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FAIR VALUE | 9 Months Ended
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Sep. 30, 2021
Fair Value Disclosures [Abstract] |
FAIR VALUE | FAIR VALUE Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are: Level 1 – quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access at the measurement date. Level 2 – significant other observable inputs other than Level 1 prices such as prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 – at least one significant unobservable input that reflects a company's own assumptions about the assumptions that market participants would use in pricing an asset or liability. In instances in which multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. The Company used the following methods and significant assumptions to estimate fair value for instruments measured on a recurring basis: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, securities are classified within Level 2 and fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flow. Level 2 securities include U.S. agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. The Company’s investment securities are classified as available for sale. The fair values of interest rate swaps and risk participation derivatives are determined using models that incorporate readily observable market data into a market standard methodology. This methodology nets the discounted future cash receipts and the discounted expected cash payments. The discounted variable cash receipts and payments are based on expectations of future interest rates derived from observable market interest rate curves. In addition, fair value is adjusted for the effect of nonperformance risk by incorporating credit valuation adjustments for the Company and its counterparties. These assets and liabilities are classified as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements. The following table summarizes assets measured at fair value on a recurring basis at September 30, 2021 and December 31, 2020:
| Level 1 |  | Level 2 |  | Level 3 |  | Total Fair Value Measurements
September 30, 2021 |  |  |  |  |  |  |
Financial Assets |  |  |  |  |  |  |
Investment securities: |  |  |  |  |  |  |
U.S. Treasury securities | $ | 19,831 |  |  | $ | — |  |  | $ | — |  |  | $ | 19,831 |
States and political subdivisions | — |  |  | 171,304 |  |  | 10,217 |  |  | 181,521 |
GSE residential MBSs | — |  |  | 20,518 |  |  | — |  |  | 20,518 |
GSE residential CMOs | — |  |  | 70,187 |  |  | — |  |  | 70,187 |
Nonagency CMOs | — |  |  | 12,400 |  |  | 13,257 |  |  | 25,657 |
Asset-backed | — |  |  | 126,907 |  |  | — |  |  | 126,907 |
Other | 397 |  |  | — |  |  | — |  |  | 397 |
Loans held for sale | — |  |  | 6,412 |  |  | — |  |  | 6,412 |
Derivatives | — |  |  | 277 |  |  | 546 |  |  | 823 |
Totals | $ | 20,228 |  |  | $ | 408,005 |  |  | $ | 24,020 |  |  | $ | 452,253 |
Financial Liabilities |  |  |  |  |  |  |
Derivatives | $ | — |  |  | $ | 272 |  |  | $ | — |  |  | $ | 272 |
December 31, 2020 |  |  |  |  |  |  |
Financial Assets |  |  |  |  |  |  |
Investment securities: |  |  |  |  |  |  |
States and political subdivisions | $ | — |  |  | $ | 103,591 |  |  | $ | 9,079 |  |  | $ | 112,670 |
GSE residential MBSs | — |  |  | 4,293 |  |  | — |  |  | 4,293 |
GSE residential CMOs | — |  |  | 58,011 |  |  | — |  |  | 58,011 |
Nonagency CMOs | — |  |  | — |  |  | 16,918 |  |  | 16,918 |
Private label commercial CMOs | — |  |  | 56,730 |  |  | 5,506 |  |  | 62,236 |
Asset-backed | — |  |  | 211,966 |  |  | — |  |  | 211,966 |
Other | 371 |  |  | — |  |  | — |  |  | 371 |
Loans held for sale | — |  |  | 11,734 |  |  | — |  |  | 11,734 |
Derivatives | — |  |  | 690 |  |  | 673 |  |  | 1,363 |
Totals | $ | 371 |  |  | $ | 447,015 |  |  | $ | 32,176 |  |  | $ | 479,562 |
Financial Liabilities |  |  |  |  |  |  |
Derivatives | $ | — |  |  | $ | 1,956 |  |  | $ | — |  |  | $ | 1,956 |
The Company h ad one municipal bond and one CMO measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at September 30, 2021. At December 31, 2020, this municipal bond as well as three CMOs were measured on a recurring basis using Level 3 unobservable inputs. One of the CMOs held at December 31, 2020 was sold and one was called in the nine months ended September 30, 2021. The Level 3 valuation is based on a non-executable broker quote, which is considered a significant unobservable input. Such quotes are updated as available and may remain constant for a period of time for certain broker-quoted securities that do not move with the market or that are not interest rate sensitive as a result of their structure or overall attributes. The Company’s residential mortgage loans held for sale are recorded at fair value utilizing Level 2 measurements. This fair value measurement is determined based upon third party quotes obtained on similar loans. For loans held for sale for which the fair value option has been elected, the aggregate fair value exceeded the aggregate principal balance by $151 thousand as of September 30, 2021. The determination of the fair value of interest rate lock commitments on residential mortgages is based on agreed upon pricing with the respective investor on each loan and includes a pull through percentage. The pull through percentage represents an estimate of loans in the pipeline to be delivered to an investor versus the total loans committed for delivery. Significant changes in this input could result in a significantly higher or lower fair value measurement. As the pull through percentage is a significant unobservable input, this is deemed a Level 3 valuation input. The average pull through percentage, which is based upon historical experience, was 89% as of September 30, 2021. An increase or decrease of 5% in the pull through assumption would result in a positive or negative change of $26 thousand in the fair value of interest rate lock commitments at September 30, 2021. The following provides details of the Level 3 fair value measurement activity for the periods ended September 30, 2021 and 2020: Investment securities:
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Balance, beginning of period | $ | 24,925 |  |  | $ | 23,834 |  |  | $ | 31,503 |  |  | $ | 24,279 |
Unrealized (loss) gain included in OCI | (964) |  |  | 200 |  |  | 467 |  |  | (229) |
Principal payments and other | (487) |  |  | (142) |  |  | (4,951) |  |  | (158) |
Sales | — |  |  | — |  |  | (3,545) |  |  | — |
Balance, end of period | $ | 23,474 |  |  | $ | 23,892 |  |  | $ | 23,474 |  |  | $ | 23,892 |
Interest rate lock commitments on residential mortgages:
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Balance, beginning of period | $ | 456 |  |  | $ | 986 |  |  | $ | 673 |  |  | $ | 103 |
Total gains (losses) |  |  |  |  |  |  |
Included in earnings | 90 |  |  | 157 |  |  | (127) |  |  | 1,040 |
Balance, end of period | $ | 546 |  |  | $ | 1,143 |  |  | $ | 546 |  |  | $ | 1,143 |
Certain financial assets are measured at fair value on a nonrecurring basis. Adjustments to the fair value of these assets usually results from the application of lower of cost or market accounting or write-downs of individual assets. The Company used the following methods and significant assumptions to estimate fair value for these financial assets. Impaired Loans Loans are designated as impaired when, in the judgment of management and based on current information and events, it is probable that all amounts due, according to the contractual terms of the loan agreement, will not be collected. The measurement of loss associated with impaired loans for all loan classes can be based on either the observable market price of the loan, the fair value of the collateral, or discounted cash flows using the rate of return implicit in the original loan for TDRs. For collateral-dependent loans, fair value is measured based on the value of the collateral securing the loan, less estimated costs to sell. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The value of the real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction, or if management adjusts the appraisal value, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal, if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3). Impaired loans with an allocation to the ALL are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the unaudited condensed consolidated statements of income. Any changes in the fair value of impaired loans still held were not material for the three and nine months ended September 30, 2021 and 2020. Foreclosed Real Estate OREO property acquired through foreclosure is initially recorded at the fair value of the property at the transfer date less estimated selling cost. Subsequently, OREO is carried at the lower of its carrying value or the fair value less estimated selling cost. Fair value is usually determined based upon an independent third-party appraisal of the property or occasionally upon a recent sales offer. The Company had no OREO balances at September 30, 2021 and December 31, 2020. Mortgage Servicing Rights The MSR fair value is estimated to be equal to its carrying value, unless the quarterly valuation model calculates the present value of the estimated net servicing income is less than its carrying value, in which case an impairment charge is taken. At September 30, 2021 and December 31, 2020, an impairment reserve of $372 thousand and $1.1 million, respectively, existed on the mortgage servicing right portfolio. For the three months ended September 30, 2021 and 2020, an impairment valuation allowance reversal of $43 thousand and an impairment charge of $166 thousand were included, respectively, in mortgage banking activities on the unaudited condensed consolidated statements of income. For the nine months ended September 30, 2021 and 2020, an impairment valuation allowance reversal of $695 thousand and an impairment charge of $986 thousand, respectively, were included in mortgage banking activities on the unaudited condensed consolidated statements of income. The impairment charges in 2020 resulted from rapidly declining market rates caused by the COVID-19 pandemic. The reversals in the three and nine months ended September 30, 2021 were due to a subsequent increase in market rates. The following table summarizes assets measured at fair value on a nonrecurring basis at September 30, 2021 and December 31, 2020:
| Level 1 |  | Level 2 |  | Level 3 |  | Total Fair Value Measurements
September 30, 2021 |  |  |  |  |  |  |
Impaired Loans |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |
Owner occupied | $ | — |  |  | $ | — |  |  | $ | 776 |  |  | $ | 776 |
Non-owner occupied residential | — |  |  | — |  |  | 69 |  |  | 69 |
Residential mortgage: |  |  |  |  |  |  |
First lien | — |  |  | — |  |  | 677 |  |  | 677 |
Home equity - lines of credit | — |  |  | — |  |  | 77 |  |  | 77 |
Total impaired loans | $ | — |  |  | $ | — |  |  | $ | 1,599 |  |  | $ | 1,599 |
Mortgage servicing rights | $ | — |  |  | $ | — |  |  | $ | 3,642 |  |  | $ | 3,642 |
December 31, 2020 |  |  |  |  |  |  |
Impaired Loans |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |
Owner occupied | $ | — |  |  | $ | — |  |  | $ | 846 |  |  | $ | 846 |
Non-owner occupied residential | — |  |  | — |  |  | 36 |  |  | 36 |
Commercial and industrial | — |  |  | — |  |  | 12 |  |  | 12 |
Residential mortgage: |  |  |  |  |  |  |
First lien | — |  |  | — |  |  | 638 |  |  | 638 |
Home equity - lines of credit | — |  |  | — |  |  | 89 |  |  | 89 |
Total impaired loans | $ | — |  |  | $ | — |  |  | $ | 1,621 |  |  | $ | 1,621 |
Mortgage servicing rights | $ | — |  |  | $ | — |  |  | $ | 2,745 |  |  | $ | 2,745 |
The following table presents additional qualitative information about assets measured on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:
| Fair Value Estimate |  | Valuation Techniques |  | Unobservable Input |  | Range
September 30, 2021 |  |  |  |  |  |  |
Impaired loans | $ | 1,599 |  |  | Appraisal of collateral |  | Management adjustments on appraisals for property type and recent activity |  | 10% - 25% discount
|  |  |  |  | - Management adjustments for liquidation expenses |  | 6% - 18% discount
Mortgage servicing rights | $ | 3,642 |  |  | Discounted cash flows |  | Weighted average CPR |  | 14.53%
|  |  |  |  | - Weighted average discount rate |  | 9.04%
December 31, 2020 |  |  |  |  |  |  |
Impaired loans | $ | 1,621 |  |  | Appraisal of collateral |  | Management adjustments on appraisals for property type and recent activity |  | 5% - 25% discount
|  |  |  |  | - Management adjustments for liquidation expenses |  | 6% - 19% discount
Mortgage servicing rights | $ | 2,745 |  |  | Discounted cash flows |  | Weighted average CPR |  | 18.02%
|  |  |  |  | - Weighted average discount rate |  | 9.56%
Fair values of financial instruments The following table presents carrying amounts and estimated fair values of the Company’s financial instruments at September 30, 2021 and December 31, 2020:
| Carrying Amount |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3
September 30, 2021 |  |  |  |  |  |  |  |  |
Financial Assets |  |  |  |  |  |  |  |  |
Cash and due from banks | $ | 36,920 |  |  | $ | 36,920 |  |  | $ | 36,920 |  |  | $ | — |  |  | $ | — |
Interest-bearing deposits with banks | 274,495 |  |  | 274,495 |  |  | 274,495 |  |  | — |  |  | — |
Restricted investments in bank stocks | 7,051 |  |  | n/a |  | n/a |  | n/a |  | n/a
Investment securities | 445,018 |  |  | 445,018 |  |  | 20,228 |  |  | 401,316 |  |  | 23,474 |
Loans held for sale | 6,412 |  |  | 6,412 |  |  | — |  |  | 6,412 |  |  | — |
Loans, net of allowance for loan losses | 1,919,799 |  |  | 1,917,091 |  |  | — |  |  | — |  |  | 1,917,091 |
Derivatives | 823 |  |  | 823 |  |  | — |  |  | 277 |  |  | 546 |
Accrued interest receivable | 8,015 |  |  | 8,015 |  |  | — |  |  | 2,169 |  |  | 5,846 |
Financial Liabilities |  |  |  |  |  |  |  |  |
Deposits | 2,502,108 |  |  | 2,503,695 |  |  | — |  |  | 2,503,695 |  |  | — |
Securities sold under agreements to repurchase | 27,595 |  |  | 27,595 |  |  | — |  |  | 27,595 |  |  | — |
FHLB advances and other | 2,003 |  |  | 2,176 |  |  | — |  |  | 2,176 |  |  | — |
Subordinated notes | 31,948 |  |  | 32,781 |  |  | — |  |  | 32,781 |  |  | — |
Derivatives | 272 |  |  | 272 |  |  | — |  |  | 272 |  |  | — |
Accrued interest payable | 631 |  |  | 631 |  |  | — |  |  | 631 |  |  | — |
Off-balance sheet instruments | — |  |  | — |  |  | — |  |  | — |  |  | — |
December 31, 2020 |  |  |  |  |  |  |  |  |
Financial Assets |  |  |  |  |  |  |  |  |
Cash and due from banks | $ | 26,203 |  |  | $ | 26,203 |  |  | $ | 26,203 |  |  | $ | — |  |  | $ | — |
Interest-bearing deposits with banks | 99,055 |  |  | 99,055 |  |  | 99,055 |  |  | — |  |  | — |
Restricted investments in bank stocks | 10,563 |  |  | n/a |  | n/a |  | n/a |  | n/a
Investment securities | 466,465 |  |  | 466,465 |  |  | 371 |  |  | 434,591 |  |  | 31,503 |
Loans held for sale | 11,734 |  |  | 11,734 |  |  | — |  |  | 11,734 |  |  | — |
Loans, net of allowance for loan losses | 1,959,539 |  |  | 1,953,860 |  |  | — |  |  | — |  |  | 1,953,860 |
Derivatives | 1,363 |  |  | 1,363 |  |  | — |  |  | 690 |  |  | 673 |
Accrued interest receivable | 8,927 |  |  | 8,927 |  |  | — |  |  | 1,529 |  |  | 7,398 |
Financial Liabilities |  |  |  |  |  |  |  |  |
Deposits | 2,356,880 |  |  | 2,359,317 |  |  | — |  |  | 2,359,317 |  |  | — |
Securities sold under agreements to repurchase | 19,466 |  |  | 19,466 |  |  | — |  |  | 19,466 |  |  | — |
FHLB advances and other | 58,045 |  |  | 58,298 |  |  | — |  |  | 58,298 |  |  | — |
Subordinated notes | 31,903 |  |  | 31,712 |  |  | — |  |  | 31,712 |  |  | — |
Derivatives | 1,956 |  |  | 1,956 |  |  | — |  |  | 1,956 |  |  | — |
Accrued interest payable | 238 |  |  | 238 |  |  | — |  |  | 238 |  |  | — |
Off-balance sheet instruments | — |  |  | — |  |  | — |  |  | — |  |  | — |
The methods used to estimate the fair value of financial instruments at September 30, 2021 and December 31, 2020 did not necessarily represent an exit price. In accordance with the Company's adoption of ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, the methods utilized to measure the fair value of financial instruments at September 30, 2021 and December 31, 2020 represent an approximation of exit price; however, an actual exit price may differ.

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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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