Fair Value Measurements

9 Months Ended

Sep. 30, 2021

FASB ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. ASC 820 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Transfers between levels, when determined to be appropriate, are recognized at the end of each reporting period.

The three levels of the fair value hierarchy under ASC 820 are:

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 – Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020, segregated by the level of valuation inputs within the fair value hierarchy used to measure fair value.


Recurring Fair Value Measurements
September 30, 2021
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Available-for-sale debt securities
U.S. Treasuries	$	138,928	$	0	$	138,928	$	0
Obligations of U.S. Government sponsored entities	810,343		0		810,343		0
Obligations of U.S. states and political subdivisions	109,911		0		109,911		0
Mortgage-backed securities – residential, issued by:
U.S. Government agencies	89,320		0		89,320		0
U.S. Government sponsored entities	916,004		0		916,004		0

U.S. corporate debt securities	2,421		0		2,421		0
Total Available-for-sale debt securities	$	2,066,927	$	0	$	2,066,927	$	0

Equity securities, at fair value	$	910	$	0	$	0	$	910


Recurring Fair Value Measurements
December 31, 2020
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Available-for-sale debt securities

Obligations of U.S. Government sponsored entities	$	607,480	$	0	$	607,480	$	0
Obligations of U.S. states and political subdivisions	129,746		0		129,746		0
Mortgage-backed securities – residential, issued by:
U.S. Government agencies	182,108		0		182,108		0
U.S. Government sponsored entities	705,480		0		705,480		0

U.S. corporate debt securities	2,379		0		2,379		0
Total Available-for-sale debt securities	$	1,627,193	$	0	$	1,627,193	$	0

Equity securities, at fair value	$	929	$	0	$	0	$	929

Securities: Fair values for U.S. Treasury securities are based on quoted market prices. Fair values for obligations of U.S. government sponsored entities, mortgage-backed securities-residential, obligations of U.S. states and political subdivisions, and U.S. corporate debt securities are based on quoted market prices, where available, as provided by third party pricing vendors. If quoted market prices were not available, fair values are based on quoted market prices of comparable instruments in active markets and/or based upon a matrix pricing methodology, which uses comprehensive interest rate tables to determine market price, movement and yield relationships. These securities are reviewed periodically to determine if there are any events or changes in circumstances that would adversely affect their value.

The change in the fair value of equity securities valued using significant unobservable inputs (level 3), for the periods ended September 30, 2021 and December 31, 2020, was immaterial.

There were no transfers between Levels 1, 2 and 3 for the nine months ended September 30, 2021.

The Company determines fair value for its available-for-sale debt securities using an independent bond pricing service for identical assets or very similar securities. The Company determines fair value for its equity securities based on the underlying equity fund’s pricing and valuation procedures which consider recent sales price, market quotations from a pricing service, or market quotes from an independent broker-dealer. The Company has reviewed the pricing sources, including methodologies used, and finds them to be fairly stated.

Certain assets are measured at fair value on a nonrecurring basis. For the Company, these include loans held for sale, individually evaluated loans, and other real estate owned (“OREO”). For the three and nine months ended September 30, 2021, certain individually evaluated loans were remeasured and reported at fair value through a specific valuation allowance and/or partial charge-offs for credit losses based upon the fair value of the underlying collateral. Collateral values are estimated using Level 3 inputs based upon customized discounting criteria. In addition to collateral dependent evaluated loans, certain other real estate owned were remeasured and reported at fair value based upon the fair value of the underlying collateral. The fair values of other real estate owned are estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. In general, the fair values of other real estate owned are based upon appraisals, with discounts made to reflect estimated costs to sell the real estate. Upon initial recognition, fair value write-downs are taken through a charge-off to the allowance for credit losses. Subsequent fair value write-downs on other real estate owned are reported in other noninterest expense.


Three months ended September 30, 2021
(In thousands)			Fair value measurements at reporting date using:						Gain (losses) from fair value changes
Assets:	As of 09/30/2021		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Three months ended 9/30/2021
Individually evaluated	$	1,122	$	0	$	0	$	1,122	$	(150)
Other real estate owned	46		0		46		0		0


Three months ended September 30, 2020
(In thousands)			Fair value measurements at reporting date using:						Gain (losses) from fair value changes
Assets:	As of 09/30/2020		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Three months ended 9/30/2020
Individually evaluated	$	6,330	$	0	$	6,330	$	0	$	0
Other real estate owned	36		0		36		0		(4)


Nine months ended September 30, 2021
(In thousands)			Fair value measurements at reporting date using:						Gain (losses) from fair value changes
Assets:	As of 09/30/2021		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Nine months ended 9/30/2021
Individually evaluated	$	30,848	$	0	$	0	$	30,848	$	(150)
Other real estate owned	46		0		46		0		(8)


Nine months ended September 30, 2020
(In thousands)			Fair value measurements at reporting date using:						Gain (losses) from fair value changes
Assets:	As of 09/30/2020		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Nine months ended 9/30/2020
Individually evaluated	$	10,759	$	0	$	10,759	$	0	$	(1,305)
Other real estate owned	124		0		124		0		(27)

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments at September 30, 2021 and December 31, 2020. The carrying amounts shown in the table are included in the Consolidated Statements of Condition under the indicated captions.

The fair value estimates, methods and assumptions set forth below for the Company's financial instruments, including those financial instruments carried at cost, are made solely to comply with disclosures required by U.S. GAAP and should be read in conjunction with the financial statements and notes included in this Report.

For loans where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the loan to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. For real estate loans, fair value of the loan’s collateral is determined by third party appraisals, which are then adjusted for the estimated selling and closing costs related to liquidation of the collateral. For this asset class, the actual valuation methods (income, sales comparable, or cost) vary based on the status of the project or property. For example, land is generally based on the sales comparable method while construction is based on the income and/or sales comparable methods. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. The Company reviews the third party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically range from 5% to 8% of the appraised value. For non-real estate loans, fair value of the loan’s collateral may be determined using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business.


Estimated Fair Value of Financial Instruments
September 30, 2021
(In thousands)	Carrying Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets:
Cash and cash equivalents	$	333,487	$	333,487	$	333,487	$	0	$	0

Securities - held-to-maturity	269,268		268,283		0		268,283		0
FHLB and other stock	10,366		10,366		0		10,366		0
Accrued interest receivable	23,350		23,350		0		23,350		0
Loans/leases, net1	5,050,519		5,072,855		0		0		5,072,855

Financial Liabilities:

Time deposits	$	675,499	$	679,335	$	0	$	679,335	$	0
Other deposits	6,415,399		6,415,399		0		6,415,399		0
Fed funds purchased and securities sold
under agreements to repurchase	72,490		72,490		0		72,490		0
Other borrowings	110,000		112,573		0		112,573		0
Trust preferred debentures	0		0		0		0		0
Accrued interest payable	900		900		0		900		0


Estimated Fair Value of Financial Instruments
December 31, 2020
(In thousands)	Carrying Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets:
Cash and cash equivalents	$	388,462	$	388,462	$	388,462	$	0	$	0

FHLB and other stock	16,382		16,382		0		16,382		0
Accrued interest receivable	32,025		32,025		0		32,025		0
Loans/leases, net1	5,208,658		5,226,301		0		22,171		5,204,130

Financial Liabilities:

Time deposits	$	746,234	$	753,045	$	0	$	753,045	$	0
Other deposits	5,691,518		5,691,518		0		5,691,518		0
Fed funds purchased and securities
sold under agreements to repurchase	65,845		65,845		0		65,845		0
Other borrowings	265,000		274,238		0		274,238		0
Trust preferred debentures	13,220		18,483		0		18,483		0
Accrued interest payable	1,727		1,727		0		1,727		0

1 Lease receivables, although excluded from the scope of ASC Topic 825, are included in the estimated fair value amounts at their carrying value.

The following methods and assumptions were used in estimating fair value disclosures for financial instruments:

Cash and Cash Equivalents: The carrying amounts reported in the Consolidated Statements of Condition for cash, noninterest-bearing deposits, money market funds, and Federal funds sold approximate the fair value of those assets.

FHLB Stock: The carrying amount of FHLB stock approximates fair value. If the stock is redeemed, the Company will receive an amount equal to the par value of the stock. For miscellaneous equity securities, carrying value is cost.

Loans and Leases: Fair value for loans are calculated using an exit price notion. The Company's valuation methodology takes into account factors such as estimated cash flows, including contractual cash flow and assumptions for prepayments; liquidity risk; and credit risk. The fair values of residential loans were estimated using discounted cash flow analyses, based upon available market benchmarks for rates and prepayment assumptions. The fair values of commercial and consumer loans were estimated using discounted cash flow analyses, based upon interest rates currently offered for loans and leases with similar terms and credit quality. The fair values of loans held for sale were determined based upon contractual prices for loans with similar characteristics.

Accrued Interest Receivable and Accrued Interest Payable: The carrying amount of these short term instruments approximate fair value.

Deposits: The fair values disclosed for noninterest bearing accounts and accounts with no stated maturities are equal to the amount payable on demand at the reporting date. The fair value of time deposits is based upon discounted cash flow analyses using rates offered for FHLB advances, which is the Company’s primary alternative source of funds.

Trust Preferred Debentures: The fair value of the trust preferred debentures has been estimated using a discounted cash flow analysis which uses a discount factor of a market spread over current interest rates for similar instruments.

- 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.

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