The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, income approach, and/or the cost approach. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance. Securities available-for-sale and mortgage servicing rights are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or impairment write-downs of individual assets.

Level 3 — Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Securities available for sale—Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. The Company had no securities classified as Level 3 during any of the periods covered in these financial statements.

Loans held for sale—Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is based on what secondary markets are currently offering for loans with similar characteristics. As such, we classify those loans subjected to nonrecurring fair value adjustments as Level 2.

Impaired loans—Loans are not recorded at fair value on a recurring basis. However, from time to time, loans maybe considered impaired and an allowance for credit losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. The fair value of an impaired loan is estimated using one of several methods, including collateral value, fair value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value which uses substantially observable data, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value, or the appraised value contains a significant unobservable assumption, such as deviations from comparable sales, and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

Foreclosed assets—Foreclosed assets include assets acquired through, or in lieu of, loan foreclosure. Foreclosed assets are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, management periodically performs valuations and the assets are carried at the lower of carrying amount or fair value less cost to sell. When the fair value of foreclosed assets is based on an observable market price or a current appraised value which uses substantially observable data, the Company records the impaired originated loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value, or the appraised value contains a significant unobservable assumption, such as deviations from comparable sales, and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3. Revenue and expenses from operations and changes in the valuation allowance are included in other non-interest expense.

Mortgage servicing rights—Mortgage servicing rights are carried at fair value. A valuation model, which utilizes a discounted cash flow analysis using a discount rate and prepayment speed assumptions is used in the computation of the fair value measurement. While the prepayment speed assumption is currently quoted for comparable instruments, the discount rate assumption currently requires a significant degree of management judgment and is therefore considered an unobservable input. As such, the Company classifies mortgage servicing rights subjected to recurring fair value adjustments as Level 3. Additional information regarding mortgage servicing rights can be found in Note 10 in the consolidated financial statements at Item 1 of this report.

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis (in thousands):


Fair value at December 31, 2021	Total		Level 1		Level 2		Level 3
Marketable equity securities	$	2,938	$	2,938	$	—	$	—
Debt securities available for sale:
Obligations of U.S. government agencies	1,257,389		—		1,257,389		—
Obligations of states and political subdivisions	192,244		—		192,244		—
Corporate bonds	6,756		—		6,756		—
Asset backed securities	751,549		—		751,549		—
Loans held for sale	3,466		—		3,466		—
Mortgage servicing rights	5,874		—		—		5,874
Total assets measured at fair value	$	2,220,216	$	2,938	$	2,211,404	$	5,874


Fair value at December 31, 2020	Total		Level 1		Level 2		Level 3
Marketable equity securities	$	3,025	$	3,025	$	—	$	—
Debt securities available for sale:
Obligations of U.S. government agencies	812,374		—		812,374		—
Obligations of states and political subdivisions	129,095		—		129,095		—
Corporate bonds	2,544		—		2,544		—
Asset backed securities	470,251		—		470,251		—
Loans held for sale	6,268		—		6,268		—
Mortgage servicing rights	5,092		—		—		5,092
Total assets measured at fair value	$	1,428,649	$	3,025	$	1,420,532	$	5,092

The following table provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the years ended December 31, 2021, 2020, and 2019. Had there been any transfer into or out of Level 3 during 2021, 2020, or 2019, the amount included in the “Transfers into (out of) Level 3” column would represent the beginning balance of an item in the period (interim quarter) during which it was transferred (in thousands):


Year ended December 31,	Beginning Balance		Transfers into (out of) Level 3	Change Included in Earnings		Issuances		Ending Balance
2021: Mortgage servicing rights	$	5,092	—	$	(872)	$	1,654	$	5,874
2020: Mortgage servicing rights	$	6,200	—	$	(2,634)	$	1,526	$	5,092
2019: Mortgage servicing rights	$	7,098	—	$	(1,811)	$	913	$	6,200

The Company’s method for determining the fair value of mortgage servicing rights is described in Note 1. The key unobservable inputs used in determining the fair value of mortgage servicing rights are mortgage prepayment speeds and the discount rate used to discount cash projected cash flows. Generally, any significant increases in the mortgage prepayment speed and discount rate utilized in the fair value measurement of the mortgage servicing rights will result in a negative fair value adjustments (and decrease in the fair value measurement). Conversely, a decrease in the mortgage prepayment speed and discount rate will result in a positive fair value adjustment (and increase in the fair value measurement). Note 10 contains additional information regarding mortgage servicing rights.

The following table presents quantitative information about recurring Level 3 fair value measurements at December 31, 2021 and 2020:

December 31, 2021

Fair Value
(in thousands)

Valuation
Technique

Unobservable
Inputs

Range,
Weighted
Average

Mortgage Servicing Rights

$5,874

Discounted
cash flow

Constant
prepayment rate

187%-264%, 208%

Discount rate

10%-14%, 12%

December 31, 2020

Mortgage Servicing Rights

$5,092

Discounted
cash flow

Constant
prepayment rate

240%-333%, 294%

Discount rate

10%-14%, 12%

The tables below present the recorded amount of assets and liabilities measured at fair value on a nonrecurring basis, as of the dates indicated, that had a write-down or an additional allowance provided during the periods indicated (in thousands):


Year ended December 31, 2021	Total		Level 1	Level 2	Level 3		Total Gains (Losses)
Fair value:
Impaired loans	$	3,683			$	3,683	$	(1,105)

The impaired loan amount above represents impaired, collateral dependent loans that have been adjusted to fair value. When we identify a collateral dependent loan as impaired, we measure the impairment using the current fair value of the collateral, less selling costs. Depending on the characteristics of a loan, the fair value of collateral is generally estimated by obtaining external appraisals. If we determine that the value of the impaired loan is less than the recorded investment in the loan, we recognize this impairment and adjust the carrying value of the loan to fair value through the allowance for loan and lease losses. The loss represents charge-offs or impairments on collateral dependent loans for fair value adjustments based on the fair value of collateral. The carrying value of loans fully charged-off is zero.

The foreclosed assets amount above represents impaired real estate that has been adjusted to fair value. Foreclosed assets represent real estate which the Bank has taken control of in partial or full satisfaction of loans. At the time of foreclosure, other real estate owned is recorded at fair value less costs to sell, which becomes the property’s new basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan and lease losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Fair value adjustments on other real estate owned are recognized within net loss on real estate owned. The loss represents impairments on non-covered other real estate owned for fair value adjustments based on the fair value of the real estate.

The Company’s property appraisals are primarily based on the sales comparison approach and income approach methodologies, which consider recent sales of comparable properties, including their income generating characteristics, and then make adjustments to reflect the general assumptions that a market participant would make when analyzing the property for purchase. These adjustments may increase or decrease an appraised value and can vary significantly depending on the location, physical characteristics and income producing potential of each property. Additionally, the quality and volume of market information available at the time of the appraisal can vary from period to period and cause significant changes to the nature and magnitude of comparable sale adjustments. Given these variations, comparable sale adjustments are generally not a reliable indicator for how fair value will increase or decrease from period to period. Under certain circumstances, management discounts are applied based on specific characteristics of an individual property.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at December 31, 2021 and 2020:

December 31, 2021

Fair Value
(in thousands)

Valuation Technique

Unobservable Inputs

Range,
Weighted Average

Impaired loans

3,683

Sales comparison
approach
Income approach

Adjustment for differences between
comparable sales; Capitalization rate

Not meaningful;
N/A

December 31, 2020

Fair Value
(in thousands)

Valuation Technique

Unobservable Inputs

Range,
Weighted Average

Impaired loans

1,424

Sales comparison
approach Income
approach

Adjustment for differences between
comparable sales Capitalization rate

Not meaningful;
N/A

Real estate owned (Residential)

824

Sales comparison
approach

Adjustment for differences between
comparable sales

Not meaningful;
N/A

The estimated fair values of financial instruments that are reported at amortized cost in the Corporation’s consolidated balance sheets, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value, were as follows (in thousands):


	December 31, 2021				December 31, 2020
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Level 1 inputs:
Cash and due from banks	$	57,032	$	57,032	$	77,253	$	77,253
Cash at Federal Reserve and other banks	711,389		711,389		592,298		592,298
Level 2 inputs:
Securities held to maturity	199,759		208,140		284,563		298,726
Restricted equity securities	17,250		N/A		17,250		N/A
Level 3 inputs:
Loans, net	4,831,248		4,880,044		4,671,280		4,753,027
Financial liabilities:
Level 2 inputs:
Deposits	7,367,159		7,366,422		6,505,934		6,507,235
Other borrowings	50,087		50,087		26,914		26,914
Level 3 inputs:
Junior subordinated debt	58,079		57,173		57,635		56,632

Securities held to maturity - This includes mortgage-backed securities issued by government sponsored entities and municipal bonds. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.

Loans - Loans are generally valued by discounting expected cash flows using market inputs with adjustments based on cohort level assumptions for certain loan types as well as internally developed estimates at a business segment level. Due to the significance of the unobservable market inputs and assumptions, as well as the absence of a liquid secondary market for most loans, these loans are classified as Level 3. Certain loans are measured based on observable market prices sourced from external data providers and classified as Level 2. Nonaccrual loans are written down and reported at their estimated recovery value which approximates their fair value and classified as Level 3.

Deposits - The estimated fair value of deposits with no stated maturity, such as demand deposit accounts, money market accounts, and savings accounts was the amount payable on demand at the reporting date. The fair value of time deposits was estimated based on a discounted cash flow technique using Level 3 inputs appropriate to the contractual maturity.