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

9 Months Ended

Sep. 30, 2024

Fair Value Disclosures [Abstract]

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

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 September 30, 2024 and December 31, 2023:

•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. In addition, the Company will enter into risk participation agreements ("RPA"). Under an RPA-in agreement, a derivative liability, the Company assumes, or participates in, a portion of the credit risk associated with the interest rate swap position with the commercial borrower, for a fee received from the other bank. Under an RPA-out agreement, a derivative asset, the Company participates out a portion of the credit risk associated with the interest rate swap position executed with the commercial borrower, for a fee paid to the participating bank. RPAs are derivative financial instruments recorded at fair value. Although we have determined that a majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit assumptions associated with our risk participation agreements utilize Level 3 inputs.

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

September 30, 2024	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	$	214,135	$	214,135	$	214,135	$	—	$	—
Securities available-for-sale	1,060,014		1,060,014		5,181		1,028,714		26,119
Securities held-to-maturity	602,328		574,750		—		574,750		—
Loans held for sale	2,987		2,987		—		2,987		—
Loans, net	5,262,890		5,023,940		—		—		5,023,940
Accrued interest receivable	33,384		33,384		—		7,342		26,042
Interest rate swaps	11,389		11,389		—		11,352		37
Liabilities:
Noninterest-bearing deposits	$	1,796,746	$	1,796,746	$	—	$	1,796,746	$	—
Interest-bearing deposits	4,763,966		4,702,034		—		4,702,034		—
Subordinated debentures	123,645		112,327		—		—		112,327
FHLB and other borrowings	207,500		207,500		—		207,500		—
Accrued interest payable	13,720		13,720		—		13,720		—
Interest rate swaps	11,388		11,388		—		11,352		36

December 31, 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	$	355,147	$	355,147	$	355,147	$	—	$	—
Securities available-for-sale	1,039,322		1,039,322		16,675		1,004,434		18,213
Securities held-to-maturity	654,539		615,944		—		615,944		—
Loans held for sale	2,914		2,914		—		2,914		—
Loans, net	5,116,010		4,877,935		—		—		4,877,935
Accrued interest receivable	33,300		33,300		—		8,632		24,668
Interest rate swaps	12,170		12,170		—		12,129		41
Liabilities:
Non-interest-bearing deposits	$	1,849,013	$	1,849,013	$	—	$	1,849,013	$	—
Interest-bearing deposits	4,613,859		4,430,227		—		4,430,227		—
Subordinated debentures	123,386		109,426		—		—		109,426
FHLB and other borrowings	390,000		390,000		—		390,000		—
Accrued interest payable	22,702		22,702		—		22,702		—
Interest rate swaps	12,175		12,175		—		12,129		46

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

September 30, 2024
($ 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	$	5,181	$	5,181	$	—	$	—
Obligations of U.S. Government agencies and sponsored entities	98,580		—		98,580		—
Municipal securities	420,701		—		394,611		26,090
Mortgage-backed securities	502,435		—		502,435		—
Corporate obligations	33,117		—		33,088		29
Total available-for-sale	$	1,060,014	$	5,181	$	1,028,714	$	26,119
Loans held for sale	$	2,987	$	—	$	2,987	$	—
Interest rate swaps	$	11,389	$	—	$	11,352	$	37
Liabilities:
Interest rate swaps	$	11,388	$	—	$	11,352	$	36

December 31, 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)
Available-for-sale
U.S. Treasury	$	16,675	$	16,675	$	—	$	—
Obligations of U.S. Government agencies and sponsored entities	104,923		—		104,923		—
Municipal securities	438,466		—		420,283		18,183
Mortgage-backed securities	441,661		—		441,661		—
Corporate obligations	37,597		—		37,567		30
Total available-for-sale	$	1,039,322	$	16,675	$	1,004,434	$	18,213
Loans held for sale	$	2,914	$	—	$	2,914	$	—
Interest rate swaps	$	12,170	$	—	$	12,129	$	41
Liabilities:
Interest rate swaps	$	12,175	$	—	$	12,129	$	46

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)	2024		2023
Balance, January 1	$	30	$	31
Paydowns	(1)		—
Balance at September 30	$	29	$	31

	Municipal Securities
($ in thousands)	2024		2023
Balance, January 1	$	18,183	$	15,117
Maturities, calls and paydowns	(580)		(532)
Transfer from level 2 to level 3	8,384		6,085
Transfer from level 3 to level 2	(270)		—
Unrealized gain (loss) included in comprehensive income	373		(1,177)
Balance at September 30	$	26,090	$	19,493

	Interest Rate Swaps - Risk Participations
($ in thousands)	2024		2023
Balance, January 1	$	(5)	$	—
RPA-in	10		11
RPA-out	(4)		—
Balance at September 30	$	1	$	11

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 September 30, 2024 and December 31, 2023. 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
September 30, 2024	$	29	Discounted cash flow	Probability of default	7.09% - 7.45%
December 31, 2023	$	30	Discounted cash flow	Probability of default	7.81% - 7.89%

Municipal Securities	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range of Inputs
September 30, 2024	$	26,090	Discounted cash flow	Discount Rate	2.60% - 5.56%
December 31, 2023	$	18,183	Discounted cash flow	Discount Rate	2.34% - 5.50%

Interest Rate Swaps - Risk Participations	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range of Inputs
September 30, 2024	$	1	Credit Value Adjustment	Credit Spread	225 bps - 300 bps
				Recovery Rate	70%
December 31, 2023	$	(5)	Credit Value Adjustment	Credit Spread	225 bps - 300 bps
				Recovery Rate	70%

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 September 30, 2024 and December 31, 2023.

September 30, 2024
($ 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	$	2,894	$	—	$	—	$	2,894
Other real estate owned	7,314		—		—		7,314

December 31, 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	$	2,494	$	—	$	—	$	2,494
Other real estate owned	8,320		—		—		8,320