XML 32 R20.htm IDEA: XBRL DOCUMENT

Fair Value Disclosures

6 Months Ended

Jun. 30, 2019

Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The Corporation determines the fair value of financial instruments based on the fair value hierarchy. The Corporation maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Corporation. Unobservable inputs are inputs that reflect the Corporation’s assumptions that market participants would use in pricing the asset or liability based on the best information available in the circumstances, including assumptions about risk. Three levels of inputs are used to measure fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input significant to the fair value measurement. Transfers between levels are recognized at the end of the reporting period.

Level 1: Valuations are based on quoted prices in active markets for identical assets or liabilities that the Corporation can access at the measurement date. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

Level 2: Valuations are based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3: Valuations are based on inputs that are unobservable and significant to the overall fair value measurement. Assets and liabilities utilizing Level 3 inputs include: financial instruments whose value is determined using pricing models, discounted cash-flow methodologies, or similar techniques, as well as instruments for which the fair value calculation requires significant management judgment or estimation.

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

Investment Securities

Where quoted prices are available in an active market for identical instruments, investment securities are classified within Level 1 of the valuation hierarchy. Level 1 investment securities include U.S. Treasury securities, most equity securities and money market mutual funds. Mutual funds are registered investment companies which are valued at net asset value of shares on a market exchange at the end of each trading day. Level 2 of the valuation hierarchy includes securities issued by U.S. Government sponsored enterprises, mortgage-backed securities, collateralized mortgage obligations, corporate and municipal bonds and certain equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. In cases where there is limited activity or less transparency around inputs to the valuation, investment securities are classified within Level 3 of the valuation hierarchy.

Fair values for securities are determined using independent pricing services and market-participating brokers. The Corporation’s independent pricing service utilizes evaluated pricing models that vary by asset class and incorporate available

trade, bid and other market information for structured securities, cash flow and, when available, loan performance data. Because many fixed income securities do not trade on a daily basis, the pricing service’s evaluated pricing applications apply information as applicable through processes, such as benchmarking of like securities, sector groupings, and matrix pricing, to prepare evaluations. If at any time, the pricing service determines that it does not have sufficient verifiable information to value a particular security, the Corporation will utilize valuations from another pricing service. Management has a sufficient understanding of the third party service’s valuation models, assumptions and inputs used in determining the fair value of securities to enable management to maintain an appropriate system of internal control.

Certain corporate bonds owned by the Corporation are classified as Level 3 as they are not traded in active markets. The fair value of each bond is estimated by benchmarking similar transactions of structure, yield and credit which are owned by the Corporation and are actively traded in the market.

On a quarterly basis, the Corporation reviews changes, as submitted by the pricing service, in the market value of its security portfolio. Individual changes in valuations are reviewed for consistency with general interest rate movements and any known credit concerns for specific securities. If, upon the Corporation’s review or in comparing with another service, a material difference between pricing evaluations were to exist, the Corporation may submit an inquiry to the current pricing service regarding the data used to determine the valuation of a particular security. If the Corporation determines there is market information that would support a different valuation than from the current pricing service’s evaluation, the Corporation may utilize and change the security's valuation. There were no material differences in valuations noted at June 30, 2019.

Derivative Financial Instruments

The fair values of derivative financial instruments are based upon the estimated amount the Corporation would receive or pay to terminate the contracts or agreements, taking into account current interest rates and, when appropriate, the current creditworthiness of the counterparties. Interest rate swaps and mortgage banking derivative financial instruments are classified within Level 2 of the valuation hierarchy. Credit derivatives are valued based on credit worthiness of the underlying borrower which is a significant unobservable input and therefore classified in Level 3 of the valuation hierarchy.

Two commercial loans associated with interest rate swaps are classified in Level 3 of the valuation hierarchy since lending credit risk is not an observable input for these loans. The unrealized gain on the two loans was $45 thousand at June 30, 2019.

Contingent Consideration Liability

The Corporation estimates the fair value of the contingent consideration liability by using a discounted cash flow model of future contingent payments based on projected revenue related to the acquired business. The estimated fair value of the contingent consideration liability is reviewed on a quarterly basis and any valuation adjustments resulting from a change of estimated future contingent payments based on projected revenue of the acquired business affecting the contingent consideration liability will be recorded through noninterest expense. Due to the significant unobservable input related to the projected revenue, the contingent consideration liability is classified within Level 3 of the valuation hierarchy. An increase in the projected revenue may result in a higher fair value of the contingent consideration liability. Alternatively, a decrease in the projected revenue may result in a lower estimated fair value of the contingent consideration liability.

The following table presents the assets and liabilities measured at fair value on a recurring basis at June 30, 2019 and December 31, 2018, classified using the fair value hierarchy:



	At June 30, 2019
(Dollars in thousands)	Level 1		Level 2		Level 3		Assets/ Liabilities at Fair Value
Assets:
Available-for-sale securities:
U.S. government corporations and agencies	$	—	$	10,316	$	—	$	10,316
State and political subdivisions	—		44,172		—		44,172
Residential mortgage-backed securities	—		141,815		—		141,815
Collateralized mortgage obligations	—		2,677		—		2,677
Corporate bonds	—		67,117		26,925		94,042
Total available-for-sale securities	—		266,097		26,925		293,022
Equity securities:
Equity securities - financial services industry	943		—		—		943
Money market mutual funds	1,922		—		—		1,922
Total equity securities	2,865		—		—		2,865
Loans*	—		—		1,725		1,725
Interest rate locks with customers*	—		798		—		798
Total assets	$	2,865	$	266,895	$	28,650	$	298,410
Liabilities:
Contingent consideration liability	$	—	$	—	$	211	$	211
Interest rate swaps*	—		293		—		293
Credit derivatives*	—		—		160		160
Forward loan sale commitments*	—		197		—		197
Total liabilities	$	—	$	490	$	371	$	861



	At December 31, 2018
(Dollars in thousands)	Level 1		Level 2		Level 3		Assets/ Liabilities at Fair Value
Assets:
Available-for-sale securities:
U.S. government corporations and agencies	$	—	$	15,315	$	—	$	15,315
State and political subdivisions	—		65,415		—		65,415
Residential mortgage-backed securities	—		151,762		—		151,762
Collateralized mortgage obligations	—		2,888		—		2,888
Corporate bonds	—		67,398		25,729		93,127
Total available-for-sale securities	—		302,778		25,729		328,507
Equity securities:
Equity securities - financial services industry	924		—		—		924
Money market mutual funds	1,241		—		—		1,241
Total equity securities	2,165		—		—		2,165
Loans*	—		—		1,779		1,779
Interest rate swap*	—		189		—		189
Interest rate locks with customers*	—		490		—		490
Total assets	$	2,165	$	303,457	$	27,508	$	333,130
Liabilities:
Contingent consideration liability	$	—	$	—	$	259	$	259
Interest rate swaps*	—		20		—		20
Credit derivatives*	—		—		72		72
Forward loan sale commitments*	—		150		—		150
Total liabilities	$	—	$	170	$	331	$	501

* Such financial instruments are recorded at fair value as further described in Note 11, "Derivative Instruments and Hedging Activities."

The following table includes a rollforward of corporate bonds, loans and credit derivatives for which the Corporation utilized Level 3 inputs to determine fair value on a recurring basis for the six months ended June 30, 2019 and 2018:



	Six Months Ended June 30, 2019
(Dollars in thousands)	Balance at December 31, 2018			Purchases/additions			Sales		Payments received			Premium amortization, net		Increase (decrease) in value		Balance at June 30, 2019
Corporate bonds	$	25,729		$	—		$	—	$	—		$	—	$	1,196	$	26,925
Loans	1,779			—			—		(78		)	—		24		1,725
Credit derivatives	(72		)	(670		)	—		—			—		582		(160		)
Net total	$	27,436		$	(670	)	$	—	$	(78	)	$	—	$	1,802	$	28,490



	Six Months Ended June 30, 2018
(Dollars in thousands)	Balance at December 31, 2017			Purchases/additions			Sales		Payments received			Premium amortization, net		(Decrease) increase in value			Balance at June 30, 2018
Corporate bonds	$	27,986		$	—		$	—	$	—		$	—	$	(1,600	)	$	26,386
Loans	1,958			—			—		(73		)	—		(38		)	1,847
Credit derivatives	(36		)	(40		)	—		—			—		39			(37		)
Net total	$	29,908		$	(40	)	$	—	$	(73	)	$	—	$	(1,599	)	$	28,196

The following table presents the change in the balance of the contingent consideration liability related to acquisitions for which the Corporation utilized Level 3 inputs to determine fair value on a recurring basis for the six months ended June 30, 2019 and 2018:



	Six Months Ended June 30, 2019
(Dollars in thousands)	Balance at December 31, 2018		Contingent Consideration from New Acquisition		Payment of Contingent Consideration		Adjustment of Contingent Consideration		Balance at June 30, 2019
Girard Partners	$	259	$	—	$	65	$	17	$	211
Total contingent consideration liability	$	259	$	—	$	65	$	17	$	211



	Six Months Ended June 30, 2018
(Dollars in thousands)	Balance at December 31, 2017		Contingent Consideration from New Acquisition		Payment of Contingent Consideration		Adjustment of Contingent Consideration		Balance at June 30, 2018
Girard Partners	$	339	$	—	$	67	$	28	$	300
Total contingent consideration liability	$	339	$	—	$	67	$	28	$	300

The Corporation may be required to periodically measure certain assets and liabilities at fair value on a non-recurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or market accounting or impairment charges of individual assets. The following table represents assets measured at fair value on a non-recurring basis at June 30, 2019 and December 31, 2018:



	At June 30, 2019
(Dollars in thousands)	Level 1		Level 2		Level 3		Assets at Fair Value
Impaired loans held for investment	$	—	$	—	$	22,663	$	22,663
Other real estate owned	—		—		540		540
Total	$	—	$	—	$	23,203	$	23,203



	At December 31, 2018
(Dollars in thousands)	Level 1		Level 2		Level 3		Assets at Fair Value
Impaired loans held for investment	$	—	$	—	$	25,166	$	25,166
Other real estate owned	—		—		1,187		1,187
Total	$	—	$	—	$	26,353	$	26,353

The following table presents assets and liabilities and off-balance sheet items not measured at fair value on a recurring or non-recurring basis in the Corporation’s consolidated balance sheets but for which the fair value is required to be disclosed at June 30, 2019 and December 31, 2018. The disclosed fair values are classified using the fair value hierarchy.



	At June 30, 2019
(Dollars in thousands)	Level 1		Level 2			Level 3		Fair Value			Carrying Amount
Assets:
Cash and short-term interest-earning assets	$	84,567	$	—		$	—	$	84,567		$	84,567
Held-to-maturity securities	—		175,296			—		175,296			172,946
Federal Home Loan Bank, Federal Reserve Bank and other stock	NA		NA			NA		NA			32,755
Loans held for sale	—		1,531			—		1,531			1,498
Net loans and leases held for investment	—		—			4,121,087		4,121,087			4,110,916
Servicing rights	—		—			8,911		8,911			6,599
Total assets	$	84,567	$	176,827		$	4,129,998	$	4,391,392		$	4,409,281
Liabilities:
Deposits:
Demand and savings deposits, non-maturity	$	3,412,673	$	—		$	—	$	3,412,673		$	3,412,673
Time deposits	—		712,030			—		712,030			709,437
Total deposits	3,412,673		712,030			—		4,124,703			4,122,110
Short-term borrowings	—		39,350			—		39,350			39,350
Long-term debt	—		171,177			—		171,177			170,195
Subordinated notes	—		96,572			—		96,572			94,696
Total liabilities	$	3,412,673	$	1,019,129		$	—	$	4,431,802		$	4,426,351
Off-Balance-Sheet:
Commitments to extend credit	$	—	$	(8,066	)	$	—	$	(8,066	)	$	—



	At December 31, 2018
(Dollars in thousands)	Level 1		Level 2			Level 3		Fair Value			Carrying Amount
Assets:
Cash and short-term interest-earning assets	$	109,420	$	—		$	—	$	109,420		$	109,420
Held-to-maturity securities	—		141,575			—		141,575			142,634
Federal Home Loan Bank, Federal Reserve Bank and other stock	NA		NA			NA		NA			28,337
Loans held for sale	—		1,798			—		1,798			1,754
Net loans and leases held for investment	—		—			3,924,329		3,924,329			3,950,265
Servicing rights	—		—			11,496		11,496			6,768
Total assets	$	109,420	$	143,373		$	3,935,825	$	4,188,618		$	4,239,178
Liabilities:
Deposits:
Demand and savings deposits, non-maturity	$	3,215,856	$	—		$	—	$	3,215,856		$	3,215,856
Time deposits	—		664,738			—		664,738			670,077
Total deposits	3,215,856		664,738			—		3,880,594			3,885,933
Short-term borrowings	—		189,768			—		189,768			189,768
Long-term debt	—		144,021			—		144,021			145,330
Subordinated notes	—		95,113			—		95,113			94,574
Total liabilities	$	3,215,856	$	1,093,640		$	—	$	4,309,496		$	4,315,605
Off-Balance-Sheet:
Commitments to extend credit	$	—	$	(2,516	)	$	—	$	(2,516	)	$	—

The following valuation methods and assumptions were used by the Corporation in estimating the fair value for financial instruments measured at fair value on a non-recurring basis and financial instruments not measured at fair value on a recurring or non-recurring basis in the Corporation’s consolidated balance sheets but for which the fair value is required to be disclosed:

Cash and short-term interest-earning assets: The carrying amounts reported in the balance sheet for cash and due from banks, interest-earning deposits with other banks and other short-term investments is their stated value. Cash and short-term interest-earning assets are classified within Level 1 in the fair value hierarchy.

Held-to-maturity securities: Fair values for the held-to-maturity investment securities are estimated by using pricing models or quoted prices of securities with similar characteristics and are classified in Level 2 in the fair value hierarchy.

Federal Home Loan Bank, Federal Reserve Bank and other stock: It is not practical to determine the fair values of Federal Home Loan Bank, Federal Reserve Bank and other stock, due to restrictions placed on their transferability.

Loans held for sale: The fair value of the Corporation’s mortgage loans held for sale are generally determined using a pricing model based on current market information obtained from external sources, including interest rates, bids or indications provided by market participants on specific loans that are actively marketed for sale. These loans are primarily residential mortgage loans and are generally classified in Level 2 due to the observable pricing data. Loans held for sale are carried at the lower of cost or estimated fair value. There were no valuation adjustments for loans held for sale at June 30, 2019 and December 31, 2018.

Loans and leases held for investment: The fair values for loans and leases held for investment are estimated using discounted cash flow analyses, using a discount rate based on current interest rates at which similar loans with similar terms would be made to borrowers, adjusted as appropriate to consider credit, liquidity and marketability factors to arrive at a fair value that represents the Corporation's exit price at which these instruments would be sold or transferred. Loans and leases are classified within Level 3 in the fair value hierarchy since credit risk is not an observable input.

Impaired loans and leases held for investment: For impaired loans and leases, the Corporation uses a variety of techniques to measure fair value, such as using the current appraised value of the collateral, agreements of sale, discounting the contractual cash flows, and analyzing market data that the Corporation may adjust due to specific characteristics of the loan/lease or collateral. At June 30, 2019, impaired loans held for investment had a carrying amount of $25.1 million with a valuation allowance of $2.4 million. At December 31, 2018, impaired loans held for investment had a carrying amount of $26.6 million with a valuation allowance of $1.4 million. The Corporation had no impaired leases at June 30, 2019 and December 31, 2018.

Servicing rights: The Corporation estimates the fair value of mortgage servicing rights using discounted cash flow models that calculate the present value of estimated future net servicing income. The model uses readily available prepayment speed assumptions for the interest rates of the portfolios serviced. Mortgage servicing rights are classified within Level 3 in the fair value hierarchy based upon management's assessment of the inputs. The Corporation reviews the mortgage servicing rights portfolio on a quarterly basis for impairment and the mortgage servicing rights are carried at the lower of amortized cost or estimated fair value. The Corporation also records servicing rights on SBA loans. At June 30, 2019, servicing rights had a carrying amount of $6.6 million with a valuation allowance of $21 thousand. At December 31, 2018, servicing rights carrying amount of $6.7 million with no valuation allowance.

Goodwill and other identifiable assets: Certain non-financial assets subject to measurement at fair value on a non-recurring basis include goodwill and other identifiable intangible assets. During the six months ended June 30, 2019, there were no triggering events that required valuation of goodwill and other identifiable intangible assets.

Other real estate owned: The fair value of other real estate owned (OREO) is originally estimated based upon the appraised value less estimated costs to sell. The fair value less cost to sell becomes the "original cost" of the OREO asset. Subsequently, OREO is reported at the lower of the original cost or the current fair value less cost to sell. Capital improvement expenses associated with the construction or repair of the property are capitalized as part of the cost of the OREO asset; however, the capitalized expenses may not increase the OREO asset's recorded value to an amount greater than the asset's fair value after improvements and less cost to sell. New appraisals are generally obtained on an annual basis if an agreement of sale does not exist. During the six months ended June 30, 2019, one property was sold with total proceeds of $599 thousand. At June 30, 2019 and December 31, 2018, OREO had a carrying amount of $540 thousand and $1.2 million, respectively. Other real estate owned is classified within Level 3 of the valuation hierarchy due to the unique characteristics of the collateral for each loan.

Deposit liabilities: The fair values for demand and savings accounts, with no stated maturities, is the amount payable on demand at the reporting date (carrying value) and are classified within Level 1 in the fair value hierarchy. The fair values for time

deposits with fixed maturities are estimated by discounting the final maturity using interest rates currently offered for deposits with similar remaining maturities. Time deposits are classified within Level 2 in the fair value hierarchy.

Short-term borrowings: The fair value of short-term borrowings are estimated using current market rates for similar borrowings and are classified within Level 2 in the fair value hierarchy.

Long-term debt: The fair value of long-term debt is estimated by using discounted cash flow analysis, based on current market rates for debt with similar terms and remaining maturities. Long-term debt is classified within Level 2 in the fair value hierarchy.

Subordinated notes: The fair value of the subordinated notes are estimated by discounting the principal balance using the treasury yield curve for the term to the call date as the Corporation has the option to call the subordinated notes. The subordinated notes are classified within Level 2 in the fair value hierarchy.

Off-balance-sheet instruments: Fair values for the Corporation’s off-balance-sheet instruments are based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing and are classified within Level 2 in the fair value hierarchy.

- 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 + Details