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Fair Value Measurements and Disclosures | 9 Months Ended
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Sep. 30, 2021
Fair Value Measurements and Disclosures |
Fair Value Measurements and Disclosures | (8) Fair Value Measurements and Disclosures The Corporation uses fair value measurements to record fair value adjustments to certain assets and liabilities. The fair value of a financial instrument 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 is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Corporation’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation techniques or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions. In accordance with this guidance, the Corporation groups its financial assets and financial 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. Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 – Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in 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 asset or liability. Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation. Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis. Securities The fair value of securities available-for-sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. Mortgage Loans Held for Sale The fair value of loans held for sale is based on secondary market prices. Mortgage Loans Held for Investment The fair value of mortgage loans held for investment is based on the price secondary markets are currently offering for similar loans using observable market data. Derivative Financial Instruments The fair values of forward commitments and interest rate swaps are based on market pricing and therefore are considered Level 2. Derivatives classified as Level 3 consist of interest rate lock commitments related to mortgage loan commitments. The determination of fair value includes assumptions related to the likelihood that a commitment will ultimately result in a closed loan, which is a significant unobservable assumption. A significant increase or decrease in the external market price would result in a significantly higher or lower fair value measurement. ​ For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2021 and December 31, 2020 are as follows: ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | September 30, 2021
(dollars in thousands) |  | Total |  | Level 1 |  | Level 2 |  | Level 3
Assets | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Securities available for sale: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
U.S. asset backed securities | ​ | $ | 21,293 | ​ | — | ​ | 21,293 | ​ | —
U.S. government agency mortgage-backed securities | ​ | ​ | 5,459 | ​ | — | ​ | 5,459 | ​ | —
U.S. government agency collateralized mortgage obligations | ​ | ​ | 24,053 | ​ | — | ​ | 24,053 | ​ | —
State and municipal securities | ​ | ​ | 72,828 | ​ | — | ​ | 72,828 | ​ | —
U.S. Treasuries | ​ | ​ | 15,010 | ​ | — | ​ | 15,010 | ​ | —
Non-U.S. government agency collateralized mortgage obligations | ​ | ​ | 999 | ​ | — | ​ | 999 | ​ | —
Corporate bonds | ​ | ​ | 6,507 | ​ | — | ​ | 6,507 | ​ | —
Equity investments | ​ | ​ | 1,011 | ​ | — | ​ | 1,011 | ​ | —
Mortgage loans held for sale | ​ | ​ | 117,996 | ​ | — | ​ | 117,996 | ​ | —
Mortgage loans held for investment | ​ | ​ | 17,142 | ​ | — | ​ | 17,142 | ​ | —
Interest rate lock commitments | ​ | ​ | 1,712 | ​ | — | ​ | — | ​ | 1,712
Forward commitments | ​ | ​ | 447 | ​ | — | ​ | 447 | ​ | —
Customer derivatives - interest rate swaps | ​ | ​ | 1,052 | ​ | — | ​ | 1,052 | ​ | —
Total | ​ | $ | 285,509 | ​ | — | ​ | 283,797 | ​ | 1,712
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Liabilities | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Interest rate lock commitments | ​ | ​ | 360 | ​ | — | ​ | — | ​ | 360
Forward commitments | ​ | ​ | 22 | ​ | — | ​ | 22 | ​ | —
Customer derivatives - interest rate swaps | ​ | ​ | 1,101 | ​ | — | ​ | 1,101 | ​ | —
​ | ​ | $ | 1,483 | ​ | — | ​ | 1,123 | ​ | 360
​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | December 31, 2020
(dollars in thousands) |  | Total |  | Level 1 |  | Level 2 |  | Level 3
Assets | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Securities available for sale: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
U.S. asset backed securities | ​ | $ | 25,592 | ​ | — | ​ | 25,592 | ​ | —
U.S. government agency mortgage-backed securities | ​ | ​ | 4,046 | ​ | — | ​ | 4,046 | ​ | —
U.S. government agency collateralized mortgage obligations | ​ | ​ | 23,909 | ​ | — | ​ | 23,909 | ​ | —
State and municipal securities | ​ | ​ | 65,810 | ​ | — | ​ | 65,810 | ​ | —
Corporate bonds | ​ | ​ | 4,205 | ​ | — | ​ | 4,205 | ​ | —
Equity investments | ​ | ​ | 1,031 | ​ | — | ​ | 1,031 | ​ | —
Mortgage loans held for sale | ​ | ​ | 229,199 | ​ | — | ​ | 229,199 | ​ | —
Mortgage loans held for investment | ​ | ​ | 12,182 | ​ | — | ​ | 12,182 | ​ | —
Interest rate lock commitments | ​ | ​ | 6,932 | ​ | — | ​ | — | ​ | 6,932
Forward commitments | ​ | ​ | — | ​ | — | ​ | — | ​ | —
Customer derivatives - interest rate swaps | ​ | ​ | 1,118 | ​ | — | ​ | 1,118 | ​ | —
Total | ​ | $ | 374,024 | ​ | — | ​ | 367,092 | ​ | 6,932
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Liabilities | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Interest rate lock commitments | ​ | ​ | 100 | ​ | — | ​ | — | ​ | 100
Forward commitments | ​ | ​ | 1,572 | ​ | — | ​ | 1,572 | ​ | —
Customer derivatives - interest rate swaps | ​ | ​ | 1,219 | ​ | — | ​ | 1,219 | ​ | —
​ | ​ | $ | 2,891 | ​ | — | ​ | 2,791 | ​ | 100
​ Financial assets measured at fair value on a nonrecurring basis, are considered Level 3 assets in the fair value hierarchy. The fair value used at September 30, 2021 and December 31, 2020 are as follows: ​
​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | September 30, 2021 | ​ | ​ | December 31, 2020
(dollars in thousands) |  | Fair Value |  |  | Fair Value
Mortgage servicing rights | ​ | $ | 10,097 | ​ | ​ | 4,647
SBA loan servicing rights | ​ | ​ | 1,835 | ​ | ​ | 970
Impaired loans (1) | ​ | ​ | 2,458 | ​ | ​ | 2,998
Total | ​ | $ | 14,390 | ​ | ​ | 8,615
(1) | Impaired loans are those in which the Corporation has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values.
Below is management’s estimate of the fair value of all financial instruments, whether carried at cost or fair value on the Corporation’s balance sheet. The following information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair value of the Corporation’s financial instruments: Cash and Cash Equivalents The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets’ fair values. Loans Receivable The fair value of loans receivable is estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair value below is reflective of an exit price. Loan Servicing Rights The Corporation estimates the fair value of mortgage servicing rights and SBA loan servicing rights using discounted cash flow models that calculate the present value of estimated future net servicing income. The model uses readily available prepayment speed assumptions for the interest rates of the portfolios serviced. These servicing rights are classified within Level 3 in the fair value hierarchy based upon management’s assessment of the inputs. The Corporation reviews the servicing rights portfolios on a quarterly basis for impairment. Impaired Loans Impaired loans are those in which the Corporation has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. Accrued Interest Receivable and Payable The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value. Deposit Liabilities The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits. Short-Term Borrowings The carrying amounts of short-term borrowings approximate their fair values. Long-Term Debt Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party. Subordinated Debt Fair values of junior subordinated debt are estimated using discounted cash flow analysis, based on market rates currently offered on such debt with similar credit risk characteristics, terms and remaining maturity. Off-Balance Sheet Financial Instruments Off-balance sheet instruments are primarily comprised of loan commitments, which are generally priced at market at the time of funding. Fees on commitments to extend credit and stand-by letters of credit are deemed to be immaterial and these instruments are expected to be settled at face value or expire unused. It is impractical to assign any fair value to these instruments and as a result they are not included in the table below. Fair values assigned to the notional value of interest rate lock commitments and forward sale contracts are based on market quotes. The estimated fair values of the Corporation’s financial instruments at September 30, 2021 and December 31, 2020 are as follows: ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | September 30, 2021 | ​ | December 31, 2020
​ | ​ | Fair Value | ​ | Carrying | ​ | ​ | ​ | Carrying | ​ | ​
(dollars in thousands) |  | Hierarchy Level |  | amount |  | Fair value |  | amount |  | Fair value
Financial assets: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Cash and cash equivalents | ​ | Level 1 | ​ | $ | 63,121 | ​ | 63,121 | ​ | 36,744 | ​ | 36,744
Securities available-for-sale | ​ | Level 2 | ​ | ​ | 146,149 | ​ | 146,149 | ​ | 123,562 | ​ | 123,562
Securities held-to-maturity | ​ | Level 2 | ​ | ​ | 6,406 | ​ | 6,660 | ​ | 6,510 | ​ | 6,857
Equity investments | ​ | Level 2 | ​ | ​ | 1,011 | ​ | 1,011 | ​ | 1,031 | ​ | 1,031
Mortgage loans held for sale | ​ | Level 2 | ​ | ​ | 117,996 | ​ | 117,996 | ​ | 229,199 | ​ | 229,199
Loans receivable, net of the allowance for loan and lease losses | ​ | Level 3 | ​ | ​ | 1,361,528 | ​ | 1,391,260 | ​ | 1,272,582 | ​ | 1,289,776
Mortgage loans held for investment | ​ | Level 2 | ​ | ​ | 17,142 | ​ | 17,142 | ​ | 12,182 | ​ | 12,182
Interest rate lock commitments | ​ | Level 3 | ​ | ​ | 1,712 | ​ | 1,712 | ​ | 6,932 | ​ | 6,932
Forward commitments | ​ | Level 2 | ​ | ​ | 447 | ​ | 447 | ​ | — | ​ | —
Restricted investment in bank stock | ​ | NA | ​ | ​ | 4,162 | ​ | NA | ​ | 7,861 | ​ | NA
Accrued interest receivable | ​ | Level 3 | ​ | ​ | 5,080 | ​ | 5,080 | ​ | 5,482 | ​ | 5,482
Customer derivatives - interest rate swaps | ​ | Level 2 | ​ | ​ | 1,052 | ​ | 1,052 | ​ | 1,118 | ​ | 1,118
Financial liabilities: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Deposits | ​ | Level 2 | ​ | ​ | 1,439,047 | ​ | 1,552,500 | ​ | 1,241,335 | ​ | 1,392,500
Short-term borrowings | ​ | Level 2 | ​ | ​ | 22,278 | ​ | 22,278 | ​ | 106,862 | ​ | 106,862
Long-term debt | ​ | Level 2 | ​ | ​ | 78,405 | ​ | 79,373 | ​ | 165,546 | ​ | 168,000
Subordinated debentures | ​ | Level 2 | ​ | ​ | 40,760 | ​ | 41,859 | ​ | 40,671 | ​ | 38,375
Accrued interest payable | ​ | Level 2 | ​ | ​ | 663 | ​ | 663 | ​ | 1,154 | ​ | 1,154
Interest rate lock commitments | ​ | Level 3 | ​ | ​ | 360 | ​ | 360 | ​ | 100 | ​ | 100
Forward commitments | ​ | Level 2 | ​ | ​ | 22 | ​ | 22 | ​ | 1,572 | ​ | 1,572
Customer derivatives - interest rate swaps | ​ | Level 2 | ​ | ​ | 1,101 | ​ | 1,101 | ​ | 1,219 | ​ | 1,219
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | Notional | ​ | ​ | ​ | Notional | ​ | ​
Off-balance sheet financial instruments: |  | ​ |  | amount |  | Fair value |  | amount |  | Fair value
Commitments to extend credit | ​ | Level 2 | ​ | $ | 505,018 | ​ | 1,712 | ​ | 421,399 | ​ | 6,932
Letters of credit | ​ | Level 2 | ​ | ​ | 17,711 | ​ | — | ​ | 8,928 | ​ | —
​ The following table includes a rollforward of interest rate lock commitments for which the Corporation utilized Level 3 inputs to determine fair value on a recurring basis for the three and nine month peiods ended September 30, 2021 and 2020. ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Three Months Ended September 30, | ​ | Nine Months Ended September 30,
​ | ​ | 2021 |  | 2020 | ​ | 2021 |  | 2020
Balance at beginning of the period | ​ | $ | 2,667 | ​ | 4,595 | ​ | $ | 6,932 | ​ | 504
(Decrease) increase in value | ​ | ​ | (955) | ​ | 3,203 | ​ | ​ | (5,220) | ​ | 7,294
Balance at end of the period | ​ | $ | 1,712 | ​ | 7,798 | ​ | $ | 1,712 | ​ | 7,798
​ The following table details the valuation techniques for Level 3 interest rate lock commitments. ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | Significant | ​ | ​ | ​ | ​ | ​
​ | ​ | Fair Value | ​ | ​ | ​ | Unobservable | ​ | Range of | ​ | Weighted | ​
​ |  | Level 3 |  | Valuation Technique |  | Input |  | Inputs |  | Average |
September 30, 2021 | ​ | $ | 1,712 | ​ | Market comparable pricing | ​ | Pull through | ​ | 1 - 99 | % | 87.26 | %
December 31, 2020 | ​ | ​ | 6,932 | ​ | Market comparable pricing | ​ | Pull through | ​ | 1 - 99 | ​ | 83.08 | ​
​ Net realized gains and losses due to changes in the fair value of interest rate lock commitments, which are classified as Level 3 assets and liabilities, are recorded in non-interest income as net change in the fair value of derivative instruments in the Corporation’s consolidated statements of income. Net realized losses of $1.1 million and $5.5 million were recorded for the three and nine months ended September 30, 2021, respectively, while net realized gains of $3.2 million and $7.2 million were recorded for the three and nine months ended September 30, 2020, respectively.

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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=117815213&loc=d3e19207-110258 + Details
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