Fair Value of Assets and Liabilities

9 Months Ended

Sep. 30, 2020

Fair Value of Assets and Liabilities [Abstract]

Note 13—Fair Value of Assets and Liabilities

The Corporation uses its best judgment in estimating the fair value of the Corporation’s assets and liabilities; however, there are inherent weaknesses in any estimation technique. The estimated fair value amounts have been measured as of their respective period-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values subsequent to the respective reporting dates may be different than the amounts reported at each period end.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date. GAAP establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:

Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that utilize model-based techniques for which all significant assumptions are observable in the market.

Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement; inputs to the valuation methodology that utilize model-based techniques for which significant assumptions are not observable in the market; or inputs to the valuation methodology that require significant management judgment or estimation, some of which may be internally developed.

Since management maximizes the use of observable inputs and minimizes the use of unobservable inputs when determining fair value, an asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Management reviews and updates the fair value hierarchy classifications on a quarterly basis.

Assets Measured at Fair Value on a Recurring Basis

Securities available-for-sale

The fair values of investment securities were measured using information from a third-party pricing service. The pricing service uses 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, by relying on the securities’ relationship to other benchmark quoted prices.



			Fair Value Measurements
(dollars in thousands)	Total		(Level 1) ‎Quoted Prices in ‎Active Markets for ‎Identical Assets		(Level 2) ‎Significant Other ‎Observable Inputs		(Level 3) ‎Significant Other ‎Unobservable Inputs
September 30, 2020
Securities available-for-sale:
U.S. Treasury notes	$	5,021	$	5,021	$	0	$	0
U.S. agency		49,996		0		49,996		0
U.S. agency mortgage-backed, residential		116,936		0		116,936		0
State and municipal		21,224		0		21,224		0
Corporate debt		4,619		0		4,619		0

December 31, 2019
Securities available-for-sale:
U.S. Treasury notes	$	9,953	$	9,953	$	0	$	0
U.S. agency		14,923		0		14,923		0
U.S. agency mortgage-backed, residential		108,155		0		108,155		0
State and municipal		26,644		0		26,644		0

Assets Measured at Fair Value on a Nonrecurring Basis

Impaired loans

Impaired loans are those that are accounted for under FASB ASC Topic 310, in which the Corporation has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These loans are included as Level 3 fair values, based on the lowest level of input that is significant to the fair value measurements. At September 30, 2020, the fair value of impaired loans with a valuation allowance or partial charge-off was $2,553,000, net of valuation allowances of $3,289,000 and partial charge-offs of $134,000. At December 31, 2019 the fair value of impaired loans with a valuation allowance or charge-off was $11,297,000, net of valuation allowances of $7,420,000 and charge-offs of $134,000.

Foreclosed Real Estate

Other real estate property acquired through foreclosure is initially recorded at fair value of the property at the transfer date less estimated selling cost. Subsequently, other real estate owned is carried at the lower of its carrying value or the fair value less estimated selling cost. Fair value is usually determined based on an independent third-party appraisal of the property or occasionally on a recent sales offer. At September 30, 2020, there were no foreclosed real estate assets with a valuation allowance or write-down, and at December 31, 2019, the fair value of foreclosed real estate with a valuation allowance or write-down was $797,000 which is net of write-downs of $617,000.

Mortgage Servicing Rights

Mortgage servicing rights are initially recorded at fair value upon the sale of residential mortgage loans to secondary market investors. The fair value of servicing rights is based on the present value of estimated future cash flows on pools of mortgages stratified by rate and original time to maturity. Mortgage servicing rights are subsequently evaluated for impairment on a quarterly basis. Significant inputs to the valuation include expected cash flow, expected net servicing income, a cash flow discount rate and the expected life of the underlying loans. At September 30, 2020, the fair value of the mortgage servicing rights asset was $548,000. At December 31, 2019, the fair value of the mortgage servicing rights asset was $1,047,000.



			Fair Value Measurements
(dollars in thousands)		Total	(Level 1) ‎Quoted Prices in ‎Active Markets for ‎Identical Assets		(Level 2) ‎Significant Other ‎Observable Inputs		(Level 3) ‎Significant Other ‎Unobservable Inputs
September 30, 2020
Impaired loans	$	2,553	$	0	$	0	$	2,553
Mortgage servicing rights		548		0		0		548

December 31, 2019
Impaired loans	$	11,297	$	0	$	0	$	11,297
Foreclosed real estate		797		0		0		797
Mortgage servicing rights		1,047		0		0		1,047

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Corporation has utilized Level 3 inputs to determine fair value:



	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value		Valuation	Unobservable		Weighted
(dollars in thousands)	Estimate		Techniques	Input	Range	Average
September 30, 2020
Impaired loans	$	2,553	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	15% -50%	42%
Mortgage Servicing Rights		548	Multiple of annual service fee	Estimated prepayment speed based on rate and term	17.0% - 20.2%	19.4%

December 31, 2019
Impaired loans	$	5,991	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	15% - 55%	44%

Impaired loans		5,306	Business asset valuation ⁽³⁾	Business asset valuation adjustments ⁽⁴⁾	10% - 73%	70%
Foreclosed real estate		797	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	22% - 22%	22%
Mortgage Servicing Rights		1,047	Multiple of annual service fee	Estimated prepayment speed based on rate and term	7.9% - 8.9%	8.7%

(1)Fair value is generally determined through independent appraisals, which generally include various level 3 inputs that are not identifiable.

(2)Appraisal amounts may be adjusted downward by the Corporation's management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expense adjustments are presented as a percent of the appraisal.

(3)Fair value is generally determined through customer-provided financial statements and bankruptcy court documents.

(4)Business asset valuation may be adjusted downward by the corporation's management qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses adjustments are presented as a percent of the financial statement book value.

The following presents the carrying amounts and estimated fair values of the Corporation’s financial instruments as of September 30, 2020 and December 31, 2019.



						Fair Value Estimates
					(Level 1)		(Level 2)		(Level 3)
					Quoted Prices		Significant		Significant
					in Active		Other		Other
	Carrying		Estimated		Markets for		Observable		Unobservable
(dollars in thousands)	Amount		Fair Value		Identical Assets		Inputs		Inputs
September 30, 2020
Financial assets
Cash and cash equivalents	$	241,509	$	241,509	$	241,509	$	0	$	0
Securities available-for-sale		197,796		197,796		5,021		192,775		0
Loans held for sale		13,817		14,854		0		14,854		0
Loans, net		1,554,102		1,559,318		0		0		1,559,318
Interest receivable		8,123		8,123		0		8,123		0

Financial liabilities
Deposits	$	1,845,873	$	1,851,955	$	0	$	1,851,955	$	0
Short-term borrowings		9,309		9,309		0		9,309		0
Long-term debt (1)		45,310		42,702		0		35,754		6,948
Interest payable		568		568		0		568		0

Off-balance sheet instruments		0		0		0		0		0

December 31, 2019
Financial assets
Cash and cash equivalents	$	131,591	$	131,591	$	131,591	$	0	$	0
Securities available-for-sale		159,675		159,675		9,953		149,722		0
Restricted investment in bank stocks		4,551		4,551		0		4,551		0
Loans held for sale		11,803		12,460		0		12,460		0
Loans, net		1,484,069		1,472,772		0		0		1,472,772
Interest receivable		5,016		5,016		0		5,016		0

Financial liabilities
Deposits	$	1,590,564	$	1,582,179	$	0	$	1,582,179	$	0
Short-term borrowings		7,925		7,925		0		7,925		0
Long-term debt (1)		80,310		79,579		0		70,486		9,093
Interest payable		842		842		0		842		0

Off-balance sheet instruments		0		0		0		0		0

(1) Exclude leases included in Long-term debt

- 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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