FAIR VALUE

6 Months Ended

Jun. 30, 2024

NOTE 10 – FAIR VALUE

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to disclose the fair value of its financial instruments. 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. For disclosure purposes, the Company groups its financial and non-financial assets and liabilities into three different levels based on the nature of the instrument and the availability and reliability of the information that is used to determine fair value. The three levels of inputs that may be used to measure fair values are defined as follows.

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.

Level 1 inputs are considered to be the most transparent and reliable. The Company assumes the use of the principal market to conduct a transaction of each particular asset or liability being measured and then considers the assumptions that market participants would use when pricing the asset or liability. Whenever possible, the Company first looks for quoted prices for identical assets or liabilities in active markets (Level 1 inputs) to value each asset or liability. However, when inputs from identical assets or liabilities on active markets are not available, the Company utilizes market observable data for similar assets and liabilities. The Company maximizes the use of observable inputs and limits the use of unobservable inputs to occasions when observable inputs are not available. The need to use unobservable inputs generally results from the lack of market liquidity of the actual financial instrument or

of the underlying collateral. Although, in some instances, third party price indications may be available, limited trading activity can challenge the implied value of those quotations.

The following is a description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of each instrument under the hierarchy.

Fair Value of Assets and Liabilities Measured on a Recurring Basis

The fair values of securities available-for-sale and equity securities with readily determinable fair value are carried at fair value on a recurring basis. To the extent possible, observable quoted prices in an active market are used to determine fair value and, as such, these securities are classified as Level 1. For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities, generally determined by matrix pricing, which is a mathematical technique widely used in the industry to value 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). The Company’s available-for-sale securities, including U.S. Government sponsored entity securities, residential mortgage-backed securities (all of which are issued or guaranteed by government sponsored agencies), private-label residential mortgage-backed securities, corporate securities, Small Business Administration securities, and State and Political Subdivision securities are classified as Level 2.

The fair values of derivatives are determined based on a valuation pricing model using readily available observable market parameters such as interest rate yield curves (Level 2 inputs) adjusted for credit risk attributable to the seller of the interest rate derivative. Cash collateral received from or delivered to a derivative counterparty is classified as Level 1.

Assets and liabilities measured at fair value on a recurring basis are summarized in the following tables as of June 30, 2024, and December 31, 2023.


	June 30, 2024
	(Level 1)			(Level 2)		(Level 3)
Assets:
Available-for-sale securities:
U.S. Government-sponsored entities	$	—		$	75,132	$	—
U.S. Treasury securities		95,039			—		—
Mortgage-backed securities
Government-sponsored residential mortgage-backed securities		—			603,847		—
Private label residential mortgage-backed securities		—			129,065		—
Corporate		—			56,095		—
Small Business Administration loan pools		—			6,873		—
State and political subdivisions		—			76,125		—
Derivative assets:
Derivative assets (included in other assets)		—			9,671		—
Cash collateral held by counterparty and netting adjustments		(8,852	)		—		—
Total derivative assets		(8,852	)		9,671		—
Other assets:
Equity securities with readily determinable fair value		648			—		—
Total other assets		648			—		—
Total assets	$	86,835		$	956,808	$	—
Liabilities:
Derivative liabilities:
Derivative liabilities (included in other liabilities)	$	—		$	3,786	$	—
Cash collateral held by counterparty and netting adjustments		189			—		—
Total derivative liabilities		189			3,786		—
Total liabilities	$	189		$	3,786	$	—


	December 31, 2023
	(Level 1)			(Level 2)		(Level 3)
Assets:
Available-for-sale securities:
U.S. Government-sponsored entities	$	—		$	33,087	$	—
U.S. Treasury securities		89,256			—		—
Mortgage-backed securities
Government-sponsored residential mortgage- backed securities		—			529,143		—
Private label residential mortgage-backed securities		—			137,841		—
Corporate		—			49,683		—
Small Business Administration loan pools		—			7,727		—
State and political subdivisions		—			72,911		—
Derivative assets:
Derivative assets (included in other assets)		—			7,002		—
Cash collateral held by counterparty and netting adjustments		(6,406	)		—		—
Total derivative assets		(6,406	)		7,002		—
Other assets:
Equity securities with readily determinable fair value		674			—		—
Total other assets		674			—		—
Total assets	$	83,524		$	837,394	$	—
Liabilities:
Derivative liabilities:
Derivative liabilities (included in other liabilities)	$	—		$	3,656	$	—
Cash collateral held by counterparty and netting adjustments		(454	)		—		—
Total derivative liabilities		(454	)		3,656		—
Total liabilities	$	(454	)	$	3,656	$	—

There were no material transfers between levels during the six months ended June 30, 2024, or the year ended December 31, 2023. The Company’s policy is to recognize transfers into or out of a level as of the end of a reporting period.

Fair Value of Assets and Liabilities Measured on a Non-recurring Basis

Certain assets are measured at fair value on a non-recurring basis when there is evidence of loans individually assessed for credit losses. The fair value of loans individually assessed for credit losses with specific allowance for credit losses are generally based on recent real estate appraisals of the collateral. Declines in the fair values of other real estate owned, subsequent to their initial acquisitions, are also based on recent real estate appraisals less estimated selling costs.

Real estate 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. Such adjustments made to real estate appraisals and other loan valuations are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Assets measured at fair value on a non-recurring basis are summarized below as of June 30, 2024, and December 31, 2023.


	June 30. 2024
	(Level 1)		(Level 2)		(Level 3)
Loans individually evaluated for credit losses:
Commercial real estate	$	—	$	—	$	2,766
Commercial and industrial		—		—		4,619
Residential real estate		—		—		3,611
Agricultural real estate		—		—		2,703
Other		—		—		1,204
Other real estate owned:
Commercial real estate		—		—		1,061
Residential real estate		—		—		57


	December 31, 2023
	(Level 1)		(Level 2)		(Level 3)
Loans individually evaluated for credit losses:
Commercial real estate	$	—	$	—	$	1,616
Commercial and industrial		—		—		3,706
Residential real estate		—		—		6,165
Agricultural real estate		—		—		2,606
Other		—		—		2,442
Other real estate owned:
Commercial real estate		—		—		1,061
Residential real estate		—		—		170

The Company did not record any liabilities for which the fair value was measured on a non-recurring basis at June 30, 2024, or December 31, 2023.

Valuations of individually evaluated loans and other real estate owned utilize third party appraisals or broker price opinions and were classified as Level 3 due to the significant judgment involved. Appraisals may include the utilization of unobservable inputs, subjective factors and utilize quantitative data to estimate fair market value.

The following table presents additional information about the unobservable inputs used in the fair value measurement of financial assets measured on a nonrecurring basis that were categorized with Level 3 of the fair value hierarchy as of June 30, 2024, and December 31, 2023.


	Fair Value		Valuation Technique	Unobservable Input	Range (weighted average) or Multiple of Earnings
June 30, 2024
Individually evaluated real estate loans	$	13,326	Sales Comparison Approach	Adjustments for differences between comparable sales	2% - 45% (23%)
Individually evaluated real estate loans	$	1,577	Cost Approach	Adjustments for differences between replacement cost and depreciated cost	26% - 70% (29%)
Individually evaluated other real estate owned	$	1,118	Sales Comparison Approach	Adjustments for differences between comparable sales	5% - 23% (14%)
December 31, 2023
Individually evaluated real estate loans	$	16,535	Sales Comparison Approach	Adjustments for differences between comparable sales	3% - 34% (19%)
Individually evaluated other real estate owned	$	1,231	Sales Comparison Approach	Adjustments for differences between comparable sales	7% - 28% (18%)

Carrying amount and estimated fair values of financial instruments at period end were as follows for June 30, 2024, and December 31, 2023.


	June 30, 2024
	Carrying Amount			Estimated Fair Value			(Level 1)			(Level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	260,266		$	260,266		$	260,266		$	—	$	—
Available-for-sale securities		1,042,176			1,042,176			95,039			947,137		—
Held-to-maturity securities		5,226			5,267			—			5,267		—
Loans held for sale		1,959			1,959			—			1,959		—
Loans, net of allowance for credit losses		3,410,920			3,352,188			—			—		3,352,188
Federal Reserve Bank and Federal Home Loan Bank stock		33,171			33,171			—			33,171		—
Interest receivable		27,381			27,381			—			27,381		—
Derivative assets		9,671			9,671			—			9,671		—
Cash collateral held by derivative counterparty and netting adjustments		(8,852	)		(8,852	)		(8,852	)		—		—
Total derivative assets		819			819			(8,852	)		9,671		—
Equity securities with readily determinable fair value		648			648			648			—		—
Total assets	$	4,782,566		$	4,723,875		$	347,101		$	1,024,586	$	3,352,188
Financial liabilities:
Deposits	$	4,341,437		$	4,336,232		$	—		$	4,336,232	$	—
Federal funds purchased and retail repurchase agreements		38,031			38,031			—			38,031		—
Federal Home Loan Bank advances		250,306			250,306			—			250,306		—
Subordinated debentures		23,769			23,769			—			23,769		—
Subordinated notes		73,427			72,302			—			72,302		—
Contractual obligations		23,770			23,770			—			23,770		—
Interest payable		6,777			6,777			—			6,777		—
Derivative liabilities		3,786			3,786			—			3,786		—
Cash collateral held by derivative counterparty and netting adjustments		189			189			189			—		—
Total derivative liabilities		3,975			3,975			189			3,786		—
Total liabilities	$	4,761,492		$	4,755,162		$	189		$	4,754,973	$	—


	December 31, 2023
	Carrying Amount			Estimated Fair Value			(Level 1)			(Level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	379,099		$	379,099		$	379,099		$	—	$	—
Available-for-sale securities		919,648			919,648			89,256			830,392		—
Held-to-maturity securities		2,209			2,250			—			2,250		—
Loans held for sale		476			476			—			476		—
Loans, net of allowance for credit losses		3,289,381			3,227,789			—			—		3,227,789
Federal Reserve Bank and Federal Home Loan Bank stock		20,608			20,608			—			20,608		—
Interest receivable		25,497			25,497			—			25,497		—
Derivative assets		7,002			7,002			—			7,002		—
Cash collateral held by derivative counterparty and netting adjustments		(6,406	)		(6,406	)		(6,406	)		—		—
Total derivative assets		596			596			(6,406	)		7,002		—
Equity securities with readily determinable fair value		674			674			674			—		—
Total assets	$	4,638,188		$	4,576,637		$	462,623		$	886,225	$	3,227,789
Financial liabilities:
Deposits	$	4,145,455		$	4,140,501		$	—		$	4,140,501	$	—
Federal funds purchased and retail repurchase agreements		43,582			43,582			—			43,582		—
Federal Home Loan Bank advances		100,000			100,000			—			100,000		—
Federal Reserve Bank Borrowings		140,000			140,000			—			140,000		—
Subordinated debentures		23,594			23,594			—			23,594		—
Subordinated notes		73,327			71,827			—			71,827		—
Contractual obligations		19,315			19,315			—			19,315		—
Interest payable		9,180			9,180			—			9,180		—
Derivative liabilities		3,656			3,656			—			3,656		—
Cash collateral held by derivative counterparty and netting adjustments		(454	)		(454	)		(454	)		—		—
Total derivative liabilities		3,202			3,202			(454	)		3,656		—
Total liabilities	$	4,557,655		$	4,551,201		$	(454	)	$	4,551,655	$	—

The fair value of off-balance-sheet items is not considered material.

- 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 + Details