Fair Value Measurement

12 Months Ended

Dec. 31, 2020

FASB ASC 820, “Fair Value Measurement” defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FASB ASC 820 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

The three levels of the fair value hierarchy under FASB ASC 820 are:

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

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 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

A. Assets and liabilities measured on a recurring basis

A description of the valuation methodologies used for financial instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Investment Securities

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 and other debt securities are determined by the Corporation, taking into account the input of an independent third party valuation service provider. The third party’s evaluations are based on market data, utilizing 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, bids, 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. Management reviews, annually, the process utilized by its independent third-party valuation service provider. On a quarterly basis, management tests the validity of the prices provided by the third party by selecting a representative sample of the portfolio and obtaining actual trade results, or if actual trade results are not available, competitive broker pricing. On an annual basis, management evaluates, for appropriateness, the methodology utilized by the independent third-party valuation service provider.

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.

Interest Rate Swaps, FX Forwards, and Risk Participation Agreements

The Corporation’s interest rate swaps, FX forwards, and RPAs are reported at fair value utilizing Level 2 inputs. Prices of these instruments are obtained through an independent pricing source utilizing pricing information which may include market observed quotations for swaps, LIBOR rates, forward rates and rate volatility. When entering into a derivative contract, the Corporation is exposed to fair value changes due to interest rate movements, and the potential non-performance of our contract counterparty. The Corporation has developed a methodology to value the non-performance risk based on internal credit risk metrics and the unique characteristics of derivative instruments, which include notional exposure rather than principle at risk and interest payment netting. The results of this methodology are used to adjust the base fair value of the instrument for the potential counterparty credit risk.

The following tables present the Corporation’s assets measured at fair value on a recurring basis as of December 31, 2020 and December 31, 2019:


As of December 31, 2020
(dollars in thousands)	Total		Level 1		Level 2		Level 3
Investment securities available for sale:
U.S. Treasury securities	$	500,100	$	500,100	$	—	$	—
Obligations of U.S. government & agencies	93,098		—		93,098		—
Obligations of state & political subdivisions	2,171		—		2,171		—
Mortgage-backed securities	453,857		—		453,857		—
Collateralized mortgage obligations	19,263		—		19,263		—
Collateralized loan obligations	94,404		—		94,404		—
Corporate bonds	11,421		—		11,421		—
Other investment securities	650		—		650		—
Total investment securities available for sale	$	1,174,964	$	500,100	$	674,864	$	—

Investment securities trading:
Mutual funds	$	8,623	$	8,623	$	—	$	—

Derivatives:
Interest rate swaps	113,848		—		113,848		—
FX Forwards	52		—		52		—
RPAs purchased	342		—		342		—
Total Derivatives	$	114,242	$	—	$	114,242	$	—

Total assets measured on a recurring basis at fair value	$	1,297,829	$	508,723	$	789,106	$	—


As of December 31, 2019
(dollars in thousands)	Total		Level 1		Level 2		Level 3
Investment securities available for sale:
U.S. Treasury securities	$	500,101	$	500,101	$	—	$	—
Obligations of U.S. government & agencies	102,020		—		102,020		—
Obligations of state & political subdivisions	5,379		—		5,379		—
Mortgage-backed securities	366,002		—		366,002		—
Collateralized mortgage obligations	31,832		—		31,832		—


Other investment securities	650		—		650		—
Total investment securities available for sale	$	1,005,984	$	500,101	$	505,883	$	—

Investment securities trading:
Mutual funds	$	8,621	$	8,621	$	—	$	—

Derivatives:
Interest rate swaps	47,627		—		47,627		—

RPAs purchased	90		—		90
Total derivatives	$	47,717	$	—	$	47,717	$	—

Total recurring fair value measurements	$	1,062,322	$	508,722	$	553,600	$	—

There have been no transfers between levels during the year ended December 31, 2020 or December 31, 2019.

B. Assets and liabilities measured on a non-recurring basis

Fair value is used on a nonrecurring basis to evaluate certain financial assets and financial liabilities in specific circumstances. Similarly, fair value is used on a nonrecurring basis for nonfinancial assets and nonfinancial liabilities such as foreclosed assets, OREO, intangible assets, nonfinancial assets and liabilities evaluated in a goodwill impairment analysis and other nonfinancial assets measured at fair value for purposes of assessing impairment. A description of the valuation methodologies used for financial and nonfinancial assets and liabilities measured at fair value, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy, is set forth below.

Loans and Leases Individually Evaluated for Credit Losses

Collateral-dependent loans and leases for which the repayment is expected to be provided substantially through the sale of the collateral and the borrower is experiencing financial difficulty are, in general, individually evaluated for credit losses. Management evaluates and values collateral-dependent loans and leases when management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, and the fair values of such loans and leases are estimated using Level 3 inputs in the fair value hierarchy. Each loan’s collateral has a unique appraisal and management’s discount of the value is based on the factors unique to each loan or lease. The significant unobservable input in determining the fair value is management’s subjective discount on appraisals of the collateral securing the loan, which range from 10% - 50%. Collateral may consist of real estate and/or business assets including equipment, inventory and/or accounts receivable and the value of these assets is determined based on the appraisals by qualified licensed appraisers hired by the Corporation. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, estimated costs to sell, and/or management’s expertise and knowledge of the client and the client’s business. For loans and leases that are not collateral-dependent, management measures expected credit loss as the difference between the amortized cost basis of the loan and the present value of expected future cash flows discounted at the loan’s effective interest rate.

Other Real Estate Owned (“OREO”)

OREO consists of properties acquired as a result of foreclosures and deeds in-lieu-of foreclosure. Properties classified as OREO are reported at the lower of cost or fair value less cost to sell, and are classified as Level 3 in the fair value hierarchy. The Corporation did not have any OREO at December 31, 2020 or December 31, 2019.

Mortgage Servicing Rights

The model to value MSRs estimates the present value of projected net servicing cash flows of the remaining servicing portfolio based on various assumptions, including changes in anticipated loan prepayment rates, the discount rate, reflective of a market participant's required return on an investment for similar assets, and other market-based economic factors. All of these assumptions are considered to be unobservable inputs. Accordingly, MSRs are classified within Level 3 of the fair value hierarchy.

The following tables present the Corporation’s assets measured at fair value on a non-recurring basis as of December 31, 2020 and December 31, 2019:


As of December 31, 2020
(dollars in thousands)	Total		Level 1		Level 2		Level 3
Mortgage servicing rights	$	2,632	$	—	$	—	$	2,632
Loans and leases individually evaluated for credit losses(1)	11,142		—		—		11,142

Total assets measured at fair value on a non-recurring basis	$	13,774	$	—	$	—	$	13,774


As of December 31, 2019
(dollars in thousands)	Total		Level 1		Level 2		Level 3
Mortgage servicing rights	$	4,838	$	—	$	—	$	4,838
Impaired loans and leases(1)	15,311		—		—		15,311

Total assets measured at fair value on a non-recurring basis	$	20,149	$	—	$	—	$	20,149

(1) As further described in Note 2 “Recent Accounting Pronouncements,” in the accompanying Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K, the Corporation adopted ASC 326 using the modified retrospective approach method. The December 31, 2020 balance includes loans and leases individually evaluated for credit losses under the CECL methodology and the December 31, 2019 balance includes impaired loans and leases under previously applicable GAAP.

For the year ended December 31, 2020, a net increase of $765 thousand was recorded in the ACL on loans and leases was recorded, and for the year ended December 31, 2019, a net decrease of $44 thousand in the ACL on loans and leases was recorded as a result of adjusting the carrying value and estimated fair value of the collateral-dependent and impaired loans in the above tables.

- 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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