Fair Value Measurements

3 Months Ended

Mar. 31, 2023

Fair Value Hierarchy

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 market prices (unadjusted) for identical instruments traded 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 an entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The estimated carrying and fair values of the Company’s financial instruments not carried at fair value are as follows (in thousands):


	March 31, 2023
	Carrying Amount		Fair Value
(In thousands)			Level 1		Level 2		Level 3		Total
Financial assets:
Cash and due from banks	$	25,464	$	25,464	$	—	$	—	$	25,464
Interest-earning deposits in other banks	38,798		38,798		—		—		38,798

Held-to-maturity investment securities	303,844		—		276,633		—		276,633
Loans, net	1,270,297		—		—		1,182,862		1,182,862
Financial liabilities:
Time Deposits	213,033		—		207,554		—		207,554

Senior debt and subordinated debentures	69,635		—		—		58,944		58,944


	December 31, 2022
	Carrying Amount		Fair Value
(In thousands)			Level 1		Level 2		Level 3		Total
Financial assets:
Cash and due from banks	$	25,485	$	25,485	$	—	$	—	$	25,485
Interest-earning deposits in other banks	5,685		5,685		—		—		5,685

Held-to-maturity investment securities	305,107		—		271,249		—		271,249

Loans, net	1,245,456		—		—		1,113,849		1,113,849
Financial liabilities:
Time deposits	67,923		—		67,047		—		67,047
Short-term borrowings	46,000		—		46,000		—		46,000
Subordinated debentures	69,599		—		—		62,504		62,504

The methods and assumptions used to estimate fair values are described as follows:

(a) Investment securities — The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded, values debt securities without relying exclusively on quoted prices for the specific securities but

rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). 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).

(b) Individually Evaluated Loans — Fair values for individually evaluated loans are estimated either using the fair value of the collateral less selling costs if collateral dependent resulting in a Level 3 classification. Individually evaluated loan amounts are initially valued at the lower of cost or fair value. Individually evaluated loans carried at fair value generally receive specific allocations of the allowance for credit losses. For collateral dependent real estate loans, fair value is commonly based on recent real estate appraisals. These 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 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. 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. Individually evaluated loans are evaluated on a quarterly basis for additional credit losses and adjusted accordingly. The estimated fair values of financial instruments disclosed above follow the guidance in ASU 2016-01 which prescribes an “exit price” approach in estimating and disclosing fair value of financial instruments incorporating discounts for credit, liquidity, and marketability factors.

(c) Real Estate Owned — Appraisals for assets acquired through foreclosure are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value is compared with independent data sources such as recent market data or industry-wide statistics.

Assets Recorded at Fair Value

The Company is required or permitted to record the following assets at fair value on a recurring basis. The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022:


	Fair Value Measurements Using
March 31, 2023	Fair Value		Level 1		Level 2		Level 3
Available-for-sale debt securities:
U.S. Treasury securities	$	8,879	$	—	$	8,879	$	—
U.S. Government agencies	98		—		98		—
Obligations of states and political subdivisions	178,051		—		178,051		—
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	92,631		—		92,631		—
Private label mortgage and asset backed securities	351,865		—		351,865		—

Equity securities	6,663		6,663		—		—
Total assets measured at fair value on a recurring basis	$	638,187	$	6,663	$	631,524	$	—


	Fair Value Measurements Using
December 31, 2022	Fair Value		Level 1		Level 2		Level 3
Available-for-sale debt securities:
U.S. Treasury securities	$	8,707	$	—	$	8,707	$	—
U.S. Government agencies	98		—		98		—
Obligations of states and political subdivisions	174,985		—		174,985		—
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	109,493		—		109,493		—
Private label mortgage and asset backed securities	355,542		—		355,542		—
Equity securities	6,558		6,558		—		—
Total assets measured at fair value on a recurring basis	$	655,383	$	6,558	$	648,825	$	—

There were no changes in valuation techniques used during the three months ended March 31, 2023 or the year ended December 31, 2022. There were no assets measured on a non-recurring basis at March 31, 2023 and December 31, 2022.