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FAIR VALUE
 9 Months Ended
Sep. 30, 2022
Fair Value Disclosures [Abstract]  
FAIR VALUE FAIR VALUE
Fair Value Measurement

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The following three levels of inputs are used to measure fair value:
Level 1: Quoted prices (unadjusted) for 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 1 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 company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Corporation used the following methods and significant assumptions to estimate fair value:

Investment Securities: The fair values of most equity securities and debt securities AFS are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1) 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 relying on the securities’ relationship to other benchmark quoted securities (Level 2). These models utilize the market approach with standard inputs that include, but are not limited to benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. For certain securities that observable inputs about the specific issuer are not available, fair values are estimated using observable data from other securities presumed to be similar or other market data on other similar securities (Level 3).

Loans Held for Sale: Loans held for sale are carried at the lower of cost or fair value, which is evaluated on a loan-level basis. The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors (Level 2).

Derivatives: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). The Corporation's derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.
Individually Evaluated Loans: The fair value of individually evaluated loans with specific allocations of the allowance for credit losses is generally based on recent real estate appraisals prepared by third-parties. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Management also adjusts appraised values based on the length of time that has passed since the appraisal date and other factors. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower's financial statements, or aging reports, adjusted or discounted based on management's historical knowledge, changes in market conditions from the time of the valuation, and management's expertise and knowledge of the client and client's business, resulting in a Level 3 fair value classification. Individually evaluated loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the allowance policy.

Assets and liabilities measured at fair value on a recurring basis are as follows at September 30, 2022 and December 31, 2021:

  Fair Value Measurements at September 30, 2022 Using:
Quoted Prices in Active Markets for Identical AssetsSignificant Other Observable InputsSignificant Unobservable Inputs
DescriptionTotal(Level 1)(Level 2)(Level 3)
Assets:
Securities Available-For-Sale:
U.S. Government sponsored entities$3,078 $0 $3,078 $0 
States and political subdivisions95,982 0 95,982 0 
Residential and multi-family mortgage222,796 0 222,796 0 
Corporate notes and bonds42,454 0 42,454 0 
Pooled SBA13,926 0 13,926 0 
Total Securities Available-For-Sale$378,236 $0 $378,236 $0 
Interest Rate swaps$1,900 $0 $1,900 $0 
Equity Securities:
Corporate equity securities$5,995 $5,995 $0 $0 
Mutual funds2,582 2,582 0 0 
Corporate notes and bonds658 658 0 0 
Total Equity Securities$9,235 $9,235 $0 $0 
Liabilities:
Interest Rate Swaps$(1,768)$0 $(1,768)$0 
  Fair Value Measurements at December 31, 2021 Using:
  Quoted Prices in Active Markets for Identical AssetsSignificant Other Observable InputsSignificant Unobservable Inputs
DescriptionTotal(Level 1)(Level 2)(Level 3)
Assets:
Securities Available-For-Sale:
U.S. Government sponsored entities$111,748 $0 $111,748 $0 
States and political subdivisions103,712 0 103,712 0 
Residential and multi-family mortgage434,635 4,995 429,640 0 
Corporate notes and bonds28,064 0 28,064 0 
Pooled SBA19,032 0 19,032 0 
Total Securities Available-For-Sale$697,191 $4,995 $692,196 $0 
Interest Rate swaps$2,124 $0 $2,124 $0 
Equity Securities:
Corporate equity securities$6,715 $6,715 $0 $0 
Mutual funds2,566 2,566 0 0 
Certificates of deposit506 506 0 0 
Corporate notes and bonds579 579 0 0 
Total Equity Securities$10,366 $10,366 $0 $0 
Liabilities:
Interest Rate Swaps$(2,512)$0 $(2,512)$0 

The table below presents a reconciliation of the fair value of securities AFS measured on a recurring basis using significant unobservable inputs (Level 3) for the three months ended September 30, 2021:

Corporate Notes and Bonds
Balance, July 1, 2021$9,826 
Purchases0 
Total gains or (losses):
Included in other comprehensive income (loss)(76)
Settlements0 
Transfers into Level 30 
Transfers out of Level 3(9,750)
Balance, September 30, 2021$0 

The Corporation's corporate notes and bonds with a fair value of $9.8 million for the three months ended September 30, 2021 were transferred out of Level 3 and into Level 2 because of available observable market data for these investments.

The table below presents a reconciliation of the fair value of securities AFS measured on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2021:

States and Political SubdivisionsCorporate Notes and Bonds
Balance, January 1, 2021$64 $0 
Purchases0 8,250 
Total gains or (losses):
Included in other comprehensive income (loss)0 0 
Settlements(64)0 
Transfers into Level 30 0 
Transfers out of Level 30 (8,250)
Balance, September 30, 2021$0 $0 

The Corporation's corporate notes and bonds with a fair value of $8.3 million for the nine months ended September 30, 2021 were transferred out of Level 3 and into Level 2 because of available observable market data for these investments.
Assets and liabilities measured at fair value on a non-recurring basis are as follows at September 30, 2022 and December 31, 2021:

  Fair Value Measurements at September 30, 2022 Using
DescriptionTotalQuoted Prices in
Active Markets for
Identical Assets
(Level 1)		Significant Other
Observable Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
Assets:
Collateral-dependent loans receivable:
Farmland$854 $0 $0 $854 
Owner-occupied, nonfarm nonresidential properties1,103 0 0 1,103 
Commercial and industrial1,778 0 0 1,778 
Multifamily (5 or more) residential properties632 0 0 632 
Non-owner occupied, nonfarm nonresidential3,203 0 0 3,203 
Home equity lines of credit236 0 0 236 
Residential Mortgages secured by first liens827 0 0 827 

  Fair Value Measurements at December 31, 2021 Using
DescriptionTotalQuoted Prices in
Active Markets for
Identical Assets
(Level 1)		Significant Other
Observable Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
Assets:
Collateral-dependent loans receivable:
Farmland$920 $0 $0 $920 
Owner-occupied, nonfarm nonresidential properties194 0 0 194 
Commercial and industrial3,102 0 0 3,102 
Other construction loans and all land development loans and other land loans248 0 0 248 
Multifamily (5 or more) residential properties627 0 0 627 
Non-owner occupied, nonfarm nonresidential2,889 0 0 2,889 

A loan is considered to be a collateral dependent loan when, based on current information and events, the Corporation expects repayment of the financial assets to be provided substantially through the operation or sale of the collateral and the Corporation has determined that the borrower is experiencing financial difficulty as of the measurement date. The allowance for credit losses is measured by estimating the fair value of the loan based on the present value of expected cash flows, the market price of the loan, or the underlying fair value of the loan’s collateral. For real estate loans, fair value of the loan’s collateral is determined by third-party appraisals, which are then adjusted for the estimated selling and closing costs related to liquidation of the collateral. For this asset class, the actual valuation methods (income, sales comparable, or cost) vary based on the status of the project or property. For example, land is generally based on the sales comparable method while construction is based on the income and/or sales comparable methods. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. The Corporation reviews the third-party appraisal for appropriateness and may adjust the value downward to consider selling and closing costs. For non-real estate loans, fair value of the loan’s collateral may be determined using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business.
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30, 2022:
Fair
value		Valuation
Technique		Unobservable InputsRange
(Weighted
Average)
Collateral-dependent loans receivable:
Farmland$854 Valuation of third party appraisal on underlying collateralLoss severity rates
20% (20%)
Owner-occupied, nonfarm nonresidential properties1,103 Valuation of third party appraisal on underlying collateralLoss severity rates
25%-100% (29%)
Commercial and industrial1,778 Valuation of third party appraisal on underlying collateralLoss severity rates
3%-100% (33%)
Multifamily (5 or more) residential properties632 Valuation of third party appraisal on underlying collateralLoss severity rates
19%-25% (23%)
Non-owner occupied, nonfarm nonresidential3,203 Valuation of third party appraisal on underlying collateralLoss severity rates
25%-26% (25%)
Home equity lines of credit236 Valuation of third party appraisal on underlying collateralLoss severity rates
52%-55% (55%)
Residential Mortgages secured by first liens827 Valuation of third party appraisal on underlying collateralLoss severity rates
19%-52% (30%)

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2021:
Fair
value		Valuation
Technique		Unobservable InputsRange
(Weighted
Average)
Collateral-dependent loans receivable:
Farmland$920 Valuation of third party appraisal on underlying collateralLoss severity rates
60% (60%)
Owner-occupied, nonfarm nonresidential properties194 Valuation of third party appraisal on underlying collateralLoss severity rates
0%-60% (57%)
Commercial and industrial3,102 Valuation of third party appraisal on underlying collateralLoss severity rates
0%-59% (42%)
Other construction loans and all land development loans and other land loans248 Valuation of third party appraisal on underlying collateralLoss severity rates
25% (25%)
Multifamily (5 or more) residential properties627 Valuation of third party appraisal on underlying collateralLoss severity rates
0%-57% (26%)
Non-owner occupied, nonfarm nonresidential2,889 Valuation of third party appraisal on underlying collateralLoss severity rates
25%-60% (34%)
Fair Value of Financial Instruments

The following table presents the carrying amount and fair value of financial instruments at September 30, 2022:
 CarryingFair Value Measurement Using:Total
 AmountLevel 1Level 2Level 3Fair Value
ASSETS
Cash and cash equivalents$209,796 $209,796 $0 $0 $209,796 
Debt securities available-for-sale378,236 0 378,236 0 378,236 
Debt securities held-to-maturity408,209 0 369,102 0 369,102 
Equity securities9,235 9,235 0 0 9,235 
Loans held for sale624 0 626 0 626 
Net loans receivable3,983,396 0 0 3,974,986 3,974,986 
FHLB and other restricted stock holdings and investments23,923 n/an/an/an/a
Interest rate swaps1,900 0 1,900 0 1,900 
Accrued interest receivable17,871 0 2,999 14,872 17,871 
LIABILITIES
Deposits$(4,623,811)$(4,299,723)$(326,305)$0 $(4,626,028)
Subordinated debentures(20,620)0 (14,684)0 (14,684)
Subordinated notes, net of unamortized issuance costs(83,888)0 (93,140)0 (93,140)
Interest rate swaps(1,768)0 (1,768)0 (1,768)
Accrued interest payable(525)0 (525)0 (525)

The following table presents the carrying amount and fair value of financial instruments at December 31, 2021:
 CarryingFair Value Measurement Using:Total
 AmountLevel 1Level 2Level 3Fair Value
ASSETS
Cash and cash equivalents$732,198 $732,198 $0 $0 $732,198 
Debt securities available-for-sale697,191 4,995 692,196 0 697,191 
Equity securities10,366 10,366 0 0 10,366 
Loans held for sale849 0 858 0 858 
Net loans receivable3,597,204 0 0 3,613,452 3,613,452 
FHLB and other restricted stock holdings and investments23,276 n/an/an/an/a
Interest rate swaps2,124 0 2,124 0 2,124 
Accrued interest receivable15,516 16 2,171 13,329 15,516 
LIABILITIES
Deposits$(4,715,619)$(4,329,167)$(391,850)$0 $(4,721,017)
Subordinated notes, net of unamortized issuance costs(104,281)0 (92,675)0 (92,675)
Interest rate swaps(2,512)0 (2,512)0 (2,512)
Accrued interest payable(886)0 (886)0 (886)

While estimates of fair value are based on management’s judgment of the most appropriate factors as of the balance sheet dates, there is no assurance that the estimated fair values would have been realized if the assets had been disposed of or the liabilities settled at that date, since market values may differ depending on various circumstances. The estimated fair values would also not apply to subsequent dates. The fair value of other equity interests is based on the net asset values provided by the underlying investment partnership. ASU 2015-7 removes the requirement to categorize within the fair value hierarchy all investments measured using the net asset value per share practical expedient and related disclosures. In addition, other assets and liabilities that are not financial instruments, such as premises and equipment, are not included in the disclosures.

Also, non-financial assets such as, among other things, the estimated earnings power of core deposits, the earnings potential of trust accounts, the trained workforce, and customer goodwill, which typically are not recognized on the balance sheet, may have value but are not included in the fair value disclosures.