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Fair Value of Assets and Liabilities
 9 Months Ended
Sep. 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 1Quoted 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 September 30, 2021 and December 31, 2020.

 

($ in thousands)  Fair value at
September 30,
2021		   (Level 1)   (Level 2)   (Level 3) 
                 
U.S. Treasury and Government Agencies  $11,715   $
-
   $11,715   $
-
 
Mortgage-backed securities   214,982    
-
    214,982    
-
 
State and political subdivisions   13,898    
-
    13,898    
-
 
Other corporate securities   8,220    
-
    8,220    
-
 
Interest rate contracts - assets   4,910    
-
    4,910    
-
 
Interest rate contracts - liabilities   (4,910)   
-
    (4,910)   
-
 
Forward contracts   285    285    
-
    
-
 
IRLCs   (119)   
-
    
-
    (119)

 

($ in thousands)  Fair value at
December 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 nine months ended September 30, 2021 and 2020.

 

   for the Three Months Ended
September 30,		   for the Nine Months Ended
September 30,		 
($ in thousands)  2021   2020   2021   2020 
Interest Rate Lock Commitments                
Balance at beginning of period  $120   $392   $278   $55 
Total realized gains (losses)   
 
    
 
    
 
    
 
 
Change in fair value   (239)   (102)   (397)   235 
Balance at end of period  $(119)  $290   $(119)  $290 

 

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 September 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 value at
September 30,
2021		   (Level 1)   (Level 2)   (Level 3) 
Impaired loans  $794   $
-
   $
-
   $794 
Mortgage servicing rights   11,194    
-
    
-
    11,194 

 

($ in thousands)  Fair value at
December 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.

 

($ in thousands)  Fair value at
September 30,
2021		   Valuation technique  Unobservable inputs  Range
(weighted-average)		 
               
Collateral-dependent impaired loans  $794   Market comparable properties  Comparability adjustments (%)   0 - 12% (8)%
Mortgage servicing rights   11,194   Discounted cash flow  Discount Rate   8.65%
           Constant prepayment rate   12.01%
           P&I earnings credit   0.08%
           T&I earnings credit   0.13%
           Inflation for cost of servicing   1.50%
                 
IRLCs   (119)  Discounted cash flow  Loan closing rates   49% - 99%

 

($ in thousands)  Fair value at
December 31,
2020		   Valuation technique  Unobservable inputs  Range
(weighted-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 September 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 September 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 September 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 September 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 
September 30, 2021  amount   value   (Level 1)   (Level 2)   (Level 3) 
Financial assets                    
Cash and due from banks  $138,015   $138,015   $138,015   $
-
   $
-
 
Interest bearing time deposits   2,651    2,651    
-
    2,651    
-
 
Loans held for sale   10,335    10,515    
-
    10,515    
-
 
Loans, net of allowance for loan losses   832,736    834,605    
-
    
-
    834,605 
Federal Reserve and FHLB Bank stock, at cost   5,303    5,303    
-
    5,303    
-
 
Interest receivable   2,954    2,954    
-
    2,954    
-
 
                          
Financial liabilities                         
Deposits  $1,111,660   $1,112,208   $953,142   $159,066   $
-
 
Short-term borrowings   20,771    20,771    
-
    20,771    
-
 
FHLB advances   5,500    5,649    
-
    5,649    
-
 
Trust preferred securities   10,310    9,136    
-
    9,136    
-
 
Subordinated debt, net of issuance costs   19,534    21,281    
-
    21,281    
-
 
Interest payable   576    576    
-
    576    
-
 

 

($ 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    
-