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FAIR VALUE MEASUREMENTS
6 Months Ended
Jun. 30, 2020
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASUREMENTS

NOTE 10.           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, 2020 and December 31, 2019, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

June 30, 2020

    

Level 1

    

Level 2

    

Level 3

    

Total

(in thousands)

Inputs

Inputs

Inputs

Fair Value

Available for sale securities:

  

  

  

Mortgage-backed securities:

 

  

 

  

 

  

 

  

US Government-sponsored enterprises

$

$

267,444

$

$

267,444

US Government agency

 

 

98,655

 

 

98,655

Private label

 

 

19,367

 

 

19,367

Obligations of states and political subdivisions thereof

 

 

159,287

 

 

159,287

Corporate bonds

 

 

96,821

 

 

96,821

Derivative assets

 

 

28,753

 

63

 

28,816

Derivative liabilities

 

 

(32,367)

 

(126)

 

(32,493)

December 31, 2019

    

Level 1

    

Level 2

    

Level 3

    

Total

(in thousands)

Inputs

Inputs

Inputs

Fair Value

Available for sale securities:

  

  

  

  

Mortgage-backed securities:

 

  

 

  

 

  

 

  

US Government-sponsored enterprises

$

$

321,969

$

$

321,969

US Government agency

 

 

99,661

 

 

99,661

Private label

 

 

19,533

 

 

19,533

Obligations of states and political subdivisions thereof

 

 

142,006

 

 

142,006

Corporate bonds

 

 

80,061

 

 

80,061

Derivative assets

 

 

6,791

 

59

 

6,850

Derivative liabilities

 

 

(8,102)

 

(84)

 

(8,186)

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 that 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

Cash Flow and Fair Value Hedges. The valuation of the Company's cash flow hedges are obtained from a third party. 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 inputs used to value the Company's cash flow hedges are all classified as Level 2 measurements.

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 Company’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, 2020, 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 and six months ended June 30, 2020:

Assets (Liabilities)

Interest Rate Lock

Forward

(in thousands)

    

Commitments

    

Commitments

Three Months Ended June 30, 2020

  

  

Balance at beginning of period

$

93

$

(73)

Realized gain recognized in non-interest income

 

(30)

 

(53)

Balance at end of period

$

63

$

(126)

Six Months Ended June 30, 2020

 

  

 

  

Balance at beginning of period

$

59

$

(84)

Realized gain (loss) recognized in non-interest income

 

4

 

(42)

Balance at end of period

$

63

$

(126)

Quantitative information about the significant unobservable inputs within Level 3 recurring assets and liabilities is, as follows:

Fair Value

Fair Value

(in thousands,

June 30, 

December 31,

Valuation 

Unobservable 

Unobservable

except ratios)

    

2020

    

2019

    

Techniques

    

Inputs

    

Input Value

 

Assets (Liabilities)

  

  

  

  

  

 

Interest Rate Lock Commitment

 

$

63

$

59

Historical trend

 

Closing Ratio

 

90

%

 

 

Pricing Model

Origination Costs, per loan

$

1.7

 

Forward Commitments

 

(126)

 

(84)

Quoted prices for similar loans in active markets.

 

Freddie Mac pricing system

 

Pair-off contract price

Total

$

(63)

$

(25)

  

 

  

 

  

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:

Fair Value

Three Months Ended

Six Months Ended

 Measurement Date as of 

June 30, 2020

December 31, 2019

June 30, 2020

June 30, 2020

June 30, 2020

Level 3

Level 3

Total

Total

Level 3

(in thousands)

    

Inputs

    

Inputs

    

Gains (Losses)

    

Gains (Losses)

    

Inputs

Assets

  

  

  

  

  

Impaired loans

$

9,623

$

9,625

$

(1,288)

$

2

June 2020

Capitalized servicing rights

 

3,234

4,301

 

(663)

 

(1,067)

 

June 2020

Other real estate owned

 

2,318

2,236

 

113

 

82

 

August 2019

Premises held for sale

 

1,764

1,764

 

 

 

September 2019

Total

$

16,939

$

17,926

$

(1,838)

$

(983)

 

  

There are no liabilities measured at fair value on a non-recurring basis in 2020 and 2019.

Quantitative information about the significant unobservable inputs within Level 3 non-recurring assets is, as follows:

(in thousands,

Fair Value

Range

 

except ratios)

    

June 30, 2020

    

Valuation Techniques

    

Unobservable Inputs

    

(Weighted Average)(a)

 

Assets

 

  

 

  

 

  

  

Impaired loans

$

6,924

 

Fair value of collateral-appraised value

 

Loss severity

0% to 70%

 

Appraised value

$0 to $1,730

Impaired loans

 

2,699

 

Discount cash flow

 

Discount rate

 

3.50% to 9.50%

 

Cash flows

$21 to $1,002

Capitalized servicing rights

 

3,234

 

Discounted cash flow

 

Constant prepayment rate (CPR)

 

15.95

%

 

  

 

  

 

Discount rate

 

10.07

%

Other real estate owned

 

2,318

 

Fair value of collateral less selling costs

 

Appraised value

 

$

2,695

 

  

 

  

 

Selling Costs

 

6% to 10%

Premises held for sale(b)

 

1,764

 

Fair value of asset less selling costs

 

Appraised value

$136 to $527

 

  

 

  

 

Selling Costs

 

6

%

Total

$

16,939

 

  

 

  

 

  

(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 individual properties.
(b)The carrying value of premises held for sale was $1.8 million as of June 30, 2020.

(in thousands,

Fair Value

Range

except ratios)

    

Dec 31, 2019

    

Valuation Techniques

    

Unobservable Inputs

    

(Weighted Average)(a)

Assets

Impaired loans

$

6,137

Fair value of collateral-appraised value

Loss severity

0% to 55.00%

Appraised value

$0 to $6,915

Impaired loans

 

3,488

Discount cash flow

Discount rate

 

2.88% to 9.50%

Cash flows

$22 to $1,002

Capitalized servicing rights

 

4,301

Discounted cash flow

Constant prepayment rate (CPR)

 

9.95

%

Discount rate

 

10.07

%

Other real estate owned

 

2,236

Fair value of collateral less selling costs

Appraised value

 

$

2,695

Selling Costs

10% to 20%

Premises held for sale(b)

 

1,764

Fair value of asset less selling costs

Appraised value

 

$

$136 to $527

Selling Costs

 

6.00

%

Total

$

17,926

(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 individual properties.
(b)The carrying value of premises held for sale was $1.8 million as of December 31, 2019.

There were no Level 1 or Level 2 non-recurring fair value measurements for the periods ended June 30, 2020 and December 31, 2019.

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 loan 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 Company. 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.

Premises held for sale. Assets held for sale, identified as part of the Company’s strategic review and branch optimization exercise, were transferred from premises and equipment at the lower of amortized cost or fair value less the estimated sales costs. Assets held for sale 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 are included in the table below. 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, 2020

Carrying

Fair

(in thousands)

    

Amount

    

Value

    

Level 1

    

Level 2

    

Level 3

Financial Assets

 

  

 

  

 

  

 

  

 

  

Cash and cash equivalents

$

70,673

$

70,763

$

70,763

$

$

Securities available for sale

 

641,574

 

641,574

 

 

641,574

 

FHLB stock

 

20,265

 

20,265

 

 

20,265

 

Net loans

 

2,712,908

 

2,698,382

 

 

 

2,698,382

Accrued interest receivable

 

3,215

 

3,215

 

 

3,215

 

Cash surrender value of bank-owned life insurance policies

 

76,896

 

76,896

 

 

76,896

 

Derivative assets

 

28,816

 

28,816

 

 

28,753

 

63

Financial Liabilities

 

  

 

  

 

  

 

  

 

  

Non-maturity deposits

$

2,016,736

$

2,090,727

$

$

2,090,727

$

Time deposits

678,126

668,803

668,803

Short-term other borrowings

 

33,846

 

33,846

 

 

33,846

 

FHLB advances

 

381,781

 

387,053

 

 

387,053

 

FRB PPPLF

131,236

131,236

131,236

Subordinated borrowings

 

59,879

 

59,879

 

 

59,879

 

Derivative liabilities

 

(32,493)

 

(32,493)

 

 

(32,367)

 

(126)

December 31, 2019

Carrying

Fair

(in thousands)

    

Amount

    

Value

    

Level 1

    

Level 2

    

Level 3

Financial Assets

 

  

 

  

 

  

 

  

 

  

Cash and cash equivalents

$

56,910

$

56,910

$

56,910

$

$

Securities available for sale

 

663,230

 

663,230

 

 

663,230

 

FHLB stock

 

20,679

 

20,679

 

 

20,679

 

Net loans

 

2,625,739

 

2,634,147

 

 

 

2,634,147

Accrued interest receivable

 

3,294

 

3,294

 

 

3,294

 

Cash surrender value of bank-owned life insurance policies

 

75,863

 

75,863

 

 

75,863

 

Derivative assets

 

6,850

 

6,850

 

 

6,791

 

59

Financial Liabilities

 

  

 

  

 

  

 

  

 

  

Non-maturity deposits

$

1,763,116

$

1,751,481

$

$

1,751,481

$

Time deposits

932,635

932,886

932,886

Short-term other borrowings

 

44,832

 

44,831

 

 

44,831

 

FHLB advances

 

426,564

 

425,989

 

 

425,989

 

Subordinated borrowings

 

59,920

 

59,920

 

 

59,920

 

Derivative liabilities

 

8,186

 

8,186

 

 

8,102

 

84