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Fair Value of Assets and Liabilities
 9 Months Ended
Sep. 30, 2020
Fair Value Disclosures [Abstract]  
FAIR VALUE OF ASSETS AND LIABILITIES

NOTE 13 – FAIR VALUE OF ASSETS AND LIABILITIES


Fair value 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. A fair value measurement must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:


Level 1Quoted prices in active markets for identical assets or liabilities

Level 2Observable inputs other than Level 1 prices, such as 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 assets or liabilities

Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis, recognized in the accompanying balance sheets, as well as the general classifications of such assets pursuant to the valuation hierarchy.


Available-for-Sale Securities


The fair values of available-for-sale securities are determined by various valuation methodologies. Level 1 securities include money market mutual funds. Level 1 inputs include quoted prices in an active market. Level 2 securities include U.S. treasury and government agencies, mortgage-backed securities, and obligations of political and state subdivisions. Level 2 inputs do not include quoted prices for individual securities in active markets; however, they do include inputs that are either directly or indirectly observable for the individual security being valued. Such observable inputs include interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, credit risks and default rates. Also included are inputs derived principally from or corroborated by observable market data by correlation or other means.


Interest Rate Contracts


The fair values of interest rate contracts are based upon the estimated amount the Company would receive or pay to terminate the contracts or agreements, taking into account underlying interest rates, creditworthiness of underlying customers for credit derivatives and, when appropriate, the creditworthiness of the counterparties.


Forward contracts


The fair values of forward contracts on to-be-announced securities are determined using quoted prices in active markets, or benchmarked thereto (Level 1).


Interest Rate Lock Commitments


The fair value of IRLCs are determined using the projected sale price of individual loans based on changes in the market interest rates, projected pull-through rates (the probability that an IRLC will ultimately result in an originated loan), the reduction in the value of the applicant’s option due to the passage of time, and the remaining origination costs to be incurred based on management’s estimate of market costs (Level 3).


The following table presents the fair value measurements of assets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2020 and December 31, 2019.


($ in thousands)  Fair Values at
09/30/2020		   (Level 1)   (Level 2)   (Level 3) 
                 
U.S. Treasury and Government Agencies  $6,867   $-   $6,867   $- 
Mortgage-backed securities   109,193    -    109,193    - 
State and political subdivisions   11,755    -    11,755    - 
Other corporate securities   2,500    -    2,500    - 
Interest rate contracts - assets   9,169    -    9,169    - 
Interest rate contracts - liabilities   (9,169)   -    (9,169)   - 
Forward contracts   (197)   (197)   -    - 
IRLCs   290    -    -    290 

($ in thousands)  Fair Values at
12/31/2019		   (Level 1)   (Level 2)   (Level 3) 
                 
U.S. Treasury and Government Agencies  $12,202   $-   $12,202   $- 
Mortgage-backed securities   78,182    -    78,182    - 
State and political subdivisions   10,564    -    10,564    - 
Interest rate contracts - assets   2,846    -    2,846    - 
Interest rate contracts - liabilities   (2,846)   -    (2,846)   - 
Forward contracts   (32)   (32)   -    - 
IRLCs   55    -    -    55 

Level 1 – Quoted Prices in Active Markets for Identical Assets


Level 2 – Significant Other Observable Inputs


Level 3 – Significant Unobservable Inputs


The following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.


Collateral-dependent Impaired Loans, Net of ALLL


Loans for which it is probable the Company will not collect all principal and interest due according to contractual terms are measured for impairment. The estimated fair value of collateral-dependent impaired loans is based on the appraised value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy. This method requires obtaining an independent appraisal of the collateral, which is reviewed for accuracy and consistency by Credit Administration. These appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by applying a discount factor to the value based on the Company’s loan review policy. All impaired loans held by the Company were collateral dependent at September 30, 2020 and December 31, 2019.


Mortgage Servicing Rights


Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models associated with the servicing rights and discounting the cash flows using discount market rates, prepayment speeds and default rates. The servicing portfolio has been valued using all relevant positive and negative cash flows including servicing fees; miscellaneous income and float; marginal costs of servicing; the cost of carry of advances; and foreclosure losses; and applying certain prevailing assumptions used in the marketplace. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy. These mortgage servicing rights are tested for impairment on a quarterly basis.


($ in thousands)  Fair values at
09/30/2020		   (Level 1)   (Level 2)   (Level 3) 
Impaired loans  $3,604   $           -   $          -   $3,604 
Mortgage servicing rights   8,535    -    -    8,535 
IRLCs   290    -    -    290 

($ in thousands)  Fair values at
12/31/2019		   (Level 1)   (Level 2)   (Level 3) 
Impaired loans  $2,527   $          -   $          -   $2,527 
Mortgage servicing rights   5,084    -    -    5,084 
IRLCs   55    -    -    55 

Level 1 - quoted prices in active markets for identical assets


Level 2 - significant other observable inputs


Level 3 - significant unobservable inputs


Unobservable (Level 3) Inputs


The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements.


   Fair value at         Range (weighted- 
($ in thousands)  9/30/2020   Valuation technique  Unobservable inputs  average) 
               
Collateral-dependent impaired loans  $3,604   Market comparable properties  Comparability adjustments (%)   0 - 30% (21%) 
Mortgage servicing rights   8,535   Discounted cash flow  Discount Rate   8.44%
           Constant prepayment rate   18.42%
IRLCs   290   Discounted cash flow  P&I earnings credit   0.15%
           T&I earnings credit   0.22%
           Inflation for cost of servicing   1.50%

   Fair Value at         Range (weighted- 
($ in thousands)  12/31/2019   Valuation technique  Unobservable inputs  average) 
               
Collateral-dependent impaired loans  $2,527   Market comparable properties  Comparability adjustments (%)   2 - 62% (28%) 
Mortgage servicing rights   5,084   Discounted cash flow  Discount Rate   9.36%
           Constant prepayment rate   10.19%
IRLCs   55   Discounted cash flow  P&I earnings credit   1.78%
           T&I earnings credit   1.93%
           Inflation for cost of servicing   1.50%

There were no changes in the inputs or methodologies used to determine fair value at September 30, 2020 as compared to December 31, 2019.


The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value.


Cash and Due From Banks, Federal Reserve and Federal Home Loan Bank Stock and Accrued Interest Receivable and Payable


The carrying amount approximates the fair value.


Loans Held for Sale


The fair value of loans held for sale is based upon quoted market prices, where available, or is determined by discounting estimated cash flows using interest rates approximating the Company’s current origination rates for similar loans and adjusted to reflect the inherent credit risk.


Loans


The estimated fair value of loans as of September 30, 2020 follows the guidance in ASU 2016-01, which prescribes an “exit price” approach in estimating and disclosing fair value of financial instruments. The fair value calculation at that date discounted estimated future cash flows using rates that incorporated discounts for credit, liquidity, and marketability factors.


Deposits, FHLB advances & Repurchase agreements


Deposits include demand deposits, savings accounts, and certain money market deposits. The carrying amount approximates the fair value. The estimated fair value for fixed-maturity time deposits, as well as borrowings, is based on estimates of the rate State Bank could pay on similar instruments with similar terms and maturities at September 30, 2020 and December 31, 2019.


Loan Commitments


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. The estimated fair values for other financial instruments and off-balance-sheet loan commitments approximate cost at September 30, 2020 and December 31, 2019 and are not considered significant to this presentation.


Trust Preferred Securities


The fair value for Trust Preferred Securities is estimated by discounting the cash flows using an appropriate discount rate.


The following table presents estimated fair values of the Company’s other financial instruments carried at other than fair value. The fair values of certain of these instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments, and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate.


($ in thousands)  Carrying       Fair value measurements using 
September 30, 2020  amount   Fair value   (Level 1)   (Level 2)   (Level 3) 
Financial assets                    
Cash and due from banks  $94,641   $94,641   $94,641   $-   $- 
Interest bearing time deposits   8,956    8,956    8,956    -    - 
Loans held for sale   13,943    14,507    -    14,507    - 
Loans, net of allowance for loan losses   874,057    866,131    -    -    866,131 
Federal Reserve and FHLB Bank stock, at cost   5,303    5,303    -    5,303    - 
Interest receivable   4,159    4,159    -    4,159    - 
                          
Financial liabilities                         
Deposits  $1,014,015   $1,016,552   $763,587   $252,965   $- 
Short term borrowings   20,710    20,710    -    20,710    - 
FHLB advances   8,000    8,316    -    8,316    - 
Trust preferred securities   10,310    8,261    -    8,261    - 
Interest payable   946    946    -    946    - 

($ in thousands)  Carrying       Fair value measurements using 
December 31, 2019  amount   Fair value   (Level 1)   (Level 2)   (Level 3) 
Financial assets                    
Cash and due from banks  $27,064   $27,064   $27,064   $-   $- 
Loans held for sale   7,258    7,419    -    7,419    - 
Loans, net of allowance for loan losses   816,755    804,808    -    -    804,808 
Federal Reserve and FHLB Bank stock, at cost   4,648    4,648    -    4,648    - 
Interest receivable   3,106    3,106    -    3,106    - 
                          
Financial liabilities                         
Deposits  $840,219   $840,272   $582,466   $257,806   $- 
Repurchase agreements   12,945    12,945    -    12,945    - 
FHLB advances   16,000    16,149    -    16,149    - 
Trust preferred securities   10,310    9,201    -    9,201    - 
Interest payable   1,191    1,191    -    1,191    -