| Fair Value Measurements |
Note 12 – Fair Value Measurements Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy established by the Company also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels of inputs that may be used to measure fair value are: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company 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 view about the assumptions that market participants would use in pricing an asset or liability. There were no transfers between levels during the six-month period ended June 30, 2026 and June 30, 2025. The Company has certain assets and liabilities measured at fair value. The majority of those assets and liabilities are measured using Level 2 measurement methods. The following is a description of the techniques used to measure all assets and liabilities using Level 2 techniques at fair value as of June 30, 2026, and December 31, 2025: | ● | Government-sponsored agency debt securities are primarily priced using available market information through processes such as benchmark spreads, market valuations of like securities, like securities groupings, and matrix pricing. |
| ● | Other government-sponsored agency securities, mortgage-backed securities (“MBS”), collateralized mortgage obligations (“CMO”), and some of the actively traded real estate mortgage investment conduits and collateralized mortgage obligations are priced using available market information including benchmark yields, prepayment speeds, spreads, volatility of similar securities and trade date. |
| ● | State and political subdivisions are largely grouped by characteristics (e.g., geographical data and source of revenue in trade dissemination systems). Because some securities are not traded daily and due to other grouping limitations, active market quotes are often obtained using benchmarking for like securities. For securities where quoted prices or market prices are not available, fair value is calculated using discounted cash flows or other market indicators (level 3). |
| ● | Asset-backed collateralized loan obligations (“CLO”), and asset-backed securities (“ABS”) were priced using data from a pricing matrix supported by our bond accounting service provider and are therefore considered Level 2 valuations. For securities where quoted prices or market prices are not available, fair value is calculated using discounted cash flows or other market indicators (level 3). |
| ● | Residential mortgage loans available for sale in the secondary market are carried at fair market value. The fair value of loans held-for-sale is determined using quoted secondary market prices for similar loans. |
| ● | Mortgage banking derivatives, e.g., residential mortgage loans with locked interest rates to be sold in the secondary market and forward commitments for the future delivery of mortgage loans to third-party investors, as well as forward commitments for future delivery of MBS, are considered derivatives. Fair values are estimated based on observable changes in mortgage interest rates including prices for MBS from the date of the commitment and do not typically involve significant judgments by management. |
| ● | The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income to derive the resultant value. The Company is able to compare the valuation model inputs, such as the discount rate, prepayment speeds, weighted average delinquency and foreclosure/bankruptcy rates to widely available published industry data for reasonableness. |
| ● | Interest rate swap positions, both assets and liabilities, are based on valuation pricing models using an income approach reflecting readily observable market parameters such as interest rate yield curves. |
Assets and Liabilities Measured at Fair Value on a Recurring Basis: The tables below present the balance of assets and liabilities at June 30, 2026 and December 31, 2025, respectively, measured by the Company at fair value on a recurring basis: | | | | | | | | | | | | | | | June 30, 2026 | | | Level 1 | | Level 2 | | Level 3 | | Total | Assets: | | | | | | | | | | | | | Securities available-for-sale | | | | | | | | | | | | | U.S. Treasury | | $ | 144,387 | | $ | - | | $ | - | | $ | 144,387 | U.S. government agencies | | | - | | | 68,404 | | | - | | | 68,404 | U.S. government agencies mortgage-backed | | | - | | | 81,236 | | | - | | | 81,236 | States and political subdivisions | | | - | | | 191,000 | | | 6,945 | | | 197,945 | Collateralized mortgage obligations | | | - | | | 343,061 | | | - | | | 343,061 | Asset-backed securities | | | - | | | 34,187 | | | 4,938 | | | 39,125 | Collateralized loan obligations | | | - | | | 165,856 | | | - | | | 165,856 | Equity securities | | | - | | | 746 | | | - | | | 746 | Loans held-for-sale | | | - | | | 2,349 | | | - | | | 2,349 | Mortgage servicing rights | | | - | | | - | | | 9,825 | | | 9,825 | Interest rate derivatives 1 | | | - | | | 3,856 | | | - | | | 3,856 | Total | | $ | 144,387 | | $ | 890,695 | | $ | 21,708 | | $ | 1,056,790 | | | | | | | | | | | | | | Liabilities: | | | | | | | | | | | | | Interest rate swap agreements, including risk participation agreements | | $ | - | | $ | 475 | | $ | - | | $ | 475 | Mortgage banking derivatives | | | - | | | 12 | | | - | | | 12 | Total | | $ | - | | $ | 487 | | $ | - | | $ | 487 | | | | | | | | | | | | | |
1 Interest rate derivatives include interest rate swaps, a rate cap and risk participation agreements. | | | | | | | | | | | | | | | December 31, 2025 | | | Level 1 | | Level 2 | | Level 3 | | Total | Assets: | | | | | | | | | | | | | Securities available-for-sale | | | | | | | | | | | | | U.S. Treasury | | $ | 165,860 | | $ | - | | $ | - | | $ | 165,860 | U.S. government agencies | | | - | | | 29,176 | | | - | | | 29,176 | U.S. government agencies mortgage-backed | | | - | | | 88,780 | | | - | | | 88,780 | States and political subdivisions | | | - | | | 199,428 | | | 6,947 | | | 206,375 | Collateralized mortgage obligations | | | - | | | 359,305 | | | - | | | 359,305 | Asset-backed securities | | | - | | | 40,966 | | | 4,850 | | | 45,816 | Collateralized loan obligations | | | - | | | 194,464 | | | - | | | 194,464 | Equity securities | | | - | | | 747 | | | - | | | 747 | Loans held-for-sale | | | - | | | 3,645 | | | - | | | 3,645 | Mortgage servicing rights | | | - | | | - | | | 9,459 | | | 9,459 | Interest rate derivatives 1 | | | - | | | 4,321 | | | - | | | 4,321 | Mortgage banking derivatives | | | - | | | 31 | | | - | | | 31 | Total | | $ | 165,860 | | $ | 920,863 | | $ | 21,256 | | $ | 1,107,979 | | | | | | | | | | | | | | Liabilities: | | | | | | | | | | | | | Interest rate swap agreements, including risk participation agreements | | $ | - | | $ | 1,157 | | $ | - | | $ | 1,157 | Total | | $ | - | | $ | 1,157 | | $ | - | | $ | 1,157 |
1 Interest rate derivatives include interest rate swaps, a rate cap and risk participation agreements. The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are as follows: | | | | | | | | | | | | | Six Months Ended June 30, 2026 | | | Securities available-for-sale | | | | | | | | States and | | Mortgage | | | Asset-backed | | Political | | Servicing | | | Securities | | Subdivisions | | Rights | Beginning balance January 1, 2026 | | $ | 4,850 | | $ | 6,947 | | $ | 9,459 | Transfers out of Level 3 | | | - | | | - | | | - | Total gains or losses | | | | | | | | | | Included in earnings | | | - | | | - | | | 52 | Included in other comprehensive income | | | (10) | | | 5 | | | - | Purchases, issuances, sales, and settlements | | | | | | | | | | Purchases | | | 474 | | | - | | | - | Issuances | | | - | | | - | | | 670 | Settlements | | | (376) | | | (7) | | | (356) | Ending balance June 30, 2026 | | $ | 4,938 | | $ | 6,945 | | $ | 9,825 | | | | | | | | | | |
| | | | | | | | | | | | | | Six Months Ended June 30, 2025 | | | | | Securities available-for-sale | | | | | | | | | States and | | Mortgage | | | | Asset-backed | | Political | | Servicing | | | | Securities | | Subdivisions | | Rights | | Beginning balance January 1, 2025 | | $ | 3,254 | | $ | 11,896 | | $ | 10,374 | | Transfers out of Level 3 | | | - | | | - | | | - | | Total gains or losses | | | | | | | | | | | Included in earnings | | | - | | | - | | | (883) | | Included in other comprehensive income | | | (11) | | | (705) | | | - | | Purchases, issuances, sales, and settlements | | | | | | | | | | | Purchases | | | 461 | | | - | | | - | | Issuances | | | - | | | - | | | 407 | | Settlements | | | (269) | | | (85) | | | (218) | | Ending balance June 30, 2025 | | $ | 3,435 | | $ | 11,106 | | $ | 9,680 | |
The following table and commentary present quantitative and qualitative information about Level 3 fair value measurements as of June 30, 2026: | | | | | | | | | | | | | | | | | | | | | | | | Weighted | Measured at fair value | | | | | | | Significant Unobservable | | | | Average | on a recurring basis: | | Fair Value | | Valuation Methodology | | Inputs | | Range of Input | | of Inputs | | | | | | | | | | | | | | States and political subdivisions | | $ | 6,945 | | Discounted Cash Flow | | Discount Rate | | 3.6 - 3.6% | | 3.6 | % | | | | | | | | Liquidity Premium | | 0.5 - 0.5% | | 0.5 | % | | | | | | | | | | | | | | Asset-backed securities | | $ | 4,938 | | Discounted Cash Flow | | Discount Rate | | 5.3 - 5.3% | | 5.3 | % | | | | | | | | | | | | | | Mortgage servicing rights | | $ | 9,825 | | Discounted Cash Flow | | Discount Rate | | 9.0 - 9.0% | | 9.0 | % | | | | | | | | Prepayment Speed | | 4.4 - 31.2% | | 7.9 | % | | | | | | | | | | | | | |
The following table and commentary present quantitative and qualitative information about Level 3 fair value measurements as December 31, 2025: | | | | | | | | | | | | | | | | | | | | | | | | Weighted | Measured at fair value | | | | | | | Significant Unobservable | | | | Average | on a recurring basis: | | Fair Value | | Valuation Methodology | | Inputs | | Range of Input | | of Inputs | | | | | | | | | | | | | | States and political subdivisions | | $ | 6,947 | | Discounted Cash Flow | | Discount Rate | | 3.5 - 3.6% | | 3.5 | % | | | | | | | | Liquidity Premium | | 0.5 - 0.5% | | 0.5 | % | | | | | | | | | | | | | | Asset-backed securities | | $ | 4,850 | | Discounted Cash Flow | | Discount Rate | | 4.9 - 4.9% | | 4.9 | % | | | | | | | | | | | | | | Mortgage servicing rights | | $ | 9,459 | | Discounted Cash Flow | | Discount Rate | | 9.0 - 9.0% | | 9.0 | % | | | | | | | | Prepayment Speed | | 0.0 - 33.2% | | 8.2 | % |
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis: The Company may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis in accordance with GAAP. These assets consist of individually evaluated loans and OREO. The following is a description of the techniques used to measure these assets using Level 3 techniques at fair value as of June 30, 2026, and December 31, 2025: | ● | The fair value of individually evaluated loans with specific allocations of the allowance for credit losses is essentially based on recent real estate appraisals or the fair value of the collateralized asset. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are made in the appraisal process by the appraisers to reflect differences between the available comparable sales and income data. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. |
| ● | Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (“OREO”) are measured at fair value, less costs to sell. Fair values are based on third-party appraisals of the property, resulting in a Level 3 classification, or an executed pending sales contract. In cases where the carrying amount exceeds the fair value, less costs to sell, a valuation loss is recognized. |
For assets measured at fair value on a nonrecurring basis at June 30, 2026 and December 31, 2025, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets: | | | | | | | | | | | | | | | June 30, 2026 | | | Level 1 | | Level 2 | | Level 3 | | Total | Individually evaluated loans1 | | $ | - | | $ | - | | $ | 32,239 | | $ | 32,239 | Other real estate owned, net2 | | | - | | | - | | | 622 | | | 622 | Total | | $ | - | | $ | - | | $ | 32,861 | | $ | 32,861 |
1 Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral or another form of third-party valuation for collateral-dependent loans, which had a carrying amount of $43.5 million and a valuation allowance of $11.3 million, resulting in an increase of specific allocations within the allowance for credit losses on loans of $4.8 million for the six months ended June 30, 2026. 2 OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $622,000 at June 30, 2026, which is made up of the outstanding balance of $632,000, net of a valuation allowance of $10,000. | | | | | | | | | | | | | | | December 31, 2025 | | | Level 1 | | Level 2 | | Level 3 | | Total | Individually evaluated loans1 | | $ | - | | $ | - | | $ | 34,430 | | $ | 34,430 | Other real estate owned, net2 | | | - | | | - | | | 1,427 | | | 1,427 | Total | | $ | - | | $ | - | | $ | 35,857 | | $ | 35,857 |
1 Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of Collateral for collateral-dependent loans and to a lesser extent the discounted cash flow, which had a carrying amount of $40.9 million and a valuation allowance of $6.4 million, resulting in a decrease of specific allocations within the allowance for credit losses on loans of $747,000 for the year December 31, 2025. 2 OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $1.4 million at December 31, 2025, which is made up of the outstanding balance of $2.1 million, net of a valuation allowance of $632,000. The Company has estimated the fair values of these assets based primarily on Level 3 inputs. OREO and individually evaluated loans are generally valued using the fair value of collateral provided by third-party appraisals. These valuations include assumptions related to cash flow projections, discount rates, and recent comparable sales. The numerical ranges of unobservable inputs for these valuation assumptions are not meaningful.
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