FAIR VALUE DISCLOSURES AND REPORTING, THE FAIR VALUE OPTION AND FAIR VALUE MEASUREMENTS

3 Months Ended

Jun. 30, 2022

FAIR VALUE DISCLOSURES AND REPORTING, THE FAIR VALUE OPTION AND FAIR VALUE MEASUREMENTS

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 assets 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 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 observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the factors that market participants would likely consider in pricing an asset or liability.

The following methods and assumptions were used by the Company to estimate its financial instrument fair values disclosed at June 30, 2022 and December 31, 2021:

•Investment Securities: The fair value 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, valuing 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).

•Loans Held for Sale: Since loans designated by the Company as available-for-sale are typically sold shortly after making the decision to sell them, realized gains or losses are usually recognized within the same period and fluctuations in fair values are not relevant for reporting purposes. If available-for-sale loans are held on our books for an extended period of time, the fair value of those loans is determined using quoted secondary-market prices.

•Collateral Dependent Loans: Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral. 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 independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans. Such adjustments, if any, result in a Level 3 classification of the inputs for determining fair value. The Company generally adjusts the appraisal down by approximately 10 percent to account for cost associated with litigation and collection. 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 expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment.

•Other Real Estate Owned: Other real estate owned consists of properties obtained through foreclosure. The adjustment at the time of foreclosure is recorded through the allowance for credit losses. Fair value of other real estate owned is based on current independent appraisals of the collateral less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals, which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach with data from comparable properties. 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, if any, result in a Level 3 classification of the inputs for determining fair value. In the determination of fair value subsequent to foreclosure, management also considers other factors or recent developments, such as changes in market conditions from the time of valuation and anticipated sales values considering plans for disposition, which could result in an adjustment to lower the collateral value estimates indicated in the appraisals. The Company generally adjusts the appraisal down by approximately 10 percent to account for carrying costs. Periodic revaluations are classified as Level 3 in the fair value hierarchy since assumptions are used that may not be observable in the market. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined the fair value declines subsequent to foreclosure, a valuation allowance is recorded through other non-interest income. Operating costs associated with the assets after acquisition are also recorded as non-interest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and recorded in other non-interest income. Other real estate owned is classified within Level 3 of the fair value hierarchy.

Estimated fair values for the Company’s financial instruments are as follows, as of the dates noted:


June 30, 2022	Carrying Amount		Estimated Fair Value		Fair Value Measurements
($ in thousands)
					Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)


Financial Instruments:
Assets:
Cash and cash equivalents	$	356,771	$	356,771	$	356,771	$	—	$	—
Securities available-for-sale:
U.S. Treasury	126,841		126,841		126,841		—		—
Obligations of U.S. government agencies and sponsored entities	158,660		158,660		—		158,660		—
Municipal securities	591,818		591,818		—		573,561		18,257
Mortgage-backed securities	574,634		574,634		—		574,634		—
Corporate obligations	37,294		37,294		—		37,262		32
Securities held-to-maturity	593,154		561,333		—		561,333		—
Loans, net	3,092,524		3,115,862		—		—		3,115,862
Accrued interest receivable	24,543		24,543		—		9,211		15,332
Liabilities:
Noninterest-bearing deposits	$	822,841	$	822,841	$	—	$	822,841	$	—
Interest-bearing deposits	4,483,356		4,331,370		—		4,331,370		—
Subordinated debentures	144,876		145,055		—		—		145,055
Accrued interest payable	1,607		1,607		—		1,607		—


December 31, 2021	Carrying Amount		Estimated Fair Value		Fair Value Measurements
($ in thousands)
					Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)


Financial Instruments:
Assets:
Cash and cash equivalents	$	919,713	$	919,713	$	919,713	$	—	$	—
Securities available-for-sale:
U.S. Treasury	135,158		135,158		135,158		—		—
Obligations of U.S. government agencies and sponsored entities	183,021		183,021		—		183,021		—
Municipal securities	708,502		708,502		—		688,379		20,123
Mortgage-backed securities	688,298		688,298		—		688,298		—
Corporate obligations	36,853		36,853		—		36,810		43
Loans, net	2,928,811		2,956,297		—		—		2,956,297
Accrued interest receivable	23,256		23,256		—		6,838		16,418
Liabilities:
Non-interest-bearing deposits	$	756,118	$	756,118	$	—	$	756,118	$	—
Interest-bearing deposits	4,470,666		4,431,771		—		4,431,771		—
Subordinated debentures	144,726		156,952		—		—		156,952
Accrued interest payable	1,711		1,711		—		1,711		—

Assets measured at fair value on a recurring basis are summarized below:


June 30, 2022
($ in thousands)	Fair Value		Fair Value Measurements Using
			Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale
U.S. Treasury	$	126,841	$	126,841	$	—	$	—
Obligations of U.S. Government agencies and sponsored entities	158,660		—		158,660		—
Municipal securities	591,818		—		573,561		18,257
Mortgage-backed securities	574,634		—		574,634		—
Corporate obligations	37,294		—		37,262		32
Total available-for-sale	$	1,489,247	$	126,841	$	1,344,117	$	18,289


December 31, 2021
($ in thousands)	Fair Value		Fair Value Measurements Using
			Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale
U.S. Treasury	$	135,158	$	135,158	$	—	$	—
Obligations of U.S. Government agencies and sponsored entities	183,021		—		183,021		—
Municipal securities	708,502		—		688,379		20,123
Mortgage-backed securities	688,298		—		688,298		—
Corporate obligations	36,853		—		36,810		43
Total available-for-sale	$	1,751,832	$	135,158	$	1,596,508	$	20,166

The following is a reconciliation of activity for assets measured at fair value based on significant unobservable inputs (Level 3) information.


	Bank-Issued Trust Preferred Securities
($ in thousands)	2022		2021
Balance, January 1	$	43	$	235
Paydowns	(11)		(55)
Unrealized gain included in comprehensive income	—		38
Balance at June 30	$	32	$	218


	Municipal Securities
($ in thousands)	2022		2021
Balance, January 1	$	20,123	$	20,126
Purchases	—		4,189
Maturities, calls and paydowns	(236)		(4,185)
Unrealized loss included in comprehensive income	(1,630)		(26)
Balance at June 30	$	18,257	$	20,104

The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis at June 30, 2022 and December 31, 2021. The following tables present quantitative information about recurring Level 3 fair value measurements ($ in thousands):

Trust Preferred Securities

Fair Value

Valuation Technique

Significant Unobservable
Inputs

Range of Inputs

June 30, 2022

Discounted cash flow

Probability of default

4.25% - 4.72%

December 31, 2021

Discounted cash flow

Probability of default

2.35% - 2.47%

Municipal Securities

Fair Value

Valuation Technique

Significant
Unobservable Inputs

Range of Inputs

June 30, 2022

18,257

Discounted cash flow

Discount Rate

2.00% - 3.90%

December 31, 2021

20,123

Discounted cash flow

Discount Rate

0.50% - 1.90%

The following table presents the fair value measurement of assets measured at fair value on a non-recurring basis and the level within the fair value hierarchy in which the fair value measurements were classified at June 30, 2022 and December 31, 2021.


June 30, 2022
($ in thousands)			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Collateral dependent loans	$	2,011	$	—	$	—	$	2,011
Other real estate owned	1,985		—		—		1,985


December 31, 2021
($ in thousands)			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Collateral dependent loans	$	3,564	$	—	$	—	$	3,564
Other real estate owned	2,565		—		—		2,565

- 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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