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

6 Months Ended

Jun. 30, 2023

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, 2023 and December 31, 2022:

•Investment Securities: The fair value for investment securities is 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 - Loans held for sale are carried at fair value in the aggregate as determined by the outstanding commitments from investors. As, such we classify those loans subjected to recurring fair value adjustments as Level 2 of the fair value 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 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.

•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.

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


June 30, 2023	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	$	194,050	$	194,050	$	194,050	$	—	$	—
Securities available-for-sale	1,199,103		1,199,103		124,616		1,053,435		21,052
Securities held-to-maturity	663,473		613,831		—		613,831		—
Loans held for sale	6,602		6,602		—		6,602		—
Loans, net	4,958,311		4,795,956		—		—		4,795,956
Accrued interest receivable	30,837		30,837		—		8,957		21,880
Interest rate swaps	12,469		12,469		—		12,469		—
Liabilities:
Noninterest-bearing deposits	$	2,086,666	$	2,086,666	$	—	$	2,086,666	$	—
Interest-bearing deposits	4,405,601		4,151,398		—		4,151,398		—
Subordinated debentures	128,214		106,361		—		—		106,361
FHLB and other borrowings	280,000		280,000		—		280,000		—
Accrued interest payable	7,968		7,968		—		7,968		—
Interest rate swaps	12,469		12,469		—		12,469		—


December 31, 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	$	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		—

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


June 30, 2023
($ 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)
Assets:
Available-for-sale
U.S. Treasury	$	124,616	$	124,616	$	—	$	—
Obligations of U.S. Government agencies and sponsored entities	132,738		—		132,738		—
Municipal securities	447,901		—		426,880		21,021
Mortgage-backed securities	455,979		—		455,979		—
Corporate obligations	37,869		—		37,838		31
Total available-for-sale	$	1,199,103	$	124,616	$	1,053,435	$	21,052
Loans held for sale	$	6,602	$	—	$	6,602	$	—
Interest rate swaps	$	12,469	$	—	$	12,469	$	—
Liabilities
Interest rate swaps	$	12,469	$	—	$	12,469	$	—


December 31, 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	$	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 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	$	—

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)	2023		2022
Balance, January 1	$	31	$	43
Paydowns	—		(11)
Balance at June 30	$	31	$	32


	Municipal Securities
($ in thousands)	2023		2022
Balance, January 1	$	15,117	$	20,123
Purchases	—		—
Maturities, calls and paydowns	(236)		(236)
Transfer from level 2 to level 3	6,085		—
Unrealized gain (loss) included in comprehensive income	55		(1,630)
Balance at June 30	$	21,021	$	18,257

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, 2023 and December 31, 2022. 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, 2023

Discounted cash flow

Probability of default

7.69% - 7.76%

December 31, 2022

Discounted cash flow

Probability of default

6.98% - 7.19%

Municipal Securities

Fair Value

Valuation Technique

Significant
Unobservable Inputs

Range of Inputs

June 30, 2023

21,021

Discounted cash flow

Discount Rate

3.65% - 5.61%

December 31, 2022

15,117

Discounted cash flow

Discount Rate

3.00% - 4.00%

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, 2023 and December 31, 2022.


June 30, 2023
($ 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	$	6,740	$	—	$	—	$	6,740
Other real estate owned	5,588		—		—		5,588


December 31, 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	$	5,552	$	—	$	—	$	5,552
Other real estate owned	4,832		—		—		4,832

- 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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