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Fair Value of Financial Instruments | 3 Months Ended
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Mar. 31, 2021
Fair Value of Financial Instruments [Abstract] |
Fair Value of Financial Instruments | Note 8 – Fair Value of Financial Instruments Fair value is defined as the price to sell an asset or to transfer a liability in an orderly transaction between willing market participants as of the measurement date. Fair value is best determined by values quoted through active trading markets. Active trading markets are characterized by numerous transactions of similar financial instruments between willing buyers and willing sellers. Because no active trading market exists for various types of financial instruments, many of the fair values disclosed were derived using present value discounted cash flows or other valuation techniques described below. As a result, the Corporation’s ability to actually realize these derived values cannot be assumed. T he Corporation measures fair values based on the fair value hierarchy established in ASC Paragraph 820-10-35-37. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of inputs that may be used to measure fair value under the hierarchy are as follows: Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets and liabilities. This level is the most reliable source of valuation. Level 2: Quoted prices that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability. Level 2 inputs include inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates). It also includes inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs). Several sources are utilized for valuing these assets, including a contracted valuation service, Standard & Poor’s (“S&P”) evaluations and pricing services, and other valuation matrices. Level 3: Prices or valuation techniques that require inputs that are both significant to the valuation assumptions and not readily observable in the market (i.e. supported with little or no market activity). Level 3 instruments are valued based on the best available data, some of which is internally developed, and consider risk premiums that a market participant would require. The level established within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Management believes that the Corporation’s valuation techniques are appropriate and consistent with the techniques used by other market participants. However, the use of different methodologies and assumptions could result in a different estimate of fair values at the reporting date. T he valuation techniques used by the Corporation to measure, on a recurring basis and on a non-recurring basis, the fair value of assets as of March 31, 2021 are discussed in the paragraphs that follow. Investments – The fair value of investments is determined using a market approach. As of March 31, 2021, the U.S. Government agencies, residential and commercial mortgage-backed securities, collateralized mortgage obligations, and state and political subdivisions bonds, excluding the tax increment financing (“TIF”) bonds, segments are classified as Level 2 within the valuation hierarchy. Their fair values were determined based upon market-corroborated inputs and valuation matrices, which were obtained through third party data service providers or securities brokers through which the Corporation has historically transacted both purchases and sales of investment securities. The TIF bonds are classified as Level 3 within the valuation hierarchy as they are not openly traded. The CDO segment, which consists of pooled trust preferred securities issued by banks, thrifts and insurance companies, is classified as Level 3 within the valuation hierarchy. At March 31, 2021, the Corporation owned nine trust preferred securities with an amortized cost of $18.6 million and a fair value of $13.6 million. At March 31, 2021, the market for these securities is not active and the markets for similar securities are also not active. Recent developments in the credit markets have had an negative impact on the market for CDOs. Specifically, as COVID-19 developed, which led to deteriorating performance of credit instruments, investors became less willing to buy a range of structured credit products. The result was massive spread-widening across a wide range of credit instruments, and for CDO bonds in particular. At present, it is no longer economically feasible to form new CDOs or restructure, as the market for CDO bonds has effectively disappeared. The market values for these securities or any securities other than those issued or guaranteed by the U.S. Department of the Treasury are depressed relative to historical levels. Therefore, in the current market, a low market price for a particular bond may only provide evidence of stress in the credit markets in general rather than being an indicator of credit problems with a particular issue. Given the conditions in the current debt markets and the absence of observable transactions in the secondary and new issue markets, management has determined that (a) the few observable transactions and market quotations that are available are not reliable for the purpose of obtaining fair value at March 31, 2021, (b) an income valuation approach technique (i.e. present value) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than a market approach, and (c) the CDO segment is appropriately classified within Level 3 of the valuation hierarchy because management determined that significant adjustments were required to determine fair value at the measurement date. Management utilizes an independent third party to prepare both the evaluations of OTTI as well as the fair value determinations for its CDO portfolio. Management believes that the valuations are adequately reflected at March 31, 2021. The approach used by the third party to determine fair value involved several steps, which included detailed credit and structural evaluation of each piece of collateral in each bond, projection of default, recovery and prepayment/amortization probabilities for each piece of collateral in the bond, and discounted cash flow modeling. The discount rate methodology used by the third party combines a baseline current market yield for comparable corporate and structured credit products with adjustments based on evaluations of the differences found in structure and risks associated with actual and projected credit performance of each CDO being valued. Currently, the only active and liquid trading market that exists is for stand-alone trust preferred securities, with a limited market for highly-rated CDO securities that are more senior in the capital structure than the securities in the CDO portfolio. Therefore, adjustments to the baseline discount rate are also made to reflect the additional leverage found in structured instruments. At March 31, 2021, there has been minimal impact on the trust preferred bonds, although there has been a significant effect on several asset classes in the equity and fixed income markets related to COVID-19. A review of assumptions, as they relate to the impact of COVID-19, will be on-going through the remainder of the year. Derivative financial instruments (Cash flow hedge) – The Corporation’s open derivative positions are interest rate swap agreements. Those classified as Level 2 open derivative positions are valued using externally developed pricing models based on observable market inputs provided by a third party and validated by management. The Corporation has considered counterparty credit risk in the valuation of its interest rate swap assets. Impaired loans – Loans included in the table below are those that are considered impaired with a specific allocation or with a partial charge-off. Fair value consists of the loan balance less its valuation allowance and is generally determined based on independent third-party appraisals of the collateral or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements. Other real estate owned – OREO included in the table below are considered impaired with specific write-downs. Fair value of other real estate owned is based on independent third-party appraisals of the properties. These values were determined based on the sales prices of similar properties in the approximate geographic area. These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements. ‎ For Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis as of March 31, 2021 and December 31, 2020, the significant unobservable inputs used in the fair value measurements were as follows:
(in thousands) |  | Fair Value at ‎March 31, ‎2021 |  | Valuation ‎Technique |  | Significant ‎Unobservable ‎Inputs |  | Significant ‎Unobservable ‎Input Value
Recurring: |  |  |  |  |  |  |  |  |
Investment Securities – available for sale |  | $ | 13,649 |  | Discounted ‎Cash Flow |  | Discount Rate |  | LIBOR+ 5.25%
Non-recurring: |  |  |  |  |  |  |  |  |
Impaired Loans |  | $ | 2,470 |  | Market Comparable ‎Properties |  | Marketability ‎Discount |  | 10.0% - 15.0% (1) ‎(weighted avg 10.9%)
Other Real Estate Owned |  | $ | 430 |  | Market Comparable ‎Properties |  | Marketability ‎Discount |  | 15.0%
(in thousands) |  | Fair Value at ‎December 31, ‎2020 |  | Valuation ‎Technique |  | Significant ‎Unobservable ‎Inputs |  | Significant ‎Unobservable ‎Input Value
Recurring: |  |  |  |  |  |  |  |  |
Investment Securities – available for sale |  | $ | 13,260 |  | Discounted ‎Cash Flow |  | Discount ‎Rate |  | LIBOR+ 5.25%
Non-recurring: |  |  |  |  |  |  |  |  |
Impaired Loans |  | $ | 1,465 |  | Market Comparable ‎Properties |  | Marketability ‎Discount |  | 10.0% - 15.0% (1) ‎(weighted avg 12.5%)
Other Real Estate Owned |  | $ | 913 |  | Market Comparable ‎Properties |  | Marketability ‎Discount |  | 15.0%
NOTE: (1)Range would include discounts taken since appraisal and estimated values ‎ For assets measured at fair value on a recurring and non-recurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2021 and December 31, 2020 were as follows:
|  |  |  |  | Fair Value Measurements ‎at March 31, 2021 Using
|  | Assets/(liabilities) ‎Measured at ‎Fair Value |  | Quoted ‎Prices in ‎Active Markets ‎for Identical ‎Assets |  | Significant ‎Other ‎Observable ‎Inputs |  | Significant ‎Unobservable ‎Inputs
(in thousands) |  | 03/31/21 |  | (Level 1) |  | (Level 2) |  | (Level 3)
Recurring: |  |  |  |  |  |  |  |  |  |  |  |
Investment securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |
U.S. government agencies |  | $ | 61,036 |  |  |  |  | $ | 61,036 |  |  |
Residential mortgage-backed agencies |  | $ | 21,822 |  |  |  |  | $ | 21,822 |  |  |
Commercial mortgage-backed agencies |  | $ | 32,757 |  |  |  |  | $ | 32,757 |  |  |
Collateralized mortgage obligations |  | $ | 64,899 |  |  |  |  | $ | 64,899 |  |  |
Obligations of states and political subdivisions |  | $ | 9,843 |  |  |  |  | $ | 9,843 |  |  |
Collateralized debt obligations |  | $ | 13,649 |  |  |  |  |  |  |  | $ | 13,649
Financial derivatives |  | $ | (788) |  |  |  |  | $ | (788) |  |  |
Non-recurring: |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans |  | $ | 2,470 |  |  |  |  |  |  |  | $ | 2,470
Other real estate owned |  | $ | 430 |  |  |  |  |  |  |  | $ | 430
|  |  |  |  | Fair Value Measurements ‎at December 31, 2020 Using
|  | Assets/(liabilities) ‎Measured at ‎Fair Value |  | Quoted ‎Prices in ‎Active Markets ‎for Identical ‎Assets |  | Significant ‎Other ‎Observable ‎Inputs |  | Significant ‎Unobservable ‎Inputs
(in thousands) |  | 12/31/20 |  | (Level 1) |  | (Level 2) |  | (Level 3)
Recurring: |  |  |  |  |  |  |  |  |  |  |  |
Investment securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |
U.S. government agencies |  | $ | 76,433 |  |  |  |  | $ | 76,433 |  |  |
Residential mortgage-backed agencies |  | $ | 22,899 |  |  |  |  | $ | 22,899 |  |  |
Commercial mortgage-backed agencies |  | $ | 33,042 |  |  |  |  | $ | 33,042 |  |  |
Collateralized mortgage obligations |  | $ | 70,637 |  |  |  |  | $ | 70,637 |  |  |
Obligations of states and political subdivisions |  | $ | 10,614 |  |  |  |  | $ | 10,614 |  |  |
Collateralized debt obligations |  | $ | 13,260 |  |  |  |  |  |  |  | $ | 13,260
Financial derivatives |  | $ | (1,320) |  |  |  |  | $ | (1,320) |  |  |
Non-recurring: |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans |  | $ | 1,465 |  |  |  |  |  |  |  | $ | 1,465
Other real estate owned |  | $ | 913 |  |  |  |  |  |  |  | $ | 913
There were no transfers of assets between any of the fair value hierarchy for the three month periods ended March 31, 2021 or 2020. ‎ The following tables show a reconciliation of the beginning and ending balances for fair valued assets measured on a recurring basis using Level 3 significant unobservable inputs for the three month periods ended March 31, 2021 and 2020:
|  | Fair Value Measurements ‎Using Significant Unobservable Inputs ‎(Level 3)
(in thousands) |  | Investment Securities ‎Available for Sale
Beginning balance January 1, 2021 |  | $ | 13,260
Total losses realized/unrealized: |  |  |
Included in other comprehensive loss |  |  | 389
Ending balance March 31, 2021 |  | $ | 13,649
|  | Fair Value Measurements ‎Using Significant Unobservable Inputs ‎(Level 3)
(in thousands) |  | Investment Securities ‎Available for Sale
Beginning balance January 1, 2020 |  | $ | 14,354
Total losses realized/unrealized: |  |  |
Included in other comprehensive loss |  |  | (1,974)
Ending balance March 31, 2020 |  | $ | 12,380
There were no gains or losses included in earnings attributable to the change in realized/unrealized gains or losses related to the assets for the three month periods ended March 31, 2021 or 2020. The disclosed fair values may vary significantly between institutions based on the estimates and assumptions used in the various valuation methodologies. The derived fair values are subjective in nature and involve uncertainties and significant judgment. Therefore, they cannot be determined with precision. Changes in the assumptions could significantly impact the derived estimates of fair value. Disclosure of non-financial assets such as buildings as well as certain financial instruments such as leases is not required. Accordingly, the aggregate fair values presented do not represent the underlying value of the Corporation. ‎ The following tables present fair value information about financial instruments, whether or not recognized in the Consolidated Statement of Financial Condition, for which it is practicable to estimate that value. The actual carrying amounts and estimated fair values of the Corporation’s financial instruments that are included in the Consolidated Statement of Financial Condition are as follows:
|  | March 31, 2021 |  | Fair Value Measurements
|  | Carrying |  | Fair |  | Quoted ‎Prices in ‎Active Markets ‎for Identical ‎Assets |  | Significant ‎Other ‎Observable ‎Inputs |  | Significant ‎Unobservable ‎Inputs
(in thousands) |  | Amount |  | Value |  | (Level 1) |  | (Level 2) |  | (Level 3)
Financial Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 189,744 |  | $ | 189,744 |  | $ | 189,744 |  |  |  |  |  |
Interest bearing deposits in banks |  |  | 3,273 |  |  | 3,273 |  |  | 3,273 |  |  |  |  |  |
Investment securities - AFS |  |  | 204,006 |  |  | 204,006 |  |  |  |  | $ | 190,357 |  | $ | 13,649
Investment securities - HTM |  |  | 69,357 |  |  | 77,612 |  |  |  |  |  | 49,831 |  |  | 27,781
Restricted bank stock |  |  | 3,654 |  |  | 3,654 |  |  |  |  |  | 3,654 |  |  |
Loans, net |  |  | 1,179,441 |  |  | 1,161,197 |  |  |  |  |  |  |  |  | 1,161,197
Accrued interest receivable |  |  | 5,993 |  |  | 5,993 |  |  |  |  |  | 639 |  |  | 5,354
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits - non-maturity |  |  | 1,242,479 |  |  | 1,242,479 |  |  |  |  |  | 1,242,479 |  |  |
Deposits - time deposits |  |  | 225,784 |  |  | 228,025 |  |  |  |  |  | 228,025 |  |  |
Financial derivatives |  |  | 788 |  |  | 788 |  |  |  |  |  | 788 |  |  |
Short-term borrowed funds |  |  | 51,454 |  |  | 51,454 |  |  |  |  |  | 51,454 |  |  |
Long-term borrowed funds |  |  | 100,929 |  |  | 103,052 |  |  |  |  |  | 103,052 |  |  |
Accrued interest payable |  |  | 364 |  |  | 364 |  |  |  |  |  | 364 |  |  |
|  | December 31, 2020 |  | Fair Value Measurements
|  | Carrying |  | Fair |  | Quoted ‎Prices in ‎Active Markets ‎for Identical ‎Assets |  | Significant ‎Other ‎Observable ‎Inputs |  | Significant ‎Unobservable ‎Inputs
(in thousands) |  | Amount |  | Value |  | (Level 1) |  | (Level 2) |  | (Level 3)
Financial Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 146,673 |  | $ | 146,673 |  | $ | 146,673 |  |  |  |  |  |
Interest bearing deposits in banks |  |  | 2,759 |  |  | 2,759 |  |  | 2,759 |  |  |  |  |  |
Investment securities - AFS |  |  | 226,885 |  |  | 226,885 |  |  |  |  | $ | 213,625 |  | $ | 13,260
Investment securities - HTM |  |  | 68,263 |  |  | 77,612 |  |  |  |  |  | 49,442 |  |  | 28,170
Restricted bank stock |  |  | 4,468 |  |  | 4,468 |  |  |  |  |  | 4,468 |  |  |
Loans, net |  |  | 1,149,596 |  |  | 1,150,186 |  |  |  |  |  |  |  |  | 1,150,186
Accrued interest receivable |  |  | 6,241 |  |  | 6,241 |  |  |  |  |  | 814 |  |  | 5,427
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits - non-maturity |  |  | 1,194,140 |  |  | 1,194,140 |  |  |  |  |  | 1,194,140 |  |  |
Deposits - time deposits |  |  | 228,226 |  |  | 231,241 |  |  |  |  |  | 231,241 |  |  |
Financial derivative |  |  | 1,320 |  |  | 1,320 |  |  |  |  |  | 1,320 |  |  |
Short-term borrowed funds |  |  | 49,160 |  |  | 49,160 |  |  |  |  |  | 49,160 |  |  |
Long-term borrowed funds |  |  | 100,929 |  |  | 104,825 |  |  |  |  |  | 104,825 |  |  |
Accrued interest payable |  |  | 391 |  |  | 391 |  |  |  |  |  | 391 |  |  |

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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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