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FAIR VALUE MEASUREMENTS

6 Months Ended

Jun. 30, 2024

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

NOTE 9. FAIR VALUE MEASUREMENTS

Recurring Fair Value Measurements

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2024 and December 31, 2023, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:


		June 30, 2024
		Level 1			Level 2			Level 3			Total
(in thousands)		Inputs			Inputs			Inputs			Fair Value
Available for sale securities:
Obligations of US Government-sponsored enterprises		$	—		$	1,650		$	—		$	1,650
Mortgage-backed securities:
US Government-sponsored enterprises			—			182,171			—			182,171
US Government agency			—			86,307			—			86,307
Private label			—			45,731			—			45,731
Obligations of states and political subdivisions thereof			—			106,402			—			106,402
Corporate bonds			—			90,667			—			90,667
Loans held for sale			—			3,897			—			3,897
Derivative assets			—			22,775			161			22,936
Derivative liabilities			—			(20,005)			—			(20,005)


		December 31, 2023
		Level 1			Level 2			Level 3			Total
(in thousands)		Inputs			Inputs			Inputs			Fair Value
Available for sale securities:
Obligations of US Government-sponsored enterprises		$	—		$	1,992		$	—		$	1,992
Mortgage-backed securities:
US Government-sponsored enterprises			—			193,282			—			193,282
US Government agency			—			74,213			—			74,213
Private label			—			59,051			—			59,051
Obligations of states and political subdivisions thereof			—			110,168			—			110,168
Corporate bonds			—			95,868			—			95,868
Loans held for sale			—			2,189			—			2,189
Derivative assets			—			21,775			63			21,838
Derivative liabilities			—			(18,587)			(20)			(18,607)

Securities Available for Sale: All securities and major categories of securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, we obtain fair value measurements from independent pricing providers. The fair value measurements used by the pricing providers consider observable data that may include dealer quotes, market maker quotes and live trading systems. If quoted prices are not readily available, fair values are determined using matrix pricing models, or other model-based valuation techniques requiring observable inputs other than quoted prices such as market pricing spreads, credit information, callable features, cash flows, the US Treasury yield curve, trade execution data, market consensus prepayment speeds, default rates, and the securities’ terms and conditions, among other things.

Loans Held for Sale: The valuation of the Company’s loans held for sale are determined on an individual basis using quoted secondary market prices and are classified as Level 2 measurements.

Derivative Assets and Liabilities

Cash Flow Hedges. The valuation of our cash flow hedges are obtained from a third party. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The inputs used to value the cash flow hedges are all classified as Level 2 measurements.

Interest Rate Lock Commitments. We enter into IRLCs for residential mortgage loans, which commit us to lend funds to potential borrowers at a specific interest rate and within a specified period of time. The estimated fair value of commitments to originate residential mortgage loans for sale is based on quoted prices for similar loans in active markets. However, this value is adjusted by a factor which considers the likelihood of a loan in a lock position will ultimately close. The closing ratio is derived from internal data and is adjusted using significant management judgment. As such, IRLCs are classified as Level 3 measurements.

Forward Sale Commitments. We utilize forward sale commitments as economic hedges against potential changes in the values of the IRLCs and loans originated for sale. The fair values of mandatory delivery loan sale commitments are determined similarly to the IRLCs using quoted prices in the market place that are observable. However, closing ratios included in the calculation are internally generated and are based on management’s judgment and prior experience, which are not considered observable factors. As such, mandatory delivery forward commitments are classified as Level 3 measurements.

Customer Loan Derivatives. The valuation of our customer loan derivatives is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. We incorporate credit valuation adjustments to appropriately reflect our nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of the derivative contracts for the effect of nonperformance risk, we have considered the impact of MNAs and any applicable credit enhancements, such as collateral postings.

Although we have determined that the majority of the inputs used to value customer loan derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and counterparties. However, as of June 30, 2024, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we determined that the derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The table below presents the changes in Level 3 assets and liabilities that were measured at fair value on a recurring basis for the three and six months ended June 30, 2024 and 2023:


		Assets (Liabilities)
		Interest Rate Lock			Forward
(in thousands)		Commitments			Commitments
Three Months Ended June 30, 2024
Balance at beginning of period		$	56		$	(16)
Realized gain recognized in non-interest income			90			31
Balance at end of period		$	146		$	15

Three Months Ended June 30, 2023
Balance at beginning of period		$	8		$	—
Realized gain (loss) recognized in non-interest income			28			49
Balance at end of period		$	36		$	49

Six Months Ended June 30, 2024
Balance at beginning of period		$	63		$	(20)
Realized gain recognized in non-interest income			83			35
Balance at end of period		$	146		$	15

Six Months Ended June 30, 2023
Balance at beginning of period		$	—		$	—
Realized loss recognized in non-interest income			36			49
Balance at end of period		$	36		$	49

Quantitative information about the significant unobservable inputs within Level 3 recurring assets and liabilities is, as follows:


		Fair Value
(in thousands,		June 30,			Valuation		Unobservable		Unobservable
except ratios)		2024			Techniques		Inputs		Input Value
Assets (Liabilities)
Interest Rate Lock Commitment		$	146		Pull-through Rate Analysis		Closing Ratio			93	%
					Pricing Model		Origination Costs, per loan		$	1.7
					Discount Cash Flows		Mortgage Servicing Asset			1.0	%

Forward Commitments			15		Quoted prices for similar loans in active markets		Freddie Mac pricing system			$100 to $102.8
Total		$	161

		Fair Value							Significant
		December 31,			Valuation		Unobservable		Unobservable
(in thousands, except ratios)		2023			Techniques		Inputs		Input Value
Assets (Liabilities)
Interest Rate Lock Commitment		$	63		Pull-through Rate Analysis		Closing Ratio			95	%
					Pricing Model		Origination Costs, per loan		$	1.7
					Discount Cash Flows		Mortgage Servicing Asset			1.0	%

Forward Commitments			(20)		Quoted prices for similar loans in active markets		Freddie Mac pricing system			$100.9 to $103.3
Total		$	43

Non-Recurring Fair Value Measurements

We are required, on a non-recurring basis, to adjust the carrying value or provide valuation allowances for certain assets using fair value measurements in accordance with GAAP. The following is a summary of applicable non-recurring fair value measurements:


											Fair Value
											Measurement Date as of
		Jun 30, 2024			Dec 31, 2023			June 30, 2024			June 30, 2024
		Level 3			Level 3			Total			Level 3
(in thousands)		Inputs			Inputs			Gains (Losses)			Inputs
Assets
Individually evaluated loans		$	2,629		$	3,500		$	(871)		June 2024
Capitalized servicing rights			6,994			6,764			230		June 2024
Premises held for sale			252			1,154			(902)		June 2024
Total		$	9,875		$	11,418		$	(1,543)

There are no liabilities measured at fair value on a non-recurring basis in 2024 and 2023.

Quantitative information about the significant unobservable inputs within Level 3 non-recurring assets is, as follows:


(in thousands, except ratios)		Fair Value June 30, 2024			Valuation Techniques		Unobservable Inputs		Range (Weighted Average)^(a)
Assets
Individually evaluated loans		$	1,752		Fair value of collateral-appraised value		Loss severity			10% to 40%
							Appraised value			$215 to $680

Individually evaluated loans			877		Discount cash flow		Discount rate			3.25% to 4.99%
							Cash flows			$317 to $510

Capitalized servicing rights			6,994		Discounted cash flow		Constant prepayment rate			6.83%
							Discount rate			10.06%

Premises held for sale			252		Fair value of asset less selling costs		Appraised value			$265
							Selling Costs			5%
Total		$	9,875

(a)	Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individual properties.



(in thousands, except ratios)		Fair Value December 31, 2023			Valuation Techniques		Unobservable Inputs		Range (Weighted Average)^(a)
Assets
Individually evaluated loans		$	2,437		Fair value of collateral-appraised value		Loss severity			10% to 43%
							Appraised value			$80 to $965

Individually evaluated loans			1,063		Discount cash flow		Discount rate			3.25% to 7.13%
							Cash flows			$2 to $520

Capitalized servicing rights			6,764		Discounted cash flow		Constant prepayment rate			7.20%
							Discount rate			10.06%

Premises held for sale			1,154		Fair value of asset less selling costs		Appraised value			$1,223
							Selling Costs			6%
Total		$	11,418

(a)	Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individual properties.

There were no Level 1 or Level 2 non-recurring fair value measurements for the periods ended June 30, 2024 and December 31, 2023.

Individually evaluated loans. Loans are generally not recorded at fair value on a recurring basis. Periodically, we record non-recurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Non-recurring adjustments can also include certain impairment amounts for collateral-dependent loans calculated when establishing the ACL. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace. However, the choice of observable data is subject to significant judgment, and there are often adjustments based on judgment in order to make observable data comparable and to consider the impact of time, the condition of properties, interest rates, and other market factors on current values. Additionally, commercial real estate appraisals frequently involve discounting of projected cash flows, which relies inherently on unobservable data. Therefore, non-recurring fair value measurement adjustments relating to real estate collateral have generally been classified as Level 3. Estimates of fair value for other collateral supporting commercial loans are generally based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3.

Capitalized loan servicing rights. A loan servicing right asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing loans exceed adequate compensation for performing the servicing. The fair value of loan servicing rights is estimated using a present value cash flow model. The most important assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Adjustments are only recorded when the discounted cash flows derived from the valuation model are less than the carrying value of the asset. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy.

Other real estate owned (“OREO”). OREO results from the foreclosure process on residential or commercial loans issued by the Company. Upon assuming the real estate, we record the property at the fair value of the asset less the estimated sales costs. Thereafter, OREO properties are recorded at the lower of cost or fair value less the estimated sales costs. OREO fair values are primarily determined based on Level 3 data including sales comparables and appraisals. There was no OREO as of June 30, 2024 and December 31, 2023.

Premises held for sale. Assets held for sale, identified as part of our strategic review and branch optimization exercise, were transferred from premises and equipment at the lower of amortized cost or fair value less the estimated sales costs. Assets held for sale fair values are primarily determined based on Level 3 data including sales comparables and appraisals.

Summary of Estimated Fair Values of Financial Instruments

The estimated fair values, and related carrying amounts, of our financial instruments are included in the table below. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.


		June 30, 2024
		Carrying			Fair
(in thousands)		Amount			Value			Level 1			Level 2			Level 3
Financial Assets
Cash and cash equivalents		$	101,836		$	101,836		$	101,836		$	—		$	—
Securities available for sale			512,928			512,928			—			512,928			—
FHLB stock			14,755			14,755			—			14,755			—
Loans held for sale			3,897			3,897			—			3,897			—
Net loans			3,035,326			2,869,157			—			—			2,869,157
Accrued interest receivable			4,958			4,958			—			4,958			—
Cash surrender value of bank-owned life insurance policies			81,221			81,221			—			81,221			—
Derivative assets			22,936			22,936			—			22,775			161

Financial Liabilities
Non-maturity deposits		$	2,339,323		$	2,184,194		$	—		$	2,184,194		$	—
Time deposits			801,143			793,797			—			793,797			—
Securities sold under agreements to repurchase			74,775			74,775			—			74,775			—
FRB advances			65,000			65,000			—			65,000			—
FHLB advances			254,574			254,393			—			254,393			—
Subordinated borrowings			60,541			68,573			—			68,573			—
Derivative liabilities			20,005			20,005			—			20,005			—


		December 31, 2023
		Carrying			Fair
(in thousands)		Amount			Value			Level 1			Level 2			Level 3
Financial Assets
Cash and cash equivalents		$	94,842		$	94,842		$	94,842		$	—		$	—
Securities available for sale			534,574			534,574			—			534,574			—
FHLB stock			14,834			14,834			—			14,834			—
Loans held for sale			2,189			2,189			—			2,189			—
Net loans			2,970,907			2,832,173			—			—			2,832,173
Accrued interest receivable			4,921			4,921			—			4,921			—
Cash surrender value of bank-owned life insurance policies			80,037			80,037			—			80,037			—
Derivative assets			21,838			21,838			—			21,775			63

Financial Liabilities
Non-maturity deposits		$	2,482,012		$	2,325,307		$	—		$	2,325,307		$	—
Time deposits			658,482			651,855			—			651,855			—
Securities sold under agreements to repurchase			8,465			8,465			—			8,465			—
FRB advances			30,000			30,000			—			30,000			—
FHLB advances			232,579			232,375			—			232,375			—
Subordinated borrowings			60,422			67,635			—			67,635			—
Derivative liabilities			15,607			15,607			—			15,587			20

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.

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