The Company carries certain assets and liabilities at fair value on a recurring basis in accordance with applicable standards. The Company’s recurring fair value measurements are based on the requirement to carry such assets and liabilities at fair value or the Company’s election to carry certain eligible assets and liabilities at fair value. Assets and liabilities that are required to be carried at fair value include securities available for sale and derivative instruments. The Company has elected to carry mortgage loans held for sale at fair value on a recurring basis as permitted under the guidance in ASC 825.

Securities available for sale: Securities available for sale consist primarily of debt securities, such as obligations of U.S. Government agencies and corporations and mortgage-backed securities. Where quoted market prices in active markets are available, securities are classified within Level 1 of the fair value hierarchy. If quoted prices from active markets are not available, fair values are based on quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active, or model-based valuation techniques where all significant assumptions are observable in the market. Such instruments are classified within Level 2 of the fair value hierarchy. When assumptions used in model-based valuation techniques are not observable in the market, the assumptions used by management reflect estimates of assumptions used by other market participants in determining fair value. When there is limited transparency around the inputs to the valuation, the instruments are classified within Level 3 of the fair value hierarchy.

Derivative instruments: Most of the Company’s derivative contracts are actively traded in over-the-counter markets and are valued using discounted cash flow models which incorporate observable market based inputs including current market interest rates, credit spreads, and other factors. Such instruments are categorized within Level 2 of the fair value hierarchy and include interest rate swaps and other interest rate contracts including interest rate caps and/or floors. The Company’s interest rate lock commitments are valued using current market prices for mortgage-backed securities with similar characteristics, adjusted for certain factors including servicing and risk. The value of the Company’s forward commitments is based on current prices for securities backed by similar types of loans. Because these assumptions are observable in active markets, the Company’s interest rate lock commitments and forward commitments are categorized within Level 2 of the fair value hierarchy.

Mortgage loans held for sale in loans held for sale: Mortgage loans held for sale are primarily agency loans which trade in active secondary markets. The fair value of these instruments is derived from current market pricing for similar loans, adjusted for differences in loan characteristics, including servicing and risk. Because the valuation is based on external pricing of similar instruments, mortgage loans held for sale are classified within Level 2 of the fair value hierarchy.

The following tables present assets and liabilities that are measured at fair value on a recurring basis as of the dates presented:


	Level 1		Level 2		Level 3		Totals
December 31, 2023
Financial assets:


Securities available for sale	$	—	$	923,279	$	—	$	923,279
Total securities available for sale	—		923,279		—		923,279
Derivative instruments	—		37,151		—		37,151
Mortgage loans held for sale in loans held for sale	—		179,756		—		179,756
Total financial assets	$	—	$	1,140,186	$	—	$	1,140,186
Financial liabilities:
Derivative instruments	$	—	$	33,608	$	—	$	33,608


	Level 1		Level 2		Level 3		Totals
December 31, 2022
Financial assets:
Securities available for sale:

Other available for sale securities	$	—	$	1,533,942	$	—	$	1,533,942
Total securities available for sale	—		1,533,942		—		1,533,942
Derivative instruments	—		38,047		—		38,047
Mortgage loans held for sale in loans held for sale	—		110,105		—		110,105
Total financial assets	$	—	$	1,682,094	$	—	$	1,682,094
Financial liabilities:
Derivative instruments	$	—	$	33,185	$	—	$	33,185

The Company reviews fair value hierarchy classifications on a quarterly basis. Changes in the Company’s ability to observe inputs to the valuation may cause reclassification of certain assets or liabilities within the fair value hierarchy. There were no such transfers between levels of the fair value hierarchy during the year ended December 31, 2023.

For 2023 and 2022, there were no gains or losses included in earnings that were attributable to the change in unrealized gains or losses related to assets or liabilities held at the end of each respective period that were measured on a recurring basis using significant unobservable inputs.

Certain assets may be recorded at fair value on a nonrecurring basis. These nonrecurring fair value adjustments typically are a result of the application of the lower of cost or market accounting or a write-down occurring during the period. The following tables provide as of the dates presented the fair value measurement for assets measured at fair value on a nonrecurring basis that were still held on the Consolidated Balance Sheets at period end and the level within the fair value hierarchy each is classified:


	Level 1		Level 2		Level 3		Totals
December 31, 2023
Individually evaluated loans, net of allowance for credit losses	$	—	$	—	$	21,303	$	21,303


Total	$	—	$	—	$	21,303	$	21,303

Individually evaluated loans: Loans that do not share similar risk characteristics such that they can be evaluated on a collective (pooled) basis are individually evaluated for credit losses each quarter taking into account the fair value of the collateral less estimated selling costs. Collateral may be real estate and/or business assets including but not limited to equipment, inventory and accounts receivable. The fair value of real estate is determined based on appraisals by qualified licensed appraisers. The fair value of the business assets is generally based on amounts reported on the business’s financial statements. Appraised and reported values may be adjusted based on changes in market conditions from the time of valuation and management’s knowledge of the client and the client’s business. Since not all valuation inputs are observable, these nonrecurring fair value determinations are classified as Level 3. Individually evaluated loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors previously identified. Individually evaluated loans that were measured or re-measured at fair value had a carrying value of $37,515 and $18,288 at December 31, 2023 and December 31, 2022, respectively, and a reserve for these loans of $9,753 and $3,556 was included in the allowance for credit losses for the same periods.

Other real estate owned: OREO is comprised of commercial and residential real estate obtained in partial or total satisfaction of loan obligations. OREO acquired in settlement of indebtedness is recorded at the fair value of the real estate less estimated costs to sell. Subsequently, it may be necessary to record nonrecurring fair value adjustments for declines in fair value. Fair value, when recorded, is determined based on appraisals by qualified licensed appraisers and adjusted for management’s estimates of costs to sell. Accordingly, values for OREO are classified as Level 3.

There was no impairment recognized during 2023 of OREO assets still held in the Consolidated Balance Sheets at period end. The following table presents, as of December 31, 2022, OREO measured at fair value on a nonrecurring basis that was still held in the Consolidated Balance Sheets at period-end.

Mortgage servicing rights: The fair value of mortgage servicing rights is determined using an income approach with various assumptions including expected cash flows, market discount rates, prepayment speeds, servicing costs, and other factors. Because these factors are not all observable and include management’s assumptions, mortgage servicing rights are classified within Level 3 of the fair value hierarchy. Mortgage servicing rights were carried at amortized cost at December 31, 2023 and December 31, 2022. See Note 8, “Mortgage Servicing Rights,” for information about the valuation adjustments to the Company’s mortgage servicing rights.

Financial instrument

Fair
Value

Valuation Technique

Significant
Unobservable Inputs

Range of Inputs

Individually evaluated loans, net of allowance for credit losses

21,303

Appraised value of collateral less estimated costs to sell

Estimated costs to sell

4-10%

OREO

—

Appraised value of property less estimated costs to sell

Estimated costs to sell

4-10%

The Company elected to measure all mortgage loans originated for sale on or after July 1, 2012 at fair value under the fair value option as permitted under ASC 825. Electing to measure these assets at fair value reduces certain timing differences and better matches the changes in fair value of the loans with changes in the fair value of derivative instruments used to economically hedge them.

Net gains of $3,300 resulting from fair value changes of these mortgage loans were recorded in income during 2023, as compared to net losses of $9,854 in 2022 and net gains of $10,354 in 2021. The amounts do not reflect changes in fair values of related derivative instruments used to hedge exposure to market-related risks associated with these mortgage loans. The change in fair value of both mortgage loans held for sale and the related derivative instruments are recorded in “Mortgage banking income” in the Consolidated Statements of Income.

The Company’s valuation of mortgage loans held for sale incorporates an assumption for credit risk; however, given the short-term period that the Company holds these loans, valuation adjustments attributable to instrument-specific credit risk is nominal. Interest income on mortgage loans held for sale measured at fair value is accrued as it is earned based on contractual rates and is reflected in loan interest income on the Consolidated Statements of Income.

The carrying amounts and estimated fair values of the Company’s financial instruments, including those assets and liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis, were as follows as of the dates presented:


			Fair Value
	Carrying Value		Level 1		Level 2		Level 3		Total
December 31, 2023
Financial assets
Cash and cash equivalents	$	801,351	$	801,351	$	—	$	—	$	801,351
Securities held to maturity	1,221,464		—		1,121,830		—		1,121,830
Securities available for sale	923,279		—		923,279		—		923,279
Loans held for sale	179,756		—		179,756		—		179,756

Loans, net	12,152,652		—		—		11,594,363		11,594,363

Mortgage servicing rights	91,688		—		—		117,664		117,664
Derivative instruments	37,151		—		37,151		—		37,151
Financial liabilities
Deposits	$	14,076,785	$	11,381,556	$	2,678,494	$	—	$	14,060,050
Short-term borrowings	307,577		307,577		—		—		307,577


Junior subordinated debentures	112,978		—		96,435		—		96,435
Subordinated notes	316,422		—		255,192		—		255,192
Derivative instruments	33,608		—		33,608		—		33,608


			Fair Value
	Carrying Value		Level 1		Level 2		Level 3		Total
December 31, 2022
Financial assets
Cash and cash equivalents	$	575,992	$	575,992	$	—	$	—	$	575,992
Securities held to maturity	1,324,040		—		1,206,540		—		1,206,540
Securities available for sale	1,533,942		—		1,533,942		—		1,533,942
Loans held for sale	110,105		—		110,105		—		110,105
Loans, net	11,386,214		—		—		10,850,181		10,850,181
Mortgage servicing rights	84,448		—		—		122,454		122,454

Derivative instruments	38,047		—		38,047		—		38,047
Financial liabilities
Deposits	$	13,486,966	$	11,791,526	$	1,653,891	$	—	$	13,445,417
Short-term borrowings	712,232		712,232		—		—		712,232


Junior subordinated debentures	112,042		—		98,574		—		98,574
Subordinated notes	316,091		—		277,500		—		277,500
Derivative instruments	33,185		—		33,185		—		33,185