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FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS

3 Months Ended

Mar. 31, 2023

FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS

FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS

12. FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS

The Corporation measures certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB topic 820, “Fair Value Measurements and Disclosures” establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs used in determining valuations into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

Level 1 – Fair value is based on unadjusted quoted prices in active markets that are accessible to the Corporation for identical assets or liabilities. These generally provide the most reliable evidence and are used to measure fair value whenever available.

Level 2 – Fair value is based on significant inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term of the asset or liability through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets or liabilities, quoted market prices in markets that are not active for identical or similar assets or liabilities and other observable inputs.

Level 3 – Fair value is based on significant unobservable inputs. Examples of valuation methodologies that would result in Level 3 classification include option pricing models, discounted cash flows and other similar techniques.

The Corporation monitors and evaluates available data relating to fair value measurements on an ongoing basis and recognizes transfers among the levels of the fair value hierarchy as of the date of an event or change in circumstances that affects the valuation method chosen. Examples of such changes may include the market for a particular asset or liability becoming active or inactive, changes in the availability of quoted prices, or changes in the availability of other market data.

At March 31, 2023 and December 31, 2022, assets and liabilities measured at fair value and the valuation methods used are as follows:


		March 31, 2023
		Quoted
		Prices			Other
		in Active			Observable			Unobservable			Total
		Markets			Inputs			Inputs			Fair
(In Thousands)		(Level 1)			(Level 2)			(Level 3)			Value
Recurring fair value measurements, assets:
AVAILABLE-FOR-SALE DEBT SECURITIES:
Obligations of the U.S. Treasury		$	31,163		$	0		$	0		$	31,163
Obligations of U.S. Government agencies			0			23,348			0			23,348
Bank holding company debt securities			0			24,723			0			24,723
Obligations of states and political subdivisions:
Tax-exempt			0			117,812			0			117,812
Taxable			0			57,572			0			57,572
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities			0			97,807			0			97,807
Residential collateralized mortgage obligations			0			38,117			0			38,117
Commercial mortgage-backed securities			0			74,195			0			74,195
Private label commercial mortgage-backed securities			0			8,077			0			8,077
Total available-for-sale debt securities			31,163			441,651			0			472,814
Marketable equity security			873			0			0			873
Servicing rights			0			0			2,585			2,585
Interest rate swap agreements, assets			0			3,145			0			3,145
Total recurring fair value measurements, assets		$	32,036		$	444,796		$	2,585		$	479,417

Recurring fair value measurements, liabilities,
Interest rate swap agreements, liabilities		$	0		$	3,145		$	0		$	3,145

Nonrecurring fair value measurements, assets:
Loans individually evaluated for credit loss, net		$	0		$	0		$	4,907		$	4,907
Foreclosed assets held for sale			0			0			459			459
Total nonrecurring fair value measurements, assets		$	0		$	0		$	5,366		$	5,366


		December 31, 2022
		Quoted
		Prices			Other
		in Active			Observable			Unobservable			Total
		Markets			Inputs			Inputs			Fair
(In Thousands)		(Level 1)			(Level 2)			(Level 3)			Value
Recurring fair value measurements, assets:
AVAILABLE-FOR-SALE DEBT SECURITIES:
Obligations of the U.S. Treasury		$	31,836		$	0		$	0		$	31,836
Obligations of U.S. Government agencies			0			23,430			0			23,430
Bank holding company debt securities			0			25,386			0			25,386
Obligations of states and political subdivisions:
Tax-exempt			0			132,623			0			132,623
Taxable			0			56,812			0			56,812
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities			0			99,941			0			99,941
Residential collateralized mortgage obligations			0			40,296			0			40,296
Commercial mortgage-backed securities			0			79,686			0			79,686
Private label commercial mortgage-backed securities			0			8,023			0			8,023
Total available-for-sale debt securities			31,836			466,197			0			498,033
Marketable equity security			859			0			0			859
Servicing rights			0			0			2,653			2,653
Interest rate swap agreements, assets			0			3,638			0			3,638
Total recurring fair value measurements, assets		$	32,695		$	469,835		$	2,653		$	505,183

Recurring fair value measurements, liabilities,
Interest rate swap agreements, liabilities		$	0		$	3,638		$	0		$	3,638

Nonrecurring fair value measurements, assets:
Impaired loans, net		$	0		$	0		$	3,007		$	3,007
Foreclosed assets held for sale			0			0			275			275
Total nonrecurring fair value measurements, assets		$	0		$	0		$	3,282		$	3,282

Management’s evaluation and selection of valuation techniques and the unobservable inputs used in determining the fair values of assets valued using Level 3 methodologies include sensitive assumptions. Other market participants might use substantially different assumptions, which could result in calculations of fair values that would be substantially different than the amount calculated by management.

At March 31, 2023 and December 31, 2022, quantitative information regarding valuation techniques and the significant unobservable inputs used for assets measured on a recurring basis using unobservable inputs (Level 3 methodologies) are as follows:


		Fair Value at
		3/31/2023			Valuation		Unobservable					Method or Value As of
Asset		(In Thousands)			Technique		Input(s)					3/31/2023
Servicing rights		$	2,585		Discounted cash flow		Discount rate			13.00	%	Rate used through modeling period
							Loan prepayment speeds			138.00	%	Weighted-average PSA
							Servicing fees			0.25	%	of loan balances
										4.00	%	of payments are late
										5.00	%	late fees assessed
									$	1.94		Miscellaneous fees per account per month
							Servicing costs		$	6.00		Monthly servicing cost per account
									$	24.00		Additional monthly servicing cost per loan on loans more than 30 days delinquent
										1.50	%	of loans more than 30 days delinquent
										3.00	%	annual increase in servicing costs


		Fair Value at
		12/31/2022			Valuation		Unobservable					Method or Value As of
Asset		(In Thousands)			Technique		Input(s)					12/31/2022
Servicing rights		$	2,653		Discounted cash flow		Discount rate			13.00	%	Rate used through modeling period
							Loan prepayment speeds			133.00	%	Weighted-average PSA
							Servicing fees			0.25	%	of loan balances
										4.00	%	of payments are late
										5.00	%	late fees assessed
									$	1.94		Miscellaneous fees per account per month
							Servicing costs		$	6.00		Monthly servicing cost per account
									$	24.00		Additional monthly servicing cost per loan on loans more than 30 days delinquent
										1.50	%	of loans more than 30 days delinquent
										3.00	%	annual increase in servicing costs

The fair value of servicing rights is affected by expected future interest rates. Increases (decreases) in future expected interest rates tend to increase (decrease) the fair value of the Corporation’s servicing rights because of changes in expected prepayment behavior by the borrowers on the underlying loans. Unrealized gains (losses) in fair value of servicing rights are included in Loan servicing fees, net, in the unaudited consolidated statements of income.

Following is a reconciliation of activity for Level 3 assets measured at fair value on a recurring basis:


(In Thousands)		Three Months Ended
		March 31, 2023			March 31, 2022
Servicing rights balance, beginning of period		$	2,653		$	2,329
Originations of servicing rights			15			98
Unrealized (loss) gain included in earnings			(83)			2
Servicing rights balance, end of period		$	2,585		$	2,429

Loans are classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Foreclosed assets held for sale consist of real estate acquired by foreclosure. For impaired commercial loans secured by real estate and foreclosed assets held for sale, estimated fair values are determined primarily using values from third-party appraisals. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

At March 31, 2023 and December 31, 2022, quantitative information regarding valuation techniques and the significant unobservable inputs used for nonrecurring fair value measurements using Level 3 methodologies are as follows:


(Dollars In Thousands)															Weighted
					Valuation										Average
		Balance at			Allowance at			Fair Value at			Valuation		Unobservable		Discount at
Asset		3/31/2023			3/31/2023			3/31/2023			Technique		Inputs		3/31/2023

Loans individually evaluated for credit loss:
Commercial real estate - nonowner occupied		$	4,781		$	609		$	4,172		Sales comparison		Discount to appraised value		27	%
Commercial real estate - owner occupied			812			183			629		Sales comparison & SBA guaranty		Discount to appraised value		56	%
All other commercial loans			209			103			106		Liquidation & SBA guaranty		Discount to appraised value		20	%
Total loans individually evaluated for credit loss		$	5,802		$	895		$	4,907
Foreclosed assets held for sale - real estate:
Residential (1-4 family)		$	184		$	0		$	184		Sales comparison		Discount to appraised value		36	%
Commercial real estate			275			0			275		Sales comparison		Discount to appraised value		50	%
Total foreclosed assets held for sale		$	459		$	0		$	459


(Dollars In Thousands)															Weighted
					Valuation										Average
		Balance at			Allowance at			Fair Value at			Valuation		Unobservable		Discount at
Asset		12/31/2022			12/31/2022			12/31/2022			Technique		Inputs		12/31/2022

Impaired loans:
Commercial:
Commercial loans secured by real estate		$	3,400		$	427		$	2,973		Sales comparison		Discount to appraised value		25	%
Commercial and industrial			60			26			34		Liquidation of assets		Discount to appraised value		33	%
Total impaired loans		$	3,460		$	453		$	3,007
Foreclosed assets held for sale - real estate:
Commercial real estate		$	275		$	0		$	275		Sales comparison		Discount to appraised value		50	%
Total foreclosed assets held for sale		$	275		$	0		$	275

Certain of the Corporation’s financial instruments are not measured at fair value in the consolidated financial statements. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from disclosure requirements. Therefore, the aggregate fair value amounts presented may not represent the underlying fair value of the Corporation.

The estimated fair values, and related carrying amounts, of the Corporation’s financial instruments that are not recorded at fair value are as follows:


(In Thousands)		Fair Value		March 31, 2023						December 31, 2022
		Hierarchy		Carrying			Fair			Carrying			Fair
		Level		Amount			Value			Amount			Value
Financial assets:
Cash and cash equivalents		Level 1		$	46,112		$	46,112		$	47,698		$	47,698
Certificates of deposit		Level 2			6,100			5,729			7,350			6,956
Restricted equity securities (included in other assets)		Level 2			16,246			16,246			14,418			14,418
Loans, net		Level 3			1,726,793			1,691,155			1,723,425			1,674,002
Accrued interest receivable		Level 2			8,805			8,805			8,653			8,653

Financial liabilities:
Deposits with no stated maturity		Level 2			1,584,383			1,584,383			1,702,404			1,702,404
Time deposits		Level 2			331,657			329,780			295,189			293,814
Short-term borrowings		Level 2			93,396			93,396			80,062			80,062
Long-term borrowings		Level 2			98,701			97,992			62,347			60,944
Senior debt		Level 2			14,781			13,346			14,765			9,712
Subordinated debt		Level 2			24,634			21,491			24,607			16,186
Accrued interest payable		Level 2			980			980			461			461

The Corporation has commitments to extend credit and has issued standby letters of credit. Standby letters of credit are conditional guarantees of performance by a customer to a third party. Estimates of the fair value of these off-balance sheet items were not made because of the short-term nature of these arrangements and the credit standing of the counterparties.

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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