Fair Value

6 Months Ended

Jun. 30, 2020

FASB ASC No. 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) of 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 I 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 fair value of most securities available for sale is 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 by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

For those securities that cannot be priced using quoted market prices or observable inputs a Level 3 valuation is determined. These securities are primarily trust preferred securities, which are priced using Level 3 due to current market illiquidity and certain investments in state and municipal securities. The fair value of the trust preferred securities is obtained from a third party provider without adjustment. As described previously, management obtains values from other pricing sources to validate the Standard & Poors pricing that they currently utilize. The fair value of state and municipal obligations are derived by comparing the securities to current market rates plus an appropriate credit spread to determine an estimated value. Illiquidity spreads are then considered. Credit reviews are performed on each of the issuers. The significant unobservable inputs used in the fair value measurement of the Corporation’s state and municipal obligations are credit spreads related to specific issuers. Significantly higher credit spread assumptions would result in significantly lower fair value measurement. Conversely, significantly lower credit spreads would result in a significantly higher fair value measurements.

The fair value of derivatives is based on valuation models using observable market data as of the measurement date (Level 2 inputs).


	June 30, 2020
	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
(Dollar amounts in thousands)	Level 1		Level 2		Level 3		Total
U.S. Government agencies	$	—	$	96,732	$	—	$	96,732
Mortgage Backed Securities-residential	—		237,148		—		237,148
Mortgage Backed Securities-commercial	—		18,824		—		18,824
Collateralized mortgage obligations	—		249,885		—		249,885
State and municipal	—		284,513		2,235		286,748
Municipal taxable	—		12,626		—		12,626
U.S. Treasury	—		2,525		—		2,525
Collateralized debt obligations	—		—		2,945		2,945
TOTAL	$	—	$	902,253	$	5,180	$	907,433
Derivative Assets			2,861
Derivative Liabilities			(2,861)


	December 31, 2019
	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
(Dollar amounts in thousands)	Level 1		Level 2		Level 3		Total
U.S. Government agencies	$	—	$	103,633	$	—	$	103,633
Mortgage Backed Securities-residential	—		243,382		—		243,382
Mortgage Backed Securities-commercial	—		22,104		—		22,104
Collateralized mortgage obligations	—		281,311		—		281,311
State and municipal	—		261,869		2,565		264,434
Municipal taxable	—		730		—		730
U.S. Treasury	—		7,504		—		7,504
Collateralized debt obligations	—		—		3,619		3,619
TOTAL	$	—	$	920,533	$	6,184	$	926,717
Derivative Assets			828
Derivative Liabilities			(828)

There were no transfers between Level 1 and Level 2 during 2020 and 2019.

The tables below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2020 and the year ended December 31, 2019.


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Three Months Ended June 30, 2020
(Dollar amounts in thousands)	State and municipal obligations		Collateralized debt obligations		Total
Beginning balance, April 1	$	2,235	$	3,233	$	5,468
Total realized/unrealized gains or losses
Included in earnings	—		—		—
Included in other comprehensive income	—		(288)		(288)
Transfers	—		—		—
Settlements	—		—		—
Ending balance, June 30	$	2,235	$	2,945	$	5,180



	Six Months Ended June 30, 2020
(Dollar amounts in thousands)	State and municipal obligations		Collateralized debt obligations		Total
Beginning balance, January 1	$	2,565	$	3,619	$	6,184
Total realized/unrealized gains or losses
Included in earnings	—		—		—
Included in other comprehensive income	—		(674)		(674)
Transfers	—		—		—
Settlements	(330)		—		(330)
Ending balance, June 30	$	2,235	$	2,945	$	5,180


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Year Ended December 31, 2019
(Dollar amounts in thousands)	State and municipal obligations		Collateralized debt obligations		Total
Beginning balance, January 1	$	3,135	$	3,258	$	6,393
Total realized/unrealized gains or losses
Included in earnings	—		—		—
Included in other comprehensive income	—		498		498
Purchases	—		—		—
Settlements	(570)		(137)		(707)
Ending balance, December 31	$	2,565	$	3,619	$	6,184

The following table presents quantitative information about recurring and non-recurring Level 3 fair value measurements at June 30, 2020.

(Dollar amounts in thousands)

Fair Value

Valuation Technique(s)

Unobservable Input(s)

Range

State and municipal obligations

2,235

Discounted cash flow

Discount rate
Probability of default

3.09%-4.44%
0%

Other real estate

3,577

Sales comparison/income approach

Discount rate for age of appraisal and market conditions

5.00%-20.00%

Impaired Loans

2,522

Sales comparison/income approach

Discount rate for age of appraisal and market conditions

0.00%-50.00%

The following table presents quantitative information about recurring and non-recurring Level 3 fair value measurements at December 31, 2019.

(Dollar amounts in thousands)

Fair Value

Valuation Technique(s)

Unobservable Input(s)

Range

State and municipal obligations

2,565

Discounted cash flow

Discount rate
Probability of default

2.87%-4.44%
0%

Other real estate

3,625

Sales comparison/income approach

Discount rate for age of appraisal and market conditions

5.00%-20.00%

Impaired Loans

100

Sales comparison/income approach

Discount rate for age of appraisal and market conditions

0.00%-50.00%

Impaired loans disclosed in footnote 2, which are measured for impairment using the fair value of collateral, are valued at Level 3. They are carried at a fair value of $2.5 million, after a valuation allowance of $237 thousand at June 30, 2020 and at

a fair value of $100 thousand, net of a valuation allowance of $48 thousand at December 31, 2019. The impact to the provision for loan losses for the three and six months ended June 30, 2020 and for the twelve months ended December 31, 2019 was a $195 thousand increase, a $189 thousand increase, and a $689 thousand decrease, respectively. Other real estate owned is valued at Level 3. Other real estate owned at June 30, 2020 with a value of $3.6 million was reduced $50 thousand for fair value adjustment. At June 30, 2020 other real estate owned was comprised of $3.4 million from commercial loans and $199 thousand from residential loans. Other real estate owned at December 31, 2019 with a value of $3.6 million was reduced $64 thousand for fair value adjustment. At December 31, 2019 other real estate owned was comprised of $3.5 million from commercial loans and $142 thousand from residential loans.

Fair value is measured based on the value of the collateral securing those loans, and is determined using several methods. Generally the fair value of real estate is determined based on appraisals by qualified licensed appraisers. Appraisals for real estate generally use three methods to derive value: cost, sales or market comparison and income approach. The cost method bases value on the cost to replace current property. The market comparison evaluates the sales price of similar properties in the same market area. The income approach considers net operating income generated by the property and the investor’s required return. The final fair value is based on a reconciliation of these three approaches. If an appraisal is not available, the fair value may be determined by using a cash flow analysis, a broker’s opinion of value, the net present value of future cash flows, or an observable market price from an active market. Fair value of other real estate is based upon the current appraised values of the properties as determined by qualified licensed appraisers and the Company’s judgment of other relevant market conditions. Appraisals are obtained annually and reductions in value are recorded as a valuation through a charge to expense. The primary unobservable input used by management in estimating fair value are additional discounts to the appraised value to consider market conditions and the age of the appraisal, which are based on management’s past experience in resolving these types of properties. These discounts range from 0% to 50%. Values for non-real estate collateral, such as business equipment, are based on appraisals performed by qualified licensed appraisers or the customers financial statements. Values for non real estate collateral use much higher discounts than real estate collateral. Other real estate and impaired loans carried at fair value are primarily comprised of smaller balance properties.

The following tables presents loans identified as impaired by class of loans, and carried at fair value on a non-recurring basis, as of June 30, 2020 and December 31, 2019, which are all considered Level 3.


	June 30, 2020
(Dollar amounts in thousands)	Carrying Value		Allowance for Loan Losses Allocated		Fair Value
Commercial
Commercial & Industrial	$	523	$	89	$	434
Farmland	—		—		—
Non Farm, Non Residential	171		—		171
Agriculture	—		—		—
All Other Commercial	754		148		606
Residential
First Liens	—		—		—
Home Equity	—		—		—
Junior Liens	—		—		—
Multifamily	1,311		—		1,311
All Other Residential	—		—		—
Consumer
Motor Vehicle	—		—		—
All Other Consumer	—		—		—
TOTAL	$	2,759	$	237	$	2,522


	December 31, 2019
(Dollar amounts in thousands)	Carrying Value		Allowance for Loan Losses Allocated		Fair Value
Commercial
Commercial & Industrial	$	148	$	48	$	100
Farmland	—		—		—
Non Farm, Non Residential	—		—		—
Agriculture	—		—		—
All Other Commercial	—		—		—
Residential
First Liens	—		—		—
Home Equity	—		—		—
Junior Liens	—		—		—
Multifamily	—		—		—
All Other Residential	—		—		—
Consumer
Motor Vehicle	—		—		—
All Other Consumer	—		—		—
TOTAL	$	148	$	48	$	100

The carrying amounts and estimated fair value of financial instruments at June 30, 2020 and December 31, 2019, are shown below. Carrying amount is the estimated fair value for cash and due from banks, federal funds sold, short-term borrowings, accrued interest receivable and payable, demand deposits, short-term debt and variable-rate loans or deposits that reprice frequently and fully. Security fair values were described previously. For fixed-rate, non-impaired loans or deposits, variable rate loans or deposits with infrequent repricing or repricing limits, and for longer-term borrowings, fair value is based on discounted cash flows using current market rates applied to the estimated life and considering credit risk. The valuation of impaired loans was described previously. Loan fair value estimates represent an exit price. Fair values of loans held for sale are based on market bids on the loans or similar loans. It was not practicable to determine the fair value of Federal Home Loan Bank stock due to restrictions placed on its transferability. Fair value of debt is based on current rates for similar financing. The fair value of off-balance sheet items is not considered material.


	June 30, 2020
	Carrying		Fair Value
(Dollar amounts in thousands)	Value		Level 1		Level 2		Level 3		Total
Cash and due from banks	$	386,507	$	26,098	$	360,409	$	—	$	386,507
Federal funds sold	—		—		—		—		—
Securities available-for-sale	907,433		—		902,253		5,180		907,433
Restricted stock	15,200		n/a		n/a		n/a		n/a
Loans, net	2,753,798		—		—		2,818,265		2,818,265
Accrued interest receivable	17,205		—		4,646		12,559		17,205
Deposits	(3,569,893)		—		(3,581,637)		—		(3,581,637)
Short-term borrowings	(100,096)		—		(100,096)		—		(100,096)
Other borrowings	(28,117)		—		(28,531)		—		(28,531)
Accrued interest payable	(1,329)		—		(1,329)		—		(1,329)


	December 31, 2019
	Carrying		Fair Value
(Dollar amounts in thousands)	Value		Level 1		Level 2		Level 3		Total
Cash and due from banks	$	127,426	$	26,275	$	101,151	$	—	$	127,426
Federal funds sold	7,500		—		7,500		—		7,500
Securities available-for-sale	926,717		—		920,533		6,184		926,717
Restricted stock	15,394		n/a		n/a		n/a		n/a
Loans, net	2,636,447		—		—		2,648,692		2,648,692
Accrued interest receivable	18,523		—		3,583		14,940		18,523
Deposits	(3,275,357)		—		(3,278,099)		—		(3,278,099)
Short-term borrowings	(80,119)		—		(80,119)		—		(80,119)
Other borrowings	(30,973)		—		(31,143)		—		(31,143)
Accrued interest payable	(1,739)		—		(1,739)		—		(1,739)

- 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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