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Fair Value of Assets and Liabilities | 6 Months Ended
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Jun. 30, 2021
Fair Value Disclosures [Abstract] |
FAIR VALUE OF ASSETS AND LIABILITIES | NOTE 14 – 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 1 | Quoted prices in active markets for identical assets or liabilities
| Level 2 | Observable 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 3 | Unobservable 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 consolidated 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 (IRLCs) 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 fell at June 30, 2021 and December 31, 2020.
($ in thousands) |  | Fair Values at 6/30/21 |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |
U.S. Treasury and Government Agencies |  | $ | 9,336 |  |  | $ | - |  |  | $ | 9,336 |  |  | $ | - |
Mortgage-backed securities |  |  | 185,687 |  |  |  | - |  |  |  | 185,687 |  |  |  | - |
State and political subdivisions |  |  | 13,221 |  |  |  | - |  |  |  | 13,221 |  |  |  | - |
Other corporate securities |  |  | 3,512 |  |  |  | - |  |  |  | 3,512 |  |  |  | - |
Interest rate contracts - assets |  |  | 5,445 |  |  |  | - |  |  |  | 5,445 |  |  |  | - |
Interest rate contracts - liabilities |  |  | (5,445 | ) |  |  | - |  |  |  | (5,445 | ) |  |  | - |
Forward contracts |  |  | (108 | ) |  |  | (108 | ) |  |  | - |  |  |  | - |
IRLCs |  |  | 120 |  |  |  | - |  |  |  | - |  |  |  | 120 |
($ in thousands) |  | Fair Values at 12/31/2020 |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |
U.S. Treasury and Government Agencies |  | $ | 6,864 |  |  | $ | - |  |  | $ | 6,864 |  |  | $ | - |
Mortgage-backed securities |  |  | 127,761 |  |  |  | - |  |  |  | 127,761 |  |  |  | - |
State and political subdivisions |  |  | 12,275 |  |  |  | - |  |  |  | 12,275 |  |  |  | - |
Other corporate securities |  |  | 2,506 |  |  |  | - |  |  |  | 2,506 |  |  |  | - |
Interest rate contracts - assets |  |  | 7,962 |  |  |  | - |  |  |  | 7,962 |  |  |  | - |
Interest rate contracts - liabilities |  |  | (7,962 | ) |  |  | - |  |  |  | (7,962 | ) |  |  | - |
Forward contracts |  |  | (265 | ) |  |  | (265 | ) |  |  | - |  |  |  | - |
IRLCs |  |  | 278 |  |  |  | - |  |  |  | - |  |  |  | 278 |
Level 1 - quoted prices in active markets for identical assets Level 2 - significant other observable inputs Level 3 - significant unobservable inputs The following table reconciles the beginning and ending balances of recurring fair value measurements recognized in the accompanying consolidated balance sheets using significant unobservable (Level 3) inputs for the three and six months ended June 30, 2021 and 2020.
|  | for the Three Months Ended June 30, |  |  | for the Six Months Ended June 30, |
($ in thousands) |  | 2021 |  |  | 2020 |  |  | 2021 |  |  | 2020 |
Interest Rate Lock Commitments |  |  |  |  |  |  |  |  |  |  |  |
Balance at beginning of period |  | $ | (414 | ) |  | $ | 726 |  |  | $ | 278 |  |  | $ | 55 |
Total realized gains (losses) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Change in fair value |  |  | 534 |  |  |  | (334 | ) |  |  | (158 | ) |  |  | 337 |
Balance at end of period |  | $ | 120 |  |  | $ | 392 |  |  | $ | 120 |  |  | $ | 392 |
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 consolidated 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 June 30, 2021 and December 31, 2020. 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 6/30/2021 |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |
Impaired loans |  | $ | 639 |  |  | $ | - |  |  | $ | - |  |  | $ | 639 |
Mortgage servicing rights |  |  | 10,678 |  |  |  | - |  |  |  | - |  |  |  | 10,678 |
($ in thousands) |  |  | Fair values at 12/31/2020 |  |  |  | (Level 1) |  |  |  | (Level 2) |  |  |  | (Level 3) |
Impaired loans |  | $ | 3,544 |  |  | $ | - |  |  | $ | - |  |  | $ | 3,544 |
Mortgage servicing rights |  |  | 7,759 |  |  |  | - |  |  |  | - |  |  |  | 7,759 |
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 |  |  | Valuation |  |  |  | Range (weighted- |
($ in thousands) |  | 6/30/2021 |  |  | technique |  | Unobservable inputs |  | average) |
Collateral-dependent impaired loans |  | $ | 639 |  |  | Market comparable properties |  | Comparability adjustments (%) |  |  | 0 - 15% (9 | %)
Mortgage servicing rights |  |  | 10,678 |  |  | Discounted cash flow |  | Discount Rate |  |  | 8.53 | %
|  |  |  |  |  |  |  | Constant prepayment rate |  |  | 12.17 | %
|  |  |  |  |  |  |  | P&I earnings credit |  |  | 0.10 | %
|  |  |  |  |  |  |  | T&I earnings credit |  |  | 0.14 | %
|  |  |  |  |  |  |  | Inflation for cost of servicing |  |  | 1.50 | %
IRLCs |  |  | 120 |  |  | Discounted cash flow |  | Loan closing rates |  |  | 47% - 99 | %
|  | Fair Value at |  |  | Valuation |  |  |  | Range (weighted- |
($ in thousands) |  | 12/31/2020 |  |  | technique |  | Unobservable inputs |  | average) |
Collateral-dependent impaired loans |  | $ | 3,544 |  |  | Market comparable properties |  | Comparability adjustments (%) |  |  | 0 - 43% (22 | %)
Mortgage servicing rights |  |  | 7,759 |  |  | Discounted cash flow |  | Discount Rate |  |  | 8.28 | %
|  |  |  |  |  |  |  | Constant prepayment rate |  |  | 20.87 | %
|  |  |  |  |  |  |  | P&I earnings credit |  |  | 0.14 | %
|  |  |  |  |  |  |  | T&I earnings credit |  |  | 0.24 | %
|  |  |  |  |  |  |  | Inflation for cost of servicing |  |  | 1.50 | %
IRLCs |  |  | 278 |  |  | Discounted cash flow |  | Loan closing rates |  |  | 49% - 100 | %
There were no changes in the inputs or methodologies used to determine fair value at June 30, 2021 as compared to December 31, 2020. The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying consolidated 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 June 30, 2021 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 June 30, 2021 and December 31, 2020. 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 June 30, 2021 and December 31, 2020 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. Subordinated Debt The fair value for subordinated debt is estimated by discounting the cash flows using a discount rate equal to the rate currently offered on similar borrowings. 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 |  | Fair value measurements using
June 30, 2021 |  | amount |  | value |  | (Level 1) |  | (Level 2) |  | (Level 3)
Financial assets |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 154,993 |  |  | $ | 154,993 |  |  | $ | 154,993 |  |  | $ | - |  |  | $ | - |
Interest bearing time deposits |  |  | 2,906 |  |  |  | 2,906 |  |  |  | - |  |  |  | 2,906 |  |  |  | - |
Loans held for sale |  |  | 8,731 |  |  |  | 8,921 |  |  |  | - |  |  |  | 8,921 |  |  |  | - |
Loans, net of allowance for loan losses |  |  | 837,207 |  |  |  | 839,479 |  |  |  | - |  |  |  | - |  |  |  | 839,479 |
Federal Reserve and FHLB Bank stock, at cost |  |  | 5,303 |  |  |  | 5,303 |  |  |  | - |  |  |  | 5,303 |  |  |  | - |
Interest receivable |  |  | 3,000 |  |  |  | 3,000 |  |  |  | - |  |  |  | 3,000 |  |  |  | - |
Financial liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | $ | 1,091,034 |  |  | $ | 1,091,886 |  |  | $ | 918,337 |  |  | $ | 173,549 |  |  | $ | - |
Short-term borrowings |  |  | 25,096 |  |  |  | 25,096 |  |  |  | - |  |  |  | 25,096 |  |  |  | - |
FHLB advances |  |  | 5,500 |  |  |  | 5,681 |  |  |  | - |  |  |  | 5,681 |  |  |  | - |
Trust preferred securities |  |  | 10,310 |  |  |  | 8,936 |  |  |  | - |  |  |  | 8,936 |  |  |  | - |
Subordinated debt, net of issuance costs |  |  | 19,522 |  |  |  | 21,067 |  |  |  | - |  |  |  | 21,067 |  |  |  | - |
Interest payable |  |  | 417 |  |  |  | 417 |  |  |  | - |  |  |  | 417 |  |  |  | - |
($ in thousands) |  | Carrying |  | Fair |  | Fair value measurements using
December 31, 2020 |  | amount |  | value |  | (Level 1) |  | (Level 2) |  | (Level 3)
Financial assets |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 140,690 |  |  | $ | 140,690 |  |  | $ | 140,690 |  |  | $ | - |  |  | $ | - |
Interest bearing time deposits |  |  | 5,823 |  |  |  | 5,823 |  |  |  | - |  |  |  | 5,823 |  |  |  | - |
Loans held for sale |  |  | 7,234 |  |  |  | 7,508 |  |  |  | - |  |  |  | 7,508 |  |  |  | - |
Loans, net of allowance for loan losses |  |  | 860,149 |  |  |  | 853,294 |  |  |  | - |  |  |  | - |  |  |  | 853,294 |
Federal Reserve and FHLB Bank stock, at cost |  |  | 5,303 |  |  |  | 5,303 |  |  |  | - |  |  |  | 5,303 |  |  |  | - |
Interest receivable |  |  | 3,799 |  |  |  | 3,799 |  |  |  | - |  |  |  | 3,799 |  |  |  | - |
Financial liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | $ | 1,049,011 |  |  | $ | 1,050,558 |  |  | $ | 819,462 |  |  | $ | 231,096 |  |  | $ | - |
Short-term borrowings |  |  | 20,189 |  |  |  | 20,189 |  |  |  | - |  |  |  | 20,189 |  |  |  | - |
FHLB advances |  |  | 8,000 |  |  |  | 8,257 |  |  |  | - |  |  |  | 8,257 |  |  |  | - |
Trust preferred securities |  |  | 10,310 |  |  |  | 8,394 |  |  |  | - |  |  |  | 8,394 |  |  |  | - |
Interest payable |  |  | 616 |  |  |  | 616 |  |  |  | - |  |  |  | 616 |  |  |  | - |

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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=123874694&loc=d3e19207-110258 + Details
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