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Fair Value

9 Months Ended

Sep. 30, 2023

5. Fair Value

FASB ASC No. 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level I prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair value of most securities available for sale is determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

For those securities that cannot be priced using quoted market prices or observable inputs a Level 3 valuation is determined. These securities are primarily trust preferred securities and investments in state and municipal securities. The fair value of state and municipal obligations are derived by comparing the securities to current market rates plus an appropriate credit spread to determine an estimated value. Illiquidity spreads are then considered. Credit reviews are performed on each of the issuers. The significant unobservable inputs used in the fair value measurement of the Corporation’s state and municipal obligations are credit spreads related to specific issuers. Significantly higher credit spread assumptions would result in significantly lower fair value measurement. Conversely, significantly lower credit spreads would result in a significantly higher fair value measurements.

The fair value of derivatives is based on valuation models using observable market data as of the measurement date (Level 2 inputs).


		September 30, 2023
		Fair Value Measurements Using
		Significant Unobservable Inputs (Level 3)
(Dollar amounts in thousands)		Level 1			Level 2			Level 3			Total
U.S. Government agencies		$	—		$	89,933		$	—		$	89,933
Mortgage Backed Securities-residential			—			556,690			—			556,690
Mortgage Backed Securities-commercial			—			7,284			—			7,284
Collateralized mortgage obligations			—			180,956			—			180,956
State and municipal			—			351,373			1,180			352,553
Municipal taxable			—			32,628			—			32,628
U.S. Treasury			—			2,151			—			2,151
Collateralized debt obligations			—			—			3,024			3,024
TOTAL		$	—		$	1,221,015		$	4,204		$	1,225,219
Derivative Assets						3,608
Derivative Liabilities						(3,608)


		December 31, 2022
		Fair Value Measurements Using
		Significant Unobservable Inputs (Level 3)
(Dollar amounts in thousands)		Level 1			Level 2			Level 3			Total
U.S. Government agencies		$	—		$	98,473		$	—		$	98,473
Mortgage Backed Securities-residential			—			620,248			—			620,248
Mortgage Backed Securities-commercial			—			9,677			—			9,677
Collateralized mortgage obligations			—			203,485			—			203,485
State and municipal			—			358,608			1,545			360,153
Municipal taxable			—			32,515			—			32,515
U.S. Treasury			—			2,944			—			2,944
Collateralized debt obligations			—			—			2,986			2,986
TOTAL		$	—		$	1,325,950		$	4,531		$	1,330,481
Derivative Assets						2,838
Derivative Liabilities						(2,838)

There were no transfers between Level 1 and Level 2 during 2023 and 2022.

The tables below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2023 and the year ended December 31, 2022.


		Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
		Three Months Ended
		September 30, 2023
		State and
		municipal			Collateralized
(Dollar amounts in thousands)		obligations			debt obligations			Total
Beginning balance, July 1		$	1,180		$	2,941		$	4,121
Total realized/unrealized gains or losses
Included in earnings			—			—			—
Included in other comprehensive income			—			83			83
Transfers			—			—			—
Settlements			—			—			—
Ending balance, September 30		$	1,180		$	3,024		$	4,204


		Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
		Nine Months Ended
		September 30, 2023
		State and
		municipal			Collateralized
(Dollar amounts in thousands)		obligations			debt obligations			Total
Beginning balance, January 1		$	1,545		$	2,986		$	4,531
Total realized/unrealized gains or losses
Included in earnings			—			—			—
Included in other comprehensive income			—			38			38
Transfers			—			—			—
Settlements			(365)			—			(365)
Ending balance, September 30		$	1,180		$	3,024		$	4,204


		Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
		Year Ended
		December 31, 2022
		State and
		municipal			Collateralized
(Dollar amounts in thousands)		obligations			debt obligations			Total
Beginning balance, January 1		$	1,895		$	3,359		$	5,254
Total realized/unrealized gains or losses
Included in earnings			—			—			—
Included in other comprehensive income			—			(373)			(373)
Purchases			—			—			—
Settlements			(350)			—			(350)
Ending balance, December 31		$	1,545		$	2,986		$	4,531

The following table presents quantitative information about recurring and non-recurring Level 3 fair value measurements at September 30, 2023.


(Dollar amounts in thousands)		Fair Value			Valuation Technique(s)		Unobservable Input(s)		Range
State and municipal obligations		$	1,180		Discounted cash flow		Discount rate		4.04%-4.44	%
Collateralized debt obligations		$	3,024		Discounted cash flow		Discount rate		7.22	%
Collateral dependent loans		$	1,812		Discounted cash flow		Discount rate for age of appraisal and market conditions		0.00%-50.00	%

The following table presents quantitative information about recurring and non-recurring Level 3 fair value measurements at December 31, 2022.


(Dollar amounts in thousands)		Fair Value			Valuation Technique(s)		Unobservable Input(s)		Range
State and municipal obligations		$	1,545		Discounted cash flow		Discount rate		3.73%-4.44	%
Collateralized debt obligations		$	2,986		Discounted cash flow		Discount rate		5.34	%
Collateral dependent loans			4,477		Discounted cash flow		Discount rate for age of appraisal and market conditions		0.00%-50.00	%

Fair value is measured based on the value of the collateral securing those loans, and is determined using several methods. Generally the fair value of real estate is determined based on appraisals by qualified licensed appraisers. Appraisals for real estate generally use three methods to derive value: cost, sales or market comparison and income approach. The cost method bases value on the cost to replace current property. The market comparison evaluates the sales price of similar properties in the same market area. The income approach considers net operating income generated by the property and the investor’s required return. The final fair value is based on a reconciliation of these three approaches. If an appraisal is not available, the fair value may be determined by using a cash flow analysis, a broker’s opinion of value, the net present value of future cash flows, or an observable market price from an active market. Fair value of other real estate is based upon the current appraised values of the properties as determined by qualified licensed appraisers and the Company’s judgment of other relevant market conditions. Appraisals are obtained annually and reductions in value are recorded as a valuation through a charge to expense. The primary unobservable input used by management in estimating fair value are additional

discounts to the appraised value to consider market conditions and the age of the appraisal, which are based on management’s past experience in resolving these types of properties. These discounts range from 0% to 50%. Values for non-real estate collateral, such as business equipment, are based on appraisals performed by qualified licensed appraisers or the customers financial statements. Values for non real estate collateral use much higher discounts than real estate collateral. Other real estate and individually evaluated loans carried at fair value are primarily comprised of smaller balance properties.

The carrying amounts and estimated fair value of financial instruments at September 30, 2023 and December 31, 2022, are shown below. Carrying amount is the estimated fair value for cash and due from banks, federal funds sold, short-term borrowings, accrued interest receivable and payable, demand deposits, short-term debt and variable-rate loans or deposits that reprice frequently and fully. Security fair values were described previously. For fixed-rate, collectively evaluated loans or deposits, variable rate loans or deposits with infrequent repricing or repricing limits, and for longer-term borrowings, fair value is based on discounted cash flows using current market rates applied to the estimated life and considering credit risk. The valuation of individually evaluated loans was described previously. Loan fair value estimates represent an exit price. Fair values of loans held for sale are based on market bids on the loans or similar loans. It was not practicable to determine the fair value of Federal Home Loan Bank stock due to restrictions placed on its transferability. Fair value of debt is based on current rates for similar financing. The fair value of off-balance sheet items is not considered material.


		September 30, 2023
		Carrying			Fair Value
(Dollar amounts in thousands)		Value			Level 1			Level 2			Level 3			Total
Cash and due from banks		$	74,668		$	25,257		$	49,411		$	—		$	74,668
Federal funds sold			688			—			688			—			688
Securities available-for-sale			1,225,219			—			1,221,015			4,204			1,225,219
Restricted stock			15,398			n/a			n/a			n/a			n/a
Loans, net			3,078,592			—			—			2,901,310			2,901,310
Accrued interest receivable			22,546			—			6,837			15,709			22,546
Deposits			(4,040,995)			—			(4,035,772)			—			(4,035,772)
Short-term borrowings			(132,734)			—			(132,734)			—			(132,734)
Other borrowings			(84,578)			—			(84,614)			—			(84,614)
Accrued interest payable			(1,929)			—			(1,929)			—			(1,929)


		December 31, 2022
		Carrying			Fair Value
(Dollar amounts in thousands)		Value			Level 1			Level 2			Level 3			Total
Cash and due from banks		$	222,517		$	29,400		$	193,117		$	—		$	222,517
Federal funds sold			9,374			—			9,374			—			9,374
Securities available-for-sale			1,330,481			—			1,325,950			4,531			1,330,481
Restricted stock			15,378			n/a			n/a			n/a			n/a
Loans, net			3,027,659			—			—			2,930,680			2,930,680
Accrued interest receivable			21,288			—			5,529			15,759			21,288
Deposits			(4,368,871)			—			(4,369,402)			—			(4,369,402)
Short-term borrowings			(70,875)			—			(70,875)			—			(70,875)
Other borrowings			(9,589)			—			(8,788)			—			(8,788)
Accrued interest payable			(483)			—			(483)			—			(483)

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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