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Fair Value Measurement
 9 Months Ended
Sep. 30, 2022
Fair Value Disclosures [Abstract]  
Fair Value Measurement Fair Value Measurement
Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. This guidance provides additional information on determining when the volume and level of activity for the asset or liability has significantly decreased. Information on identifying circumstances when a transaction may not be considered orderly is also included within the guidance.
Fair value measurement and disclosure guidance provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with the fair value measurement and disclosure guidance.
This guidance clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The guidance provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.
Inputs to valuation techniques refer to the assumptions that market participants would use in measuring the fair value of an asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own belief about the assumptions market participants would use in pricing the asset or liability based upon the best information available in the circumstances. Fair value measurement and disclosure guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. An asset’s or liability’s placement in the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement or disclosure. The fair value hierarchy is as follows:
Level 1 - Inputs that represent quoted prices for identical instruments in active markets.
Level 2 - Inputs that represent quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 - Inputs that are largely unobservable, as little or no market data exists for the instrument being valued.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
There were no transfers of assets between fair value Level 1 and Level 2 during the three and nine months ended September 30, 2022 and 2021.
The following tables illustrate the assets measured at fair value on a recurring basis segregated by hierarchy fair value levels.
(Dollars in thousands)Total carrying value atFair value measurements at September 30, 2022 using:
Assets:September 30, 2022Level 1Level 2Level 3
Loans held for sale$5,997  $5,997 $— 
Available-for-sale securities:   
U.S. Treasury and U.S. government agencies37,584 — 37,584 — 
Mortgage-backed U.S. government agencies168,204 — 168,204 — 
State and political subdivision obligations3,374 — 3,374 — 
Corporate debt securities33,033 — 33,033 — 
Other assets:   
Equity securities428 428 — — 
Interest rate swap agreements12,825 — 12,825 — 
Mortgage banking derivative assets3 — 3 — 
Total$261,448 $428 $261,020 $— 
(Dollars in thousands)Total carrying value atFair value measurements at December 31, 2021 using:
Assets:December 31, 2021Level 1Level 2Level 3
Loans held for sale$11,514 $— $11,514 $— 
Available-for-sale securities:
Mortgage-backed U.S. government agencies49,480 — 49,480 — 
State and political subdivision obligations3,914 — 3,914 — 
Corporate debt securities9,468 — 9,468 — 
Other assets:
Equity securities500 500 — — 
Interest rate swap agreements629 — 629 — 
Mortgage banking derivative assets88 — 88 — 
Total$75,593 $500 $75,093 $— 
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
The following tables illustrate the assets measured at fair value on a nonrecurring basis segregated by hierarchy fair value levels.
(Dollars in thousands)Total carrying value atFair value measurements at September 30, 2022 using:
Assets:September 30, 2022Level 1Level 2Level 3
Impaired Loans$936 $— $— $936 
Foreclosed assets held for sale49 — — 49 
(Dollars in thousands)Total carrying value atFair value measurements at December 31, 2021 using:
Assets:December 31, 2021Level 1Level 2Level 3
Impaired Loans$508 $— $— $508 
The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Mid Penn has utilized Level 3 inputs to determine the fair value.
(Dollars in thousands)
September 30, 2022Fair Value EstimateValuation TechniqueUnobservable InputRangeWeighted Average
Impaired Loans$936 
Appraisal of collateral (1), (2)
Appraisal adjustments (2)
22% - 77%
52%
(Dollars in thousands)
December 31, 2021Fair Value EstimateValuation TechniqueUnobservable InputRangeWeighted Average
Impaired Loans$508 
Appraisal of collateral (1), (2)
Appraisal adjustments (2)
21% - 69%
30%
(1)Fair value is generally determined through independent appraisals of the underlying collateral, which generally includes various Level 3 inputs which are not observable.
(2)Appraisals may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal. Higher downward adjustments are caused by negative changes to the collateral or conditions in the real estate market, actual offers or sales contracts received, or age of the appraisal.
There were no changes in unrealized gains and losses included in other comprehensive income during the nine months ended September 30, 2022 or 2021 related to Level 3 recurring fair value measurements, as Mid Penn has no assets measured at fair value on a Level 3 recurring basis.
Mid Penn uses the following methodologies and assumptions to estimate the fair value of certain assets and liabilities.
Securities
The fair value of equity securities and debt securities classified as available for sale is determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather, relying on the securities’ relationship to other benchmark quoted prices.
Mortgage Banking Derivative Assets
Mortgage banking derivative assets represent the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors and the fair value of interest rate swaps. The fair values of the Bank’s interest rate locks, forward commitments and interest rate swaps represent the amounts that would be required to settle the derivative financial instruments at the balance sheet date. These characteristics classify interest rate swap agreements as Level 2. See "Note 6 - Derivative Financial Instruments," for additional information.
Interest Rate Swap Agreements
Interest rate swap agreements are measured by alternative pricing sources with reasonable levels of price transparency in markets that are not active. Based on the complex nature of interest rate swap agreements, the markets these instruments trade in are not as efficient and are less liquid than that of the more mature Level 1 markets. These markets do however have comparable, observable inputs in which an alternative pricing source values these assets in order to arrive at a fair market value. These characteristics classify interest rate swap agreements as Level 2.
Impaired Loans (included in "Net Loans and Leases" in the following tables)
All performing troubled debt restructured loans and loans classified as nonaccrual are deemed to be impaired, and all of these loans are considered collateral dependent; therefore, all of Mid Penn’s impaired loans, whether reporting a specific allowance allocation or not, are considered collateral dependent.
It is Mid Penn’s policy to obtain updated third-party collateral valuations on all impaired loans secured by real estate as soon as practically possible following the credit being classified as substandard nonaccrual. Prior to receipt of the updated real estate valuation, Mid Penn will use existing real estate valuations to determine any potential allowance for loan and lease loss issues and will update the allowance impact calculation upon receipt of the updated real estate valuation.
In some instances, Mid Penn is not holding real estate as collateral and is relying on business assets (personal property) for repayment. In these circumstances a collateral inspection is performed by Mid Penn personnel to determine an estimated value. The value is based on net book value, as provided by the financial statements, and discounted accordingly based on determinations made by management. Occasionally, Mid Penn will employ an outside service to provide a fair estimate of value based on auction sales or private sales. Management reviews the estimates of these third parties and discounts them accordingly based on management’s judgment, if deemed necessary. Mid Penn considers the estimates used in its impairment analysis to be Level 3 inputs.
Mid Penn actively monitors the values of collateral on impaired loans. This monitoring may require the modification of collateral values, either in a positive or negative way, due to the passage of time or some other change in one or more valuation inputs. Collateral values for impaired loans will be reassessed by management at least every 12 months for possible revaluation by an independent third party.
Foreclosed Assets Held for Sale
Certain assets included in foreclosed assets held for sale are carried at fair value and accordingly is presented as measured on a non-recurring basis. Values are estimated using Level 3 inputs, based on appraisals that consider the sales prices of property in the proximate vicinity.
The following table summarizes the carrying value and fair value of financial instruments:
(Dollars in thousands)September 30, 2022December 31, 2021
Carrying
Value		Fair
Value		Carrying
Value		Fair
Value
Financial assets:
Cash and cash equivalents$94,678 $94,678 $913,752 $913,752 
Available-for-sale investment securities242,195 242,195 62,862 62,862 
Held-to-maturity investment securities402,142 346,625 329,257 330,626 
Equity securities428 428 500 500 
Loans held for sale5,997 5,997 11,514 11,787 
Net loans and leases3,303,977 3,252,277 3,089,799 3,118,416 
Restricted investment in bank stocks4,595 4,595 9,134 9,134 
Accrued interest receivable15,861 15,861 10,779 10,779 
Interest rate swap agreements12,825 12,825 629 629 
Mortgage banking derivative assets6 6 88 88 
    
Financial liabilities:    
Deposits$3,729,596 $3,716,190 $4,002,016 $4,046,217 
Long-term debt (1)
1,188 1,148 77,890 77,455 
Subordinated debt66,357 63,895 74,274 74,553 
Accrued interest payable1,841 1,841 1,791 1,791 
Mortgage banking derivative liabilities342 342 — — 
(1)Long-term debt excludes finance lease obligations.
The Bank’s outstanding and unfunded credit commitments and financial standby letters of credit were deemed to have no significant fair value as of September 30, 2022 and December 31, 2021.
The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of Mid Penn’s financial instruments as of September 30, 2022 and December 31, 2021. Carrying values approximate fair values for cash and cash equivalents, restricted investment in bank stocks, accrued interest receivable and payable, and short-term borrowings. Other than cash and cash equivalents, which are considered Level 1 Inputs, and mortgage servicing rights, which are Level 3 Inputs,
these instruments are Level 2 Inputs. These tables exclude financial instruments for which the carrying amount approximates fair value, not previously disclosed.
(Dollars in thousands)Fair Value Measurements
September 30, 2022Carrying
Amount		Fair ValueLevel 1Level 2Level 3
Financial instruments - assets
Held-to-maturity investment securities$402,142 $346,625 $— $346,625 $— 
Net loans and leases3,303,977 3,252,277 — — 3,252,277 
    
Financial instruments - liabilities    
Deposits$3,729,596 $3,716,190 $— $3,716,190 $— 
Long-term debt (1)
1,188 1,148 — 1,148 — 
Subordinated debt66,357 63,895 — 63,895 — 
(1) Long-term debt excludes finance lease obligations.
(Dollars in thousands)Fair Value Measurements
December 31, 2021Carrying
Amount		Fair ValueLevel 1Level 2Level 3
Financial instruments - assets
Held-to-maturity investment securities$329,257 $330,626 $— $330,626 $— 
Net loans and leases3,089,799 3,118,416 — — 3,118,416 
    
Financial instruments - liabilities    
Deposits$4,002,016 $4,046,217 $— $4,046,217 $— 
Long-term debt (1)
77,890 77,455 — 77,455 — 
Subordinated debt74,274 74,553 — 74,553 — 
(1) Long-term debt excludes finance lease obligations.