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FAIR VALUE MEASUREMENTS | 6 Months Ended
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Jun. 30, 2018
Fair Value Disclosures [Abstract] |
FAIR VALUE MEASUREMENTS | FAIR VALUE MEASUREMENTS A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities that are carried at fair value. Recurring Fair Value Measurements The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2018 and December 31, 2017, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.
|  | June 30, 2018
|  | Level 1 |  | Level 2 |  | Level 3 |  | Total
(in thousands) |  | Inputs |  | Inputs |  | Inputs |  | Fair Value
Available for sale securities: |  |  |  |  |  |  |  |
Obligations of US Government-sponsored enterprises |  | $ | — |  |  | $ | 3,988 |  |  | $ | — |  |  | $ | 3,988 |
Mortgage-backed securities: |  |  |  |  |  |  |  |
US Government-sponsored enterprises |  | — |  |  | 446,850 |  |  | — |  |  | 446,850 |
US Government agency |  | — |  |  | 86,254 |  |  | — |  |  | 86,254 |
Private label |  | — |  |  | 564 |  |  | — |  |  | 564 |
Obligations of states and political subdivisions thereof |  | — |  |  | 134,386 |  |  | — |  |  | 134,386 |
Corporate bonds |  | — |  |  | 38,105 |  |  | — |  |  | 38,105 |
Derivative assets |  | — |  |  | 1,944 |  |  | 8 |  |  | 1,952 |
Derivative liabilities |  | — |  |  | (625 | ) |  | (74 | ) |  | (699 | )
|  | December 31, 2017
|  | Level 1 |  | Level 2 |  | Level 3 |  | Total
(in thousands) |  | Inputs |  | Inputs |  | Inputs |  | Fair Value
Available for sale securities: |  |  |  |  |  |  |  |
Obligations of US Government-sponsored enterprises |  | $ | — |  |  | $ | 6,972 |  |  | $ | — |  |  | $ | 6,972 |
Mortgage-backed securities: |  |  |  |  |  |  |  |
US Government-sponsored enterprises |  | — |  |  | 443,003 |  |  | — |  |  | 443,003 |
US Government agency |  | — |  |  | 95,596 |  |  | — |  |  | 95,596 |
Private label |  | — |  |  | 674 |  |  | — |  |  | 674 |
Obligations of states and political subdivisions thereof |  | — |  |  | 140,200 |  |  | — |  |  | 140,200 |
Corporate bonds |  | — |  |  | 30,797 |  |  | — |  |  | 30,797 |
Derivative assets |  | — |  |  | 669 |  |  | — |  |  | 669 |
Derivative liabilities |  | — |  |  | — |  |  | (222 | ) |  | (222 | )
Securities Available for Sale: All securities and major categories of securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from independent pricing providers. The fair value measurements used by the pricing providers consider observable data may include dealer quotes, market maker quotes and live trading systems. If quoted prices are not readily available, fair values are determined using matrix pricing models, or other model-based valuation techniques requiring observable inputs other than quoted prices such as market pricing spreads, credit information, callable features, cash flows, the U.S. Treasury yield curve, trade execution data, market consensus prepayment speeds, default rates, and the securities’ terms and conditions, among other things. Derivative Assets and Liabilities Interest Rate Lock Commitments. The Company enters into IRLCs for residential mortgage loans, which commit the Company to lend funds to a potential borrower at a specific interest rate and within a specified period of time. The estimated fair value of commitments to originate residential mortgage loans for sale is based on quoted prices for similar loans in active markets. However, this value is adjusted by a factor which considers the likelihood of a loan in a lock position will ultimately close. The closing ratio is derived from the Bank’s internal data and is adjusted using significant management judgment. As such, IRLCs are classified as Level 3 measurements. Forward Sale Commitments. The Company utilizes forward sale commitments as economic hedges against potential changes in the values of the IRLCs and loans originated for sale. The fair values of the Company’s mandatory delivery loan sale commitments are determined similarly to the IRLCs using quoted prices in the market place that are observable. However, closing ratios included in the calculation are internally generated and are based on management’s judgment and prior experience, which are not considered observable factors. As such, mandatory delivery forward commitments are classified as Level 3 measurements. Customer Loan Derivatives. The valuation of the Company’s customer loan derivatives is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of master netting arrangements and any applicable credit enhancements, such as collateral postings. Although the Company has determined that the majority of the inputs used to value its customer loan derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2018, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. The table below presents the changes in Level 3 assets and liabilities that were measured at fair value on a recurring basis for the three months ended June 30, 2018.
|  | Assets (Liabilities)
|  | Interest Rate Lock |  | Forward
(in thousands) |  | Commitments |  | Commitments
Three Months Ended June 30, 2018 |  |  |  |  |  |
December 31, 2017 |  | $ | 7 |  |  | $ | (51 | )
Realized gain recognized in non-interest income |  | 1 |  |  | (23 | )
June 30, 2018 |  | $ | 8 |  |  | $ | (74 | )
Six Months Ended June 30, 2018 |  |  |  |  |  |
December 31, 2017 |  | $ | (1 | ) |  | $ | (221 | )
Realized (loss) recognized in non-interest income |  | 9 |  |  | 147 |
June 30, 2018 |  | $ | 8 |  |  | $ | (74 | )
Quantitative information about the significant unobservable inputs within Level 3 recurring assets and liabilities is as follows:
(in thousands, except ratios) |  | Fair Value June 30, 2018 |  | Valuation Techniques |  | Unobservable Inputs |  | Significant Unobservable Input Value
Assets (Liabilities) |  |  |  |  |  |  |  |  |  |
Interest Rate Lock Commitment |  | $ | 8 |  |  | Historical trend |  | Closing Ratio |  | 90 | %
|  |  |  | Pricing Model |  | Origination Costs, per loan |  | $ | 1.7 |
Forward Commitments |  | (74 | ) |  | Quoted prices for similar loans in active markets. |  | Freddie Mac pricing system |  | Pair-off contract price
Total |  | $ | (66 | ) |  |  |  |  |  |  |
Non-Recurring Fair Value Measurements The Company is required, on a non-recurring basis, to adjust the carrying value or provide valuation allowances for certain assets using fair value measurements in accordance with GAAP. The following is a summary of applicable non-recurring fair value measurements. There are no liabilities measured at fair value on a non-recurring basis.
|  | June 30, 2018 |  | December 31, 2017 |  | Three Months Ended June 30, 2018 |  | Six Months Ended June 30, 2018 |  | Fair Value Measurement Date as of June 30, 2018
(in thousands) |  | Level 3 Inputs |  | Level 3 Inputs |  | Total Gains (Losses) |  | Total Gains (Losses) |  | Level 3 Inputs
Assets |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans |  | $ | 16,652 |  |  | $ | 10,793 |  |  | $ | (1,525 | ) |  | (5,859 | ) |  | June 2018
Capitalized servicing rights |  | 4,978 |  |  | 4,158 |  |  |  |  |  |  |  |  | June 2018
Other real estate owned |  | 129 |  |  | 122 |  |  |  |  |  |  |  |  | Mar 2018 - June 2018
Total |  | $ | 21,759 |  |  | $ | 15,073 |  |  | (1,525 | ) |  | (5,859 | ) |  |
Quantitative information about the significant unobservable inputs within Level 3 non-recurring assets is as follows:
|  | Fair Value |  |  |  |  |  | Range (Weighted Average)(a)
(in thousands, except ratios) |  | June 30, 2018 |  | Valuation Techniques |  | Unobservable Inputs |
Assets |  |  |  |  |  |  |  |  |  |
Impaired loans |  | $ | 13,696 |  |  | Fair value of collateral -appraised value |  | Loss severity |  | 0% to 55% |
|  |  |  |  |  | Appraised value |  | $65 to $6,915 |
Impaired loans |  | 2,956 |  |  | Discount cash flow |  | Discount rate |  | 2.88% to 9.50% |
|  |  |  |  |  | Cash flows |  | $37 to $1,162 |
Capitalized servicing rights |  | 4,978 |  |  | Discounted cash flow |  | Constant prepayment rate (CPR) |  | 8.85 | %
|  |  |  |  |  | Discount rate |  | 10.09 | %
Other real estate owned |  | 129 |  |  | Fair value of collateral less selling costs |  | Appraised value |  |  | $142 |
|  |  |  |  |  | Selling Costs |  | 10 | %
Total |  | $ | 21,759 |  |  |  |  |  |  |
(a) | Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individuals properties.
|  | Fair Value |  |  |  |  |  | Range
(in thousands, except ratios) |  | December 31, 2017 |  | Valuation Techniques |  | Unobservable Inputs |  | (Weighted Average)(a)
Assets |  |  |  |  |  |  |  |  |  |
Impaired loans |  | $ | 8,586 |  |  | Fair value of collateral -appraised value |  | Loss severity |  | 15.7% to 45.28% |
|  |  |  |  |  | Appraised value |  | $100 to $7,545 |
Impaired loans |  | 2,207 |  |  | Discount cash flow |  | Discount rate |  | 2.63% to 9.50% |
|  |  |  |  |  | Cash flows |  | $6 to $320 |
Capitalized servicing rights |  | 4,158 |  |  | Discounted cash flow |  | Constant prepayment rate (CPR) |  | 10.97 | %
|  |  |  |  |  | Discount rate |  | 10.10 | %
Other real estate owned |  | 122 |  |  | Fair value of collateral less selling costs |  | Appraised value |  |  | $136 |
|  |  |  |  |  | Selling Costs |  | 10 | %
Total |  | $ | 15,073 |  |  |  |  |  |  |
(a) | Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individuals properties.
There were no Level 1 or Level 2 non-recurring fair value measurements for the periods ended June 30, 2018 and December 31, 2017. Impaired Loans. Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records non-recurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Non-recurring adjustments can also include certain impairment amounts for collateral-dependent loans calculated when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace. However, the choice of observable data is subject to significant judgment, and there are often adjustments based on judgment in order to make observable data comparable and to consider the impact of time, the condition of properties, interest rates, and other market factors on current values. Additionally, commercial real estate appraisals frequently involve discounting of projected cash flows, which relies inherently on unobservable data. Therefore, non-recurring fair value measurement adjustments relating to real estate collateral have generally been classified as Level 3. Estimates of fair value for other collateral supporting commercial loans are generally based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3. Capitalized loan servicing rights. A loan servicing right asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing loans exceed adequate compensation for performing the servicing. The fair value of servicing rights is estimated using a present value cash flow model. The most important assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Adjustments are only recorded when the discounted cash flows derived from the valuation model are less than the carrying value of the asset. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy. Other real estate owned (“OREO”). OREO results from the foreclosure process on residential or commercial loans issued by the Bank. Upon assuming the real estate, the Company records the property at the fair value of the asset less the estimated sales costs. Thereafter, OREO properties are recorded at the lower of cost or fair value less the estimated sales costs. OREO fair values are primarily determined based on Level 3 data including sales comparables and appraisals. Summary of Estimated Fair Values of Financial Instruments. The estimated fair values, and related carrying amounts, of the Company’s financial instruments follow. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.
|  | June 30, 2018
(in thousands) |  | Carrying Amount |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3
Financial Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 61,393 |  |  | $ | 61,393 |  |  | $ | 61,393 |  |  | $ | — |  |  | $ | — |
Securities available for sale |  | 710,147 |  |  | 710,147 |  |  | — |  |  | 710,147 |  |  | — |
FHLB stock |  | 38,712 |  |  | 38,712 |  |  | — |  |  | 38,712 |  |  | — |
Net loans |  | 2,471,976 |  |  | 2,406,857 |  |  | — |  |  | — |  |  | 2,406,857 |
Accrued interest receivable |  | 3,498 |  |  | 3,498 |  |  | — |  |  | 3,498 |  |  | — |
Cash surrender value of bank-owned life insurance policies |  | 58,811 |  |  | 58,811 |  |  | — |  |  | 58,811 |  |  | — |
Derivative assets |  | 1,952 |  |  | 1,952 |  |  | — |  |  | 1,944 |  |  | 8 |
Financial Liabilities |  |  |  |  |  |  |  |  |  |
Total deposits |  | $ | 2,374,721 |  |  | $ | 2,291,030 |  |  | $ | — |  |  | $ | 2,291,030 |  |  | $ | — |
Securities sold under agreements to repurchase |  | 34,740 |  |  | 34,709 |  |  | — |  |  | 34,709 |  |  | — |
FHLB advances |  | 701,184 |  |  | 698,844 |  |  | — |  |  | 698,844 |  |  | — |
Subordinated borrowings |  | 5,000 |  |  | 5,000 |  |  | — |  |  | 5,000 |  |  | — |
Junior subordinated borrowings |  | 38,003 |  |  | 36,781 |  |  | — |  |  | 36,781 |  |  | — |
Derivative liabilities |  | (699 | ) |  | (699 | ) |  | — |  |  | — |  |  | (699 | )
|  | December 31, 2017
(in thousands) |  | Carrying Amount |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3
Financial Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 90,685 |  |  | $ | 90,685 |  |  | $ | 90,685 |  |  | $ | — |  |  | $ | — |
Securities available for sale |  | 717,242 |  |  | 717,242 |  |  | — |  |  | 717,242 |  |  | — |
FHLB stock |  | 38,105 |  |  | 38,105 |  |  | — |  |  | 38,105 |  |  | — |
Net loans |  | 2,473,288 |  |  | 2,433,557 |  |  | — |  |  | — |  |  | 2,433,557 |
Accrued interest receivable |  | 3,347 |  |  | 3,347 |  |  | — |  |  | 3,347 |  |  | — |
Cash surrender value of bank-owned life insurance policies |  | 57,997 |  |  | 57,997 |  |  | — |  |  | 57,997 |  |  | — |
Derivative assets |  | 669 |  |  | 669 |  |  | — |  |  | 669 |  |  | — |
Financial Liabilities |  |  |  |  |  |  |  |  |  |
Total deposits |  | $ | 2,352,085 |  |  | $ | 2,348,574 |  |  | $ | — |  |  | $ | 2,348,574 |  |  | $ | — |
Securities sold under agreements to repurchase |  | 40,706 |  |  | 40,680 |  |  | — |  |  | 40,680 |  |  | — |
FHLB advances |  | 745,982 |  |  | 744,006 |  |  | — |  |  | 744,006 |  |  | — |
Subordinated borrowings |  | 38,033 |  |  | 38,033 |  |  | — |  |  | 38,033 |  |  | — |
Junior subordinated borrowings |  | 5,000 |  |  | 3,782 |  |  | — |  |  | 3,782 |  |  | — |
Derivative liabilities |  | (222 | ) |  | (222 | ) |  | — |  |  | — |  |  | (222 | )
Other than as discussed above, the following methods and assumptions were used by management to estimate the fair value of significant classes of financial instruments for which it is practicable to estimate that value. Cash and cash equivalents. Carrying value is assumed to represent fair value for cash and cash equivalents that have original maturities of 90 days or less. FHLB stock and restricted securities. Carrying value approximates fair value based on the redemption provisions of the issuers. Cash surrender value of life insurance policies. Carrying value approximates fair value. Loans, net. As of June 30, 2018, the fair value of loans were calculated on an individual basis with consideration given to the loans' underlying characteristics, including account types, remaining terms, annual interest rates or coupons, interest types, timing of principal and interest payments, current market rates, risk ratings, credit ratings and remaining balances. A discounted cash flow model is used to estimate the fair value of the loans using assumptions for the coupon rates, remaining maturities, prepayment speeds, liquidity premiums, projected default probabilities, losses given defaults, and estimates of prevailing discount rates. As of December 31, 2017, the fair value of loans was estimated by discounting future cash flows using the current interest rates at which similar loans with similar terms would be made to borrowers of similar credit quality. Accrued interest receivable. Carrying value approximates fair value. Deposits. The fair value of demand, non-interest bearing checking, savings and money market deposits is determined as the amount payable on demand at the reporting date. The fair value of time deposits is estimated by discounting the estimated future cash flows using market rates offered for deposits of similar remaining maturities. Borrowed funds. The fair value of borrowed funds is estimated by discounting the future cash flows using market rates for similar borrowings. Such funds include all categories of debt and debentures in the table above. Subordinated borrowings. The Company utilizes a pricing service along with internal models to estimate the valuation of its junior subordinated debentures. The junior subordinated debentures re-price every 90 days. Off-balance-sheet financial instruments. Off-balance-sheet financial instruments include standby letters of credit and other financial guarantees and commitments are considered immaterial to the Company’s financial statements.

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