XML 31 R21.htm IDEA: XBRL DOCUMENT v3.23.3
FAIR VALUE
 9 Months Ended
Sep. 30, 2023
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 discounted cash flow. 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 available-for-sale.
The fair values of interest rate swaps 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, 2023 and December 31, 2022:
Level 1Level 2Level 3Total Fair
Value
Measurements
September 30, 2023
Financial Assets
Investment securities:
U.S. Treasury securities$17,143 $— $— $17,143 
U.S. Government Agencies— 4,322 — 4,322 
States and political subdivisions— 182,522 5,595 188,117 
GSE residential MBSs— 57,351 — 57,351 
GSE commercial MBSs— 4,778 — 4,778 
GSE residential CMOs— 72,037 — 72,037 
Non-agency CMOs— 17,521 21,458 38,979 
Asset-backed— 112,315 — 112,315 
Other120 — — 120 
Loans held for sale— 6,448 — 6,448 
Derivatives— 16,553 15 16,568 
Totals$17,263 $473,847 $27,068 $518,178 
Financial Liabilities
Derivatives$— $14,328 $— $14,328 
December 31, 2022
Financial Assets
Investment securities:
U.S. Treasury securities$17,291 $— $— $17,291 
U.S. Government Agencies— 5,135 — 5,135 
States and political subdivisions— 191,488 5,926 197,414 
GSE residential MBSs— 59,402 — 59,402 
GSE residential CMOs— 68,378 — 68,378 
Non-agency CMOs— 18,491 21,267 39,758 
Asset-backed— 125,973 — 125,973 
Other377 — — 377 
Loans held for sale— 10,880 — 10,880 
Derivatives— 10,482 35 10,517 
Totals$17,668 $490,229 $27,228 $535,125 
Financial Liabilities
Derivatives$— $11,333 $— $11,333 
The Company had one municipal bond and three CMOs measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at both September 30, 2023 and December 31, 2022 compared to one municipal bond at September 30, 2022. During the nine months ended September 30, 2022, the Company had one non-agency CMO security called by the issuer. 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 below the aggregate principal balance by $1.4 million and $1.2 million as of September 30, 2023, and December 31, 2022, respectively.
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, 2023. An increase or decrease of 5% in the pull through assumption would result in a positive or negative change of $1 thousand in the fair value of interest rate lock commitments at September 30, 2023.
The following provides details of the Level 3 fair value measurement activity for the periods ended September 30, 2023 and 2022:
Investment securities:
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Balance, beginning of period$27,994 $6,255 $27,193 $23,147 
Unrealized losses included in OCI(736)(422)(600)(2,002)
Purchases— — 871 — 
Net discount accretion (premium amortization)19 (4)42 62 
Principal payments and other(225)— (454)— 
Sales— — — (3,053)
Calls— — — (12,154)
OTTI— — — (171)
Balance, end of period$27,052 $5,829 $27,052 $5,829 

Interest rate lock commitments on residential mortgages:
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Balance, beginning of period$67 $186 $35 $353 
Total losses included in earnings(52)(98)(20)(265)
Balance, end of period$15 $88 $15 $88 
Certain financial assets are measured at fair value on a nonrecurring basis. Adjustments to the fair value of these assets usually results 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.
Individually Evaluated Loans
Upon adoption of CECL, loans individually evaluated for credit expected losses included 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 income. Prior to the adoption of CECL and ASU No. 2022-02, which eliminated the TDR accounting model, loans were designated as impaired when, in the judgment of management and based on current information and events, it is probable that all amounts due, according to the contractual terms of the loan agreement, will not be collected.
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 discounted cash flows. 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 a decline of $224 thousand and an increase of $286 thousand for the three and nine months ended September 30, 2023, respectively, compared to zero and a decline of $40 thousand for the three and nine months ended September 30, 2022, respectively.
Mortgage Servicing Rights
MSRs are evaluated for impairment by comparing the carrying value to the fair value, which is determined through a discounted cash flow 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, 2023 and December 31, 2022, the MSR impairment reserve was zero for both periods. For both the three months ended September 30, 2023 and 2022, there was no impairment valuation allowance adjustment. The adjustments in the three and nine months ended September 30, 2022 were zero and a $79 thousand reversal, respectively, due to increases in market rates, which increased the MSR fair value.
The following table summarizes assets measured at fair value on a nonrecurring basis at September 30, 2023 and December 31, 2022:
Level 1Level 2Level 3Total
Fair Value
Measurements
September 30, 2023
Individually Evaluated Loans
Commercial real estate:
Owner occupied$— $— $88 $88 
Non-owner occupied residential— — — — 
Commercial and industrial— — 146 146 
Residential mortgage:
First lien— — 226 226 
Home equity - lines of credit— — 62 62 
Total individually evaluated loans$— $— $522 $522 
December 31, 2022
Impaired Loans
Commercial real estate:
Owner occupied$— $— $116 $116 
Non-owner occupied residential— — 9 9 
Residential mortgage:
First lien— — 309 309 
Home equity - lines of credit— — 86 86 
Total impaired loans$— $— $520 $520 
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, 2023
Individually evaluated loans$522 Appraisal of collateralManagement adjustments on appraisals for property type and recent activity
10% - 25% discount
 - Management adjustments for liquidation expenses
6.75% - 10.29% discount
December 31, 2022
Impaired loans$520 Appraisal of collateralManagement adjustments on appraisals for property type and recent activity
10% - 25% discount
 - Management adjustments for liquidation expenses
6.08% - 17.93% 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, 2023 and December 31, 2022:
Carrying
Amount		Fair ValueLevel 1Level 2Level 3
September 30, 2023
Financial Assets
Cash and due from banks$34,728 $34,728 $34,728 $— $— 
Interest-bearing deposits with banks60,211 60,211 60,211 — — 
Restricted investments in bank stock12,987 n/an/an/an/a
Investment securities495,162 495,162 17,263 450,846 27,053 
Loans held for sale6,448 6,448 — 6,448 — 
Loans, net of allowance for credit losses2,238,558 2,083,811 — — 2,083,811 
Derivatives16,568 16,568 — 16,553 15 
Accrued interest receivable12,212 12,212 — 4,338 7,874 
Financial Liabilities
Deposits2,546,435 2,542,571 — 2,542,571 — 
Deposits held for assumption in connection with sale of bank branches— — — — — 
Securities sold under agreements to repurchase and federal funds purchased17,991 17,991 — 17,991 — 
FHLB advances and other borrowings157,250 156,513 — 156,513 — 
Subordinated notes32,076 28,774 — 28,774 — 
Derivatives14,328 14,328 — 14,328 — 
Accrued interest payable1,783 1,783 — 1,783 — 
Off-balance sheet instruments— — — — — 
December 31, 2022
Financial Assets
Cash and due from banks$28,477 $28,477 $28,477 $— $— 
Interest-bearing deposits with banks32,346 32,346 32,346 — — 
Restricted investments in bank stock10,642 n/an/an/an/a
Investment securities513,728 513,728 17,668 468,867 27,193 
Loans held for sale10,880 10,880 — 10,880 — 
Loans, net of allowance for loan losses2,126,054 1,991,164 — — 1,991,164 
Derivatives10,517 10,517 — 10,482 35 
Accrued interest receivable11,027 11,027 — 4,441 6,586 
Financial Liabilities
Deposits2,444,939 2,440,660 — 2,440,660 — 
Deposits held for assumption in connection with sale of bank branches31,307 29,429 — 29,429 — 
Securities sold under agreements to repurchase17,251 17,251 — 17,251 — 
FHLB advances and other borrowings106,139 106,141 — 106,141 — 
Subordinated notes32,026 31,321 — 31,321 — 
Derivatives11,333 11,333 — 11,333 — 
Accrued interest payable457 457 — 457 — 
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, 2023 and December 31, 2022 represent an approximation of exit price; however, an actual exit price may differ. At December 31, 2022, deposits held for assumption in connection with the sale of bank branches includes the balance from the Purchase and Assumption Agreement entered into by the Company and announced on December 23, 2022. This agreement provided for the sale of a branch and associated deposit liabilities at an agreed upon premium of 6.0% of the financial deposit balance transferred. The Company completed the sale of the subject branch on May 12, 2023.