Fair Value

9 Months Ended

Sep. 30, 2019

Fair Value Disclosures [Abstract]

Fair Value

Fair Value

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (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. There are three levels of inputs that may be used to measure fair values:

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 reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For investment securities where quoted prices are not available, fair values are calculated based on market prices of similar investment securities (Level 2). For investment securities where quoted prices or market prices of similar investment securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Level 3 pricing is obtained from a third-party based upon similar trades that are not traded frequently without adjustment by the Company. At September 30, 2019, the Company held $4.0 million in Level 3 securities which consist of non-rated Obligations of State and Political Subdivisions. Absent the credit rating, significant assumptions must be made such that the credit risk input becomes an unobservable input and thus these investment securities are reported by the Company in a Level 3 classification.

Derivatives: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2).

Impaired Loans: Fair values for impaired collateral dependent loans are generally based on appraisals obtained from licensed real estate appraisers and in certain circumstances includes consideration of offers obtained to purchase properties prior to foreclosure. Appraisals for commercial real estate generally use three methods to derive value: cost, sales or market comparison and income approach. The cost method bases value in the cost to replace the current property. Value of market comparison approach evaluates the sales price of similar properties in the same market area. The income approach considers net operating income generated by the property and an investor's required return. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Comparable sales adjustments are based on known sales prices of similar type and similar use properties and duration of time that the property has been on the market to sell. Such adjustments made in the appraisal process are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Company’s Risk Management Area reviews the assumptions and approaches utilized in the appraisal. In determining the value of impaired collateral dependent loans and other real estate owned, significant unobservable inputs may be used which include: physical condition of comparable properties sold, net operating income generated by the property and investor rates of return.

Other Real Estate: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate (ORE) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property utilizing similar techniques as discussed above for Impaired Loans, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, impairment loss is recognized.

Loans Held-for-Sale: The fair values of loans held for sale are determined by using quoted prices for similar assets, adjusted for specific attributes of that loan resulting in a Level 2 classification.

Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Company has elected the fair value option, are summarized below:

	Fair Value Measurements at September 30, 2019 Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Obligations of State and Political Subdivisions	$	—	$	313,442	$	4,030	$	317,472
MBS/CMO - Residential	—		531,973		—		531,973
Total Securities	$	—	$	845,415	$	4,030	$	849,445
Loans Held-for-Sale	$	—	$	19,156	$	—	$	19,156
Derivative Assets	$	—	$	3,985	$	—	$	3,985
Derivative Liabilities	$	—	$	4,353	$	—	$	4,353

	Fair Value Measurements at December 31, 2018 Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable  Inputs (Level 3)		Total
Assets:
Obligations of State and Political Subdivisions	$	—	$	289,542	$	4,991	$	294,533
MBS/CMO - Residential	—		518,078		—		518,078
Total Securities	$	—	$	807,620	$	4,991	$	812,611
Loans Held-for-Sale	$	—	$	4,263	$	—	$	4,263
Derivative Assets	$	—	$	1,713	$	—	$	1,713
Derivative Liabilities	$	—	$	1,734	$	—	$	1,734

There were no transfers between Level 1 and Level 2 for the periods ended September 30, 2019 and December 31, 2018.

At September 30, 2019, the aggregate fair value of the Loans Held-for-Sale was $19,156. Aggregate contractual principal balance was $18,786 with a difference of $370.  At December 31, 2018, the aggregate fair value of the Loans Held-for-Sale was $4,263. Aggregate contractual principal balance was $4,231 with a difference of $32. No loans were 90 days past due or on non-accrual.

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2019 and 2018:

	Obligations of State and Political Subdivisions
	2019			2018
Balance of Recurring Level 3 Assets at July 1	$	4,506		$	5,167
Total Gains or Losses Included in Other Comprehensive Income	(1		)	(44		)
Maturities / Calls	(475		)	(460		)
Purchases	—			—
Balance of Recurring Level 3 Assets at September 30	$	4,030		$	4,663

	Obligations of State and Political Subdivisions
	2019			2018
Balance of Recurring Level 3 Assets at January 1	$	4,991		$	5,649
Total Gains or Losses Included in Other Comprehensive Income	(16		)	(66		)
Maturities / Calls	(945		)	(920		)
Purchases	—			—
Balance of Recurring Level 3 Assets at September 30	$	4,030		$	4,663

Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

	Fair Value Measurements at September 30, 2019 Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable  Inputs (Level 3)		Total
Assets:
Impaired Loans
Commercial and Industrial Loans	$	—	$	—	$	2,688	$	2,688
Commercial Real Estate Loans	—		—		488		488

 

	Fair Value Measurements at December 31, 2018 Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable  Inputs (Level 3)		Total
Assets:
Impaired Loans
Commercial and Industrial Loans	$	—	$	—	$	2,210	$	2,210
Commercial Real Estate Loans	—		—		2,528		2,528

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $6,236 with a valuation allowance of $3,060, resulting in an increase to the provision for loan losses of $1,510 and $1,237 for the three and nine months ended September 30, 2019, respectively. For the three months ended September 30, 2018, impaired loans resulted in an increase to the provision for loan losses of $190 and a decrease to the provision for loan losses of $640 for the nine months ended September 30, 2018. Impaired loans, which are measured for impairment using the fair value

of the collateral for collateral dependent loans, had a carrying amount of $6,561 with a valuation allowance of $1,823, resulting in a decrease to the provision for loan losses of $411 for the year ended December 31, 2018.

There was no Other Real Estate carried at fair value less costs to sell at September 30, 2019. No charge to earnings was included in the three or nine months ended September 30, 2019 and 2018. There was no Other Real Estate carried at fair value less costs to sell at December 31, 2018. No charge to earnings was included in the year ended December 31, 2018.

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, 2019 and December 31, 2018:

September 30, 2019	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
Impaired Loans - Commercial and Industrial Loans	$	2,688	Sales comparison approach	Adjustment for physical condition of comparable properties sold	29%-100% (61%)
Impaired Loans - Commercial Real Estate Loans	$	488	Sales comparison approach	Adjustment for physical condition of comparable properties sold	47%-89% (64%)

December 31, 2018	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
Impaired Loans - Commercial and Industrial Loans	$	2,210	Sales comparison approach	Adjustment for physical condition of comparable properties sold	0%-100% (99%)
Impaired Loans - Commercial Real Estate Loans	$	2,528	Sales comparison approach	Adjustment for physical condition of comparable properties sold	22%-76% (55%)

The carrying amounts and estimated fair values of the Company’s financial instruments not previously presented are provided in the tables below for the periods ending September 30, 2019 and December 31, 2018. Not all of the Company’s assets and liabilities are considered financial instruments, and therefore are not included in the tables. Because no active market exists for a significant portion of the Company’s financial instruments, fair value estimates were based on subjective judgments, and therefore cannot be determined with precision. In accordance with the adoption of ASU 2016-01, the tables below for September 30, 2019 and December 31, 2018, present the fair values measured using an exit price notion.

				Fair Value Measurements at September 30, 2019 Using
	Carrying Value			Level 1			Level 2			Level 3			Total
Financial Assets:
Cash and Short-term Investments	$	89,134		$	64,791		$	24,343		$	—		$	89,134
Interest Bearing Time Deposits with Banks	1,985			—			1,985			—			1,985
Loans, Net	3,037,862			—			—			3,027,538			3,027,538
Accrued Interest Receivable	17,824			—			4,347			13,477			17,824
Financial Liabilities:
Demand, Savings, and Money Market Deposits	(2,737,654		)	(2,737,654		)	—			—			(2,737,654		)
Time Deposits	(693,632		)	—			(685,518		)	—			(685,518		)
Short-term Borrowings	(126,123		)	(92,000		)	(34,123		)	—			(126,123		)
Long-term Debt	(190,516		)	—			(152,854		)	(15,168		)	(168,022		)
Accrued Interest Payable	(2,834		)	—			(2,798		)	(36		)	(2,834		)

				Fair Value Measurements at December 31, 2018 Using
	Carrying Value			Level 1			Level 2			Level 3			Total
Financial Assets:
Cash and Short-term Investments	$	96,550		$	64,549		$	32,001		$	—		$	96,550
Interest Bearing Time Deposits with Banks	250			—			250			—			250
Loans, Net	2,707,498			—			—			2,689,393			2,689,393
Accrued Interest Receivable	16,634			—			4,143			12,491			16,634
Financial Liabilities:
Demand, Savings, and Money Market Deposits	(2,484,149		)	(2,848,149		)	—			—			(2,848,149		)
Time Deposits	(588,483		)	—			(586,338		)	—			(586,338		)
Short-term Borrowings	(249,774		)	(204,500		)	(45,274		)	—			(249,774		)
Long-term Debt	(126,635		)	—			(117,513		)	(11,315		)	(128,828		)
Accrued Interest Payable	(1,740		)	—			(1,718		)	(22		)	(1,740		)