Fair Value Measurement

FASB ASC 820, “Fair Value Measurement” establishes a fair value hierarchy based on the nature of data inputs for fair value determinations, under which the Corporation is required to value each asset using assumptions that market participants would utilize to value that asset. When the Corporation uses its own assumptions, it is required to disclose additional information about the assumptions used and the effect of the measurement on earnings or the net change in assets for the period.

The value of the Corporation’s available for sale investment securities, which include obligations of the U.S. government and its agencies, mortgage-backed securities issued by U.S. government- and U.S. government sponsored agencies, obligations of state and political subdivisions, corporate bonds, other debt securities, as well as bond mutual funds are determined by the Corporation, including the use of an independent third party. Management performs tests to assess the validity of these third-party values. The third party’s evaluations are based on market data. They utilize pricing models that vary by asset and incorporate available trade, bid and other market information. For securities that do not trade on a daily basis, their pricing models apply available information such as benchmarking and matrix pricing. The market inputs normally sought in the evaluation of securities include benchmark yields, reported trades, broker/dealer quotes (only obtained from market makers or broker/dealers recognized as market participants), issuer spreads, two-sided markets, benchmark securities, bid, offers and reference data. For certain securities, additional inputs may be used or some market inputs may not be applicable. Inputs are prioritized differently on any given day based on market conditions.

U.S. Government agencies are evaluated and priced using multi-dimensional relational models and option adjusted spreads. State and municipal securities are evaluated on a series of matrices including reported trades and material event notices. Mortgage-backed securities are evaluated using matrix correlation to treasury or floating index benchmarks, prepayment speeds, monthly payment information and other benchmarks. Other available-for-sale investments are evaluated using a broker-quote based application, including quotes from issuers.

The value of the investment portfolio is determined using three broad levels of inputs:

Level 1 – Quoted prices in active markets for identical securities.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active and model derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 – Instruments whose significant value drivers are unobservable.

These levels are not necessarily an indication of the risks or liquidity associated with these investments. The following tables summarize the assets at December 31, 2018 and 2017 that are recognized on the Corporation’s Consolidated Balance Sheets using fair value measurement determined based on the differing levels of input.

Fair value of assets measured on a recurring basis as of December 31, 2018:



(dollars in thousands)	Total		Level 1		Level 2		Level 3
Investment securities available for sale:
U.S. Treasury securities	$	200,013	$	200,013	$	—	$	—
Obligations of U.S. government & agencies	195,855		—		195,855		—
Obligations of state & political subdivisions	11,332		—		11,332		—
Mortgage-backed securities	289,890		—		289,890		—
Collateralized mortgage obligations	39,252		—		39,252		—
Other investment securities	1,100		—		1,100		—
Total investment securities available for sale	$	737,442	$	200,013	$	537,429	$	—

Investment securities trading:
Mutual funds	$	7,502	$	7,502	$	—	$	—

Derivatives:
Interest rate swaps	12,550		—		12,550		—
RPAs purchased	71		—		71		—
Total derivatives	$	12,621	$	—	$	12,621	$	—

Total assets measured on a recurring basis at fair value	$	757,565	$	207,515	$	550,050	$	—

Fair value of assets measured on a non-recurring basis as of December 31, 2018:



(dollars in thousands)	Total		Level 1		Level 2		Level 3
Mortgage servicing rights	$	6,277	$	—	$	—	$	6,277
Impaired loans and leases	22,112		—		—		22,112
OREO	417		—		—		417
Total assets measured at fair value on a non-recurring basis	$	28,806	$	—	$	—	$	28,806

Fair value of assets measured on a recurring basis as of December 31, 2017:



(dollars in thousands)	Total		Level 1		Level 2		Level 3
Investment securities available for sale:
U.S. Treasury securities	$	200,088	$	200,088	$	—	$	—
Obligations of U.S. government & agencies	151,044		—		151,044		—
Obligations of state & political subdivisions	21,310		—		21,310		—
Mortgage-backed securities	274,990		—		274,990		—
Collateralized mortgage obligations	36,662		—		36,662		—
Mutual funds	3,509		3,509		—		—
Other investment securities	1,599		—		1,599		—
Total investment securities available for sale	$	689,202	$	203,597	$	485,605	$	—

Investment securities trading:
Mutual funds	$	4,610	$	4,610	$	—	$	—

Derivatives:
Interest rate swaps	1,895		—		1,895		—
RPAs purchased	21		—		21
Total derivatives	$	1,916	$	—	$	1,916	$	—

Total recurring fair value measurements	$	695,728	$	208,207	$	487,521	$	—

Fair value of assets measured on a non-recurring basis as of December 31, 2017:



(dollars in thousands)	Total		Level 1		Level 2		Level 3
Mortgage servicing rights	$	6,397	$	—	$	—	$	6,397
Impaired loans and leases	13,954		—		—		13,954
OREO	304		—		—		304
Total assets measured at fair value on a non-recurring basis	$	20,655	$	—	$	—	$	20,655

For the year ended December 31, 2018, a net increase of $204 thousand in the Allowance was recorded, and for the year ended December 31, 2017, a net increase of $175 thousand in the Allowance was recorded as a result of adjusting the carrying value and estimated fair value of the impaired loans in the above tables. As it relates to the fair values of assets measured on a recurring basis, there have been no transfers between levels during the year ended December 31, 2018.