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FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2020

12.

FAIR VALUE MEASUREMENTS

Fair value estimates, methods, and assumptions are set forth below for the Corporation’s financial instruments.

Cash, cash equivalents, and interest-bearing deposits - The carrying values approximate the fair values for these assets.

Securities - Fair values are based on quoted market prices where available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Federal Home Loan Bank stock – Federal Home Loan Bank stock is carried at cost, which is its redeemable value and approximates its fair value, since the market for this stock is limited.

Loans - Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, residential mortgage, and other consumer. The fair value of loans is calculated by discounting scheduled cash flows using discount rates reflecting the credit and interest rate risk inherent in the loan.

The methodology in determining fair value of nonaccrual loans is to average them into the blended interest rate at 0% interest. This has the effect of decreasing the carrying amount below the risk-free rate amount and, therefore, discounts the estimated fair value.

Impaired loans are measured at the estimated fair value of the expected future cash flows at the loan’s effective interest rate or the fair value of the collateral for loans which are collateral dependent. Therefore, the carrying values of impaired loans approximate the estimated fair values for these assets.

Deposits - The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits and savings, is equal to the amount payable on demand at the reporting date. The fair value of time deposits is based on the discounted value of contractual cash flows applying interest rates currently being offered on similar time deposits.

Borrowings - Rates currently available for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. The fair value of borrowed funds due on demand is the amount payable at the reporting date.

Accrued interest - The carrying amount of accrued interest approximates fair value.

Off-balance-sheet instruments - The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the current interest rates, and the present creditworthiness of the counterparties. Since the differences in the current fees and those reflected to the off-balance-sheet instruments at year-end are immaterial, no amounts for fair value are presented.

The following table presents information for financial instruments at September 30, 2020 and December 31, 2019 (dollars in thousands):


		September 30, 2020				December 31, 2019
	Level in Fair	Carrying		Estimated		Carrying		Estimated
	Value Hierarchy	Amount		Fair Value		Amount		Fair Value

Financial assets:
Cash and cash equivalents	Level 1	$	173,769	$	173,769	$	49,826	$	49,826
Interest-bearing deposits	Level 2		5,367		5,367		10,295		10,295
Securities available for sale	Level 2		105,488		105,488		106,569		106,569
Securities available for sale	Level 3		1,342		1,342		1,403		1,403
Federal Home Loan Bank stock	Level 2		4,924		4,924		4,924		4,924
Net loans	Level 3		1,138,493		1,140,659		1,053,468		1,055,985
Accrued interest receivable	Level 3		4,443		4,443		3,751		3,751

Total financial assets		$	1,433,826	$	1,435,992	$	1,230,236	$	1,232,753

Financial liabilities:
Deposits	Level 2	$	1,280,887	$	1,281,656	$	1,075,677	$	1,044,267
Borrowings	Level 2		63,505		61,740		64,551		64,403
Accrued interest payable	Level 3		450		450		569		569

Total financial liabilities		$	1,344,842	$	1,343,846	$	1,140,797	$	1,109,239

Limitations - Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Corporation’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. 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. Fair value estimates are based on existing on-and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include premises and equipment, other assets, and other liabilities. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

The following is information about the Corporation’s assets and liabilities measured at fair value on a recurring basis at September 30, 2020, and the valuation techniques used by the Corporation to determine those fair values.


Level 1:	In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access.

Level 2:	Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3:	Level 3 inputs are unobservable inputs, including inputs available in situations where there is little, if any, market activity for the related asset or liability.

The fair value of all investment securities at September 30, 2020 and December 31, 2019 were based on level 2 and level 3 inputs. There are no other assets or liabilities measured on a recurring basis at fair value. For additional information regarding investment securities, please refer to “Note 4 - Investment Securities.”

The table below shows investment securities measured at fair value on a recurring basis (dollars in thousands):

Quoted Prices

Significant

Total (Gains)

in Active Markets

Other Observable

Unobservable

Losses for

Balance at

for Identical Assets

Inputs

Three Months Ended

Nine Months Ended

(dollars in thousands)

September 30, 2020

(Level 1)

(Level 2)

(Level 3)

September 30, 2020

Assets

Corporate

21,232

—

20,732

500

—

US Agencies

9,615

—

9,615

—

US Agencies - MBS

32,497

—

32,497

—

Obligations of state and political subdivisions

43,486

—

42,644

842

—

106,830

—


			Quoted Prices		Significant		Significant
			in Active Markets		Other Observable		Unobservable		Total (Gains) Losses for
	Balance at		for Identical Assets		Inputs		Inputs		Twelve months ended
(dollars in thousands)	December 31, 2019		(Level 1)		(Level 2)		(Level 3)		December 31, 2019
Assets

Corporate	$	20,938	$	—	$	20,438	$	500	$	—
US Agencies		14,496		—		14,496		—		—
US Agencies - MBS		34,526		—		34,526		—		—
Obligations of state and political subdivisions		38,012		—		37,024		903		—
	$	107,972							$	—

The Corporation had no Level 3 assets or liabilities measured at fair value on a recurring basis as of September 30, 2020, or December 31, 2019 other than as described above.

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Corporation’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

The Corporation also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets include certain impaired loans and other real estate owned. The Corporation has estimated the fair values of these assets using Level 3 inputs, specifically discounted cash flow projections.

Assets Measured at Fair Value on a Nonrecurring Basis at September 30, 2020

Quoted Prices

Significant

Total (Gains)

in Active Markets

Other Observable

Unobservable

Losses for

Balance at

for Identical Assets

Inputs

Three Months Ended

Nine Months Ended

(dollars in thousands)

September 30, 2020

(Level 1)

(Level 2)

(Level 3)

September 30, 2020

Assets

Impaired loans

7,034

—

7,034

—

Other real estate owned

1,851

—

1,851

(21)

Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2019


			Quoted Prices		Significant		Significant
			in Active Markets		Other Observable		Unobservable		Total Losses for
	Balance at		for Identical Assets		Inputs		Inputs		Twelve months ended
(dollars in thousands)	December 31, 2019		(Level 1)		(Level 2)		(Level 3)		December 31, 2019
Assets

Impaired loans	$	12,823	$	—	$	—	$	12,823	$	280
Other real estate held for sale		2,194		—		—		2,194		212
									$	492

Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. The Corporation estimates the fair value of the loans based on the present value of expected future cash flows using management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals).

- 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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