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FAIR VALUE
 12 Months Ended
Dec. 31, 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 financial 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. All of the Company’s investment securities are classified as available-for-sale.
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 December 31, 2023 or 2022.
Level 1Level 2Level 3
Total Fair
Value
Measurements
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 
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 
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 December 31, 2023 and 2022. 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 loans held-for-sale were 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 $1.5 million and $1.2 million as of December 31, 2023 and 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 December 31, 2023. An increase or decrease of 5% in the pull through assumption would result in a positive or negative change of $3 thousand in the fair value of interest rate lock commitments at December 31, 2023.
The following provides details of the Level 3 fair value measurement activity for the years ended December 31, 2023 or 2022.
Investment securities:
20232022
Balance, beginning of year$27,193 $23,147 
Unrealized gains (losses) included in OCI
358 (1,859)
Purchases871 21,237 
Net discount accretion62 56 
Principal payments and other(631)(10)
Sales— (3,053)
Calls— (12,154)
OTTI— (171)
Balance, end of year$27,853 $27,193 
There were no transfers into or out of Level 3 at December 31, 2023 and 2022.
Interest rate lock commitments on residential mortgages:
20232022
Balance, beginning of year$35 $353 
Total gains (losses) included in earnings
20 (318)
Balance, end of year$55 $35 

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 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 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 a decline of $332 thousand, zero and $247 thousand for the years ended December 31, 2023, 2022 and 2021, respectively.
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 both December 31, 2023 and 2022, the MSR impairment reserve was zero for both periods. For the years ended December 31, 2023 and 2022, an impairment valuation allowance reversal of zero and $79 thousand were included, respectively, in mortgage banking activities on the consolidated statement of income, due to increases in market rates, due to increases in market rates, which increased the MSR's fair value.
The following table summarizes assets measured at fair value on a nonrecurring basis at December 31, 2023 and 2022.
Level 1Level 2Level 3
Total
Fair Value
Measurements
December 31, 2023
Individually evaluated loans
Commercial real estate:
Owner-occupied$— $— $75 $75 
Non-owner occupied residential— — — — 
Commercial and industrial— — 164 164 
Residential mortgage:
First lien— — 219 219 
Home equity - lines of credit— — 56 56 
Total impaired loans$— $— $514 $514 
December 31, 2022
Impaired loans
Commercial real estate:
Owner-occupied$— $— $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 Input
Range
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
3.3% - 12.3% 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 the carrying amounts and estimated fair values of financial assets and liabilities at December 31, 2023, and 2022.
Carrying
Amount
Fair ValueLevel 1Level 2Level 3
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 credit 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 repurchase and federal funds purchased 9,785 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— — — — — 
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 repurchase and federal funds purchased17,251 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 December 31, 2023 and 2022 represents 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.