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Fair Value | 9 Months Ended
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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. There are three levels of inputs that may be used to measure fair values: Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 – Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument: Investment Securities: The Company uses a third party service to estimate fair value on available for sale securities on a monthly basis. The Company’s service provider uses a leading evaluation pricing service for U.S. domestic fixed income securities and values securities using exit pricing requirements. The Company independently corroborates the fair value received through this pricing service by obtaining the pricing through a second source. The fair values for investment securities, which consist of equity securities that are recorded at fair market value to comply with exit pricing, are determined by quoted market prices in active markets, if available (Level 1). The equity securities change in fair market value is recorded in the income statements. For securities where quoted prices are not available, fair values are calculated based on quoted prices for similar assets in active markets, quoted prices for similar assets in markets that are not active or inputs other than quoted prices, which provide a reasonable basis for fair value determination. Such inputs may include interest rates and yield curves, prepayment speeds, credit risks and default rates. Inputs used are derived principally from observable market data (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). The fair values of Level 3 investment securities are determined by using unobservable inputs to measure fair value of assets for which there is little, if any, market activity at the measurement date, using reasonable inputs and assumptions based on the best information at the time, to the extent that inputs are available without undue cost and effort. Mortgage Banking Derivatives: The fair value of mortgage banking derivatives are calculated using derivative valuation models that utilize quoted prices for similar assets adjusted for the specific attributes of the commitments and other observable market data at the valuation date. (Level 2). Interest Rate Swaps: The Company periodically enters into interest rate swap agreements with its commercial customers who desire a fixed rate loan term that is longer than the Company is willing to extend. The Company enters into a reciprocal swap agreement with a third party that offsets the interest rate risk from the interest rate extended to the customer. The fair value of these interest rate swap derivative instruments are based on valuation models using observable market data as of the measurement date. The loan agreement containing a two-way yield maintenance provision, if invoked, is expected to exactly offset the fair value of unwinding the swap. The yield maintenance provision represents an embedded derivative which is bifurcated from the host loan contract and, as such, the swaps and embedded derivatives are not designated as hedges (Level 2). The Company also entered into a fair value hedge to mitigate the risk of further interest rate increases and the subsequent impact on the valuation of the company’s state and political subdivision municipal bond portfolio. The Company uses an independent third party to perform a market valuation analysis for this derivative (Level 2). Loans Held for Sale: The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification. Collateral Dependent Loans: Fair value estimates of collateral dependent loans that are individually reviewed are based on the fair value of the collateral, less estimated costs to sell. Loans carried at fair value generally receive specific allocations of the allowance for credit losses in the current period, 2023 and 2022. For collateral dependent loans, fair value is commonly based on recent real estate appraisals or in quoted sales prices in certain instances. Appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Adjustments to quoted price are routinely made to factor in data that affect the marketability of the collateral. Such adjustments, in both instances, are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. These loans are evaluated on a quarterly basis and adjusted accordingly. Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair values are commonly based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Appraisals for both collateral-dependent loans and other real estate owned are performed by certified general appraisers (for commercial and commercial real estate properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Appraisal Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what adjustments should be made to appraisals to arrive at fair value. Assets measured at fair value on a recurring basis are summarized below:
|  |  |  |  | Fair Value Measurements at September 30, 2023 Using: |
(In Thousands of Dollars) |  | Carrying Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Financial Assets |  |  |  |  |  |  |  |  |  |  |  |
Investment securities available-for sale |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and U.S. government sponsored entities |  | $ | 121,311 |  |  | $ | 0 |  |  | $ | 121,311 |  |  | $ | 0 |
State and political subdivisions |  |  | 498,136 |  |  |  | 0 |  |  |  | 498,136 |  |  |  | 0 |
Corporate bonds |  |  | 17,751 |  |  |  | 0 |  |  |  | 16,516 |  |  |  | 1,235 |
Mortgage-backed securities-residential |  |  | 495,041 |  |  |  | 0 |  |  |  | 495,040 |  |  |  | 1 |
Collateralized mortgage obligations |  |  | 75,552 |  |  |  | 0 |  |  |  | 75,552 |  |  |  | 0 |
Small Business Administration |  |  | 2,945 |  |  |  | 0 |  |  |  | 2,945 |  |  |  | 0 |
Equity securities |  |  |  |  |  |  |  |  |  |  |  |
Equity securities at fair value |  |  | 212 |  |  |  | 212 |  |  |  | 0 |  |  |  | 0 |
Other investments measured at net asset value |  |  | 15,043 |  |  | n/a |  |  | n/a |  |  | n/a |
Total investment securities |  | $ | 1,225,991 |  |  | $ | 212 |  |  | $ | 1,209,500 |  |  | $ | 1,236 |
Loans held for sale |  | $ | 1,910 |  |  | $ | 0 |  |  | $ | 1,910 |  |  | $ | 0 |
Interest rate swaps |  |  | 6,234 |  |  | $ | 0 |  |  |  | 6,234 |  |  |  | 0 |
Fair value hedge derivative |  |  | 920 |  |  |  | 0 |  |  |  | 920 |  |  |  | 0 |
Mortgage banking derivative |  |  | 37 |  |  | $ | 0 |  |  |  | 37 |  |  |  | 0 |
Financial Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | 6,234 |  |  | $ | 0 |  |  | $ | 6,234 |  |  | $ | 0 |
|  |  |  |  | Fair Value Measurements at December 31, 2022 Using: |
(In Thousands of Dollars) |  | Carrying Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Financial Assets |  |  |  |  |  |  |  |  |  |  |  |
Investment securities available-for sale |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and U.S. government sponsored entities |  | $ | 128,096 |  |  | $ | 0 |  |  | $ | 128,096 |  |  | $ | 0 |
State and political subdivisions |  |  | 530,080 |  |  |  | 0 |  |  |  | 530,080 |  |  |  | 0 |
Corporate bonds |  |  | 3,879 |  |  |  | 0 |  |  |  | 3,879 |  |  |  | 0 |
Mortgage-backed securities-residential |  |  | 555,142 |  |  |  | 0 |  |  |  | 555,141 |  |  |  | 1 |
Collateralized mortgage obligations |  |  | 47,354 |  |  |  | 0 |  |  |  | 47,354 |  |  |  | 0 |
Small Business Administration |  |  | 3,474 |  |  |  | 0 |  |  |  | 3,474 |  |  |  | 0 |
Equity securities |  |  |  |  |  |  |  |  |  |  |  |
Equity securities at fair value |  |  | 196 |  |  |  | 196 |  |  |  | 0 |  |  |  | 0 |
Other investments measured at net asset value |  |  | 15,048 |  |  | n/a |  |  | n/a |  |  | n/a |
Total investment securities |  | $ | 1,283,269 |  |  | $ | 196 |  |  | $ | 1,268,024 |  |  | $ | 1 |
Loans held for sale |  | $ | 858 |  |  | $ | 0 |  |  | $ | 858 |  |  | $ | 0 |
Interest rate swaps |  |  | 5,503 |  |  |  | 0 |  |  |  | 5,503 |  |  |  | 0 |
Mortgage banking derivative -asset |  |  | 31 |  |  |  | 0 |  |  |  | 31 |  |  |  | 0 |
Financial Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | 5,503 |  |  | $ | 0 |  |  | $ | 5,503 |  |  | $ | 0 |
There were no significant transfers between Level 1 and Level 2 during the periods presented above. The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
|  | Three Months ended September 30, |  |  | Nine Months ended September 30, |
(In Thousands of Dollars) |  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Beginning Balance |  | $ | 1,224 |  |  | $ | 2 |  |  | $ | 1 |  |  | $ | 3 |
Transfers between levels |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Acquired and/or purchased |  |  | 0 |  |  |  | 0 |  |  |  | 1,615 |  |  |  | 0 |
Discount accretion (premium amortization) |  |  | 12 |  |  |  | 0 |  |  |  | 120 |  |  |  | 0 |
Repayments, calls and maturities |  |  | 0 |  |  |  | 0 |  |  |  | (500 | ) |  |  | (1 | )
Ending Balance |  | $ | 1,236 |  |  | $ | 2 |  |  | $ | 1,236 |  |  | $ | 2 |
Assets measured at fair value on a non-recurring basis are summarized below:
|  |  |  |  | Fair Value Measurements at September 30, 2023 Using: |
(In Thousands of Dollars) |  | Carrying Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Financial Assets |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated loans |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |
Non-owner occupied |  | $ | 2,205 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 2,205 |
Commercial and industrial |  |  | 267 |  |  |  | 0 |  |  |  | 0 |  |  |  | 267 |
1–4 family residential |  |  | 1,517 |  |  |  | 0 |  |  |  | 0 |  |  |  | 1,517 |
|  |  |  |  | Fair Value Measurements at December 31, 2022 Using: |
(In Thousands of Dollars) |  | Carrying Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Financial Assets |  |  |  |  |  |  |  |  |  |  |  |
Individually Evaluated loans |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |
Non-owner occupied |  | $ | 746 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 746 |
Commercial |  |  | 395 |  |  |  | 0 |  |  |  | 0 |  |  |  | 395 |
1–4 family residential |  |  | 74 |  |  |  | 0 |  |  |  | 0 |  |  |  | 74 |
Collateral dependent loans were individually evaluated under ASC 326 for the periods ending September 30, 2023 and December 31, 2022. Collateral dependent loans had a principal balance of $5.7 million with a valuation allowance of $1.7 million at September 30, 2023. Collateral dependent loans had a principal balance of $1.6 million with a valuation allowance of $372 thousand at December 31, 2022. For the period ending September 30, 2023, the fair value of the collateral dependent commercial and residential real estate relationships are valued by independent external appraisals. These external appraisals are prepared using the sales comparison approach and income approach valuation techniques. The commercial relationships are valued by the quoted price of the collateral. Management makes subsequent unobservable adjustments on the appraisals for the real estate and the quoted price for the commercial collateral dependent loans. For the year ending December 31, 2022, the fair value of the collateral dependent commercial real estate and commercial relationships are valued by the quoted price of the collateral. Management makes subsequent unobservable adjustments on the quoted price of collateral dependent loans. Collateral dependent loans other than commercial real estate and other real estate owned are not considered material. The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at the periods ended September 30, 2023 and December 31, 2022:
September 30, 2023 | Fair value |  |  | Valuation Technique(s) |  | Unobservable Input(s) |  | Range (Weighted Average)
Individually evaluated loans |  |  |  |  |  |  |  |
Commercial real estate | $ | 2,205 |  |  | Sales Comparison |  | Adjustment for differences between comparable sales |  | (10.67%) - 15.37% (7.28%)
Commercial |  | 267 |  |  | Quoted price for collateral |  | Offer Price |  | 65.47%
Residential |  | 1,517 |  |  | Sales comparison |  | Adjustment for differences between comparable sales |  | (5.39%) - 2.11% (2.67%)
December 31, 2022 | Fair value |  |  | Valuation Technique(s) |  | Unobservable Input(s) |  | Range (Weighted Average)
Individually evaluated loans |  |  |  |  |  |  |  |
Commercial real estate | $ | 746 |  |  | Quoted price for collateral |  | Offer Price |  | 7.45%
Commercial |  | 395 |  |  | Quoted price for collateral |  | Offer Price |  | 43.00%
Residential |  | 74 |  |  | Sales comparison |  | Adjustment for differences between comparable sales |  | (13.77%) - (5.68%) (13.77%)
The carrying amounts and estimated fair values of financial instruments not previously disclosed at September 30, 2023 and December 31, 2022 are as follows:
|  |  |  |  | Fair Value Measurements at September 30, 2023 Using: |
(In Thousands of Dollars) |  | Carrying Amount |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Financial assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 93,923 |  |  | $ | 25,341 |  |  | $ | 68,582 |  |  | $ | 0 |  |  | $ | 93,923 |
Regulatory stock |  |  | 20,087 |  |  | n/a |  |  | n/a |  |  | n/a |  |  | n/a |
Loans, net |  |  | 3,133,801 |  |  |  | 0 |  |  |  | 0 |  |  |  | 2,941,885 |  |  |  | 2,941,885 |
Financial liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 4,511,650 |  |  |  | 3,542,907 |  |  |  | 965,388 |  |  |  | 0 |  |  |  | 4,508,295 |
Long-term borrowings |  |  | 88,550 |  |  |  | 0 |  |  |  | 71,561 |  |  |  | 0 |  |  |  | 71,561 |
|  |  |  |  | Fair Value Measurements at December 31, 2022 Using: |
(In Thousands of Dollars) |  | Carrying Amount |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Financial assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 75,551 |  |  | $ | 21,395 |  |  | $ | 54,156 |  |  | $ | 0 |  |  | $ | 75,551 |
Regulatory stock |  |  | 18,200 |  |  | n/a |  |  | n/a |  |  | n/a |  |  | n/a |
Loans, net |  |  | 2,377,772 |  |  |  | 0 |  |  |  | 0 |  |  |  | 2,330,164 |  |  |  | 2,330,164 |
Financial liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 3,561,768 |  |  |  | 2,999,188 |  |  |  | 561,292 |  |  |  | 0 |  |  |  | 3,560,480 |
Short-term borrowings |  |  | 95,000 |  |  |  | 0 |  |  |  | 95,000 |  |  |  | 0 |  |  |  | 95,000 |
Long-term borrowings |  |  | 88,211 |  |  |  | 0 |  |  |  | 73,566 |  |  |  | 0 |  |  |  | 73,566 |

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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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