FAIR VALUE

6 Months Ended

Jun. 30, 2020

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

The Corporation used the following methods and significant assumptions to estimate fair value on a recurring basis:

Available for Sale Securities:  The fair values of securities available for sale are usually determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs), or matrix pricing, which is a mathematical technique widely used to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3 inputs).

Equity Investments: Securities that are held to fund a deferred compensation plan and securities that have a readily determinable fair market value, are recorded at fair value with changes in fair value included in earnings.  The fair values of equity investments are determined by quoted market prices (Level 1 inputs).

Impaired Loans:  At the time a loan is considered impaired, it is valued at the lower of cost or fair value.  Impaired loans carried at fair value have been partially charged-off or receive specific allocations as part of the allowance for loan loss accounting.  For collateral dependent loans, fair value is commonly based on real estate appraisals.  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 independent appraisers to adjust for differences between the comparable sales and income data available.  Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.  Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, typically resulting in a Level 3 fair value classification.  Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

OREO:  Assets acquired through or instead of loan foreclosures are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis.  These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell.  Fair value is commonly based on recent real estate appraisals. 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 independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for both collateral dependent impaired loans and OREO are performed by certified general appraisers (commercial properties) or certified residential appraisers (residential properties) whose qualifications and licenses have been reviewed and verified by the Corporation.  Once received, appraisals are reviewed for reasonableness of assumptions, approaches utilized, Uniform Standards of Professional Appraisal Practice and other regulatory compliance, as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.  Appraisals are generally completed within the previous 12 month period prior to a property being placed into OREO.  On impaired loans, appraisal values are adjusted based on the age of the appraisal, the position of the lien, the type of the property and its condition.

Derivatives: The fair values of interest rate swaps are based on valuation models using observable market data as of the measurement date (Level 2 inputs). Derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices, and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The Corporation also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counter-party's nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Corporation has considered the impact of any applicable credit enhancements, such as collateral postings. Although the Corporation has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize credit default rate assumptions (Level 3 inputs).

Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):

			Fair Value Measurement at June 30, 2020 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Mortgage-backed securities, residential	$	251,307	$	—	$	251,307	$	—
Obligations of states and political subdivisions	43,305		—		43,305		—
Corporate bonds and notes	2,250		—		2,250		—
SBA loan pools	20,199		—		20,199		—
Total available for sale securities	$	317,061	$	—	$	317,061	$	—
Equity investments, at fair value	$	2,169	$	1,507	$	—	$	662
Derivative assets	17,893		—		17,893		—
Financial Liabilities:
Derivative liabilities	$	18,104	$	—	$	17,893	$	211

There were no transfers between Level 1 and Level 2 during the three and six month periods ended June 30, 2020.

			Fair Value Measurement at December 31, 2019 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Mortgage-backed securities, residential	$	225,234	$	—	$	225,234	$	—
Obligations of states and political subdivisions	42,845		—		42,845		—
Corporate bonds and notes	250		—		250		—
SBA loan pools	15,761		—		15,761		—
Total available for sale securities	$	284,090	$	—	$	284,090	$	—
Equity investments, at fair value	$	1,442	$	1,442	$	—	$	—
Derivative assets	6,466		—		6,466		—
Financial Liabilities:
Derivative liabilities	$	6,831	$	—	$	6,466	$	365

There were no transfers between Level 1 and Level 2 during the three and six month periods ended June 30, 2019.

The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three month periods ended June 30, 2020 and 2019 (in thousands):

	Assets (Liabilities)
	Derivative Liabilities
	June 30, 2020		June 30, 2019
Balance of recurring Level 3 assets at April 1	$	(430)	$	(230)
Derivative instruments entered into	(6)		(11)
Total gains or losses for the period:
Included in earnings - other non-interest income	225		(124)
Included in other comprehensive income	—		—
Transfers out of Level 3	—		—
Balance of recurring Level 3 assets at June 30,	$	(211)	$	(365)

The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six month periods ended June 30, 2020 and June 30, 2019 (in thousands):

	Assets (Liabilities)
	Derivative Liabilities
	June 30, 2020		June 30, 2019
Balance of recurring Level 3 assets at January 1	$	(365)	$	(140)
Derivative instruments entered into	(15)		(35)
Total gains or losses for the period:
Included in earnings - other non-interest income	169		(190)
Included in other comprehensive income	—		—
Transfers out of Level 3	—		—
Balance of recurring Level 3 assets at June 30,	$	(211)	$	(365)

The following table presents information related to Level 3 recurring fair value measurements at June 30, 2020 and December 31, 2019 (in thousands):

Description	Fair Value at June 30, 2020		Valuation Technique	Unobservable Inputs	Range [Weighted Average] at June 30, 2020
Derivative liabilities	$	211	Historical trend	Credit default rate	0.10% - 5.50% [1.11%]

Description	Fair Value at December 31, 2019		Valuation Technique	Unobservable Inputs	Range [Weighted Average] at December 31, 2019
Derivative liabilities	$	365	Historical trend	Credit default rate	7.30% - 7.30% [7.30%]

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

			Fair Value Measurement at June 30, 2020 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)
Impaired Loans:
Commercial mortgages:
Commercial mortgages	$	516	$	—	$	—	$	516	$	232
Total impaired loans	$	516	$	—	$	—	$	516	$	232
Other real estate owned:
Commercial mortgages:
Commercial mortgages	$	111	$	—	$	—	$	111	$	—
Residential mortgages	115		—		—		115		—
Consumer loans:
Home equity lines and loans	55		—		—		55		—
Total other real estate owned, net	$	281	$	—	$	—	$	281	$	—

			Fair Value Measurement at December 31, 2019 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)
Impaired Loans:
Commercial mortgages:
Commercial mortgages	$	1,554	$	—	$	—	$	1,554	$	(1,597)
Total impaired loans	$	1,554	$	—	$	—	$	1,554	$	(1,597)
Other real estate owned:
Commercial mortgages:
Commercial mortgages	$	111	$	—	$	—	$	111	$	—
Residential mortgages	284		—		—		284		(12)
Consumer loans:
Home equity lines and loans	122		—		—		122		—
Total other real estate owned, net	$	517	$	—	$	—	$	517	$	(12)

The following tables present information related to Level 3 non-recurring fair value measurement at June 30, 2020 and December 31, 2019 (in thousands):

Description	Fair Value at June 30, 2020		Valuation Technique	Unobservable Inputs	Range [Weighted Average] at June 30, 2020
Impaired loans:
Commercial mortgages:
Commercial mortgages	$	516	Sales comparison	Discount to appraised value	5.84% - 5.84% [5.84%]
	$	516
OREO:
Commercial mortgages:
Commercial mortgages	$	111	Sales comparison	Discount to appraised value	20.80% - 20.80% [20.80%]
Residential mortgages	115		Sales comparison	Discount to appraised value	20.80% - 20.80% [20.80%]
Consumer loans:
Home equity lines and loans	55		Sales comparison	Discount to appraised value	31.25% - 31.25% [31.25%]
	$	281

Description	Fair Value at December 31, 2019		Valuation Technique	Unobservable Inputs	Range [Weighted Average] at December 31, 2019
Impaired loans:
Commercial mortgages:
Commercial mortgages	1,554		Sales comparison	Discount to appraised value	10.00% - 10.00% [10.00%]
	$	1,554
OREO:
Commercial mortgages:
Commercial mortgages	$	111	Sales comparison	Discount to appraised value	20.80% - 20.80% [20.80%]
Residential mortgages	284		Sales comparison	Discount to appraised value	20.80% - 35.29% [24.09%]
Consumer loans:
Home equity lines and loans	122		Sales comparison	Discount to appraised value	20.80% - 20.80% [20.80%]
	$	517

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of other financial instruments, at June 30, 2020 and December 31, 2019, are as follows (in thousands):

	June 30, 2020
Financial assets:	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Estimated Fair Value (1)
Cash and due from financial institutions	$	28,689	$	28,689	$	—	$	—	$	28,689
Interest-earning deposits in other financial institutions	126,473		126,473		—		—		126,473
Equity investments	2,169		1,507		—		662		2,169
Securities held to maturity	3,597		—		2,892		754		3,646
FHLBNY and FRBNY stock	3,150		—		—		—		N/A
Loans, net and loans held for sale	1,475,359		—		—		1,489,509		1,489,509
Accrued interest receivable	5,611		1		862		4,748		5,611
Derivative Assets	17,893		—		17,893		—		17,893
Financial liabilities:
Deposits:
Demand, savings, and insured money market accounts	$	1,640,546	$	1,640,546	$	—	$	—	$	1,640,546
Time deposits	170,710		—		174,034		—		174,034
Accrued interest payable	254		9		245		—		254
Derivative Liabilities	18,104		—		17,893		211		18,104

(1) Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.

	December 31, 2019
Financial assets:	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Estimated Fair Value (1)
Cash and due from financial institutions	$	25,203	$	25,203	$	—	$	—	$	25,203
Interest-earning deposits in other financial institutions	96,701		96,701		—		—		96,701
Equity investments	2,174		2,174		—		—		2,174
Securities available for sale	284,090		—		284,090		—		284,090
Securities held to maturity	3,115		—		2,094		1,045		3,139
FHLBNY and FRBNY stock	3,099		—		—		—		N/A
Loans, net and loans held for sale	1,286,926		—		—		1,285,215		1,285,215
Accrued interest receivable	4,633		63		885		3,685		4,633
Derivative Asset	6,466		—		6,466		—		6,466
Financial liabilities:
Deposits:
Demand, savings, and insured money market accounts	$	1,410,962	$	1,410,962	$	—	$	—	$	1,410,962
Time deposits	161,176		—		163,761		—		163,761
Accrued interest payable	299		27		272		—		299
Derivative Liabilities	6,831		—		6,466		365		6,831

(1) Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.