Fair Value Measurements

9 Months Ended

Sep. 30, 2022

We use fair value measurements when recording and disclosing certain financial assets and liabilities. Debt securities, equity securities and derivative financial instruments are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record other financial instruments at fair value on a nonrecurring basis, such as loans held for sale, individually assessed loans, other real estate owned, or OREO, and other repossessed assets, mortgage servicing rights, or MSRs, and certain other assets.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. In determining fair value, we use various valuation approaches, including market, income and cost approaches. The fair value standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability, which are developed based on market data that we have obtained from independent sources. Unobservable inputs reflect our estimates of assumptions that market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances.

The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:

Level 1: valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets.

Level 2: valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by market data.

Level 3: valuation is derived from other valuation methodologies, including discounted cash flow models and similar techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in determining fair value.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

There have been no changes in our valuation methodologies during the three and nine months ended September 30, 2022. Refer to Note 1 of the Notes to Consolidated Financial Statements in our 2021 Form 10-K for more information on the valuation methodologies that we use for financial instruments recorded at fair value on a recurring or nonrecurring basis.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The following tables present our assets and liabilities that are measured at fair value on a recurring basis by fair value hierarchy level at the dates presented:


	September 30, 2022
(dollars in thousands)	Level 1		Level 2		Level 3		Total
ASSETS
Available-for-sale debt securities:
U.S. Treasury securities	$	120,825	$	—	$	—	$	120,825
Obligations of U.S. government corporations and agencies	—		51,784		—		51,784
Collateralized mortgage obligations of U.S. government corporations and agencies	—		419,719		—		419,719
Residential mortgage-backed securities of U.S. government corporations and agencies	—		41,984		—		41,984
Commercial mortgage-backed securities of U.S. government corporations and agencies	—		323,469		—		323,469
Corporate obligations	—		500		—		500
Obligations of states and political subdivisions	—		38,122		—		38,122
Total Available-for-sale Debt Securities	120,825		875,578		—		996,403
Marketable equity securities	963		62		—		1,025
Total Securities	121,788		875,640		—		997,428
Securities held in a deferred compensation plan	7,354		—		—		7,354
Derivative financial assets:
Interest rate swaps - commercial loans	—		88,888		—		88,888

Forward sale contracts - mortgage loans	—		—		8		8

Total Assets	$	129,142	$	964,528	$	8	$	1,093,678
LIABILITIES
Derivative financial liabilities:
Interest rate swaps - commercial loans	$	—	$	88,920	$	—	$	88,920

Interest rate lock commitments	—		—		3		3
Interest rate swaps - cash flow hedge	—		22,724		—		22,724
Total Liabilities	$	—	$	111,644	$	3	$	111,647


	December 31, 2021
(dollars in thousands)	Level 1		Level 2		Level 3		Total
ASSETS
Available-for-sale debt securities:
U.S. Treasury securities	$	95,327	$	—	$	—	$	95,327
Obligations of U.S. government corporations and agencies	—		70,348		—		70,348
Collateralized mortgage obligations of U.S. government corporations and agencies	—		270,294		—		270,294
Residential mortgage-backed securities of U.S. government corporations and agencies	—		56,793		—		56,793
Commercial mortgage-backed securities of U.S. government corporations and agencies	—		341,300		—		341,300
Corporate obligations	—		500		—		500
Obligations of states and political subdivisions	—		75,089		—		75,089
Total Available-for-sale Debt Securities	95,327		814,324		—		909,651
Marketable equity securities	1,061		81		—		1,142
Total Securities	96,388		814,405		—		910,793
Securities held in a deferred compensation plan	10,230		—		—		10,230
Derivative financial assets:
Interest rate swaps - commercial loans	—		33,528		—		33,528
Interest rate lock commitments	—		—		401		401
Forward sale contracts - mortgage loans	—		—		4		4


Total Assets	$	106,618	$	847,933	$	405	$	954,956
LIABILITIES
Derivative financial liabilities:
Interest rate swaps - commercial loans	$	—	$	33,631	$	—	$	33,631



Total Liabilities	$	—	$	33,631	$	—	$	33,631

Assets Recorded at Fair Value on a Nonrecurring Basis

We may be required to measure certain assets and liabilities at fair value on a nonrecurring basis. Nonrecurring assets are recorded at the lower of cost or fair value in our consolidated financial statements. There were no liabilities measured at fair value on a nonrecurring basis at either September 30, 2022 or December 31, 2021.

There were no Level 3 assets measured at fair value on a nonrecurring basis as of September 30, 2022. Level 3 assets measured at fair value on a nonrecurring basis and the significant unobservable inputs used in the fair value measurements as of December 31, 2021 were as follows:


	December 31, 2021		Valuation Technique	Significant Unobservable Inputs	Range			Weighted Average (1) (2)
(dollars in thousands)
Loans individually evaluated	$	7,268	Collateral method	Appraisal adjustment	0%	-	20%	4.48%
Other real estate owned	1,011		Collateral method	Appraisal adjustment	2.53%			2.53%



Total Assets	$	8,279
(1) Weighted averages for loans individually evaluated were weighted by loan amounts. (2) Weighted averages for other real estate owned were weighted by OREO balances.

The following tables present the carrying values and fair values of our financial instruments at the dates presented:


	Carrying Value(1)		Fair Value Measurements at September 30, 2022
(dollars in thousands)			Total		Level 1		Level 2		Level 3
ASSETS
Cash and due from banks, including interest-bearing deposits	$	134,903	$	134,903	$	134,903	$	—	$	—
Securities	997,428		997,428		121,788		875,640		—
Loans held for sale	1,039		1,039		—		—		1,039
Portfolio loans, net	6,997,222		6,729,260		—		—		6,729,260
Collateral receivable	5,529		5,529		5,529		—		—
Securities held in a deferred compensation plan	7,354		7,354		7,354		—		—
Mortgage servicing rights	7,374		7,374		—		—		7,374
Interest rate swaps - commercial loans	88,888		88,888		—		88,888		—


Forward sale contracts	8		8		—		—		8
LIABILITIES
Deposits	$	7,410,597	$	7,382,732	$	6,457,813	$	924,919	$	—
Collateral payable	69,183		69,183		69,183		—		—

Short-term borrowings	35,000		35,000		35,000		—		—
Long-term borrowings	14,853		14,257		4,156		10,101		—
Junior subordinated debt securities	54,438		54,438		54,438		—		—
Interest rate swaps - commercial loans	88,920		88,920		—		88,920		—
Interest rate swaps - cash flow hedge	22,724		22,724		—		22,724		—
Interest rate lock commitments	3		3		—		—		3

(1) As reported in the Consolidated Balance Sheets


	Carrying Value(1)		Fair Value Measurements at December 31, 2021
(dollars in thousands)			Total		Level 1		Level 2		Level 3
ASSETS
Cash and due from banks, including interest-bearing deposits	$	922,215	$	922,215	$	922,215	$	—	$	—
Securities	910,793		910,793		96,388		814,405		—
Loans held for sale	1,522		1,522		—		—		1,522
Portfolio loans, net	6,901,414		6,815,468		—		—		6,815,468
Collateral receivable	37,363		37,363		37,363		—		—
Securities held in a deferred compensation plan	10,230		10,230		10,230		—		—
Mortgage servicing rights	7,677		7,677		—		—		7,677
Interest rate swaps	33,528		33,528		—		33,528		—
Interest rate lock commitments	401		401		—		—		401
Forward sale contracts	4		4		—		—		4
LIABILITIES
Deposits	$	7,996,524	$	7,992,942	$	6,908,453	$	1,084,489	$	—

Securities sold under repurchase agreements	84,491		84,491		84,491		—		—
Short-term borrowings	—		—		—		—		—
Long-term borrowings	22,430		22,678		4,300		18,378		—
Junior subordinated debt securities	54,393		54,393		54,393		—		—
Interest rate swaps - commercial loans	33,631		33,631		—		33,631		—

(1) As reported in the Consolidated Balance Sheets

- 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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