FAIR VALUES OF ASSETS AND LIABILITIES

12 Months Ended

Dec. 31, 2022

The Company follows the guidance of ASC Topic 820, Fair Value Measurements and Disclosures, that establishes a framework for measuring fair value and expands disclosures about fair value measurements.

The guidance defines the fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

In accordance with the guidance, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1:Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2:Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use 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 for substantially the full term of the assets and liabilities.

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

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value:

Cash and Cash Equivalents – For such short-term instruments, the carrying amount is a reasonable estimate of fair value.

Debt Securities - The fair value of available-for-sale securities is determined by various valuation methodologies. Where quoted market prices are available in an active market, securities are classified within Level 1. If quoted market prices are not available, then fair values are estimated by using pricing models or quoted prices of securities with similar characteristics. Level 2 securities include obligations of U.S. government corporations and agencies, obligations of states and political subdivisions, mortgage-backed securities and collateralized mortgage obligations. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using the discounted cash flow or other market indicators (Level 3).

Loans – The fair value of loans was estimated by discounting the expected future cash flows using the current interest rates at which similar loans would be made for the same remaining maturities, in accordance with the exit price notion as defined by FASB ASC 820, Fair Value Measurement ("ASC 820"). Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments and as a result of the adoption of ASU 2016-01, which also included credit risk and other market factors to calculate the exit price fair value in accordance with ASC 820.

Loans Held for Sale - Loans held for sale are carried at the lower of cost or fair value in the aggregate as determined by the outstanding commitments from investors. As, such we classify those loans subjected to nonrecurring fair value adjustments as Level 2 of the fair value hierarchy.

Interest Rate Swaps - The Company offers interest rate swaps to certain commercial loan customers to allow them to hedge the risk of rising interest rates on their variable rate loans. The Company originates a variable rate loan and enters into a variable to fixed interest rate swap with the customer. The Company also enters into an offsetting swap with a correspondent bank. These back-to-back agreements are intended to offset each other and allow the Company to originate a variable rate loan, while providing the contract or fixed interest payments for the customer. Due to the observable nature of the inputs used in deriving the fair value of these derivative contracts, the valuation of interest rates swaps is classified within Level 2 of the fair value hierarchy.

Accrued Interest Receivable – The carrying amount of accrued interest receivable approximates fair value and is classified as level 2 for accrued interest receivable related to investments securities and Level 3 for accrued interest receivable related to loans.

Deposits – The fair values of demand deposits are, as required by ASC Topic 825, equal to the carrying value of such deposits. Demand deposits include non-interest-bearing demand deposits, savings accounts, NOW accounts, and money market demand accounts. The fair value of variable rate term deposits, those repricing within six months or less, approximates the carrying value of these deposits. Discounted cash flows have been used to value fixed rate term deposits and variable rate term deposits repricing after six months. The discount rate used is based on interest rates currently being offered on comparable deposits as to amount and term.

Short-Term Borrowings – The carrying value of any federal funds purchased and other short-term borrowings approximates their fair values.

FHLB and Other Borrowings – The fair value of the fixed rate borrowings is estimated using discounted cash flows, based on current incremental borrowing rates for similar types of borrowing arrangements. The carrying amount of any variable rate borrowing approximates its fair value.

Subordinated Debentures – Fair values are determined based on the current market value of like instruments of a similar maturity and structure.

Accrued Interest Payable – The carrying amount of accrued interest payable approximates fair value resulting in a Level 2 classification.

Off-Balance Sheet Instruments – Fair values of off-balance sheet financial instruments are based on fees charged to enter into similar agreements. However, commitments to extend credit do not represent a significant value until such commitments are funded or closed. Management has determined that these instruments do not have a distinguishable fair value and no fair value has been assigned.

The following table presents the Company’s securities that are measured at fair value on a recurring basis and the level within the hierarchy in which the fair value measurements fell as of December 31, 2022 and 2021:


December 31, 2022	Fair Value Measurements
($ in thousands)	Fair Value		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Available-for-sale
U.S. Treasury	$	123,854	$	123,854	$	—	$	—
Obligations of U.S. government agencies and sponsored entities	144,369		—		144,369		—
Municipal securities	457,857		—		442,740		15,117
Mortgage-backed Securities	490,139		—		490,139		—
Corporate obligations	40,882		—		40,851		31
Total investment securities available-for-sale	$	1,257,101	$	123,854	$	1,118,099	$	15,148
Loans held for sale	4,443		—		4,443		—
Interest rate swaps	$	12,825	$	—	$	12,825	$	—
Liabilities:
Interest rate swaps	$	12,825	$	—	$	12,825	$	—


December 31, 2021	Fair Value Measurements
($ in thousands)	Fair Value		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
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 investment securities available-for-sale	$	1,751,832	$	135,158	$	1,596,508	$	20,166
Loans held for sale	$	7,678	$	—	$	7,678	$	—

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


	Bank-Issued Trust Preferred Securities
($ in thousands)	2022		2021
Balance, January 1	$	43	$	235
Paydowns	(12)		(215)
Gain included in income	—		27
Unrealized (loss) included in comprehensive income	—		(4)
Balance, December 31	$	31	$	43


	Municipal Securities
($ in thousands)	2022		2021
Balance, January 1	$	20,123	$	20,126
Purchases	—		6,019
Maturities, calls and paydowns	(2,328)		(5,457)
Unrealized (loss) gain included in comprehensive income	(2,678)		(565)
Balance, December 31	$	15,117	$	20,123

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 December 31, 2022 and 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

December 31, 2022

Discounted cash flow

Discount rate

6.98% - 7.19%

December 31, 2021

Discounted cash flow

Discount rate

2.35% - 2.47%

Municipal Securities

Fair Value

Valuation Technique

Significant Unobservable
Inputs

Range of Inputs

December 31, 2022

15,117

Discounted cash flow

Discount rate

3.00% - 4.00%

December 31, 2021

20,123

Discounted cash flow

Discount rate

0.50% - 1.90%

Following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a non-recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.

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 the independent appraisers to adjust for differences between the comparable sales and income date 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 adjusts the appraisal for cost associated with litigation and collections. 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 loan 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 costs 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 adjust the appraisal 10 percent 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 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 income. Other real estate measured at fair value on a non-recurring basis at December 31, 2022, amounted to $4.8 million. Other real estate owned is classified within Level 3 of the fair value hierarchy.

The following table presents the fair value measurement of assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements were reported at December 31, 2022 and 2021:


	Fair Value Measurements Using
($ in thousands)	Fair Value		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2022
Collateral dependent loans	$	5,552	$	—	$	—	$	5,552
Other real estate owned	4,832		—		—		4,832

December 31, 2021
Collateral dependent loans	$	3,564	$	—	$	—	$	3,564
Other real estate owned	2,565		—		—		2,565

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


	Fair Value Measurements
December 31, 2022	Carrying Amount		Estimated Fair Value		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
($ in thousands)
Financial Instruments:
Assets:
Cash and cash equivalents	$	145,315	$	145,315	$	145,315	$	—	$	—
Securities available-for-sale	1,257,101		1,257,101		123,854		1,118,099		15,148
Securities held-to-maturity	691,484		642,097		—		642,097		—
Loans held for sale	4,443		4,443		—		4,443		—
Loans, net	3,735,240		3,681,313		—		—		3,681,313
Accrued interest receivable	27,723		27,723		—		9,757		17,966
Interest rate swaps	12,825		12,825		—		12,825		—

Liabilities:
Non-interest-bearing deposits	$	1,630,203	$	1,630,203	$	—	$	1,630,203	$	—
Interest-bearing deposits	3,864,201		3,505,990		—		3,505,990		—
Subordinated debentures	145,027		133,816		—		—		133,816
FHLB and other borrowings	130,100		130,100		—		130,100		—
Accrued interest payable	3,324		3,324		—		3,324		—
Interest rate swaps	12,825		12,825		—		12,825		—


	Fair Value Measurements
December 31, 2021	Carrying Amount		Estimated Fair Value		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
($ in thousands)
Financial Instruments:
Assets:
Cash and cash equivalents	$	919,713	$	919,713	$	919,713	$	—	$	—
Securities available-for-sale	1,751,832		1,751,832		135,158		1,596,508		20,166
Loans held for sale	7,678		7,678		—		7,678		—
Loans, net	2,928,811		2,956,278		—		—		2,956,278
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		—

- 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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