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Fair Value of Assets and Liabilities | 9 Months Ended
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Sep. 30, 2021
Fair Value Disclosures [Abstract] |
Fair Value of Assets and Liabilities | Note 7 -- Fair Value of Assets and Liabilities Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value: Level 1 Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. Level 2 Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Following is a description of the inputs and valuation methodologies used for assets measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. Available-for-Sale Securities. The fair value of available-for-sale securities is determined by various valuation methodologies. Where quoted market prices are available in an active market, securities are classified within Level 1. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independent sources of market parameters, including but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Fair value determinations for Level 3 measurements of securities are the responsibility of the Treasury function of the Company. The Company contracts with a pricing specialist to generate fair value estimates on a monthly basis. The Treasury function of the Company challenges the reasonableness of the assumptions used and reviews the methodology to ensure the estimated fair value complies with accounting standards generally accepted in the United States, analyzes the changes in fair value and compares these changes to internally developed expectations and monitors these changes for appropriateness. Derivatives. The fair value of derivatives is based on models using observable market data as of the measurement date and are therefore classified in Level 2 of the valuation hierarchy. 34 The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall as of September 30, 2021 and December 31, 2020 (in thousands):
|  | Fair Value Measurements Using |
|  |  |  |  |  | Quoted Prices in Active Markets for Identical Assets |  |  | Significant Other Observable Inputs |  |  | Significant Unobservable Inputs |
|  | Fair Value |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |
September 30, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities and obligations of U.S. government corporations and agencies |  | $ | 191,684 |  |  | $ | — |  |  | $ | 191,684 |  |  | $ | — |
Obligations of states and political subdivisions |  |  | 338,744 |  |  |  | — |  |  |  | 338,128 |  |  |  | 616 |
Mortgage-backed securities |  |  | 782,615 |  |  |  | — |  |  |  | 782,615 |  |  |  | — |
Other securities |  |  | 33,923 |  |  |  | — |  |  |  | 33,923 |  |  |  | — |
Total available-for-sale securities |  |  | 1,346,966 |  |  |  | — |  |  |  | 1,346,350 |  |  |  | 616 |
Equity securities |  |  | 348 |  |  |  | 348 |  |  |  | — |  |  |  | — |
Derivative assets: interest rate swaps |  |  | 35 |  |  |  | — |  |  |  | 35 |  |  |  | — |
Total assets |  | $ | 1,347,349 |  |  | $ | 348 |  |  | $ | 1,346,385 |  |  | $ | 616 |
Derivative liabilities: interest rate swaps |  | $ | 899 |  |  | $ | — |  |  | $ | 899 |  |  | $ | — |
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities and obligations of U.S. government corporations and agencies |  | $ | 127,069 |  |  | $ | — |  |  | $ | 127,069 |  |  | $ | — |
Obligations of states and political subdivisions |  |  | 249,844 |  |  |  | — |  |  |  | 249,050 |  |  |  | 794 |
Mortgage-backed securities |  |  | 491,348 |  |  |  | — |  |  |  | 491,348 |  |  |  | — |
Other securities |  |  | 10,979 |  |  |  | — |  |  |  | 10,979 |  |  |  | — |
Total available-for-sale securities |  |  | 879,240 |  |  |  | — |  |  |  | 878,446 |  |  |  | 794 |
Equity securities |  |  | 218 |  |  |  | 218 |  |  |  | 193 |  |  |  | — |
Derivative assets: interest rate swaps |  |  | 1,399 |  |  |  | — |  |  |  | 1,399 |  |  |  | — |
Total assets |  | $ | 880,857 |  |  | $ | 218 |  |  | $ | 880,038 |  |  | $ | 794 |
Derivative liabilities: interest rate swaps |  | $ | 2,892 |  |  | $ | — |  |  | $ | 2,892 |  |  | $ | — |
The change in fair value of assets measured on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2021 and 2020 is summarized as follows (in thousands):
|  | Obligation of State and Political Subdivisions |
|  | Three months ended |  |  | Nine months ended |
|  | September 30, 2021 |  |  | September 30, 2020 |  |  | September 30, 2021 |  |  | September 30, 2020 |
Beginning balance |  | $ | 615 |  |  | $ | 792 |  |  | $ | 794 |  |  | $ | 973 |
Transfers into Level 3 |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Transfers out of Level 3 |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total gains or losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Included in net income |  |  | 1 |  |  |  | 1 |  |  |  | 3 |  |  |  | 4 |
Included in other comprehensive income (loss) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Purchases, issuances, sales and settlements: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Purchases |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Issuances |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Sales |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Settlements |  |  | — |  |  |  | — |  |  |  | (181 | ) |  |  | (184 | )
Ending balance |  | $ | 616 |  |  | $ | 793 |  |  | $ | 616 |  |  | $ | 793 |
Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets and liabilities still held at the reporting date |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
35 Following is a description of the valuation methodologies used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. Collateral Dependent Loans. Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment and estimating fair value include using the fair value of the collateral for collateral dependent loans. If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. Individually evaluated loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method. Management establishes a specific allowance for individually evaluated loans that have an estimated fair value that is below the carrying value. The total carrying amount of loans for which a change in specific allowance has occurred as of September 30, 2021 was $16,035,000 and a fair value of $13,682,000 resulting in specific loss exposures of $2,353,000. When there is little prospect of collecting principal or interest, loans, or portions of loans, may be charged-off to the allowance for credit losses. Losses are recognized in the period an obligation becomes uncollectible. The recognition of a loss does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan even though partial recovery may be affected in the future. Foreclosed Assets Held For Sale. Other real estate owned acquired through loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for credit losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned, or foreclosed asset could differ from the original estimate. If it is determined that fair value declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Operating costs associated with the assets after acquisition are also recorded as noninterest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other noninterest expense. The total carrying amount of other real estate owned as of September 30, 2021 was $5,625,000. Other real estate owned included in the total carrying amount and measured at fair value on a nonrecurring basis during the period amounted to $1,720,000. Mortgage Servicing Rights. As of September 30, 2021, mortgage servicing rights had a carrying value of $570,000 and a fair value of $455,000 resulting in a valuation reserve of $115,000. The fair value used to determine the valuation reserve for mortgage servicing rights was estimated using the discounted cash flow models. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the fair value hierarchy. The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2021 and December 31, 2020 (in thousands):
|  | Fair Value Measurements Using |
|  |  |  |  |  | Quoted Prices in Active Markets for Identical Assets |  |  | Significant Other Observable Inputs |  |  | Significant Unobservable Inputs |
|  | Fair Value |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |
September 30, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateral dependent loans |  | $ | 13,682 |  |  | $ | — |  |  | $ | — |  |  | $ | 13,682 |
Foreclosed assets held for sale |  |  | 1,720 |  |  |  | — |  |  |  | — |  |  |  | 1,720 |
Mortgage servicing rights |  |  | 455 |  |  |  | — |  |  |  | — |  |  |  | 455 |
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateral dependent loans |  | $ | 14,876 |  |  | $ | — |  |  | $ | — |  |  | $ | 14,876 |
Foreclosed assets held for sale |  |  | 290 |  |  |  | — |  |  |  | — |  |  |  | 290 |
Mortgage servicing rights |  |  | 516 |  |  |  | — |  |  |  | — |  |  |  | 517 |
36 Sensitivity of Significant Unobservable Inputs The following table presents quantitative information about unobservable inputs used in Level 3 fair value measurements other than goodwill at September 30, 2021.
September 30, 2021 |  | Fair Value |  |  | Valuation Technique |  | Unobservable Inputs |  | Range |  | Weighted Average |
Collateral dependent loans |  | $ | 13,682 |  |  | Third party valuations |  | Discount to reflect realizable value |  | 0% - 40% |  | 20% |
Foreclosed assets held for sale |  |  | 1,720 |  |  | Third party valuations |  | Discount to reflect realizable value less estimated selling costs |  | 0% - 40% |  | 35% |
Mortgage servicing rights |  |  | 455 |  |  | Third party valuations |  | PSA standard prepayment model rate |  | 230 - 438 |  |  | 281 |
December 31, 2020 |  | Fair Value |  |  | Valuation Technique |  | Unobservable Inputs |  | Range |  | Weighted Average |
Collateral dependent loans |  | $ | 14,876 |  |  | Third party valuations |  | Discount to reflect realizable value |  | 0% - 40% |  | 20% |
Foreclosed assets held for sale |  |  | 290 |  |  | Third party valuations |  | Discount to reflect realizable value less estimated selling costs |  | 0% - 40% |  | 35% |
Mortgage servicing rights |  |  | 517 |  |  | Third party valuations |  | PSA standard prepayment model rate |  | 242 - 441 |  |  | 384 |
37 The following tables present estimated fair values of the Company’s financial instruments at September 30, 2021 and December 31, 2020 in accordance with ASC 825 (in thousands):
|  | Carrying Amount |  |  | Fair Value |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
September 30, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Financial assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 343,859 |  |  | $ | 343,859 |  |  | $ | 343,859 |  |  | $ | — |  |  | $ | — |
Federal funds sold |  |  | 1,347 |  |  |  | 1,347 |  |  |  | 1,347 |  |  |  | — |  |  |  | — |
Certificates of deposit investments |  |  | 2,695 |  |  |  | 2,695 |  |  |  | — |  |  |  | 2,695 |  |  |  | — |
Available-for-sale securities |  |  | 1,346,966 |  |  |  | 1,346,966 |  |  |  | — |  |  |  | 1,346,351 |  |  |  | 615 |
Held-to-maturity securities |  |  | 7,026 |  |  |  | 7,057 |  |  |  | 2,022 |  |  |  | 5,035 |  |  |  | — |
Equity securities |  |  | 348 |  |  |  | 348 |  |  |  | 348 |  |  |  | — |  |  |  | — |
Loans held for sale |  |  | 1,897 |  |  |  | 1,897 |  |  |  | — |  |  |  | 1,897 |  |  |  | — |
Loans net of allowance for credit losses |  |  | 3,891,889 |  |  |  | 3,830,149 |  |  |  | — |  |  |  | — |  |  |  | 3,830,149 |
Interest receivable |  |  | 22,057 |  |  |  | 22,057 |  |  |  | — |  |  |  | 22,057 |  |  |  | — |
Federal Reserve Bank stock |  |  | 13,845 |  |  |  | 13,845 |  |  |  | — |  |  |  | 13,845 |  |  |  | — |
Federal Home Loan Bank stock |  |  | 6,528 |  |  |  | 6,528 |  |  |  | — |  |  |  | 6,528 |  |  |  | — |
Financial liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | $ | 4,988,562 |  |  | $ | 4,991,225 |  |  | $ | — |  |  | $ | 4,347,567 |  |  | $ | 643,658 |
Securities sold under agreements to repurchase |  |  | 149,891 |  |  |  | 149,896 |  |  |  | — |  |  |  | 149,896 |  |  |  | — |
Interest payable |  |  | 2,569 |  |  |  | 2,569 |  |  |  | — |  |  |  | 2,569 |  |  |  | — |
Federal Home Loan Bank borrowings |  |  | 112,641 |  |  |  | 113,205 |  |  |  | — |  |  |  | 113,205 |  |  |  | — |
Subordinated debt, net |  |  | 94,363 |  |  |  | 94,363 |  |  |  |  |  |  |  | 94,363 |  |  |  |  |
Junior subordinated debentures, net |  |  | 19,153 |  |  |  | 14,528 |  |  |  | — |  |  |  | 14,528 |  |  |  | — |
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Financial assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 415,973 |  |  | $ | 415,973 |  |  | $ | 415,973 |  |  | $ | — |  |  | $ | — |
Federal funds sold |  |  | 1,308 |  |  |  | 1,308 |  |  |  | 1,308 |  |  |  | — |  |  |  | — |
Certificates of deposit investments |  |  | 2,695 |  |  |  | 2,695 |  |  |  | — |  |  |  | 2,695 |  |  |  | — |
Available-for-sale securities |  |  | 879,240 |  |  |  | 879,240 |  |  |  | — |  |  |  | 878,446 |  |  |  | 794 |
Held-to-maturity securities |  |  | 5,016 |  |  |  | 5,119 |  |  |  | — |  |  |  | 5,119 |  |  |  | — |
Equity securities |  |  | 218 |  |  |  | 218 |  |  |  | 218 |  |  |  | — |  |  |  | — |
Loans held for sale |  |  | 1,924 |  |  |  | 1,924 |  |  |  | — |  |  |  | 1,924 |  |  |  | — |
Loans net of allowance for credit losses |  |  | 3,094,585 |  |  |  | 3,056,344 |  |  |  | — |  |  |  | — |  |  |  | 3,056,344 |
Interest receivable |  |  | 19,287 |  |  |  | 19,287 |  |  |  | — |  |  |  | 19,287 |  |  |  | — |
Federal Reserve Bank stock |  |  | 9,401 |  |  |  | 9,401 |  |  |  | — |  |  |  | 9,401 |  |  |  | — |
Federal Home Loan Bank stock |  |  | 5,450 |  |  |  | 5,450 |  |  |  | — |  |  |  | 5,450 |  |  |  | — |
Financial liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | $ | 3,692,784 |  |  | $ | 3,697,105 |  |  | $ | — |  |  | $ | 3,215,715 |  |  | $ | 481,390 |
Securities sold under agreements to repurchase |  |  | 206,937 |  |  |  | 206,945 |  |  |  | — |  |  |  | 206,945 |  |  |  | — |
Interest payable |  |  | 2,345 |  |  |  | 2,345 |  |  |  | — |  |  |  | 2,345 |  |  |  | — |
Federal Home Loan Bank borrowings |  |  | 93,969 |  |  |  | 96,669 |  |  |  | — |  |  |  | 96,669 |  |  |  | — |
Subordinated debt, net |  |  | 94,253 |  |  |  | 94,253 |  |  |  | — |  |  |  | 94,253 |  |  |  | — |
Junior subordinated debentures, net |  |  | 19,027 |  |  |  | 14,604 |  |  |  | — |  |  |  | 14,604 |  |  |  | — |

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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=123874694&loc=d3e19207-110258 + Details
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