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Fair Value Measurement | 9 Months Ended
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Sep. 30, 2018
Fair Value Disclosures [Abstract] |
Fair Value Measurement |
(6) | Fair Value Measurement
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: Level 1 Inputs - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; Level 2 Inputs - Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability; Level 3 Inputs - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). 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 during the nine months ended September 30, 2018 or 2017. The following tables illustrate the assets measured at fair value on a recurring basis segregated by hierarchy fair value levels.
|  |  |  |  |  | Fair value measurements at September 30, 2018 using: |
(Dollars in thousands) |  | Total carrying value at |  |  | Quoted prices in active markets |  |  | Significant other observable inputs |  |  | Significant unobservable inputs |
Assets: |  | September 30, 2018 |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |
Available-for-sale securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and U.S. government agencies |  | $ | 37,950 |  |  | $ | - |  |  | $ | 37,950 |  |  | $ | - |
Mortgage-backed U.S. government agencies |  |  | 40,187 |  |  |  | - |  |  |  | 40,187 |  |  |  | - |
State and political subdivision obligations |  |  | 31,147 |  |  |  | - |  |  |  | 31,147 |  |  |  | - |
Corporate debt securities |  |  | 1,243 |  |  |  | - |  |  |  | 1,243 |  |  |  | - |
Other assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Equity securities |  |  | 488 |  |  |  | 488 |  |  |  | - |  |  |  | - |
Loans held for sale |  |  | 3,181 |  |  |  | 3,181 |  |  |  | - |  |  |  | - |
Total |  | $ | 114,196 |  |  | $ | 3,669 |  |  | $ | 110,527 |  |  | $ | - |
|  |  |  |  |  | Fair value measurements at December 31, 2017 using: |
(Dollars in thousands) |  | Total carrying value at |  |  | Quoted prices in active markets |  |  | Significant other observable inputs |  |  | Significant unobservable inputs |
Assets: |  | December 31, 2017 |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |
Available-for-sale securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and U.S. government agencies |  | $ | 38,730 |  |  | $ | - |  |  | $ | 38,730 |  |  | $ | - |
Mortgage-backed U.S. government agencies |  |  | 25,831 |  |  |  | - |  |  |  | 25,831 |  |  |  | - |
State and political subdivision obligations |  |  | 27,043 |  |  |  | - |  |  |  | 27,043 |  |  |  | - |
Corporate debt securities |  |  | 1,355 |  |  |  | - |  |  |  | 1,355 |  |  |  | - |
Other assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Equity securities |  |  | 506 |  |  |  | 506 |  |  |  | - |  |  |  | - |
Loans held for sale |  |  | 1,040 |  |  |  | 1,040 |  |  |  | - |  |  |  | - |
Total |  | $ | 94,505 |  |  | $ | 1,546 |  |  | $ | 92,959 |  |  | $ | - |
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 September 30, 2018 using: |
(Dollars in thousands) |  | Total carrying value at |  |  | Quoted prices in active markets |  |  | Significant other observable inputs |  |  | Significant unobservable inputs |
Assets: |  | September 30, 2018 |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |
Impaired Loans |  | $ | 4,995 |  |  | $ | - |  |  | $ | - |  |  | $ | 4,995 |
Foreclosed Assets Held for Sale |  |  | 581 |  |  |  | - |  |  |  | - |  |  |  | 581 |
Mortgage Servicing Rights |  |  | 107 |  |  |  | - |  |  |  | - |  |  |  | 107 |
|  |  |  |  |  | Fair value measurements at December 31, 2017 using: |
(Dollars in thousands) |  | Total carrying value at |  |  | Quoted prices in active markets |  |  | Significant other observable inputs |  |  | Significant unobservable inputs |
Assets: |  | December 31, 2017 |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |
Impaired Loans |  | $ | 6,090 |  |  | $ | - |  |  | $ | - |  |  | $ | 6,090 |
Foreclosed Assets Held for Sale |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Mortgage Servicing Rights |  |  | 126 |  |  |  | - |  |  |  | - |  |  |  | 126 |
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 |
September 30, 2018 |  | Fair Value Estimate |  |  | Valuation Technique |  | Unobservable Input |  | Range |  | Weighted Average |
Impaired Loans |  | $ | 4,995 |  |  | Appraisal of collateral (a), (c) |  | Appraisal adjustments (b) |  | 26% - 100% |  | 36% |
Foreclosed Assets Held for Sale |  |  | 581 |  |  | Appraisal of collateral (a), (c) |  | Appraisal adjustments (b) |  | 17% - 17% |  | 17% |
Mortgage Servicing Rights |  |  | 107 |  |  | Multiple of annual service fee |  | Estimated prepayment speed based on rate and term |  | 70% - 100% |  | 99% |
(Dollars in thousands) |  | Quantitative Information about Level 3 Fair Value Measurements |
December 31, 2017 |  | Fair Value Estimate |  |  | Valuation Technique |  | Unobservable Input |  | Range |  | Weighted Average |
Impaired Loans |  | $ | 6,090 |  |  | Appraisal of collateral (a), (c) |  | Appraisal adjustments (b) |  | 6% - 51% |  | 28% |
Foreclosed Assets Held for Sale |  |  | - |  |  | Appraisal of collateral (a), (c) |  | Appraisal adjustments (b) |  | 0% - 0% |  | 0% |
Mortgage Servicing Rights |  |  | 126 |  |  | Multiple of annual service fee |  | Estimated prepayment speed based on rate and term |  | 70% - 100% |  | 98% |
| (a) | Fair value is generally determined through independent appraisals of the underlying collateral, which generally includes various level 3 inputs which are not observable.
| (b) | Appraisals may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal. Higher downward adjustments are caused by negative changes to the collateral or conditions in the real estate market, actual offers or sales contracts received, or age of the appraisal.
| (c) | Includes qualitative adjustments by management and estimated liquidation expenses.
Mid Penn uses the following methodologies and assumptions to estimate the fair value of certain assets and liabilities. Cash and Cash Equivalents: The carrying value of cash and cash equivalents is considered to be a reasonable estimate of fair value. Interest-bearing Balances with other Financial Institutions: The estimate of fair value was determined by comparing the present value of quoted interest rates on like deposits with the weighted average yield and weighted average maturity of the balances. Securities Available for Sale: The fair value of 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. Held-to-Maturity Securities: The fair values of held-to-maturity securities are based on a market approach using observable inputs such as benchmark yields and securities, reported trades, issuer spreads, current bids and offers, monthly payment information and collateral performance. Loans Held for Sale: The fair values of mortgage loans originated and intended for sale in the secondary market are carried at fair value, as determined by outstanding commitments from investors. Impaired Loans (included in “Net Loans and Leases” in the following tables): 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 12 months for possible revaluation by an independent third party. Loans: Loan fair values as of September 30, 2018 are estimated using an exit price approach, which incorporates discounts for credit risk and prepayment risk and considers the value indicated by current market expectations in the estimated fair value of the loan portfolio. Loan fair values as of December 31, 2017 were calculated using the entrance price approach. Under this approach, variable rate loans that reprice frequently and which entail no significant changes in credit risk had a fair value approximating carrying value. The fair value of other loans was estimated by calculating the present value of the cash flow difference between the current rate and the market rate, for the average maturity, discounted quarterly at the market rate. Foreclosed Assets Held for Sale: 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. Accrued Interest Receivable and Payable: The carrying amount of accrued interest receivable and payable approximates their fair values. Restricted Investment in Bank Stocks: The carrying amount of required and restricted investment in correspondent bank stock approximates fair value, and considers the limited marketability of such securities. Mortgage Servicing Rights: 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 maturity date. Deposits: The fair value for demand deposits (e.g., interest and noninterest checking, savings, and money market deposit accounts) is, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair value for fixed-rate certificates of deposit was estimated using a discounted cash flow calculation by combining all fixed-rate certificates into a pool with a weighted average yield and a weighted average maturity for the pool and comparing the pool with interest rates currently being offered on a similar maturity. Short-term Borrowings: Because of time to maturity, the estimated fair value of short-term borrowings approximates the book value. Long-term and Subordinated Debt: The estimated fair values of long-term and subordinated debt were determined using discounted cash flow analysis, based on currently available borrowing rates for similar types of borrowing arrangements. Commitments to Extend Credit and Letters of Credit: The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account market interest rates, the remaining terms and present creditworthiness of the counterparties. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements. The following table summarizes the carrying value and fair value of financial instruments at September 30, 2018 and December 31, 2017.
(Dollars in thousands) | September 30, 2018 |  |  | December 31, 2017 |
| Carrying |  |  | Fair |  |  | Carrying |  |  | Fair |
| Value |  |  | Value |  |  | Value |  |  | Value |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $ | 62,085 |  |  | $ | 62,085 |  |  | $ | 23,514 |  |  | $ | 23,514 |
Available-for-sale investment securities |  | 110,527 |  |  |  | 110,527 |  |  |  | 93,465 |  |  |  | 93,465 |
Held-to-maturity investment securities |  | 171,521 |  |  |  | 167,120 |  |  |  | 101,356 |  |  |  | 100,483 |
Loans held for sale |  | 3,181 |  |  |  | 3,181 |  |  |  | 1,040 |  |  |  | 1,040 |
Net loans and leases |  | 1,559,057 |  |  |  | 1,551,077 |  |  |  | 902,798 |  |  |  | 917,081 |
Restricted investment in bank stocks |  | 3,373 |  |  |  | 3,373 |  |  |  | 4,384 |  |  |  | 4,384 |
Accrued interest receivable |  | 7,491 |  |  |  | 7,491 |  |  |  | 4,564 |  |  |  | 4,564 |
Mortgage servicing rights |  | 107 |  |  |  | 107 |  |  |  | 126 |  |  |  | 126 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits | $ | 1,762,465 |  |  | $ | 1,759,822 |  |  | $ | 1,023,568 |  |  | $ | 1,026,830 |
Short-term borrowings |  | 1,771 |  |  |  | 1,771 |  |  |  | 34,611 |  |  |  | 34,611 |
Long-term debt |  | 18,064 |  |  |  | 15,544 |  |  |  | 12,352 |  |  |  | 11,692 |
Subordinated debt |  | 27,088 |  |  |  | 27,256 |  |  |  | 17,338 |  |  |  | 17,358 |
Accrued interest payable |  | 2,262 |  |  |  | 2,262 |  |  |  | 645 |  |  |  | 645 |
Off-balance sheet financial instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commitments to extend credit | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
Financial standby letters of credit |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of Mid Penn’s financial instruments as of September 30, 2018 and December 31, 2017. Carrying values approximate fair values for cash and cash equivalents, interest-bearing time balances with other financial institutions, loans held for sale, restricted investment in bank stocks, mortgage servicing rights, accrued interest receivable and payable, and short-term borrowings. Other than cash and cash equivalents, which are considered Level 1 Inputs and mortgage servicing rights, which are Level 3 Inputs, these instruments are Level 2 Inputs. These tables exclude financial instruments for which the carrying amount approximates fair value, not previously disclosed.
|  |  |  |  |  |  |  |  |  | Fair Value Measurements |
|  |  |  |  |  |  |  |  |  | Quoted Prices |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  | in Active Markets |  |  |  |  |  | Significant |
(Dollars in thousands) |  |  |  |  |  |  |  |  |  | for Identical Assets |  |  | Significant Other |  |  | Unobservable |
|  | Carrying |  |  |  |  |  |  | or Liabilities |  |  | Observable Inputs |  |  | Inputs |
September 30, 2018 |  | Amount |  |  | Fair Value |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |
Financial instruments - assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Held-to-maturity investment securities |  | $ | 171,521 |  |  | $ | 167,120 |  |  | $ | - |  |  | $ | 167,120 |  |  | $ | - |
Net loans and leases |  |  | 1,559,057 |  |  |  | 1,551,077 |  |  |  | - |  |  |  | - |  |  |  | 1,551,077 |
Financial instruments - liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | $ | 1,762,465 |  |  | $ | 1,759,822 |  |  | $ | - |  |  | $ | 1,759,822 |  |  | $ | - |
Long-term debt |  |  | 18,064 |  |  |  | 15,544 |  |  |  | - |  |  |  | 15,544 |  |  |  | - |
Subordinated debt |  |  | 27,088 |  |  |  | 27,256 |  |  |  | - |  |  |  | 27,256 |  |  |  | - |
|  |  |  |  |  |  |  |  |  | Fair Value Measurements |
|  |  |  |  |  |  |  |  |  | Quoted Prices |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  | in Active Markets |  |  |  |  |  | Significant |
(Dollars in thousands) |  |  |  |  |  |  |  |  |  | for Identical Assets |  |  | Significant Other |  |  | Unobservable |
|  | Carrying |  |  |  |  |  |  | or Liabilities |  |  | Observable Inputs |  |  | Inputs |
December 31, 2017 |  | Amount |  |  | Fair Value |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |
Financial instruments - assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Held-to-maturity investment securities |  | $ | 101,356 |  |  | $ | 100,483 |  |  | $ | - |  |  | $ | 100,483 |  |  | $ | - |
Net loans and leases |  |  | 902,798 |  |  |  | 917,081 |  |  |  | - |  |  |  | - |  |  |  | 917,081 |
Financial instruments - liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | $ | 1,023,568 |  |  | $ | 1,026,830 |  |  | $ | - |  |  | $ | 1,026,830 |  |  | $ | - |
Long-term debt |  |  | 12,352 |  |  |  | 11,692 |  |  |  | - |  |  |  | 11,692 |  |  |  | - |
Subordinated debt |  |  | 17,338 |  |  |  | 17,358 |  |  |  |  |  |  |  | 17,358 |  |  |  |  |

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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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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