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Fair Value | 9 Months Ended
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Sep. 30, 2020
Fair Value Disclosures [Abstract] |
Fair Value | Fair Value 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).
|  | September 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 |  | $ | — |  |  | $ | 100,350 |  |  | $ | — |  |  | $ | 100,350 |
Mortgage Backed Securities-residential |  | — |  |  | 284,610 |  |  | — |  |  | 284,610 |
Mortgage Backed Securities-commercial |  | — |  |  | 18,680 |  |  | — |  |  | 18,680 |
Collateralized mortgage obligations |  | — |  |  | 231,568 |  |  | — |  |  | 231,568 |
State and municipal |  | — |  |  | 292,519 |  |  | 2,235 |  |  | 294,754 |
Municipal taxable |  | — |  |  | 20,727 |  |  | — |  |  | 20,727 |
U.S. Treasury |  | — |  |  | 2,514 |  |  | — |  |  | 2,514 |
Collateralized debt obligations |  | — |  |  | — |  |  | 3,036 |  |  | 3,036 |
TOTAL |  | $ | — |  |  | $ | 950,968 |  |  | $ | 5,271 |  |  | $ | 956,239 |
Derivative Assets |  |  |  | 2,723 |  |  |  |  |
Derivative Liabilities |  |  |  | (2,723) |  |  |  |  |
|  | 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 nine months ended September 30, 2020 and the year ended December 31, 2019.
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
| Three Months Ended September 30, 2020
(Dollar amounts in thousands) | State and municipal obligations |  | Collateralized debt obligations |  | Total
Beginning balance, July1 | $ | 2,235 |  |  | $ | 2,945 |  |  | $ | 5,180 |
Total realized/unrealized gains or losses |  |  |  |  |
Included in earnings | — |  |  | — |  |  | — |
Included in other comprehensive income | — |  |  | 91 |  |  | 91 |
Transfers | — |  |  | — |  |  | — |
Settlements | — |  |  | — |  |  | — |
Ending balance, September 30 | $ | 2,235 |  |  | $ | 3,036 |  |  | $ | 5,271 |
| Nine Months Ended September 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 | — |  |  | (583) |  |  | (583) |
Transfers | — |  |  | — |  |  | — |
Settlements | (330) |  |  | — |  |  | (330) |
Ending balance, September 30 | $ | 2,235 |  |  | $ | 3,036 |  |  | $ | 5,271 |
|  | 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 September 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 |  | $ | 3,465 |  |  | Sales comparison/income approach |  | Discount rate for age of appraisal and market conditions |  | 5.00%-20.00%
Impaired Loans |  | $ | 4,749 |  |  | 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 $4.7 million, after a valuation allowance of $1.7 million at September 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 nine months ended September 30, 2020 and for the twelve months ended December 31, 2019 was a $1.4 million increase, a $1.6 million increase, and a $689 thousand decrease, respectively. Other real estate owned is valued at Level 3. Other real estate owned at September 30, 2020 with a value of $3.5 million was reduced zero for fair value adjustment. At September 30, 2020 other real estate owned was comprised of $3.4 million from commercial loans and $119 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 September 30, 2020 and December 31, 2019, which are all considered Level 3.
|  | September 30, 2020
(Dollar amounts in thousands) |  | Carrying Value |  | Allowance for Loan Losses Allocated |  | Fair Value
Commercial |  |  |  |  |  |
Commercial & Industrial |  | $ | 3,749 |  |  | $ | 1,054 |  |  | $ | 2,695 |
Farmland |  | — |  |  | — |  |  | — |
Non Farm, Non Residential |  | 171 |  |  | — |  |  | 171 |
Agriculture |  | 380 |  |  | 380 |  |  | — |
All Other Commercial |  | 754 |  |  | 251 |  |  | 503 |
Residential |  |  |  |  |  |
First Liens |  | — |  |  | — |  |  | — |
Home Equity |  | — |  |  | — |  |  | — |
Junior Liens |  | — |  |  | — |  |  | — |
Multifamily |  | 1,380 |  |  | — |  |  | 1,380 |
All Other Residential |  | — |  |  | — |  |  | — |
Consumer |  |  |  |  |  |
Motor Vehicle |  | — |  |  | — |  |  | — |
All Other Consumer |  | — |  |  | — |  |  | — |
TOTAL |  | $ | 6,434 |  |  | $ | 1,685 |  |  | $ | 4,749 |
|  | 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 September 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.
|  | September 30, 2020
|  | Carrying |  | Fair Value
(Dollar amounts in thousands) |  | Value |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Cash and due from banks |  | $ | 388,440 |  |  | $ | 25,428 |  |  | $ | 363,012 |  |  | $ | — |  |  | $ | 388,440 |
Federal funds sold |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Securities available-for-sale |  | 956,239 |  |  | — |  |  | 950,968 |  |  | 5,271 |  |  | 956,239 |
Restricted stock |  | 15,012 |  |  | n/a |  | n/a |  | n/a |  | n/a
Loans, net |  | 2,726,533 |  |  | — |  |  | — |  |  | 2,787,631 |  |  | 2,787,631 |
Accrued interest receivable |  | 18,482 |  |  | — |  |  | 5,007 |  |  | 13,475 |  |  | 18,482 |
Deposits |  | (3,604,353) |  |  | — |  |  | (3,615,014) |  |  | — |  |  | (3,615,014) |
Short-term borrowings |  | (95,249) |  |  | — |  |  | (95,249) |  |  | — |  |  | (95,249) |
Other borrowings |  | (10,845) |  |  | — |  |  | (11,237) |  |  | — |  |  | (11,237) |
Accrued interest payable |  | (1,107) |  |  | — |  |  | (1,107) |  |  | — |  |  | (1,107) |
|  | 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) |

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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