active market, the Company determines fair value utilizing vendors who apply matrix pricing for similar bonds where no price is observable or may compile prices from various sources. These models are primarily industry-standard models that consider various assumptions, including time value, yield curve, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace. Fair values from these models are verified, where possible, against quoted market prices for recent trading activity of assets with similar characteristics to the security being valued. Such methods are generally classified as Level 2; however, when prices from independent sources vary, cannot be obtained or cannot be corroborated, a security is generally classified as Level 3. The change in fair value of debt securities available-for-sale is recorded through an adjustment to the consolidated statement of comprehensive income (loss). The change in fair value of equity securities with readily determinable fair values is recorded through an adjustment to the consolidated statement of income.
Derivative Financial Instruments
Interest rate swap agreements are carried at fair value as determined by dealer valuation models. Based on the inputs used, the derivative financial instruments subjected to recurring fair value adjustments are classified as Level 2. For derivative financial instruments designated as hedging instruments, the change in fair value is recorded through an adjustment to the consolidated statement of comprehensive income (loss). For derivative financial instruments not designated as hedging instruments, the change in fair value is recorded through an adjustment to the consolidated statement of income.
Mortgage Servicing Rights
The Company has elected to record its mortgage servicing rights at fair value. Mortgage servicing rights do not trade in an active market with readily observable prices. Accordingly, the Company determines the fair value of mortgage servicing rights by estimating the fair value of the future cash flows associated with the mortgage loans being serviced as calculated by an independent third party. Key economic assumptions used in measuring the fair value of mortgage servicing rights include, but are not limited to, prepayment speeds and discount rates. Due to the nature of the valuation inputs, mortgage servicing rights are classified as Level 3. The change in fair value is recorded through an adjustment to the consolidated statement of income.
The following tables present additional information about the unobservable inputs used in the fair value measurement of the mortgage servicing rights (dollars in thousands):
September 30, 2023Fair ValueValuation TechniqueUnobservable InputsRange
(Weighted Average)
Mortgage servicing rights$20,156 Discounted cash flowsConstant pre-payment rates (CPR)
6.5% to 41.5% (8.2%)
Discount rate
9.0% to 45.9% (9.8%)
December 31, 2022Fair ValueValuation TechniqueUnobservable InputsRange
(Weighted Average)
Mortgage servicing rights$10,147 Discounted cash flowsConstant pre-payment rates (CPR)
5.3% to 59.7% (8.2%)
Discount rate
9.0% to 11.7% (9.3%)
Nonrecurring Basis
Certain assets are measured at fair value on a nonrecurring basis. These assets are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as there is evidence of impairment or a change in the amount of previously recognized impairment.
The following tables present the balances of the assets measured at fair value on a nonrecurring basis:
September 30, 2023
(dollars in thousands)Level 1
Inputs		Level 2
Inputs		Level 3
Inputs		Total
Fair Value
Loans held for sale$— $3,563 $— $3,563 
Collateral-dependent loans— — 31,484 31,484 
Bank premises held for sale— — 35 35 
Foreclosed assets— — 1,519 1,519 
December 31, 2022
(dollars in thousands)Level 1
Inputs		Level 2
Inputs		Level 3
Inputs		Total
Fair Value
Loans held for sale$— $615 $— $615 
Collateral-dependent loans— — 17,460 17,460 
Bank premises held for sale— — 235 235 
Foreclosed assets— — 3,030 3,030 
Loans Held for Sale
Mortgage loans originated and held for sale are carried at the lower of cost or estimated fair value. The Company obtains quotes or bids on these loans directly from purchasing financial institutions. Typically, these quotes include a premium on the sale and thus these quotes indicate fair value of the held for sale loans is greater than cost.
Collateral-Dependent Loans
In accordance with the provisions of the loan impairment guidance, impairment was measured for loans with respect to which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. The fair value of collateral-dependent impaired loans is estimated based on the fair value of the underlying collateral supporting the loan. Collateral-dependent loans require classification in the fair value hierarchy. Impaired loans include loans acquired with deteriorated credit quality. Collateral values are estimated using Level 3 inputs based on customized discounting criteria.
Bank Premises Held for Sale
Bank premises held for sale are recorded at the lower of cost or fair value, less estimated selling costs, at the date classified as held for sale. Values are estimated using Level 3 inputs based on appraisals and customized discounting criteria. The carrying value of bank premises held for sale is not re-measured to fair value on a recurring basis but is subject to fair value adjustments when the carrying value exceeds the fair value, less estimated selling costs.
Foreclosed Assets
Foreclosed assets are recorded at fair value based on property appraisals, less estimated selling costs, at the date of the transfer. Subsequent to the transfer, foreclosed assets are carried at the lower of cost or fair value, less estimated selling costs. Values are estimated using Level 3 inputs based on appraisals and customized discounting criteria. The carrying value of foreclosed assets is not re-measured to fair value on a recurring basis but is subject to fair value adjustments when the carrying value exceeds the fair value, less estimated selling costs.
Collateral-Dependent Loans, Bank Premises Held for Sale, and Foreclosed Assets
The estimated fair value of collateral-dependent loans, bank premises held for sale, and foreclosed assets is based on the appraised fair value of the collateral, less estimated costs to sell. Collateral-dependent loans, bank premises held for sale, and foreclosed assets are classified within Level 3 of the fair value hierarchy.
The Company considers the appraisal or a similar evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals or a similar evaluation of the collateral underlying collateral-dependent loans and foreclosed assets are obtained at the time a loan is first considered impaired or a loan is transferred to foreclosed assets. Appraisals or a similar evaluation of bank premises held for sale are obtained when first classified as held for sale. Appraisals or similar evaluations are obtained subsequently as deemed necessary by management but at least annually on foreclosed assets and bank premises held for sale. Appraisals are reviewed for accuracy and consistency by management. Appraisals are performed by individuals selected from the list of approved appraisers maintained by management. The appraised values are reduced by estimated costs to sell. These discounts and estimates are developed by management by comparison to historical results.
The following tables present quantitative information about unobservable inputs used in nonrecurring Level 3 fair value measurements (dollars in thousands):
September 30, 2023Fair
Value		Valuation
Technique		Unobservable InputsRange
(Weighted Average)
Collateral-dependent loans$31,484 Appraisal of collateralAppraisal adjustmentsNot meaningful
Bank premises held for sale35 AppraisalAppraisal adjustments
7% (7%)
Foreclosed assets1,519 AppraisalAppraisal adjustments
7% (7%)
December 31, 2022
Fair Value
Valuation Technique
Unobservable Inputs
Range
(Weighted Average)
Collateral-dependent loans$17,460 Appraisal of collateralAppraisal adjustmentsNot meaningful
Bank premises held for sale235 AppraisalAppraisal adjustments
7% (7%)
Foreclosed assets3,030 AppraisalAppraisal adjustments
7% (7%)
Other Fair Value Methods
The following methods and assumptions were used by the Company in estimating fair value disclosures of its other financial instruments. There were no changes in the methods and significant assumptions used to estimate the fair value of these financial instruments.
Cash and Cash Equivalents
The carrying amounts of these financial instruments approximate their fair values.
Restricted Stock
The carrying amount of FHLB stock approximates fair value based on the redemption provisions of the FHLB.
Loans
The fair value estimation process for the loan portfolio uses an exit price concept and reflects discounts the Company believes are consistent with discounts in the marketplace. Fair values are estimated for portfolios of loans with similar characteristics. Loans are segregated by type such as commercial and industrial, agricultural and farmland, commercial real estate - owner occupied, commercial real estate - non-owner occupied, multi-family, construction and land development, one-to-four family residential, and municipal, consumer, and other. The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for similar maturities. The fair value analysis also includes other assumptions to estimate fair value, intended to approximate those a market participant would use in an orderly transaction, with adjustments for discount rates, interest rates, liquidity, and credit spreads, as appropriate.
Investments in Unconsolidated Subsidiaries
The fair values of the Company’s investments in unconsolidated subsidiaries are presumed to approximate carrying amounts.
Time Deposits
Fair values of certificates of deposit with stated maturities have been estimated using the present value of estimated future cash flows discounted at rates currently offered for similar instruments. Time deposits also include public funds time deposits.
Securities Sold Under Agreements to Repurchase
The fair values of repurchase agreements with variable interest rates are presumed to approximate their recorded carrying amounts.
Subordinated Notes
The fair values of subordinated notes are estimated using discounted cash flow analyses based on rates observed on recent debt issuances by other financial institutions.
Junior Subordinated Debentures
The fair values of subordinated debentures are estimated using discounted cash flow analyses based on rates observed on recent debt issuances by other financial institutions.
Accrued Interest
The carrying amounts of accrued interest approximate fair value.
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair values have been estimated using data which management considered the best available and estimation methodologies deemed suitable for the pertinent category of financial instrument.
The following table provides summary information on the carrying amounts and estimated fair values of the Company’s financial instruments:
(dollars in thousands)Fair Value
Hierarchy
Level		September 30, 2023December 31, 2022
Carrying
Amount		Estimated
Fair Value		Carrying
Amount		Estimated
Fair Value
Financial assets:
Cash and cash equivalentsLevel 1$111,913 $111,913 $114,159 $114,159 
Debt securities held-to-maturityLevel 2527,144 450,313 541,600 478,801 
Restricted stockLevel 311,165 11,165 7,965 7,965 
Loans, netLevel 33,303,923 3,252,850 2,594,920 2,566,930 
Investments in unconsolidated subsidiariesLevel 31,614 1,614 1,165 1,165 
Accrued interest receivableLevel 223,447 23,447 19,506 19,506 
Financial liabilities:
Time depositsLevel 3679,607 668,960 262,968 253,619 
Securities sold under agreements to repurchaseLevel 228,900 28,900 43,081 43,081 
Subordinated notesLevel 339,454 36,852 39,395 37,205 
Junior subordinated debenturesLevel 352,774 43,600 37,780 37,030 
Accrued interest payableLevel 23,707 3,707 1,363 1,363 
The Company estimated the fair value of lending related commitments as described in Note 15 to be immaterial based on limited interest rate exposure due to their variable nature, short-term commitment periods and termination clauses provided in the agreements.