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FAIR VALUE OF FINANCIAL INSTRUMENTS
3 Months Ended
Mar. 31, 2020
FAIR VALUE OF FINANCIAL INSTRUMENTS  
FAIR VALUE OF FINANCIAL INSTRUMENTS

Note 16 – Fair Value of Financial Instruments

Fair value is defined as the exchange 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 reflecting assumptions that a market participant would use when pricing an asset or liability. The hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:

Level 1: Unadjusted quoted prices for identical assets or liabilities traded in active markets.
Level 2: Significant other observable inputs other than Level 1, including quoted prices for similar assets and liabilities in active markets, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Assets and liabilities measured and recorded at fair value, including financial assets for which the Company has elected the fair value option, on a recurring and nonrecurring basis as of March 31, 2020 and December 31, 2019, are summarized below:

March 31, 2020

 

Quoted prices

 

in active

Significant

 

markets

other

Significant

 

for identical

observable

unobservable

 

assets

inputs

inputs

 

(dollars in thousands)

Total

(Level 1)

(Level 2)

(Level 3)

 

Assets and liabilities measured at fair value on a recurring basis:

    

    

    

    

    

    

    

    

Assets

Investment securities available for sale:

U.S. government sponsored entities and U.S. agency securities

$

47,357

$

$

47,357

$

Mortgage-backed securities - agency

 

326,700

 

 

326,700

 

Mortgage-backed securities - non-agency

27,281

27,281

State and municipal securities

 

116,094

 

 

116,094

 

Corporate securities

 

138,822

 

 

137,897

 

925

Equity securities

5,640

5,640

Loans held for sale

 

113,852

 

 

113,852

 

Interest rate lock commitments

 

4,305

 

 

4,305

 

Interest rate swap contracts

888

888

Total

$

780,939

$

$

780,014

$

925

Liabilities

Interest rate swap contracts

$

888

$

$

888

$

Assets measured at fair value on a non-recurring basis:

Loan servicing rights

$

44,566

$

$

$

44,566

Mortgage servicing rights held for sale

1,460

1,460

Nonperforming loans

 

15,972

 

 

15,450

 

522

Other real estate owned

909

909

Assets held for sale

 

3,790

 

 

3,790

 

December 31, 2019

 

Quoted prices

 

in active

Significant

 

markets

other

Significant

 

for identical

observable

unobservable

 

assets

inputs

inputs

 

(dollars in thousands)

Total

(Level 1)

(Level 2)

(Level 3)

 

Assets and liabilities measured at fair value on a recurring basis:

    

    

    

    

    

    

    

    

Assets

Investment securities available for sale:

U.S. government sponsored entities and U.S. agency securities

$

60,020

$

$

60,020

$

Mortgage-backed securities - agency

 

324,974

 

 

324,974

 

Mortgage-backed securities - non-agency

 

17,148

 

 

17,148

 

State and municipal securities

 

124,555

 

 

124,555

 

Corporate securities

 

122,736

 

 

121,781

 

955

Equity securities

5,621

5,621

Loans held for sale

 

16,431

 

 

16,431

 

Interest rate lock commitments

 

3,350

 

 

3,350

 

Interest rate swap contracts

 

306

 

 

306

 

Total

$

675,141

$

$

674,186

$

955

Liabilities

Interest rate swap contracts

$

306

$

$

306

$

Assets measured at fair value on a non-recurring basis:

Loan servicing rights

$

53,824

$

$

$

53,824

Mortgage servicing rights held for sale

1,972

1,972

Nonperforming loans

14,693

12,518

2,175

Assets held for sale

3,974

3,974

The following table provides a reconciliation of activity for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2020 and 2019:

Three Months Ended

March 31, 

(dollars in thousands)

2020

2019

Balance, beginning of period

$

955

$

1,923

Total realized in earnings (1)

2

22

Total unrealized in other comprehensive income (2)

(30)

7

Net settlements (principal and interest)

(2)

(22)

Balance, end of period

$

925

$

1,930

(1)Amounts included in interest income from investment securities taxable in the consolidated statements of income.
(2)Represents change in unrealized gains or losses for the period included in other comprehensive income for assets held at the end of the reporting period.

The following table provides quantitative information about significant unobservable inputs used in fair value measurements of Level 3 assets measured at fair value on a recurring basis at March 31, 2020 and December 31, 2019:

Valuation

Unobservable

(dollars in thousands)

Fair Value

technique

input / assumptions

Range (weighted average)(1)

March 31, 2020

Corporate securities

$

925

Consensus pricing

Net market price

-1.5% - 2.0% (1.0%)

December 31, 2019

Corporate securities

$

955

Consensus pricing

Net market price

-2.0% - 2.5% (1.5%)

(1)Unobservable inputs were weighted by the relative fair value of the instruments.

The significant unobservable inputs used in the fair value measurement of the Company’s corporate securities is net market price. The corporate securities are not actively traded, and as a result, fair value is determined utilizing third-party valuation services through consensus pricing. Significant changes in any of the inputs in isolation would result in a significant change to the fair value measurement. Generally, net market price increases when market interest rates decline and declines when market interest rates increase.

The following table presents losses recognized on assets measured on a nonrecurring basis for the three months ended March 31, 2020 and 2019:

Three Months Ended

March 31, 

(dollars in thousands)

    

2020

    

2019

 

Loan servicing rights

$

8,468

$

25

Mortgage servicing rights held for sale

496

Nonperforming loans

12,919

981

Other real estate owned

605

16

Assets held for sale

146

Total losses on assets measured on a nonrecurring basis

$

22,634

$

1,022

The following tables present quantitative information about significant unobservable inputs used in fair value measurements of Level 3 assets measured on a nonrecurring basis at March 31, 2020 and December 31, 2019:

Valuation

Unobservable

(dollars in thousands)

Fair Value

technique

input / assumptions

Range (weighted average)(1)

March 31, 2020

Loan servicing rights:

Commercial MSR

$

43,497

Discounted cash flow

Prepayment speed

8.00% - 22.50% (8.38%)

Discount rate

10.00% - 27.00% (11.43%)

SBA servicing rights

$

1,069

Discounted cash flow

Prepayment speed

8.31% - 9.21% (8.60%)

Discount rate

No range (11.70%)

MSR held for sale

$

1,460

Discounted cash flow

Prepayment speed

14.04% - 26.28% (16.92%)

Discount rate

9.00% - 11.50% (10.13%)

Other:

Nonperforming loans

$

522

Fair value of collateral

Discount for type of property,

No range (4.50%)

age of appraisal and current status

December 31, 2019

Loan servicing rights:

Commercial MSR

$

52,693

Discounted cash flow

Prepayment speed

8.00% - 18.00% (8.20%)

Discount rate

10.00% - 14.00% (11.02%)

SBA servicing rights

$

1,131

Discounted cash flow

Prepayment speed

8.31% - 9.21% (8.60%)

Discount rate

No range (11.70%)

MSR held for sale

$

1,972

Discounted cash flow

Prepayment speed

8.64% - 26.28% (12.42%)

Discount rate

9.50% - 12.50% (10.75%)

Other:

Nonperforming loans

$

2,175

Fair value of collateral

Discount for type of property,

4.32% - 8.00% (5.22%)

age of appraisal and current status

(1)Unobservable inputs were weighted by the relative fair value of the instruments.

Loan Servicing Rights. In accordance with GAAP, the Company must record impairment charges on loan servicing rights on a non-recurring basis when the carrying value exceeds the estimated fair value. The fair value of our servicing rights is estimated by using a cash flow valuation model, which calculates the present value of estimated future net servicing cash flows, taking into consideration expected loan prepayment rates, discount rates, servicing costs, replacement reserves and other economic factors which are estimated based on current market conditions. The determination of fair value of servicing rights relies upon Level 3 inputs.

Nonperforming loans. Nonperforming loans are measured and recorded at fair value on a non-recurring basis. All of our nonaccrual loans and restructured loans are considered nonperforming and are reviewed individually for the amount of impairment, if any. Most of our loans are collateral dependent and, accordingly, we measure nonperforming loans based on the estimated fair value of such collateral. The fair value of each loan’s collateral is generally based on estimated market prices from an independently prepared appraisal, which is then adjusted for the cost related to liquidating such collateral; such valuation inputs result in a nonrecurring fair value measurement that is categorized as a Level 2 measurement. When adjustments are made to an appraised value to reflect various factors such as the age of the appraisal or known changes in the market or the collateral, such valuation inputs are considered unobservable and the fair value measurement is categorized as a Level 3 measurement. The nonperforming loans categorized as Level 3 also include unsecured loans and other secured loans whose fair values are based significantly on unobservable inputs such as the strength of a guarantor, cash flows discounted at the effective loan rate, and management’s judgment.

ASC Topic 825, Financial Instruments, requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate such fair values. Additionally, certain financial instruments and all nonfinancial instruments are excluded from the applicable disclosure requirements.

The Company has elected the fair value option for newly originated commercial and residential loans held for sale. These loans are intended for sale and are hedged with derivative instruments. We have elected the fair value option

to mitigate accounting mismatches in cases where hedge accounting is complex and to achieve operational simplification.

The following table presents the difference between the aggregate fair value and the aggregate remaining principal balance for loans for which the fair value option has been elected as of March 31, 2020 and December 31, 2019:

March 31, 2020

December 31, 2019

Aggregate

Contractual

Aggregate

Contractual

(dollars in thousands)

fair value

Difference

principal

fair value

Difference

principal

Commercial loans held for sale

    

$

1,706

$

48

$

1,658

$

8,236

$

206

$

8,030

Residential loans held for sale

    

12,458

667

11,791

8,195

446

7,749

Consumer loans held for sale

99,688

99,688

Total loans held for sale

$

113,852

$

715

$

113,137

$

16,431

$

652

$

15,779

The following table presents the amount of gains and losses from fair value changes included in income before income taxes for financial assets carried at fair value for the three months ended March 31, 2020 and 2019:

Three Months Ended

March 31, 

(dollars in thousands)

2020

2019

Commercial loans held for sale

$

(158)

$

(328)

Residential loans held for sale

255

(57)

Total loans held for sale

$

97

$

(385)

The carrying values and estimated fair value of certain financial instruments not carried at fair value at March 31, 2020 and December 31, 2019 were as follows:

March 31, 2020

 

Quoted prices

 

in active

Significant

 

markets

other

Significant

 

for identical

observable

unobservable

 

Carrying

assets

inputs

inputs

 

(dollars in thousands)

Amount

Fair Value

(Level 1)

(Level 2)

(Level 3)

 

Assets

Cash and due from banks

    

$

445,097

    

$

445,097

    

$

445,097

    

$

    

$

Federal funds sold

 

4,299

 

4,299

 

4,299

 

 

Nonmarketable equity securities

 

46,068

 

46,068

 

 

46,068

 

Loans, net

 

4,337,659

 

4,387,244

 

 

 

4,387,244

Accrued interest receivable

 

16,532

 

16,532

 

 

16,532

 

Liabilities

Deposits

$

4,650,640

$

4,661,375

$

$

4,661,375

$

Short-term borrowings

 

43,578

 

43,578

 

 

43,578

 

FHLB and other borrowings

 

593,089

 

631,450

 

 

631,450

 

Subordinated debt

 

169,505

 

160,344

 

 

160,344

 

Trust preferred debentures

 

48,420

 

42,391

 

 

42,391

 

Accrued interest payable

 

7,078

 

7,078

 

 

7,078

 

December 31, 2019

Quoted prices

in active

Significant

markets

other

Significant

for identical

observable

unobservable

Carrying

assets

inputs

inputs

(dollars in thousands)

Amount

Fair Value

(Level 1)

(Level 2)

(Level 3)

Assets

Cash and due from banks

    

$

392,694

    

$

392,694

    

$

392,694

    

$

    

$

Federal funds sold

 

1,811

 

1,811

 

1,811

 

 

Nonmarketable equity securities

 

44,505

 

44,505

 

 

44,505

 

Loans, net

 

4,373,382

 

4,385,768

 

 

 

4,385,768

Accrued interest receivable

 

16,346

 

16,346

 

 

16,346

 

Liabilities

Deposits

$

4,544,254

$

4,548,327

$

$

4,548,327

$

Short-term borrowings

 

82,029

 

82,029

 

 

82,029

 

FHLB and other borrowings

 

493,311

 

506,832

 

 

506,832

 

Subordinated debt

 

176,653

 

182,189

 

 

182,189

 

Trust preferred debentures

 

48,288

 

53,811

 

 

53,811

 

Accrued interest payable

 

6,400

 

6,400

 

 

6,400