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Fair Value Measurements | 9 Months Ended
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Sep. 30, 2023
Fair Value Disclosures [Abstract] |
Fair Value Measurements | Fair Value Measurements Fair value represents the amount expected to be received to sell an asset or paid to transfer a liability in its principal or most advantageous market in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, the Company uses various valuation methodologies and assumptions to estimate fair value. The measurement of fair value under U.S. GAAP uses a hierarchy intended to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows. The fair value hierarchy is as follows: Level 1 – Inputs are unadjusted quoted prices for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and is used to measure fair value whenever available. A contractually binding sales price also provides reliable evidence of fair value. Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 – Inputs are unobservable inputs for the asset or liability and significant to the fair value. These may be internally developed using the Company’s best information and assumptions that a market participant would consider. In accordance with fair value accounting guidance, the Company measures, records, and reports various types of assets and liabilities at fair value on either a recurring or non-recurring basis in the consolidated financial statements. Nonfinancial assets measured at fair value on a non-recurring basis would include foreclosed real estate, long-lived assets, and core deposit intangible assets, which are reviewed when circumstances or other events indicate that impairment may have occurred. Valuation Methods for Assets and Liabilities Measured at Fair Value on a Recurring Basis Following is a description of the Company’s valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis: Available-for-Sale Securities The fair value measurements of the Company’s investment securities are determined by a third party pricing service that considers observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. The fair value measurements are subject to management's independent verification to another pricing source for reasonableness each quarter. Other Investment Securities Other investment securities include equity securities with readily determinable fair values and other investment securities that do not have readily determinable fair values. Investments in FHLB stock and MIB bankers bank stock, that do not have readily determinable fair values, are required for membership in those organizations. Equity securities that are not actively traded are classified in Level 2. Equity securities with readily determinable fair values are recorded at fair value, with changes in fair value reflected in earnings. Equity securities that do not have readily determinable fair values are carried at cost and are periodically assessed for impairment. The Company uses Level 1 inputs to value equity securities that are traded in active markets. Loans Held for Sale The fair value of the committed in forward sale agreements loans is the price at which they could be sold in the principal market at the measurement date, therefore the Company classifies as Level 2. Derivative Assets and Liabilities Derivative assets and liabilities include interest rate lock commitments (IRLCs) and forward sale commitments. The fair values of IRLCs and forward sale commitments are determined using readily observable market data such as interest rates, prices, volatility factors, and customer credit-related adjustments. For IRLCs, the fair value is subject to the anticipated loan funding probability (pull-through rate), which is considered an unobservable factor. Factors that affect pull-through rates include origination channel, current mortgage interest rates in the market versus the interest rate incorporated in the IRLC, the purpose of the mortgage, stage of completion of the underlying application and underwriting process, and the time remaining until the IRLC expires. The Company classifies IRLCs as Level 3 due to the unobservable input of pull-through rates. Mortgage Servicing Rights (MSRs) The fair value of MSRs is based on the discounted value of estimated future cash flows utilizing contractual cash flows, servicing rate, constant prepayment rate, servicing cost, and discount rate factors. Accordingly, the fair value is estimated based on a valuation model that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost to service, float earnings rates, and other ancillary income, including late fees. The valuation models estimate the present value of estimated future net servicing income. The Company classifies its MSRs as Level 3.
|  |  | Fair Value Measurements
(in thousands) | Fair Value |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
September 30, 2023 |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |
U.S. Treasury | $ | 4,868 |  |  | $ | 4,868 |  |  | $ | — |  |  | $ | — |
U.S. government and federal agency obligations | 420 |  | — |  | 420 |  | —
U.S. government-sponsored enterprises | 24,862 |  | — |  | 24,862 |  | —
Obligations of states and political subdivisions | 98,935 |  | — |  | 98,935 |  | —
Mortgage-backed securities | 92,743 |  | — |  | 92,743 |  | —
Other debt securities | 10,534 |  | — |  | 10,534 |  | —
Bank-issued trust preferred securities | 1,154 |  | — |  | 1,154 |  | —
Equity securities | 64 |  | 64 |  | — |  | —
Interest rate lock commitments | 45 |  | — |  | — |  | 45
Forward sale commitments | 18 |  | — |  | 18 |  | —
Loans held for sale | 3,006 |  | — |  | 3,006 |  | —
Mortgage servicing rights | 2,885 |  | — |  | — |  | 2,885
Total | $ | 239,534 |  |  | $ | 4,932 |  |  | $ | 231,672 |  |  | $ | 2,930 |
Liabilities: |  |  |  |  |  |  |
Interest rate lock commitments | $ | 2 |  |  | $ | — |  |  | $ | — |  |  | $ | 2 |
Total | $ | 2 |  |  | $ | — |  |  | $ | — |  |  | $ | 2 |
December 31, 2022 |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |
U.S. Treasury | $ | 2,152 |  |  | $ | 2,152 |  |  | $ | — |  |  | $ | — |
U.S. government and federal agency obligations | 559 |  | — |  | 559 |  | —
U.S. government-sponsored enterprises | 23,777 |  | — |  | 23,777 |  | —
Obligations of states and political subdivisions | 109,440 |  | — |  | 109,440 |  | —
Mortgage-backed securities | 102,699 |  | — |  | 102,699 |  | —
Other debt securities | 10,943 |  | — |  | 10,943 |  | —
Bank-issued trust preferred securities | 1,177 |  | — |  | 1,177 |  | —
Equity securities | 46 |  | 46 |  | — |  | —
Interest rate lock commitments | 20 |  | — |  | — |  | 20
Forward sale commitments | 3 |  | — |  | 3 |  | —
Loans held for sale | 591 |  | — |  | 591 |  | —
Mortgage servicing rights | 2,899 |  | — |  | — |  | 2,899
Total | $ | 254,306 |  |  | $ | 2,198 |  |  | $ | 249,189 |  |  | $ | 2,919 |
Liabilities: |  |  |  |  |  |  |
Interest rate lock commitments | $ | 18 |  |  | $ | — |  |  | $ | — |  |  | $ | 18 |
Forward sale commitments | 3 |  |  | — |  |  | 3 |  |  | — |
Total | $ | 21 |  |  | $ | — |  |  | $ | 3 |  |  | $ | 18 |
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
| Mortgage Servicing Rights |  | Interest Rate Lock Commitments
| Nine Months Ended September 30,
(in thousands) | 2023 |  | 2022 |  | 2023 |  | 2022
Balance at beginning of period | $ | 2,899 |  | $ | 2,659 |  | $ | 2 |  | $ | 286
Total gains or (losses) (realized/unrealized): |  |  |  |  |  |  |
Included in earnings | (52) |  | 186 |  | (31) |  |  | (22) |
Included in other comprehensive income | — |  | — |  | — |  | —
Purchases | — |  | — |  | — |  | —
Sales | — |  | — |  | (125) |  | (474)
Issues | 38 |  | 61 |  | 197 |  | 144
Settlements | — |  | — |  | — |  | —
Balance at end of period | $ | 2,885 |  | $ | 2,906 |  | $ | 43 |  | $ | (66)
Valuation Methods for Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis Following is a description of the Company’s valuation methodologies used for assets and liabilities recorded at fair value on a non-recurring basis: Collateral Dependent Impaired Loans While the overall loan portfolio is not carried at fair value, the Company periodically records 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 also include certain impairment amounts for collateral dependent loans when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. In determining the value of real estate collateral, the Company relies on external and internal appraisals of property values depending on the size and complexity of the real estate collateral. The Company maintains staff trained to perform in-house evaluations and also to review third-party appraisal reports for reasonableness. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgments based on the experience and expertise of internal specialists. Values of all loan collateral are regularly reviewed by a senior loan committee. Because many of these inputs are not observable, the measurements are classified as Level 3. As of September 30, 2023, the Company identified $2.6 million in collateral-dependent loans that required $22,000 of specific allowances for credit losses. Related to these loans, there were $13,800 and $54,800 in charge-offs recorded during the three and nine months ended September 30, 2023, respectively. As of September 30, 2022, the Company identified $15.9 million in collateral-dependent impaired loans that required no specific allowances for losses aggregating. Related to these loans, there were $61,000 and $86,000 in charge-offs recorded during the three and nine months ended September 30, 2022, respectively. Other Real Estate and Foreclosed Assets Other real estate owned (OREO) and foreclosed assets consisted of loan collateral repossessed through foreclosure. This collateral is comprised of commercial and residential real estate and other non-real estate property, including autos, manufactured homes, and construction equipment. Subsequent to foreclosure, these assets are initially carried at fair value of the collateral less estimated selling costs. Fair value, when recorded, is generally based upon appraisals by approved, independent state-certified appraisers. Like impaired loans, appraisals on OREO may be discounted based on the Company’s historical knowledge, changes in market conditions from the time of appraisal or other information available. During the holding period, valuations are updated periodically, and the assets may be written down to reflect a new cost basis. Because many of these inputs are not observable, the measurements are classified as Level 3.
|  |  | Fair Value Measurements Using
(in thousands) | Total Fair Value |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Three Months Ended September 30, Total Gains (Losses)* |  | Nine Months Ended September 30, Total Gains (Losses)*
September 30, 2023 |  |  |  |  |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |  |  |  |  |
Collateral dependent impaired loans: |  |  |  |  |  |  |  |  |  |  |
Real estate mortgage - residential | $ | 120 |  |  | $ | — |  |  | $ | — |  |  | $ | 120 |  |  | $ | — |  |  | $ | — |
Real estate mortgage - commercial | 2,432 |  |  | — |  |  | — |  |  | 2,432 |  |  | (2) |  |  | (26) |
Installment and other consumer | — |  |  | — |  |  | — |  |  | — |  |  | (12) |  |  | (29) |
Total | $ | 2,552 |  |  | $ | — |  |  | $ | — |  |  | $ | 2,552 |  |  | $ | (14) |  |  | $ | (55) |
Other real estate and repossessed assets | $ | 3,564 |  |  | $ | — |  |  | $ | — |  |  | $ | 3,564 |  |  | $ | (2,811) |  |  | $ | (4,594) |
September 30, 2022 |  |  |  |  |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |  |  |  |  |
Collateral dependent impaired loans: |  |  |  |  |  |  |  |  |  |  |
Real estate mortgage - commercial | $ | 15,898 |  |  | $ | — |  |  | $ | — |  |  | $ | 15,898 |  |  | $ | (23) |  |  | $ | (48) |
Installment and other consumer | — |  |  | — |  |  | — |  |  | — |  |  | (38) |  |  | (38) |
Total | $ | 15,898 |  |  | $ | — |  |  | $ | — |  |  | $ | 15,898 |  |  | $ | (61) |  |  | $ | (86) |
Other real estate and repossessed assets | $ | 9,210 |  |  | $ | — |  |  | $ | — |  |  | $ | 9,210 |  |  | $ | — |  |  | $ | (22) |
*Total losses reported for other real estate and foreclosed assets includes charge-offs, valuation write downs, and net losses taken during the periods reported.

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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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