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Fair Value of Assets and Liabilities | 9 Months Ended
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Sep. 30, 2017
Fair Value Disclosures [Abstract] |
Fair Value of Assets and Liabilities | Fair Value of Assets and Liabilities The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
• | Level 1: Valuation is based upon quoted prices for identical instruments 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: Valuation is based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
• | Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s estimation of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
The following methods and assumptions were used to estimate fair value disclosures. All financial instruments are held for other than trading purposes. Cash and cash equivalents: Due to the short term nature of these instruments, the carrying amounts reported in the consolidated balance sheets represent their fair values. Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Investments in Federal Home Loan Bank stock are recorded at cost, which also represents fair value. Loans held for sale: Due to the short term nature of these instruments, the carrying amounts reported in the consolidated balance sheets represent their fair values. Loans: Fair values were generally determined by discounting both principal and interest cash flows on pools of loans expected to be collected using a discount rate for similar instruments with adjustments that the Company believes a market participant would consider in determining fair value. The Company estimates the cash flows expected to be collected using internal credit risk, interest rate and prepayment risk models that incorporate the Corporation’s best estimate of current key assumptions, such as default rates, loss severity and prepayment speeds for the life of the loan. The carrying value of loans is presented net of the Allowance (see Note 5). Impaired loans are carried at fair value. Specific valuation allowances are included in the Allowance. Purchased receivables: Fair values for purchased receivables are based on their carrying amounts due to their short duration and repricing frequency. Generally, purchased receivables have a duration of less than one year. Mortgage servicing rights: MSR are held at fair value on a recurring basis. These assets are classified as Level 3 as quoted prices are not available. In order to determine the fair value of MSRs, the present value of net expected future cash flows is estimated. Assumptions used include market discount rates, anticipated prepayment speeds, escrow calculations, delinquency rates, and ancillary fee income net of servicing costs. The model assumptions are also compared to publicly filed information from several large MSR holders, as available. Accrued interest receivable: Due to the short term nature of these instruments, the carrying amounts reported in the consolidated balance sheets represent their fair values. Deposits: The fair value for deposits with stated maturities was determined by discounting contractual cash flows using current market rates for instruments with similar maturities. For deposits with no stated maturities, the carrying value was considered to approximate fair value and does not take into account the significant value of the cost advantage and stability of the Company's long-term relationships with depositors. Accrued interest payable: Due to the short term nature of these instruments, the carrying amounts reported in the consolidated balance sheets represent their fair values. Securities sold under repurchase agreements: Fair values for securities sold under repurchase agreements are based on their carrying amounts due to their short duration and repricing frequency. Borrowings: Due to the short term nature of these instruments, the carrying amount of short-term borrowings reported in the consolidated balance sheets approximate the fair value. Fair values for long-term borrowings are estimated using a discounted cash flow calculation that applies currently offered interest rates to a schedule of aggregate expected monthly payments. Accrued liability, RML acquisition payments: The carrying value of the accrued liability for estimated acquisition payments represents management's estimate of amounts owed to the sellers that are earned, but unpaid, as of the balance sheet date. Adjustments to the liability are reported in other operating expense. Due to the short term nature of this liability, the carrying amounts reported in the consolidated balance sheets represent their fair values. Junior subordinated debentures: Fair value adjustments for junior subordinated debentures are based on discounted cash flows to maturity using current interest rates for similar financial instruments. Management utilized a market approach to determine the appropriate discount rate for junior subordinated debentures. Derivative instruments: The fair value of the interest rate lock commitments are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions based on historical information, where appropriate. The pull-through rate assumptions are considered Level 3 valuation inputs and are significant to the interest rate lock commitment valuation; as such, the interest rate lock commitment derivatives are classified as Level 3. Interest rate contracts are valued in a model, which uses as its basis a discounted cash flow technique incorporating credit valuation adjustments to reflect nonperformance risk in the measurement of fair value. Although the Company has determined that the majority of inputs used to value its interest rate 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 September 30, 2017, the Company has assessed the significance of the impact of these adjustments on the overall valuation of its interest rate positions and has determined that they are not significant to the overall valuation of its interest rate derivatives. As a result, the Company has classified its interest rate derivative valuations in Level 2 of the fair value hierarchy. Assets subject to nonrecurring adjustment to fair value: The Company is also required to measure certain assets such as equity method investments, goodwill, intangible assets, impaired loans, and other real estate owned (“OREO”) at fair value on a nonrecurring basis in accordance with GAAP. Any nonrecurring adjustments to fair value usually result from the write down of individual assets. The Company uses either in-house evaluations or external appraisals to estimate the fair value of OREO and impaired loans as of each reporting date. In-house appraisals are considered Level 3 inputs and external appraisals are considered Level 2 inputs. The Company’s determination of which method to use is based upon several factors. The Company takes into account compliance with legal and regulatory guidelines, the amount of the loan, the size of the assets, the location and type of property to be valued and how critical the timing of completion of the analysis is to the assessment of value. Those factors are balanced with the level of internal expertise, internal experience and market information available, versus external expertise available such as qualified appraisers, brokers, auctioneers and equipment specialists. The Company uses external sources to estimate fair value for projects that are not fully constructed as of the date of valuation. These projects are generally valued as if complete, with an appropriate allowance for cost of completion, including contingencies developed from external sources such as vendors, engineers and contractors. The Company believes that recording other real estate owned that is not fully constructed based on as if complete values is more appropriate than recording other real estate owned that is not fully constructed using as is values. We concluded that as-is-complete values are appropriate for these types of projects based on the accounting guidance for capitalization of project costs and subsequent measurement of the value of real estate. GAAP specifically states that estimates and cost allocations must be reviewed at the end of each reporting period and reallocated based on revised estimates. The Company adjusts the carrying value of other real estate owned in accordance with this guidance for increases in estimated cost to complete that exceed the fair value of the real estate at the end of each reporting period. Commitments to extend credit and standby letters of credit: The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counterparties at the reporting date. Limitations: Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Estimated fair values as of the periods indicated are as follows:
| September 30, 2017 |  | December 31, 2016
(In Thousands) | Carrying Amount |  | Fair Value |  | Carrying Amount |  | Fair Value
Financial assets: |  |  |  |  |  |  |  |  |  |  |
Level 1 inputs: |  |  |  |  |  |  |  |  |  |  |
Cash, due from banks and deposits in other banks |  | $87,269 |  |  |  | $87,269 |  |  |  | $50,551 |  |  |  | $50,551 |
Investment securities | 58,316 |  |  | 58,316 |  |  | 43,486 |  |  | 43,486 |
Level 2 inputs: |  |  |  |  |  |  |  |  |  |  |
Investment securities | 212,932 |  |  | 212,931 |  |  | 288,632 |  |  | 288,655 |
Investment in Federal Home Loan Bank stock | 2,116 |  |  | 2,116 |  |  | 1,965 |  |  | 1,965 |
Accrued interest receivable | 4,130 |  |  | 4,130 |  |  | 3,734 |  |  | 3,734 |
Interest rate swaps | 161 |  |  | 161 |  |  | 71 |  |  | 71 |
Level 3 inputs: |  |  |  |  |  |  |  |  |  |  |
Loans and loans held for sale | 1,048,468 |  |  | 1,047,884 |  |  | 1,018,661 |  |  | 1,026,350 |
Purchased receivables, net | 12,930 |  |  | 12,930 |  |  | 20,491 |  |  | 20,491 |
Interest rate lock commitments | 1,508 |  |  | 1,508 |  |  | 1,137 |  |  | 1,137 |
Mortgage servicing rights | 6,181 |  |  | 6,181 |  |  | 4,157 |  |  | 4,157 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |
Level 2 inputs: |  |  |  |  |  |  |  |  |  |  |
Deposits |  | $1,258,317 |  |  |  | $1,257,825 |  |  |  | $1,267,653 |  |  |  | $1,266,995 |
Securities sold under repurchase agreements | 31,084 |  |  | 31,084 |  |  | 27,607 |  |  | 27,607 |
Borrowings | 7,387 |  |  | 7,352 |  |  | 4,338 |  |  | 4,186 |
Accrued interest payable | 125 |  |  | 125 |  |  | 64 |  |  | 64 |
Interest rate swaps | 34 |  |  | 34 |  |  | 71 |  |  | 71 |
Retail interest rate contracts | 38 |  |  | 38 |  |  | 78 |  |  | 78 |
Level 3 inputs: |  |  |  |  |  |  |
Accrued liability, RML acquisition payments | 509 |  |  | 509 |  |  | 186 |  |  | 186 |
Junior subordinated debentures | 10,310 |  |  | 9,786 |  |  | 18,558 |  |  | 18,398 |
Unrecognized financial instruments: |  |  |  |  |  |  |  |  |  |  |
Commitments to extend credit(1) |  | $298,601 |  |  |  | $2,986 |  |  |  | $236,624 |  |  |  | $2,366 |
Standby letters of credit(1) | 7,631 |  |  | 76 |  |  | 9,931 |  |  | 99 |
(1) Carrying amounts reflect the notional amount of credit exposure under these financial instruments. The following table sets forth the balances as of the periods indicated of assets measured at fair value on a recurring basis:
(In Thousands) | Total |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
September 30, 2017 |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |
Available for sale securities |  |  |  |  |  |  |
U.S. Treasury and government sponsored entities |  | $209,100 |  |  |  | $30,012 |  |  |  | $179,088 |  |  |  | $— |
Municipal securities | 17,366 |  |  | — |  |  | 17,366 |  |  | — |
Corporate bonds | 35,082 |  |  | 22,503 |  |  | 12,579 |  |  | — |
Collateralized loan obligations | 3,002 |  |  | — |  |  | 3,002 |  |  | — |
Preferred stock | 5,801 |  |  | 5,801 |  |  | — |  |  | — |
Total available for sale securities |  | $270,351 |  |  |  | $58,316 |  |  |  | $212,035 |  |  |  | $— |
Interest rate swaps |  | $161 |  |  |  | $— |  |  |  | $161 |  |  |  | $— |
Interest rate lock commitments | 1,508 |  |  | — |  |  | — |  |  | 1,508 |
Mortgage servicing rights | 6,181 |  |  | — |  |  | — |  |  | 6,181 |
Total other assets |  | $7,850 |  |  |  | $— |  |  |  | $161 |  |  |  | $7,689 |
Liabilities: |  |  |  |  |  |  |  |
Interest rate swaps |  | $34 |  |  |  | $— |  |  |  | $34 |  |  |  | $— |
Total other liabilities |  | $72 |  |  |  | $— |  |  |  | $72 |  |  |  | $— |
December 31, 2016 |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |
Available for sale securities |  |  |  |  |  |  |
U.S. Treasury and government sponsored entities |  | $263,361 |  |  |  | $30,063 |  |  |  | $233,298 |  |  |  | $— |
Municipal securities | 18,157 |  |  | — |  |  | 18,157 |  |  | — |
U.S. Agency mortgage-backed securities | 2 |  |  | — |  |  | 2 |  |  | — |
Corporate bonds | 44,732 |  |  | 8,456 |  |  | 36,276 |  |  | — |
Preferred stock | 4,967 |  |  | 4,967 |  |  | — |  |  | — |
Total available for sale securities |  | $331,219 |  |  |  | $43,486 |  |  |  | $287,733 |  |  |  | $— |
Interest rate swaps |  | $71 |  |  |  | $— |  |  |  | $71 |  |  |  | $— |
Interest rate lock commitments | 1,137 |  |  | — |  |  | — |  |  | 1,137 |
Mortgage servicing rights | 4,157 |  |  | — |  |  | — |  |  | 4,157 |
Total other assets |  | $5,365 |  |  |  | $— |  |  |  | $71 |  |  |  | $5,294 |
Liabilities: |  |  |  |  |  |  |
Interest rate swaps |  | $71 |  |  |  | $— |  |  |  | $71 |  |  |  | $— |
Retail interest rate contracts | 78 |  |  | — |  |  | 78 |  |  | — |
Total other liabilities |  | $149 |  |  |  | $— |  |  |  | $149 |  |  |  | $— |
The following table provides a reconciliation of the assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three and nine month periods ended September 30, 2017 and 2016, respectively:
(In Thousands) | Beginning balance | Change included in earnings | Purchases and issuances | Sales and settlements | Ending balance | Net change in unrealized gains (losses) relating to items held at end of period
Three Months Ended September 30, 2017 |  |  |  |  |  |
Interest rate lock commitments |  | $1,337 |  |  | ($455 | ) |  | $4,443 |  |  | ($3,817 | ) |  | $1,508 |  |  | $1,508 |
Mortgage servicing rights | 5,828 |  | (296 | ) | 649 |  | — |  | 6,181 |  | — |
Total |  | $7,165 |  |  | ($751 | ) |  | $5,092 |  |  | ($3,817 | ) |  | $7,689 |  |  | $1,508 |
Three Months Ended September 30, 2016 |  |  |  |  |  |
Interest rate lock commitments |  | $2,580 |  |  | ($589 | ) |  | $6,003 |  |  | ($6,230 | ) |  | $1,764 |  |  | $1,764 |
Mortgage servicing rights | 2,602 |  | (166 | ) | 760 |  | — |  | 3,196 |  | — |
Total |  | $5,182 |  |  | ($755 | ) |  | $6,763 |  |  | ($6,230 | ) |  | $4,960 |  |  | $1,764 |
(In Thousands) | Beginning balance | Change included in earnings | Purchases and issuances | Sales and settlements | Ending balance | Net change in unrealized gains (losses) relating to items held at end of period
Nine Months Ended September 30, 2017 |  |  |  |  |  |
Interest rate lock commitments |  | $1,137 |  |  | ($873 | ) |  | $11,944 |  |  | ($10,700 | ) |  | $1,508 |  |  | $1,508 |
Mortgage servicing rights | 4,157 |  | (62 | ) | 2,086 |  | — |  | 6,181 |  | — |
Total |  | $5,294 |  |  | ($935 | ) |  | $14,030 |  |  | ($10,700 | ) |  | $7,689 |  |  | $1,508 |
Nine Months Ended September 30, 2016 |  |  |  |  |  |
Interest rate lock commitments |  | $1,514 |  |  | ($1,647 | ) |  | $16,446 |  |  | ($14,549 | ) |  | $1,764 |  |  | $1,764 |
Mortgage servicing rights | 1,654 |  | (523 | ) | 2,065 |  | — |  | 3,196 |  | — |
Total |  | $3,168 |  |  | ($2,170 | ) |  | $18,511 |  |  | ($14,549 | ) |  | $4,960 |  |  | $1,764 |
As of and for the periods ending September 30, 2017 and December 31, 2016, respectively, except for certain assets as shown in the following table, no impairment or valuation adjustment was recognized for assets recognized at fair value on a nonrecurring basis. For loans measured for impairment, the Company classifies fair value measurements using observable inputs, such as external appraisals, as Level 2 valuations in the fair value hierarchy, and unobservable inputs, such as in-house evaluations, as Level 3 valuations in the fair value hierarchy.
(In Thousands) | Total |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
September 30, 2017 |  |  |  |  |  |  |
Loans measured for impairment |  | $11,966 |  |  |  | $— |  |  |  | $— |  |  |  | $11,966 |
Other real estate owned | — |  |  | — |  |  | — |  |  | — |
Total |  | $11,966 |  |  |  | $— |  |  |  | $— |  |  |  | $11,966 |
December 31, 2016 |  |  |  |  |  |  |
Loans measured for impairment |  | $9,222 |  |  |  | $— |  |  |  | $— |  |  |  | $9,222 |
Other real estate owned | 1,700 |  |  | — |  |  | — |  |  | 1,700 |
Total |  | $10,922 |  |  |  | $— |  |  |  | $— |  |  |  | $10,922 |
The following table presents the losses resulting from nonrecurring fair value adjustments for the three and nine month periods ended September 30, 2017 and 2016, respectively:
| Three Months Ended September 30, | Nine Months Ended September 30,
(In Thousands) | 2017 |  | 2016 | 2017 |  | 2016
Loans measured for impairment |  | $1,120 |  |  |  | $309 |  |  | $900 |  |  |  | $191 |
Other real estate owned | 74 |  |  | 57 |  | 340 |  |  | 187 |
Total loss from nonrecurring measurements |  | $1,194 |  |  |  | $366 |  |  | $1,240 |  |  |  | $378 |
Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3) The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring and nonrecurring basis at September 30, 2017:
Financial Instrument | Valuation Technique | Unobservable Input | Weighted Average Rate Range
Loans measured for impairment | In-house valuation of collateral | Discount rate | 25% - 100% |
| Discounted cash flow | Discount rate | 7 | %
Other real estate owned | Fair value of collateral | Estimated capital costs to complete improvements | 25 | %
Interest rate lock commitment | External pricing model | Pull through rate | 92.79 | %
Mortgage servicing rights | Discounted cash flow | Constant prepayment rate | 10.05% - 12.89% |
|  | Discount rate | 9.17% - 9.78% |

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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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