Fair Value

6 Months Ended

Jun. 30, 2020

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. A fair value hierarchy has also been established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. 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 fair values of most trading securities and securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) 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 inputs). 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 inputs).

The Corporation’s derivative instruments are interest rate swaps that are similar to those that trade in liquid markets. As such, significant fair value inputs can generally be verified and do not typically involve significant management judgments (Level 2 inputs).

The fair value of impaired loans with specific allocations of the allowance for loan 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.

Assets and liabilities measured at fair value on a recurring basis are as follows at June 30, 2020 and December 31, 2019:


			Fair Value Measurements at June 30, 2020 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Securities Available For Sale:
U.S. Government sponsored entities	$	146,619	$	0	$	146,619	$	0
States and political subdivisions	64,191		0		64,191		0
Residential and multi-family mortgage	304,771		5,130		299,641		0
Corporate notes and bonds	9,172		0		9,172		0
Pooled SBA	23,358		0		23,358		0
Other	983		983		0		0
Total Securities Available For Sale	$	549,094	$	6,113	$	542,981	$	0
Interest Rate swaps	$	4,709	$	0	$	4,709	$	0
Trading Securities:
Corporate equity securities	$	3,847	$	3,847	$	0	$	0
Mutual funds	994		994		0		0
Certificates of deposit	322		322		0		0
Corporate notes and bonds	675		675		0		0
U.S. Government sponsored entities	51		0		51		0
Total Trading Securities	$	5,889	$	5,838	$	51	$	0
Liabilities:
Interest rate swaps	$	(5,615)	$	0	$	(5,615)	$	0

			Fair Value Measurements at December 31, 2019 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Securities Available For Sale:
U.S. Government sponsored entities	$	127,094	$	0	$	127,094	$	0
States and political subdivisions	104,363		0		104,363		0
Residential and multi-family mortgage	276,636		0		273,841		2,795
Corporate notes and bonds	8,082		0		8,082		0
Pooled SBA	25,174		0		25,174		0
Other	964		964		0		0
Total Securities Available For Sale	$	542,313	$	964	$	538,554	$	2,795
Interest Rate swaps	$	1,877	$	0	$	1,877	$	0
Trading Securities:
Corporate equity securities	$	7,946	$	7,946	$	0	$	0
Mutual funds	807		807		0		0
Certificates of deposit	350		350		0		0
Corporate notes and bonds	655		655		0		0
U.S. Government sponsored entities	51		0		51		0
Total Trading Securities	$	9,809	$	9,758	$	51	$	0
Liabilities:
Interest rate swaps	$	(2,362)	$	0	$	(2,362)	$	0

Assets and liabilities measured at fair value on a non-recurring basis are as follows at June 30, 2020 and December 31, 2019:


			Fair Value Measurements at June 30, 2020 Using:
			Quoted Prices in Active Markets for Identical Assets	Significant Other Observable Inputs	Significant Unobservable Inputs
Description	Total		(Level 1)	(Level 2)	(Level 3)
Assets:
Impaired loans:
Commercial, industrial and agricultural	$	5,417	0	0	$	5,417
Commercial mortgages	$	10,981	0	0	$	10,981

			Fair Value Measurements at December 31, 2019 Using
			Quoted Prices in		Significant
			Active Markets for	Significant Other	Unobservable
			Identical Assets	Observable Inputs	Inputs
Description	Total		(Level 1)	(Level 2)	(Level 3)
Assets:
Impaired loans:
Commercial, industrial and agricultural	$	2,910	0	0	$	2,910
Commercial mortgages	$	1,147	0	0	$	1,147

The estimated fair values of impaired collateral dependent loans such as commercial or residential mortgages are determined primarily through third-party appraisals. When a collateral dependent loan, such as a commercial or residential mortgage loan, becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal, and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral and a further reduction for estimated costs to sell the property is applied, which results in an amount that is considered to be the estimated fair value. If a loan becomes impaired and the appraisal of related loan collateral is outdated, management applies an appropriate adjustment factor based on its experience with current valuations of similar collateral in determining the loan’s estimated fair value and resulting allowance for loan losses. Third-party appraisals are not customarily obtained in respect of unimpaired loans, unless in management’s view changes in circumstances warrant obtaining an updated appraisal.

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 June 30, 2020:

Fair
value

Valuation Technique

Unobservable Inputs

Range
(Weighted Average)

Impaired loans – commercial, industrial and agricultural

$5,417

Collateral based measurements

Discount to reflect current market conditions and ultimate collectability

0%-100% (30%)

Impaired loans – commercial mortgages

$10,981

Collateral based measurements

Discount to reflect current market conditions and ultimate collectability

25%-100% (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, 2019:

Fair
value

Valuation Technique

Unobservable Inputs

Range
(Weighted Average)

Impaired loans – commercial, industrial and agricultural

$2,910

Collateral based measurements

Discount to reflect current market conditions and ultimate collectability

0%-60% (54%)

Impaired loans – commercial mortgages

$1,147

Collateral based measurements

Discount to reflect current market conditions and ultimate collectability

25%-100% (52%)

Fair Value of Financial Instruments

The following table presents the carrying amount and fair value of financial instruments at June 30, 2020:


	Carrying		Fair Value Measurement Using:								Total
	Amount		Level 1		Level 2		Level 3		Fair Value
ASSETS
Cash and cash equivalents	$	663,348	$	663,348	$	0	$	0	$	663,348
Securities available for sale	549,094		6,113		542,981		0		549,094
Trading securities	5,889		5,838		51		0		5,889
Loans held for sale	6,065		0		6,087		0		6,087
Net loans	3,005,642		0		0		2,947,830		2,947,830
FHLB and other restricted interests	28,661		n/a		n/a		n/a		n/a

Interest rate swaps	4,709		0		4,709		0		4,709
Accrued interest receivable	14,659		32		2,852		11,775		14,659
LIABILITIES
Deposits	$	(3,596,022)	$	(3,194,126)	$	(414,180)	$	0	$	(3,608,306)
FHLB and other borrowings	(416,313)		0		(422,324)		0		(422,324)
Subordinated debentures	(70,620)		0		(62,276)		0		(62,276)
Interest rate swaps	(5,615)		0		(5,615)		0		(5,615)
Accrued interest payable	(1,677)		0		(1,677)		0		(1,677)

The following table presents the carrying amount and fair value of financial instruments at December 31, 2019:


	Carrying		Fair Value Measurement Using:								Total
	Amount		Level 1		Level 2		Level 3		Fair Value
ASSETS
Cash and cash equivalents	$	192,974	$	192,974	$	0	$	0	$	192,974
Securities available for sale	542,313		964		538,554		2,795		542,313
Trading securities	9,809		9,758		51		0		9,809
Loans held for sale	930		0		933		0		933
Net loans	2,784,562		0		0		2,765,133		2,765,133
FHLB and other restricted interests	27,868		n/a		n/a		n/a		n/a

Interest rate swaps	1,877		0		1,877		0		1,877
Accrued interest receivable	11,486		6		3,238		8,242		11,486
LIABILITIES
Deposits	$	(3,102,327)	$	(2,674,511)	$	(432,287)	$	0	$	(3,106,798)
FHLB and other borrowings	(227,907)		0		(230,679)		0		(230,679)
Subordinated debentures	(70,620)		0		(64,084)		0		(64,084)
Interest rate swaps	(2,362)		0		(2,632)		0		(2,632)
Accrued interest payable	(1,597)		0		(1,597)		0		(1,597)

While estimates of fair value are based on management’s judgment of the most appropriate factors as of the balance sheet date, 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.

- 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.

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