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Fair Value Disclosures
6 Months Ended
Jun. 30, 2017
Fair Value Disclosures [Abstract]  
Fair Value Disclosures
Fair Value Disclosures
The Corporation determines the fair values of its financial instruments based on the fair value hierarchy established in ASC Topic 820, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is defined as the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date and is based on exit prices. Fair value includes assumptions about risk, such as nonperformance risk in liability fair values, and is a market-based measurement, not an entity-specific measurement. The standard describes three levels of inputs that may be used to measure fair value.
Level 1 — Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date.

Level 2 — Level 2 inputs are inputs, other than quoted prices included with Level 1, that are observable for the asset or liability either directly or indirectly, 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 — Level 3 inputs are supported by little or no market activity and are significant to the fair value of the assets or liabilities.
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Corporation’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Assets and liabilities measured at fair value on a recurring basis, segregated by fair value hierarchy level, are summarized below:
 
 
June 30, 2017
 
 
Fair Value Measurements Using
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(In Thousands)
Assets:
 
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
 
U.S. Government agency obligations - government-sponsored enterprises
 
$

 
$
5,306

 
$

 
$
5,306

Municipal obligations
 

 
7,670

 

 
7,670

Asset backed securities
 

 
1,009

 

 
1,009

Collateralized mortgage obligations - government issued
 

 
25,234

 

 
25,234

Collateralized mortgage obligations - government-sponsored enterprises
 

 
97,615

 

 
97,615

Interest rate swaps
 

 
873

 

 
873

Liabilities:
 
 
 
 
 
 
 

Interest rate swaps
 

 
873

 

 
873

 
 
December 31, 2016
 
 
Fair Value Measurements Using
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(In Thousands)
Assets:
 
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
 
U.S. Government agency obligations - government-sponsored enterprises
 
$

 
$
6,295

 
$

 
$
6,295

Municipal obligations
 

 
8,156

 

 
8,156

Asset backed securities
 

 
1,081

 

 
1,081

Collateralized mortgage obligations - government issued
 

 
31,213

 

 
31,213

Collateralized mortgage obligations - government-sponsored enterprises
 

 
99,148

 

 
99,148

Interest rate swaps
 

 
352

 

 
352

Liabilities:
 
 
 
 
 
 
 
 
Interest rate swaps
 

 
352

 

 
352



For assets and liabilities measured at fair value on a recurring basis, there were no transfers between the levels during the six months ended June 30, 2017 or the year ended December 31, 2016 related to the above measurements.
Assets and liabilities measured at fair value on a non-recurring basis, segregated by fair value hierarchy are summarized below:
 
 
June 30, 2017
 
 
Fair Value Measurements Using
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(In Thousands)
Impaired loans
 
$

 
$
10,988

 
$
6,416

 
$
17,404

Foreclosed properties
 

 
2,873

 

 
2,873

Loan servicing rights
 

 

 
1,919

 
1,919


 
 
December 31, 2016
 
 
Fair Value Measurements Using
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(In Thousands)
Impaired loans
 
$

 
$
12,268

 
$
1,097

 
$
13,365

Foreclosed properties
 

 
1,472

 

 
1,472

Loan servicing rights
 

 

 
1,906

 
1,906



Impaired loans were written down to the fair value of their underlying collateral less costs to sell of $17.4 million and $13.4 million at June 30, 2017 and December 31, 2016, respectively, through the establishment of specific reserves or by recording charge-offs when the carrying value exceeded the fair value of the underlying collateral of impaired loans. Valuation techniques consistent with the market approach, income approach or cost approach were used to measure fair value and primarily included observable inputs for the individual impaired loans being evaluated such as current appraisals, recent sales of similar assets or other observable market data, and are reflected within Level 2 of the hierarchy. In cases where an input is unobservable, specifically when discounts are applied to appraisal values to adjust such values to current market conditions or to reflect net realizable value, the impaired loan balance is reflected within Level 3 of the hierarchy. The quantification of unobservable inputs for Level 3 impaired loan values range from 15% - 90% as of the measurement date of June 30, 2017. The weighted average of those unobservable inputs was 21%. The majority of the impaired loans in the Level 3 category are considered collateral dependent loans or are supported by a SBA guaranty.
Foreclosed properties, upon initial recognition, are remeasured and reported at fair value through a charge-off to the allowance for loan and lease losses, if deemed necessary, based upon the fair value of the foreclosed property. The fair value of a foreclosed property, upon initial recognition, is estimated using a market approach or Level 2 inputs based on observable market data, typically a current appraisal, or Level 3 inputs based upon assumptions specific to the individual property or equipment. Level 3 inputs typically include unobservable inputs such as management applied discounts used to further reduce values to a net realizable value and may be used in situations when observable inputs become stale. Foreclosed property fair value inputs may transition to Level 1 upon receipt of an accepted offer for the sale of the related foreclosed property.
Loan servicing rights represent the asset retained upon sale of the guaranteed portion of certain SBA loans. When SBA loans are sold, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. The servicing rights are subsequently measured using the amortization method, which requires amortization into interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.
The Corporation periodically reviews this portfolio for impairment and engages a third-party valuation firm to assess the fair value of the overall servicing rights portfolio. Loan servicing rights do not trade in an active, open market with readily observable prices. While sales of loan servicing rights do occur, the precise terms and conditions typically are not readily available to allow for a “quoted price for similar assets” comparison. Accordingly, the Corporation utilizes an independent valuation from a third party which uses a discounted cash flow model to estimate the fair value of its loan servicing rights. The valuation model incorporates prepayment assumptions to project loan servicing rights cash flows based on the current interest rate scenario, which is then discounted to estimate an expected fair value of the loan servicing rights. The valuation model considers portfolio characteristics of the underlying serviced portion of the SBA loans and uses the following significant unobservable inputs: (1) constant prepayment rate (“CPR”) assumptions based on the SBA loans sold pools historical CPR as quoted in Bloomberg and (2) a discount rate of 10%. Due to the nature of the valuation inputs, loan servicing rights are classified in Level 3 of the fair value hierarchy.
Fair Value of Financial Instruments
The Corporation is required to disclose estimated fair values for its financial instruments. Fair value estimates, methods and assumptions, consistent with exit price concepts for fair value measurements, are set forth below:
 
 
June 30, 2017
 
 
Carrying
Amount
 
Fair Value
 
 
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(In Thousands)
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
63,745

 
$
63,763

 
$
46,515

 
$
17,248

 
$

Securities available-for-sale
 
136,834

 
136,834

 

 
136,834

 

Securities held-to-maturity
 
37,806

 
38,152

 

 
38,152

 

Loans held for sale
 
3,491

 
3,840

 

 
3,840

 

Loans and lease receivables, net
 
1,436,498

 
1,448,491

 

 
10,988

 
1,437,503

Bank-owned life insurance
 
39,674

 
39,674

 
39,674

 

 

Federal Home Loan Bank and Federal Reserve Bank stock
 
2,815

 
2,815

 

 

 
2,815

Accrued interest receivable
 
4,428

 
4,428

 
4,428

 

 

Interest rate swaps
 
873

 
873

 

 
873

 

Financial liabilities:
 
 
 

 
 
 
 
 
 
Deposits
 
1,474,598

 
1,475,442

 
1,066,143

 
409,299

 

Federal Home Loan Bank advances and other borrowings
 
106,395

 
105,885

 

 
105,885

 

Junior subordinated notes
 
10,012

 
8,867

 

 

 
8,867

Accrued interest payable
 
1,735

 
1,735

 
1,735

 

 

Interest rate swaps
 
873

 
873

 

 
873

 

Off-balance-sheet items:
 
 
 

 
 
 
 
 
 
Standby letters of credit
 
89

 
89

 

 

 
89



 
 
December 31, 2016
 
 
Carrying
Amount
 
Fair Value
 
 
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(In Thousands)
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
77,517

 
$
77,517

 
$
55,622

 
$
21,895

 
$

Securities available-for-sale
 
145,893

 
145,893

 

 
145,893

 

Securities held-to-maturity
 
38,612

 
38,520

 

 
38,520

 

Loans held for sale
 
1,111

 
1,222

 

 
1,222

 

Loans and lease receivables, net
 
1,429,763

 
1,447,044

 

 
12,268

 
1,434,776

Bank-owned life insurance
 
39,048

 
39,048

 

 
39,048

 

Federal Home Loan Bank and Federal Reserve Bank stock
 
2,131

 
2,131

 

 
2,131

 

Accrued interest receivable
 
4,677

 
4,677

 
4,677

 

 

Interest rate swaps
 
352

 
352

 

 
352

 

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits
 
1,538,855

 
1,539,413

 
1,063,720

 
475,693

 

Federal Home Loan Bank advances and other borrowings
 
59,676

 
60,893

 

 
60,893

 

Junior subordinated notes
 
10,004

 
9,072

 

 

 
9,072

Accrued interest payable
 
1,765

 
1,765

 
1,765

 

 

Interest rate swaps
 
352

 
352

 

 
352

 

Off-balance-sheet items:
 
 
 
 
 
 
 
 
 
 
Standby letters of credit
 
58

 
58

 

 

 
58


Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the unaudited Consolidated Balance Sheets. 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. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Corporation.
Cash and Cash Equivalents: The carrying amount reported for cash and due from banks and interest-bearing deposits held by the Corporation approximates fair value because of its immediate availability and because it does not present unanticipated credit concerns. As of June 30, 2017 and December 31, 2016, the Corporation held $14.9 million and $20.3 million, respectively, of commercial paper. The fair value of commercial paper is classified as a Level 2 input due to the lack of available independent pricing sources. The carrying value of brokered certificates of deposit purchased approximates the fair value for these instruments. The fair value of brokered certificates of deposits purchased is based on the discounted value of contractual cash flows using a discount rate reflective of rates currently offered for deposits of similar remaining maturities. As of both June 30, 2017 and December 31, 2016, the Corporation held $2.3 million and $1.6 million of brokered certificates of deposits, respectively.
Securities: The fair value measurements of investment securities are determined by a third-party pricing service which considers observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, trade execution data, market consensus prepayment speeds, credit information and the securities’ terms and conditions, among other things. The fair value measurements are subject to independent verification by another pricing source on a quarterly basis to review for reasonableness. Any significant differences in pricing are reviewed with appropriate members of management who have the relevant technical expertise to assess the results. The Corporation has determined that these valuations are classified in Level 2 of the fair value hierarchy. When the independent pricing service does not provide a fair value measurement for a particular security, the Corporation will estimate the fair value based on specific information about each security. Fair values derived in this manner are classified in Level 3 of the fair value hierarchy.

Loans Held for Sale: Loans held for sale, which consist of the guaranteed portion of SBA loans, are carried at the lower of cost or estimated fair value. The estimated fair value is based on what secondary markets are currently offering for portfolios with similar characteristics.
Loans and Lease Receivables, net: The fair value estimation process for the loan portfolio uses an exit price concept and reflects discounts that the Corporation believes are consistent with liquidity discounts in the market place. Fair values are estimated for portfolios of loans with similar financial characteristics. The fair value of performing and nonperforming loans is calculated by discounting scheduled and expected cash flows through the estimated maturity using estimated market rates that reflect the credit and interest rate risk inherent in the portfolio of loans and then applying a discount factor based upon the embedded credit risk of the loan and the fair value of collateral securing nonperforming loans when the loan is collateral dependent. The estimate of maturity is based on the Bank’s historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. Significant unobservable inputs include, but are not limited to, discounts (investor yield premiums) applied to fair value calculations to further determine the exit price value of a portfolio of loans.
Federal Home Loan Bank and Federal Reserve Bank Stock: The carrying amount of FHLB and FRB stock equals its fair value because the shares may be redeemed by the FHLB and the FRB at their carrying amount of $100 per share.
Bank-Owned Life Insurance: The carrying amount of the cash surrender value of life insurance approximates its fair value as the carrying value represents the current settlement amount.
Accrued Interest Receivable and Accrued Interest Payable: The carrying amounts reported for accrued interest receivable and accrued interest payable approximate fair value because of their immediate availability and because they do not present unanticipated credit concerns.
Deposits: The fair value of deposits with no stated maturity, such as demand deposits and money market accounts, is equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the intangible value that results from the funding provided by deposit liabilities compared to borrowing funds in the market.
Borrowed Funds: Market rates currently available to the Corporation and Bank for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.
Interest Rate Swaps: The carrying amount and fair value of existing derivative financial instruments are based upon independent valuation models, which use widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative contract. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The Corporation incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Corporation considers the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.
Financial Instruments with Off-Balance-Sheet Risks: The fair value of the Corporation’s off-balance-sheet instruments is based on quoted market prices and fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the credit standing of the related counterparty. Commitments to extend credit and standby letters of credit are generally not marketable. Furthermore, interest rates on any amounts drawn under such commitments would generally be established at market rates at the time of the draw. Fair value would principally derive from the present value of fees received for those products.
Limitations: Fair value estimates are made at a discrete 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 Corporation’s entire holding of a particular financial instrument. Because no market exists for a significant portion of the Corporation’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.
Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and are not considered in the estimates.