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FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS

6 Months Ended

Jun. 30, 2022

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 June 30, 2022 and December 31, 2021, assets and liabilities measured at fair value and the valuation methods used are as follows:


		June 30, 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		$	35,774		$	0		$	0		$	35,774
Obligations of U.S. Government agencies			0			22,785			0			22,785
Bank holding company debt securities			0			27,415			0			27,415
Obligations of states and political subdivisions:
Tax-exempt			0			139,400			0			139,400
Taxable			0			63,898			0			63,898
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities			0			106,043			0			106,043
Residential collateralized mortgage obligations			0			44,761			0			44,761
Commercial mortgage-backed securities			0			86,761			0			86,761
Total available-for-sale debt securities			35,774			491,063			0			526,837
Marketable equity security			895			0			0			895
Servicing rights			0			0			2,640			2,640
Interest rate swap agreements, assets			0			1,619			0			1,619
Total recurring fair value measurements, assets		$	36,669		$	492,682		$	2,640		$	531,991

Recurring fair value measurements, liabilities,
Interest rate swap agreements, liabilities		$	0		$	1,619		$	0		$	1,619

Nonrecurring fair value measurements, assets:
Impaired loans, net		$	0		$	0		$	2,965		$	2,965
Foreclosed assets held for sale			0			0			505			505
Total nonrecurring fair value measurements, assets		$	0		$	0		$	3,470		$	3,470


		December 31, 2021
		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		$	24,912		$	0		$	0		$	24,912
Obligations of U.S. Government agencies			0			24,091			0			24,091
Bank holding company debt securities			0			17,987			0			17,987
Obligations of states and political subdivisions:
Tax-exempt			0			148,028			0			148,028
Taxable			0			72,765			0			72,765
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities			0			98,181			0			98,181
Residential collateralized mortgage obligations			0			44,247			0			44,247
Commercial mortgage-backed securities			0			87,468			0			87,468
Total available-for-sale debt securities			24,912			492,767			0			517,679
Marketable equity security			971			0			0			971
Servicing rights			0			0			2,329			2,329
Interest rate swap agreements, assets			0			3,104			0			3,104
Total recurring fair value measurements, assets		$	25,883		$	495,871		$	2,329		$	524,083

Recurring fair value measurements, liabilities,
Interest rate swap agreements, liabilities		$	0		$	3,104		$	0		$	3,104

Nonrecurring fair value measurements, assets:
Impaired loans, net		$	0		$	0		$	5,800		$	5,800
Foreclosed assets held for sale			0			0			684			684
Total nonrecurring fair value measurements, assets		$	0		$	0		$	6,484		$	6,484

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 June 30, 2022 and December 31, 2021, 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
		6/30/2022			Valuation		Unobservable					Method or Value As of
Asset		(In Thousands)			Technique		Input(s)					6/30/2022
Servicing rights		$	2,640		Discounted cash flow		Discount rate			13.00	%	Rate used through modeling period
							Loan prepayment speeds			152.00	%	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
		12/31/2021			Valuation		Unobservable					Method or Value As of
Asset		(In Thousands)			Technique		Input(s)					12/31/2021
Servicing rights		$	2,329		Discounted cash flow		Discount rate			13.00	%	Rate used through modeling period
							Loan prepayment speeds			209.00	%	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						Six Months Ended
		June 30, 2022			June 30, 2021			June 30, 2022			June 30, 2021
Servicing rights balance, beginning of period		$	2,429		$	1,956		$	2,329		$	1,689
Originations of servicing rights			61			199			159			391
Unrealized gain (loss) included in earnings			150			(39)			152			36
Servicing rights balance, end of period		$	2,640		$	2,116		$	2,640		$	2,116

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 June 30, 2022 and December 31, 2021, 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		6/30/2022			6/30/2022			6/30/2022			Technique		Inputs		6/30/2022

Impaired loans:
Commercial:
Commercial loans secured by real estate		$	3,392		$	427		$	2,965		Sales comparison		Discount to appraised value		25	%
Total impaired loans		$	3,392		$	427		$	2,965
Foreclosed assets held for sale - real estate:
Commercial real estate		$	275		$	0		$	275		Sales comparison		Discount to appraised value		50	%
Residential (1-4 family)			230			0			230		Sales comparison		Discount to appraised value		50	%
Total foreclosed assets held for sale		$	505		$	0		$	505


(Dollars In Thousands)															Weighted
					Valuation										Average
		Balance at			Allowance at			Fair Value at			Valuation		Unobservable		Discount at
Asset		12/31/2021			12/31/2021			12/31/2021			Technique		Inputs		12/31/2021

Impaired loans:
Commercial:
Commercial loans secured by real estate		$	6,468		$	668		$	5,800		Sales comparison		Discount to appraised value		27	%
Commercial and industrial			72			72			0		Liquidation of assets		Discount to appraised value		100	%
Total impaired loans		$	6,540		$	740		$	5,800
Foreclosed assets held for sale - real estate:
Commercial real estate		$	428		$	0		$	428		Sales comparison		Discount to appraised value		50	%
Residential (1-4 family)			256			0			256		Sales comparison		Discount to appraised value		53	%
Total foreclosed assets held for sale		$	684		$	0		$	684

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		June 30, 2022						December 31, 2021
		Hierarchy		Carrying			Fair			Carrying			Fair
		Level		Amount			Value			Amount			Value
Financial assets:
Cash and cash equivalents		Level 1		$	60,337		$	60,337		$	95,848		$	95,848
Certificates of deposit		Level 2			8,850			8,532			9,100			9,142
Restricted equity securities (included in Other Assets)		Level 2			13,693			13,693			9,562			9,562
Loans, net		Level 3			1,643,057			1,640,553			1,551,312			1,573,955
Accrued interest receivable		Level 2			7,740			7,740			7,235			7,235

Financial liabilities:
Deposits with no stated maturity		Level 2			1,665,866			1,665,866			1,639,167			1,639,167
Time deposits		Level 2			298,404			298,432			285,893			286,962
Short-term borrowings		Level 2			90,042			89,720			1,803			1,603
Long-term borrowings		Level 2			36,791			36,524			28,042			28,347
Senior debt		Level 2			14,733			12,355			14,701			15,016
Subordinated debt		Level 2			24,553			20,639			33,009			33,171
Accrued interest payable		Level 2			179			179			205			205

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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