Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. This guidance provides additional information on determining when the volume and level of activity for the asset or liability has significantly decreased. The guidance also includes information on identifying circumstances when a transaction may not be considered orderly.

Fair value measurement and disclosure guidance provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with the fair value measurement and disclosure guidance.

This guidance clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The guidance provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.

Inputs to valuation techniques refer to the assumptions that market participants would use in measuring the fair value of an asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own belief about the assumptions market participants would use in pricing the asset or liability based upon the best information available in the circumstances. Fair value measurement and disclosure guidance 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. An asset’s or liability’s placement in the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement or disclosure. The fair value hierarchy is as follows:

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.

There were no transfers of assets between fair value Level 1 and Level 2 for the years ended December 31, 2020 or 2019.

The following tables illustrate the assets measured at fair value on a recurring basis segregated by hierarchy fair value levels:

			Fair value measurements at December 31, 2020 using:
(Dollars in thousands)	Total carrying value at		Quoted prices in active markets		Significant other observable inputs		Significant unobservable inputs
Assets:	December 31, 2020		(Level 1)		(Level 2)		(Level 3)
Available-for-sale debt securities:
Mortgage-backed U.S. government agencies	$	2	$	—	$	2	$	—
Corporate debt securities		5,746		—		5,746		—
Other assets:
Equity securities		515		515		—		—
Interest rate swap agreements		489		—		489		—
	$	6,752	$	515	$	6,237	$	—

			Fair value measurements at December 31, 2019 using:
(Dollars in thousands)	Total carrying value at		Quoted prices in active markets		Significant other observable inputs		Significant unobservable inputs
Assets:	December 31, 2019		(Level 1)		(Level 2)		(Level 3)
Available-for-sale debt securities:
U.S. government agencies	$	22,830	$	—	$	22,830	$	—
Mortgage-backed U.S. government agencies		12,890		—		12,890		—
State and political subdivision obligations		30		—		30		—
Corporate debt securities		1,259		—		1,259		—
Other assets:
Equity securities		507		507		—		—
	$	37,516	$	507	$	37,009	$	—

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

The following tables illustrate the assets measured at fair value on a nonrecurring basis segregated by hierarchy fair value levels.

			Fair value measurements at December 31, 2020 using:
(Dollars in thousands)	Total carrying value at		Quoted prices in active markets		Significant other observable inputs		Significant unobservable inputs
Assets:	December 31, 2020		(Level 1)		(Level 2)		(Level 3)
Impaired Loans	$	800	$	—	$	—	$	800
Foreclosed Assets Held for Sale		77		—		—		77

			Fair value measurements at December 31, 2019 using:
(Dollars in thousands)	Total carrying value at		Quoted prices in active markets		Significant other observable inputs		Significant unobservable inputs
Assets:	December 31, 2019		(Level 1)		(Level 2)		(Level 3)
Impaired Loans	$	271	$	—	$	—	$	271
Foreclosed Assets Held for Sale		122		—		—		122

The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Mid Penn has utilized Level 3 inputs to determine the fair value.

(Dollars in thousands)

Quantitative Information about Level 3 Fair Value Measurements

December 31, 2020

Fair Value

Estimate

Valuation

Technique

Unobservable

Input

Range

Weighted

Average

Impaired Loans

800

Appraisal of collateral (a), (b)

Appraisal adjustments (b)

25%-100%

40%

Foreclosed Assets Held for Sale

Appraisal of collateral (a), (b)

Appraisal adjustments (b)

27%-27%

27%

(Dollars in thousands)

Quantitative Information about Level 3 Fair Value Measurements

December 31, 2019

Fair Value

Estimate

Valuation

Technique

Unobservable

Input

Range

Weighted

Average

Impaired Loans

271

Appraisal of collateral (a), (b)

Appraisal adjustments (b)

26% - 85%

36%

Foreclosed Assets Held for Sale

122

Appraisal of collateral (a), (b)

Appraisal adjustments (b)

8% - 27%

16%

The following methodologies and assumptions were used to estimate the fair value of certain assets and liabilities:

The fair value of equity and debt securities classified as available for sale is determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather, relying on the securities’ relationship to other benchmark quoted prices.

Interest rate swap agreements are measured by alternative pricing sources with reasonable levels of price transparency in markets that are not active. Based on the complex nature of interest rate swap agreements, the markets these instruments trade in are not as efficient and are less liquid than that of the more mature Level 1 markets. These markets do however have comparable, observable inputs in which an alternative pricing source values these assets in order to arrive at a fair market value. These characteristics classify interest rate swap agreements as Level 2.

All performing troubled debt restructured loans and loans classified as nonaccrual are deemed to be impaired, and all of these loans are considered collateral dependent; therefore, all of Mid Penn’s impaired loans, whether reporting a specific allowance allocation or not, are considered collateral dependent.

It is Mid Penn’s policy to obtain updated third-party valuations on all impaired loans collateralized by real estate within 30 days of the credit being classified as substandard nonaccrual. Prior to receipt of the updated real estate valuation, Mid Penn will use existing real estate valuations to determine any potential allowance for loan loss issues, and will update the allowance impact calculation upon receipt of the updated real estate valuation.

In some instances, Mid Penn is not holding real estate as collateral and is relying on business assets (personal property) for repayment. In these circumstances a collateral inspection is performed by Mid Penn personnel to determine an estimated value. The value is based on net book value, as provided by the financial statements, and discounted accordingly based on determinations made by management. Occasionally, Mid Penn will employ an outside service to provide a fair estimate of value based on auction sales or private sales. Management reviews the estimates of these third parties and discounts them accordingly based on management’s judgment, if deemed necessary. Mid Penn considers the estimates used in its impairment analysis to be Level 3 inputs.

Mid Penn actively monitors the values of collateral on impaired loans. This monitoring may require the modification of collateral values, either in a positive or negative way, due to the passage of time or some other change in one or more valuation inputs. Collateral values for impaired loans will be reassessed by management at least every twelve months for possible revaluation by an independent third party.

Certain assets included in foreclosed assets held for sale are carried at fair value and accordingly is presented as measured on a non-recurring basis. Values are estimated using Level 3 inputs, based on appraisals that consider the sales prices of property in the proximate vicinity.

The following table summarizes the carrying value and fair value of financial instruments at December 31, 2020 and 2019.

(Dollars in thousands)	December 31, 2020				December 31, 2019
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Financial assets:
Cash and cash equivalents	$	303,724	$	303,724	$	139,030	$	139,030
Available for sale investment securities		5,748		5,748		37,009		37,009
Held to maturity investment securities		128,292		132,794		136,477		137,476
Loans held for sale		25,506		26,262		8,422		8,630
Equity securities		515		515		507		507
Net loans and leases		2,370,659		2,444,105		1,753,241		1,789,402
Restricted investment in bank stocks		7,594		7,594		4,902		4,902
Accrued interest receivable		3,619		3,619		2,810		2,810
Interest rate swap agreements		489		489		—		—

Financial liabilities:
Deposits	$	2,474,580	$	2,496,799	$	1,912,394	$	1,916,624
Short-term borrowings		125,617		125,617		—		—
Long-term debt (a)		71,648		70,498		29,352		30,216
Subordinated debt		44,580		43,098		27,070		25,273
Accrued interest payable		2,007		2,007		2,208		2,208

The Bank’s outstanding and unfunded credit commitments and financial standby letters of credit were deemed to have no significant fair value as of December 31, 2020 and 2019.

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of Mid Penn’s financial instruments as of December 31, 2020 and 2019. Carrying values approximate fair values for cash and cash equivalents, equity securities, restricted investment in bank stocks, accrued interest receivable and payable, interest rate swap agreements and short-term borrowings. Other than cash and cash equivalents, which are considered as valued using Level 1 Inputs, these instruments are valued using Level 2 Inputs. The following tables exclude financial instruments for which the placement in the fair value hierarchy has been disclosed elsewhere or for which the carrying amount approximates fair value.

					Fair Value Measurements
(Dollars in thousands)					Quoted Prices		Significant
					in Active Markets		Other		Significant
					for Identical Assets		Observable		Unobservable
	Carrying		Fair		or Liabilities		Inputs		Inputs
December 31, 2020	Amount		Value		(Level 1)		(Level 2)		(Level 3)
Financial instruments - assets
Held-to-maturity investment securities	$	128,292	$	132,794	$	—	$	132,794	$	—
Loans held for sale		25,506		26,262		—		26,262		—
Net loans and leases		2,370,659		2,444,105		—		—		2,444,105
Financial instruments - liabilities
Deposits	$	2,474,580	$	2,496,799	$	—	$	2,496,799	$	—
Long-term debt (a)		71,648		70,498		—		70,498		—
Subordinated debt		44,580		43,098		—		43,098		—

					Fair Value Measurements
(Dollars in thousands)					Quoted Prices		Significant
					in Active Markets		Other		Significant
					for Identical Assets		Observable		Unobservable
	Carrying		Fair		or Liabilities		Inputs		Inputs
December 31, 2019	Amount		Value		(Level 1)		(Level 2)		(Level 3)
Financial instruments - assets
Held-to-maturity investment securities	$	136,477	$	137,476	$	—	$	137,476	$	—
Loans held for sale		8,422		8,630		—		8,630		—
Net loans and leases		1,753,241		1,789,402		—		—		1,789,402
Financial instruments - liabilities
Deposits	$	1,912,394	$	1,916,624	$	—	$	1,916,624	$	—
Long-term debt		29,352		30,216		—		30,216		—
Subordinated debt		27,070		25,273		—		25,273		—