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FAIR VALUE MEASUREMENT AND DISCLOSURE | 9 Months Ended
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Sep. 30, 2022
Fair Value Disclosures [Abstract] |
FAIR VALUE MEASUREMENT AND DISCLOSURE | FAIR VALUE MEASUREMENT AND DISCLOSURE Fair value is 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. Fair value is best determined using quoted market prices. However, in many instances, quoted market prices are not available. In such instances, fair values are determined using various valuation techniques. Various assumptions and observable inputs must be relied upon in applying these techniques. GAAP 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. GAAP permits an entity to choose to measure eligible financial instruments and other items at fair value. The Company has elected the fair value option for its loans held for sale. Electing the fair value option for loans held for sale enables the Company’s financial position to align more clearly with the economic value of the actively traded asset. The fair value hierarchy for valuation of an asset or liability is as follows: Level 1: Valuation is based upon unadjusted quoted prices in active markets for identical assets and liabilities that the entity has the ability to access as of the measurement date. Level 2: Valuation is determined from quoted prices for similar assets or liabilities in active markets, from quoted prices for identical or similar instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market. Level 3: Valuation is derived from model-based and other techniques in which at least one significant input is unobservable and which may be based on the Company’s own estimates about the assumptions that market participants would use to value the asset or liability. In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon model-based techniques incorporating various assumptions including interest rates, prepayment speeds and credit losses. Assets and liabilities valued using model-based techniques are classified as either Level 2 or Level 3, depending on the lowest level classification of an input that is considered significant to the overall valuation. 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. Financial Instruments Recorded at Fair Value on a Recurring Basis Trading Securities and Deferred Compensation: The fair value of trading securities and deferred compensation is reported using market quoted prices and has been classified as Level 1 as such securities and underlying securities are actively traded and no valuation adjustments have been applied. Debt Securities: The fair value of investments in debt securities is reported utilizing prices provided by an independent pricing service based on recent trading activity and other observable information including, but not limited to, dealer quotes, market spreads, cash flows, market interest rate curves, market consensus prepayment speeds, credit information, and the bond’s terms and conditions. The fair value of debt securities is classified as Level 2. Loans Held For Sale: The fair value of loans held for sale is determined on an individual loan basis using quoted secondary market prices and is classified as Level 2. Derivatives: The fair value of interest rate swaps is determined using inputs that are observable in the market place obtained from third parties including yield curves, publicly available volatilities, and floating indexes and, accordingly, are classified as Level 2 inputs. The credit value adjustments associated with derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default. As of September 30, 2022 and December 31, 2021, the credit valuation adjustment on the overall valuation of its derivative positions and was not significant to the overall valuation of its derivatives, and, thus, the Company's interest rate swaps were classified as Level 2. The fair value of the Company's fixed rate interest rate lock commitments were determined using secondary market pricing for loans with similar structures, including term, rate and borrower credit quality, adjusted for the Company's pull-through rate estimate (i.e. estimate of loans within its loan pipeline that will ultimately complete the origination process and be funded). The Company has classified its fixed rate interest rate lock commitments as Level 2, as the quoted secondary market prices are the more significant input, and, although the Company's internal pull-through rate estimate is a Level 3 estimate, it is less significant to the ultimate valuation. The fair value of the Company's forward delivery commitments is determined using secondary market pricing for loans with similar structures, including term, rate and borrower credit quality, and the locked and agreed to price with the secondary market investor. The Company has classified its fixed rate interest rate lock commitments as Level 2. The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value, for the dates indicated:
(In thousands) |  | Fair Value |  | Readily Available Market Prices (Level 1) |  | Observable Market Data (Level 2) |  | Company Determined Fair Value (Level 3)
September 30, 2022 |  |  |  |  |  |  |  |
Financial assets: |  |  |  |  |  |  |  |
Trading securities |  | $ | 3,727 |  |  | $ | 3,727 |  |  | $ | — |  |  | $ | — |
AFS debt securities: |  |  |  |  |  |  |  |
Obligations of states and political subdivisions |  | 51,474 |  |  | — |  |  | 51,474 |  |  | — |
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises |  | 529,788 |  |  | — |  |  | 529,788 |  |  | — |
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises |  | 121,811 |  |  | — |  |  | 121,811 |  |  | — |
Subordinated corporate bonds |  | 20,545 |  |  | — |  |  | 20,545 |  |  | — |
Loans held for sale |  | 4,629 |  |  | — |  |  | 4,629 |  |  | — |
Customer loan swaps |  | 16,112 |  |  | — |  |  | 16,112 |  |  | — |
Interest rate contracts |  | 13,806 |  |  | — |  |  | 13,806 |  |  | — |
Fixed rate mortgage interest rate lock commitments |  | 11 |  |  | — |  |  | 11 |  |  | — |
Forward delivery commitments |  | 318 |  |  | — |  |  | 318 |  |  | — |
Financial liabilities: |  |  |  |  |  |  |  |
Deferred compensation |  | $ | 3,727 |  |  | $ | 3,727 |  |  | $ | — |  |  | $ | — |
Customer loan swaps |  | 16,134 |  |  | — |  |  | 16,134 |  |  | — |
Interest rate contracts |  | 5,459 |  |  | — |  |  | 5,459 |  |  | — |
Fixed rate mortgage interest rate lock commitments |  | 395 |  |  | — |  |  | 395 |  |  | — |
December 31, 2021 |  |  |  |  |  |  |  |
Financial assets: |  |  |  |  |  |  |  |
Trading securities |  | $ | 4,428 |  |  | $ | 4,428 |  |  | $ | — |  |  | $ | — |
AFS debt securities: |  |  |  |  |  |  |  |
Obligations of U.S. government-sponsored enterprises |  | 8,344 |  |  | — |  |  | 8,344 |  |  | — |
Obligations of states and political subdivisions |  | 117,478 |  |  | — |  |  | 117,478 |  |  | — |
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises |  | 1,000,257 |  |  | — |  |  | 1,000,257 |  |  | — |
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises |  | 358,849 |  |  | — |  |  | 358,849 |  |  | — |
Subordinated corporate bonds |  | 22,558 |  |  | — |  |  | 22,558 |  |  | — |
Loans held for sale |  | 5,815 |  |  | — |  |  | 5,815 |  |  | — |
Customer loan swaps |  | 19,297 |  |  | — |  |  | 19,297 |  |  | — |
Interest rate contracts |  | 5,589 |  |  | — |  |  | 5,589 |  |  | — |
Fixed rate mortgage interest rate lock commitments |  | 371 |  |  | — |  |  | 371 |  |  | — |
Forward delivery commitments |  | 86 |  |  | — |  |  | 86 |  |  | — |
Financial liabilities: |  |  |  |  |  |  |  |
Deferred compensation |  | $ | 4,428 |  |  | $ | 4,428 |  |  | $ | — |  |  | $ | — |
Customer loan swaps |  | 19,485 |  |  | — |  |  | 19,485 |  |  | — |
Interest rate contracts |  | 7,872 |  |  | — |  |  | 7,872 |  |  | — |
Fixed rate mortgage interest rate lock commitments |  | 91 |  |  | — |  |  | 91 |  |  | — |
Forward delivery commitments |  | 6 |  |  | — |  |  | 6 |  |  | — |
The Company did not have any transfers between Level 1 and Level 2 of the fair value hierarchy during the nine months ended September 30, 2022. The Company’s policy for determining transfers between levels occurs at the end of the reporting period when circumstances in the underlying valuation criteria change and result in transfer between levels. Financial Instruments Recorded at Fair Value on a Nonrecurring Basis The Company may be required, from time to time, to measure certain financial assets and financial liabilities at fair value on a nonrecurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period. Collateral-Dependent Loans: Expected credit losses on individually assessed loans deemed to be collateral dependent are valued based upon the lower of amortized cost or fair value of the underlying collateral less costs to sell. Management estimates the fair values of these assets using Level 2 inputs, such as the fair value of collateral based on independent third-party market approach appraisals for collateral-dependent loans, and Level 3 inputs where circumstances warrant an adjustment to the appraised value based on the age of the appraisal and/or comparable sales, condition of the collateral, and market conditions. Servicing Assets: The Company accounts for mortgage servicing assets at cost, subject to impairment testing. When the carrying value of a tranche exceeds fair value, a valuation allowance is established to reduce the carrying cost to fair value. Fair value is based on a valuation model that calculates the present value of estimated net servicing income. The Company obtains a third-party valuation based upon loan level data including note rate, type and term of the underlying loans. The model utilizes two significant unobservable inputs, namely loan prepayment assumptions and the discount rate used, to calculate the fair value of each tranche, and, as such, the Company has classified the model within Level 3 of the fair value hierarchy. Non-Financial Instruments Recorded at Fair Value on a Non-Recurring Basis The Company has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Non-financial assets measured at fair value on a non-recurring basis consist of OREO, goodwill and core deposit intangible assets. OREO: OREO properties acquired through foreclosure or deed in lieu of foreclosure are recorded at net realizable value, which is the fair value of the real estate, less estimated costs to sell. Any write-down of the recorded investment in the related loan is charged to the ACL upon transfer to OREO. Upon acquisition of a property, a current appraisal is used or an internal valuation is prepared to substantiate fair value of the property. After foreclosure, management periodically, but at least annually, obtains updated valuations of the OREO properties and, if additional impairments are deemed necessary, the subsequent write-downs for declines in value are recorded through a valuation allowance and a provision for credit losses charged to other non-interest expense within the consolidated statements of income. As management considers appropriate, adjustments are made to the appraisal obtained for the OREO property to account for recent sales activity of comparable properties, changes in the condition of the property, and changes in market conditions. These adjustments are not observable in an active market and are classified as Level 3. At September 30, 2022 and December 31, 2021, the Company did not have any OREO properties. Goodwill: Goodwill represents the excess cost of an acquisition over the fair value of the net assets acquired. The fair value of goodwill is estimated by utilizing several standard valuation techniques, including discounted cash flow analyses, bank merger multiples, and/or an estimation of the impact of business conditions and investor activities on the long-term value of the goodwill. Should an impairment occur, the associated goodwill is written-down to fair value and the impairment charge is recorded within non-interest expense in the consolidated statements of income. The Company conducts an annual impairment test of goodwill in the fourth quarter each year, or more frequently as necessary. There have been no indications or triggering events during the nine months ended September 30, 2022, for which management believes it is more likely than not that goodwill is impaired. Core Deposit Intangible Assets: The Company's core deposit intangible assets represent the estimated value of acquired customer relationships and are amortized over the estimated life of those relationships. Core deposit intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. There were no events or changes in circumstances for the nine months ended September 30, 2022, that indicated the carrying amount may not be recoverable. The table below highlights financial and non-financial assets measured and recorded at fair value on a non-recurring basis for the dates indicated:
(In thousands) |  | Fair Value |  | Readily Available Market Prices (Level 1) |  | Observable Market Data (Level 2) |  | Company Determined Fair Value (Level 3)
September 30, 2022 |  |  |  |  |  |  |  |
Financial assets: |  |  |  |  |  |  |  |
Collateral-dependent loans |  | $ | 69 |  |  | $ | — |  |  | $ | — |  |  | $ | 69 |
December 31, 2021 |  |  |  |  |  |  |  |
Financial assets: |  |  |  |  |  |  |  |
Collateral-dependent loans |  | $ | 73 |  |  | $ | — |  |  | $ | — |  |  | $ | 73 |
The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis for the dates indicated:
(Dollars in thousands) |  | Fair Value |  | Valuation Methodology |  | Unobservable Input |  | Discount |
September 30, 2022 |  |  |  |  |  |  |  |  |
Collateral-dependent loans: |  |  |  |  |  |  |  |  |
Partially charged-off |  | $ | 69 |  |  | Market approach appraisal of collateral |  | Estimated selling costs |  | 18% |
December 31, 2021 |  |  |  |  |  |  |  |  |
Collateral-dependent loans |  |  |  |  |  |  |  |  |
Specifically reserved |  | $ | 73 |  |  | Market approach appraisal of collateral |  | Estimated selling costs |  | 11% |
The estimated fair values and related carrying amounts for assets and liabilities for which fair value is only disclosed are shown below as of the dates indicated:
|  | Carrying Amount |  | Fair Value |  | Readily Available Market Prices (Level 1) |  | Observable Market Prices (Level 2) |  | Company Determined Market Prices (Level 3)
September 30, 2022 |  |  |  |  |  |  |  |  |  |
Financial assets: |  |  |  |  |  |  |  |  |  |
HTM debt securities |  | $ | 534,309 |  |  | $ | 491,759 |  |  | $ | — |  |  | $ | 491,759 |  |  | $ | — |
Commercial real estate loans(1)(2) |  | 1,543,107 |  |  | 1,517,911 |  |  | — |  |  | — |  |  | 1,517,911 |
Commercial loans(2) |  | 418,110 |  |  | 412,670 |  |  | — |  |  | — |  |  | 412,670 |
SBA PPP loans(2) |  | 684 |  |  | 704 |  |  | — |  |  | — |  |  | 704 |
Residential real estate loans(2) |  | 1,610,324 |  |  | 1,424,504 |  |  | — |  |  | — |  |  | 1,424,504 |
Home equity loans(2) |  | 231,507 |  |  | 238,723 |  |  | — |  |  | — |  |  | 238,723 |
Consumer loans(2) |  | 20,406 |  |  | 18,277 |  |  | — |  |  | — |  |  | 18,277 |
Servicing assets |  | 2,470 |  |  | 4,466 |  |  | — |  |  | — |  |  | 4,466 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |
Time deposits |  | $ | 279,603 |  |  | $ | 270,794 |  |  | $ | — |  |  | $ | 270,794 |  |  | $ | — |
Short-term borrowings |  | 421,101 |  |  | 420,608 |  |  | — |  |  | 420,608 |  |  | — |
Subordinated debentures |  | 44,331 |  |  | 31,918 |  |  | — |  |  | 31,918 |  |  | — |
December 31, 2021 |  |  |  |  |  |  |  |  |  |
Financial assets: |  |  |  |  |  |  |  |  |  |
HTM debt securities |  | $ | 1,291 |  |  | $ | 1,380 |  |  | $ | — |  |  | $ | 1,380 |  |  | $ | — |
Commercial real estate loans(1)(2) |  | 1,474,087 |  |  | 1,435,794 |  |  | — |  |  | — |  |  | 1,435,794 |
Commercial loans(2) |  | 359,512 |  |  | 356,463 |  |  | — |  |  | — |  |  | 356,463 |
SBA PPP loans(2) |  | 35,934 |  |  | 37,133 |  |  | — |  |  | — |  |  | 37,133 |
Residential real estate loans(2) |  | 1,300,314 |  |  | 1,297,592 |  |  | — |  |  | — |  |  | 1,297,592 |
Home equity loans(2) |  | 208,934 |  |  | 205,920 |  |  | — |  |  | — |  |  | 208,934 |
Consumer loans(2) |  | 19,437 |  |  | 17,551 |  |  | — |  |  | — |  |  | 17,551 |
Servicing assets |  | 2,471 |  |  | 3,310 |  |  | — |  |  | — |  |  | 3,310 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |
Time deposits |  | $ | 409,668 |  |  | $ | 409,264 |  |  | $ | — |  |  | $ | 409,264 |  |  | $ | — |
Short-term borrowings |  | 211,608 |  |  | 211,586 |  |  | — |  |  | 211,586 |  |  | — |
Subordinated debentures |  | 44,331 |  |  | 33,248 |  |  | — |  |  | 33,248 |  |  | — |
(1) Commercial real estate loan includes non-owner-occupied and owner-occupied properties. (2) The presented carrying amount is net of the allocated ACL on loans. Excluded from the summary were financial instruments measured at fair value on a recurring and nonrecurring basis, as previously described. The Company considers its financial instruments' current use to be the highest and best use of the instruments.

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI https://asc.fasb.org/extlink&oid=126976982&loc=d3e19207-110258 + Details
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