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Fair Values of Financial Instruments

12 Months Ended

Dec. 31, 2021

FAIR VALUES OF FINANCIAL INSTRUMENTS

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 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. Level 1 securities include U.S. Treasury securities. 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 U.S. Government-sponsored agency and mortgage-backed securities, state and municipal securities and corporate obligations 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 securities, U.S. Government-sponsored mortgage-backed securities 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 12. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES of these Notes to Consolidated 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 December 31, 2021 and 2020.


			Fair Value Measurements Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
December 31, 2021	Fair Value		(Level 1)		(Level 2)		(Level 3)
Available for sale securities:
U.S. Government-sponsored agency securities	$	95,136	$	—	$	95,136	$	—
U.S. Treasury	999		999		—		—
State and municipal	1,576,532		—		1,571,076		5,456
U.S. Government-sponsored mortgage-backed securities	667,605		—		667,601		4

Corporate obligations	4,279		—		4,248		31

Interest rate swap asset	41,133		—		41,133		—

Interest rate swap liability	41,968		—		41,968		—


			Fair Value Measurements Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
December 31, 2020	Fair Value		(Level 1)		(Level 2)		(Level 3)
Available for sale securities:
U.S. Government-sponsored agency securities	$	2,430	$	—	$	2,430	$	—

State and municipal	1,257,885		—		1,255,441		2,444
U.S. Government-sponsored mortgage-backed securities	654,669		—		654,665		4

Corporate obligations	4,135		—		4,104		31

Interest rate swap asset	74,335		—		74,335		—

Interest rate swap liability	76,353		—		76,353		—

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 year ended December 31, 2021 and 2020.


	Available for Sale Securities
	For The Year Ended
	December 31, 2021		December 31, 2020
Beginning Balance	$	2,479	$	2,893


Included in other comprehensive income	227		16
Purchases, issuances, and settlements	3,241		—

Principal payments	(456)		(430)
Ending balance	$	5,491	$	2,479

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 December 31, 2021 or 2020.

TRANSFERS BETWEEN LEVELS

There were no transfers in or out of Level 3 during 2021 or 2020.

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 year ended December 31, 2021 and 2020.


			Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets	Significant Other Observable Inputs	Significant Unobservable Inputs
December 31, 2021	Fair Value		(Level 1)	(Level 2)	(Level 3)
Collateral dependent loans	$	24,491	—	—	$	24,491
Other real estate owned	$	96	—	—	$	96


			Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets	Significant Other Observable Inputs	Significant Unobservable Inputs
December 31, 2020	Fair Value		(Level 1)	(Level 2)	(Level 3)
Collateral dependent loans	$	37,250	—	—	$	37,250
Other real estate owned	$	544	—	—	$	544

Collateral Dependent Loans and Other Real Estate Owned

Determining fair value for collateral dependent loans and other real estate requires obtaining a current independent appraisal of the collateral and applying a discount factor, which includes selling costs if applicable, to the value. The fair value of real estate is generally 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 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 December 31, 2021 and 2020.

December 31, 2021

Fair Value

Valuation Technique

Unobservable Inputs

Range (Weighted-Average)

State and municipal securities

5,456

Discounted cash flow

Maturity Call Date
US Muni BQ curve
Discount rate
Weighted-average coupon

1 month to 15 years

A- to BBB-

0.75% - 4%

3.7%

Corporate obligations and U.S. Government-sponsored mortgage backed securities

Discounted cash flow

Risk free rate
plus Premium for illiquidity
Weighted-average coupon

3 month LIBOR

plus 200bps

Collateral dependent loans

24,491

Collateral based measurements

Discount to reflect current market conditions and ultimate collectability
Weighted-average discount by loan balance

0% - 10% 5.5%

Other real estate owned

Appraisals

Discount to reflect current market conditions
Weighted-average discount of other real estate owned balance

0% - 44% 43.5%

December 31, 2020

Fair Value

Valuation Technique

Unobservable Inputs

Range (Weighted-Average)

State and municipal securities

2,444

Discounted cash flow

Maturity Call Date
US Muni BQ curve
Discount rate
Weighted-average coupon

1 month to 15 years

A- to BBB-

1.5% - 4%

3.9%

Corporate obligations and U.S. Government-sponsored mortgage backed securities

Discounted cash flow

Risk free rate
plus Premium for illiquidity
Weighted-average coupon

3 month LIBOR

plus 200bps

Collateral dependent loans

37,250

Collateral based measurements

Discount to reflect current market conditions and ultimate collectability
Weighted-average discount by loan balance

0% - 10% 6.0%

Other real estate owned

544

Appraisals

Discount to reflect current market conditions
Weighted-average discount of other real estate owned balance

0% - 30% 26.2%

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 December 31, 2021 and 2020.


	2021
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets at December 31:
Cash and cash equivalents	$	167,146	$	167,146	$	—	$	—
Interest-bearing deposits	474,154		474,154		—		—
Investment securities available for sale	2,344,551		999		2,338,061		5,491
Investment securities held to maturity	2,179,802		—		2,188,600		13,903
Loans held for sale	11,187		—		11,187		—
Loans	9,046,464		—		—		9,068,319
Federal Home Loan Bank stock	28,736		—		28,736		—
Interest rate swap asset	41,133		—		41,133		—
Interest receivable	57,187		—		57,187		—
Liabilities at December 31:
Deposits	$	12,732,577	$	12,038,992	$	690,089	$	—
Borrowings:

Securities sold under repurchase agreements	181,577		—		181,572		—
Federal Home Loan Bank advances	334,055		—		337,005		—
Subordinated debentures and term loans	118,618		—		107,892		—
Interest rate swap liability	41,968		—		41,968		—
Interest payable	2,762		—		2,762		—


	2020
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets at December 31:
Cash and cash equivalents	$	192,896	$	192,896	$	—	$	—
Interest-bearing deposits	392,305		392,305		—		—
Investment securities available for sale	1,919,119		—		1,916,640		2,479
Investment securities held to maturity	1,227,668		—		1,260,815		19,478
Loans held for sale	3,966		—		3,966		—
Loans	9,112,526		—		—		9,191,628
Federal Home Loan Bank stock	28,736		—		28,736		—
Interest rate swap asset	74,335		—		74,335		—
Interest receivable	53,948		—		53,948		—
Liabilities at December 31:
Deposits	$	11,361,610	$	10,482,865	$	878,257	$	—
Borrowings:

Securities sold under repurchase agreements	177,102		—		177,097		—
Federal Home Loan Bank advances	389,430		—		399,991		—
Subordinated debentures and term loans	118,380		—		108,439		—
Interest rate swap liability	76,353		—		76,353		—
Interest payable	3,287		—		3,287		—

- 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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