Fair Value Measurement

9 Months Ended

Sep. 30, 2023

(13) Fair Value Measurement

The Company uses a fair value hierarchy to measure fair value. This hierarchy describes three levels of inputs that may be used to measure fair value: Level 1: Quoted prices for identical assets in active markets that are identifiable on the measurement date; Level 2: Significant other observable inputs, such as quoted prices for similar assets, quoted prices in markets that are not active and other inputs that are observable or can be corroborated by observable market data; and Level 3: Significant unobservable inputs that reflect the Company’s own view about the assumptions that market participants would use in pricing an asset.

Debt securities: The fair values of securities available-for-sale are determined by matrix pricing, which is a mathematical technique widely used in the industry to value 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).

Equity securities: The Company’s equity securities are not actively traded in an open market. The fair value of these equity securities available-for-sale not actively traded in an open market is determined by using market data inputs for similar securities that are observable (Level 2 inputs).

The fair value of the swap asset/liability: The fair value of the swap asset and liability is based on an external derivative model using data inputs based on similar transactions as of the valuation date and classified Level 2. The changes in fair value of these assets/liabilities had no impact on net income or comprehensive income.

Mortgage servicing rights: Mortgage servicing rights do not trade in an active market with readily observable market data. As a result, the Company estimates the fair value of mortgage servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income. The Company stratifies its mortgage servicing portfolio on the basis of loan type. The assumptions used in the discounted cash flow model are those that the Company believes market participants would use in estimating future net servicing income. Significant assumptions in the valuation of mortgage servicing rights include estimated loan repayment rates, the discount rate, servicing costs, and the timing of cash flows, among other factors. Mortgage servicing rights are classified as Level 3 measurements due to the use of significant unobservable inputs, as well as significant management judgment and estimation.

Assets and liabilities measured at fair value are summarized in the tables below.


	Fair Value Measurements at September 30, 2023 Using:
Assets:	(Level 1)		(Level 2)		(Level 3)
Assets measured at fair value on a recurring basis:
Securities available-for-sale
U.S. Treasury securities and obligations of U.S. Government agencies	$	—	$	71,295	$	—
Obligations of states and political subdivisions		—		310,535		—
Mortgage-backed securities in government sponsored entities		—		211,657		—
Total securities available-for-sale		—		593,487		—
Equity securities		—		2,021		—
Swap asset		—		19,784		—
Liabilities measured at fair value on a recurring basis:
Swap liability	$	—	$	19,784	$	—
Assets measured at fair value on a nonrecurring basis:
Mortgage servicing rights	$	—	$	—	$	3,046


	Fair Value Measurements at December 31, 2022 Using:
Assets:	(Level 1)		(Level 2)		(Level 3)
Assets measured at fair value on a recurring basis:
Securities available-for-sale
U.S. Treasury securities and obligations of U.S. Government agencies	$	—	$	61,029	$	—
Obligations of states and political subdivisions		—		317,248		—
Mortgage-backed securities in government sponsored entities		—		237,125		—
Total securities available-for-sale		—		615,402		—
Equity securities		—		2,190		—
Swap asset		—		16,579		—
Liabilities measured at fair value on a recurring basis:
Swap liability		—		16,579		—
Assets measured at fair value on a nonrecurring basis:
Mortgage servicing rights	$	—	$	—	$	2,689

The following tables present quantitative information about the Level 3 significant unobservable inputs for assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2023 and December 31, 2022.

Quantitative Information about Level 3 Fair Value Measurements

September 30, 2023

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted Average

Mortgage Servicing
    Rights

3,046

Discounted Cash Flow

Constant Prepayment
    Rate

4.3% - 10.4%

6%

Discount Rate

12%

12%

Quantitative Information about Level 3 Fair Value Measurements

December 31, 2022

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted Average

Mortgage Servicing
    Rights

2,689

Discounted Cash Flow

Constant Prepayment
    Rate

5% - 20%

7%

Discount Rate

12%

12%

The carrying amount and fair values of financial instruments not measured at fair value on a recurring or nonrecurring basis at September 30, 2023 were as follows:


September 30, 2023	Carrying Amount		Total Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from financial institutions	$	50,316	$	50,316	$	50,316	$	—	$	—
Other securities		34,224		34,224		34,224		—		—
Loans, held for sale		1,589		1,589		1,589		—		—
Loans, net of allowance		2,719,610		2,627,715		—		—		2,627,715
Bank owned life insurance		54,053		54,053		54,053		—		—
Accrued interest receivable		11,489		11,489		11,489		—		—
Financial Liabilities:
Nonmaturing deposits		2,139,757		2,139,782		2,139,782		—		—
Time deposits		655,986		653,827		—		—		653,827
Short-term FHLB advances		431,500		430,534		430,534		—		—
Long-term FHLB advances		2,573		2,543		—		—		2,543
Other borrowings		10,964		10,964		—		—		10,964
Securities sold under agreement to repurchase		—		—		—		—		—
Subordinated debentures		103,921		99,264		—		—		99,264
Accrued interest payable		—		—		—		—		—

The carrying amount and fair values of financial instruments not measured at fair value on a recurring or nonrecurring basis at December 31, 2022 were as follows:


December 31, 2022	Carrying Amount		Total Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from financial institutions	$	43,361	$	43,361	$	43,361	$	—	$	—
Other securities		33,585		33,585		33,585		—		—
Loans, held for sale		683		698		698		—		—
Loans, net of allowance		2,518,155		2,427,291		—		—		2,427,291
Bank owned life insurance		53,543		53,543		53,543		—		—
Accrued interest receivable		11,178		11,178		11,178		—		—
Financial Liabilities:
Nonmaturing deposits		2,300,215		2,300,215		2,300,215		—		—
Time deposits		319,769		318,886		—		—		318,886
Short-term FHLB advances		393,700		393,247		393,247		—		—
Long-term FHLB advances		3,578		3,534		—		—		3,534
Securities sold under agreement to repurchase		25,143		25,143		25,143		—		—
Subordinated debentures		103,799		98,513		—		—		98,513
Other borrowings		15,516		15,806		—		—		15,806
Accrued interest payable		668		668		668		—		—

An immaterial revision has been made to the fair market value of loans for the period ended December 31, 2022. This revision did not have a significant impact on the financial statement line item affected or total assets, equity or net income.

- 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.

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