Disclosures About Fair Value of Assets and Liabilities

3 Months Ended

Mar. 31, 2019

Fair Value Disclosures [Abstract]

Disclosures About Fair Value of Assets and Liabilities

DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES

The Corporation used fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The accounting guidance defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  ASC 820 applies only when other guidance requires or permits assets or liabilities to be measured at fair value; it does not expand the use of fair value in any new circumstances.

As defined in ASC 820, fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants. It represents an exit price at the measurement date. Market participants are buyers and sellers, who are independent, knowledgeable, and willing and able to transact in the principal (or most advantageous) market for the asset or liability being measured. Current market conditions, including imbalances between supply and demand, are considered in determining fair value. The Corporation values its assets and liabilities in the principal market where it sells the particular asset or transfers the liability with the greatest volume and level of activity. In the absence of a principal market, the valuation is based on the most advantageous market for the asset or liability (i.e., the market where the asset could be sold or the liability transferred at a price that maximizes the amount to be received for the asset or minimizes the amount to be paid to transfer the liability).

Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability. Inputs can be observable or unobservable. Observable inputs are those assumptions which market participants would use in pricing the particular asset or liability. These inputs are based on market data and are obtained from a source independent of the Corporation. Unobservable inputs are assumptions based on the Corporation’s own information or estimate of assumptions used by market participants in pricing the asset or liability. Unobservable inputs are based on the best and most current information available on the measurement date. All inputs, whether observable or unobservable, are ranked in accordance with a prescribed fair value hierarchy which gives the highest ranking to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest ranking to unobservable inputs for which there is little or no market activity (Level 3). Fair values for assets or liabilities classified as Level 2 are based on one or a combination of the following factors: (i) quoted prices for similar assets; (ii) observable inputs for the asset or liability, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Corporation considers an input to be significant if it drives 10 percent or more of the total fair value of a particular asset or liability.

RECURRING MEASUREMENTS

Assets and liabilities are considered to be measured at fair value on a recurring basis if fair value is measured regularly (i.e., daily, weekly, monthly or quarterly). Recurring valuation occurs at a minimum on the measurement date. Assets and liabilities are considered to be measured at fair value on a nonrecurring basis if the fair value measurement of the instrument does not necessarily result in a change in the amount recorded on the balance sheet. Generally, nonrecurring valuation is the result of the application of other accounting pronouncements which require assets or liabilities to be assessed for impairment or recorded at the lower of cost or fair value. The fair value of assets or liabilities transferred in or out of Level 3 is measured on the transfer date, with any additional changes in fair value subsequent to the transfer considered to be realized or unrealized gains or losses.

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the

accompanying balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Investment Securities

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. The Corporation currently has no securities classified within Level 1 of the hierarchy. Where significant observable inputs, other than Level 1 quoted prices, are available, securities are classified within Level 2 of the valuation hierarchy. Level 2 securities include government-sponsored agency and mortgage backs and state and municipal securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include state and municipal, government-sponsored mortgage backs and corporate obligations securities. Level 3 fair value for securities was determined using a discounted cash flow model that incorporated market estimates of interest rates and volatility in markets that have not been active.

Third party vendors compile prices from various sources and may apply such techniques as matrix pricing to determine the value of identical or similar investment securities (Level 2). Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather relying on the investment securities’ relationship to other benchmark quoted investment securities. Any investment security not valued based upon the methods above are considered Level 3.

Interest Rate Derivative Agreements

See information regarding the Corporation’s interest rate derivative products in NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS of these Notes to Consolidated Condensed Financial Statements. The following table presents the fair value measurements of assets and liabilities recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the ASC 820-10 fair value hierarchy in which the fair value measurements fall at March 31, 2019, and December 31, 2018.

			Fair Value Measurements Using:
March 31, 2019	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale securities:
U.S. Government-sponsored agency securities	$	33,703	$	—	$	33,703	$	—
State and municipal	651,858		—		648,957		2,901
U.S. Government-sponsored mortgage-backed securities	562,040		—		562,036		4
Corporate obligations	31		—		—		31
Interest rate swap asset	14,194		—		14,194		—
Interest rate cap	35		—		35		—
Interest rate swap liability	15,166		—		15,166		—

			Fair Value Measurements Using:
December 31, 2018	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale securities:
U.S. Government-sponsored agency securities	$	13,582	$	—	$	13,582	$	—
State and municipal	606,135		—		602,842		3,293
U.S. Government-sponsored mortgage-backed securities	522,447		—		522,443		4
Corporate obligations	31		—		—		31
Interest rate swap asset	11,948		—		11,948		—
Interest rate cap	135		—		135		—
Interest rate swap liability	12,636		—		12,636		—

There were no gains or losses included in earnings that were attributable to the changes in unrealized gains or losses related to assets or

liabilities held at March 31, 2019 or December 31, 2018.

Level 3 Reconciliation

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying

balance sheets using significant unobservable Level 3 inputs for the three months ended March 31, 2019 and 2018.

	Available for Sale Securities
	Three Months Ended
	March 31, 2019			March 31, 2018
Balance at beginning of the period	$	3,328		$	3,978
Included in other comprehensive income	43			(25		)
Principal payments	(435		)	13
Ending balance	$	2,936		$	3,966

Transfers Between Levels

There were no transfers in or out of Level 3 for the three months ended March 31, 2019 and 2018.

Nonrecurring Measurements

Following is a description of valuation methodologies used for instruments measured at fair value on a non-recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy for March 31, 2019, and December 31, 2018.

			Fair Value Measurements Using
March 31, 2019	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans (collateral dependent)	$	11,728	$	—	$	—	$	11,728
Other real estate owned	112		—		—		112

			Fair Value Measurements Using
December 31, 2018	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable  Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans (collateral dependent)	$	11,866	$	—	$	—	$	11,866
Other real estate owned	657		—		—		657

Impaired Loans (collateral dependent)

Loans for which it is probable that the Corporation will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value of the collateral for collateral dependent loans. 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 and applying a discount factor to the value. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to increase, such increase is reported as a component of the provision for loan losses. Loan losses are charged against the allowance when management believes the uncollectability of the loan is confirmed. During 2018 and 2019, certain impaired loans were partially charged off or re-evaluated. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

Other Real Estate Owned

The fair value for impaired loans and other real estate owned is measured based on the value of the collateral securing those loans or real estate and is determined using several methods. The fair value of real estate is generally determined based on appraisals by qualified licensed appraisers. The appraisers typically determine the value of the real estate by utilizing an income or market valuation approach. If an appraisal is not available, the fair value may be determined by using a discounted cash flow analysis. Fair value on other collateral such as business assets is typically ascertained by assessing, either singularly or some combination of, asset appraisals, accounts receivable aging reports, inventory listings and or customer financial statements. Both appraised values and values based on borrower’s financial information are discounted as considered appropriate based on age and quality of the information and current market conditions.

Unobservable (Level 3) Inputs

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements, other than goodwill, at March 31, 2019 and December 31, 2018.

March 31, 2019	Fair Value		Valuation Technique	Unobservable Inputs	Range (Weighted-Average)
State and municipal securities	$	2,901	Discounted cash flow	Maturity/Call date	1 month to 15 yrs
				US Muni BQ curve	A- to BBB-
				Discount rate	2% - 5%
Corporate obligations and U.S. Government-sponsored mortgage backed securities	$	35	Discounted cash flow	Risk free rate	3 month LIBOR
				plus premium for illiquidity	plus 200bps
Impaired loans (collateral dependent)	$	11,728	Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	0% - 10% (5%)
Other real estate owned	$	112	Appraisals	Discount to reflect current market conditions	0% - 51% (51%)

December 31, 2018	Fair Value		Valuation Technique	Unobservable Inputs	Range (Weighted-Average)
State and municipal securities	$	3,293	Discounted cash flow	Maturity/Call date	1 month to 20 yrs
				US Muni BQ curve	A- to BBB-
				Discount rate	.69% - 5%
Corporate obligations and equity securities	$	35	Discounted cash flow	Risk free rate	3 month LIBOR
				plus premium for illiquidity	plus 200bps
Impaired loans (collateral dependent)	$	11,866	Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	0% - 10% (6%)
Other real estate owned	$	657	Appraisals	Discount to reflect current market conditions	0% - 10% (4%)

The following is a discussion of the sensitivity of significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used in recurring fair value measurement and how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement.

State and Municipal Securities, Corporate Obligations and U.S. Government-sponsored Mortgage Backed Securities

The significant unobservable inputs used in the fair value measurement of the Corporation's state and municipal securities, corporate obligations and U.S. Government-sponsored mortgage backed securities are premiums for unrated securities and marketability discounts. Significant increases or decreases in either of those inputs in isolation would result in a significantly lower or higher fair value measurement. Generally, changes in either of those inputs will not affect the other input.

Fair Value of Financial Instruments

The following table presents estimated fair values of the Corporation’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2019, and December 31, 2018.

			March 31, 2019
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying Amount		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and cash equivalents	$	115,878	$	115,878	$	—	$	—
Interest-bearing time deposits	70,672		70,672		—		—
Investment securities available for sale	1,247,632		—		1,244,697		2,936
Investment securities held to maturity	615,027		—		615,182		7,453
Loans held for sale	3,330		—		3,330		—
Loans	7,218,418		—		—		7,140,432
Federal Home Loan Bank stock	24,588		—		24,588		—
Interest rate swap and cap asset	14,229		—		14,229		—
Interest receivable	40,931		—		40,931		—
Liabilities:
Deposits	$	8,047,798	$	6,439,422	$	1,576,603	$	—
Borrowings:
Federal funds purchased	20,000		—		20,000		—
Securities sold under repurchase agreements	111,783		—		111,742		—
Federal Home Loan Bank advances	345,013		—		342,283		—
Subordinated debentures and term loans	138,519		—		129,020		—
Interest rate swap liability	15,166		—		15,166		—
Interest payable	7,313		—		7,313		—

			December 31, 2018
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying Amount		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and cash equivalents	$	139,247	$	139,247	$	—	$	—
Interest-bearing time deposits	36,963		36,963		—		—
Investment securities available for sale	1,142,195		—		1,138,867		3,328
Investment securities held to maturity	490,387		—		481,377		7,840
Loans held for sale	4,778		—		4,778		—
Loans	7,143,915		—		—		7,004,193
Federal Home Loan Bank stock	24,588		—		24,588		—
Interest rate swap and cap asset	12,083		—		12,083		—
Interest receivable	40,881		—		40,881		—
Liabilities:
Deposits	$	7,754,593	$	6,267,879	$	1,464,129	$	—
Borrowings:
Federal funds purchased	104,000		—		104,000		—
Securities sold under repurchase agreements	113,512		—		113,437		—
Federal Home Loan Bank advances	314,986		—		318,728		—
Subordinated debentures and term loans	138,463		—		127,298		—
Interest rate swap liability	12,636		—		12,636		—
Interest payable	5,607		—		5,607		—