Fair Value Measurements

12 Months Ended

Sep. 30, 2020

The Company measures, monitors and discloses certain of its assets and liabilities on a fair value basis. Fair value is defined as 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. The fair value guidance also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes the following 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; and

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.

Level 1 inputs are considered to be the most transparent and reliable and Level 3 inputs are considered to be the least transparent and reliable. The Company assumes the use of the principal market to conduct a transaction of each particular asset or liability being measured and then considers the assumptions that market participants would use when pricing the asset or liability. Whenever possible, the Company first looks for quoted prices for identical assets or liabilities in active markets (Level 1 inputs) to value each asset or liability. However, when inputs from identical assets or liabilities on active markets are not available, the Company utilizes market observable data for similar assets and liabilities. The Company maximizes the use of observable inputs and limits the use of unobservable inputs to occasions when observable inputs are not available. The need to use unobservable inputs generally results from the lack of market liquidity of the actual financial instrument or of the underlying collateral. Although in some instances, third party price indications may be available, limited trading activity can challenge the observability of these quotations.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Following is a description of the valuation methodologies and inputs used for assets and liabilities measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.

Securities Available for Sale

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include U.S. Treasury securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows and classified as Level 2 securities. Level 2 securities include mortgage-backed, states and political subdivisions, and other securities. Where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Level 3 securities were immaterial at September 30, 2020 and 2019.

Interest Rate Swaps and Loans

Interest rate swaps are valued by the Company's Swap Dealers using cash flow valuation techniques with observable market data inputs. The fair value of loans accounted for under the fair value option represents the net carrying value of the loan, plus the equal and opposite amount of the value of the swap needed to offset the interest rate risk and an adjustment for credit risk based on the Company's assessment of existing market conditions for the specific portfolio of loans. This is used due to the strict prepayment penalties put in the loan terms to cover the cost of exiting the interest rate swap of the loans in the case of early prepayment or termination. The adjustment for credit risk on loans accounted for under the fair value option is not significant to the overall fair value of the loans. The fair values estimated by the Company's Swap Dealers use interest rates that are observable or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy. The Company has entered into Collateral Agreements with its Swap Dealers and Futures Clearing Merchant which entitle it to receive collateral to cover market values on derivatives which are in asset position, thus a credit risk adjustment on interest rate swaps is not warranted. The Company regularly enters into interest rate lock commitments on mortgage loans to be held for sale with corresponding forward sales contracts related to these interest rate lock commitments, the fair values of which are calculated by applying observable market values from Fannie Mae TBA pricing to each interest rate lock commitment and forward sales contract, therefore, are classified within Level 2 of the valuation hierarchy. The Company also has back-to-back swaps with loan customers, with corresponding swaps with an outside third party in exact offsetting terms.

Loan Servicing Rights

Fair value is determined at a tranche level, based on market prices for comparable mortgage servicing contracts (Level 3), when available, or alternatively based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes interest rate, prepayment speed, and default rate assumptions that market participants would use in estimating future net servicing income and that can be validated against market data (Level 3).

The following table presents the fair value measurements of assets and liabilities recognized in the accompanying consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2020 and 2019.


	Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
As of September 30, 2020
U.S. Treasury securities	$	50,152	$	50,152	$	—	$	—
U.S. Agency securities	25,060		25,060		—		—
Mortgage-backed securities	1,642,780		—		1,642,780		—
States and political subdivision securities	55,580		—		51,783		3,797
Other	1,054		—		1,054		—
Total securities available for sale	$	1,774,626	$	75,212	$	1,695,617	$	3,797
Derivatives-assets	$	98,380	$	—	$	98,380	$	—
Derivatives-liabilities	98		—		98		—
Fair value loans	655,185		—		655,185		—
Loan servicing rights	1,303		—		—		1,303
As of September 30, 2019
U.S. Treasury securities	$	94,745	$	94,745	$	—	$	—
Mortgage-backed securities	1,620,903		—		1,620,903		—
States and political subdivision securities	66,523		—		62,403		4,120
Other	1,037		—		1,037		—
Total securities available for sale	$	1,783,208	$	94,745	$	1,684,343	$	4,120
Derivatives-assets	$	58,534	$	—	$	58,534	$	—
Derivatives-liabilities	13		—		13		—
Fair value loans	812,991		—		812,991		—
Loan servicing rights	2,255		—		—		2,255

The following table presents the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the fiscal years ended September 30, 2020, 2019 and 2018.


	Fiscal Years Ended September 30,
	2020		2019		2018
	(dollars in thousands)
Other securities available for sale
Balance, beginning of period	$	4,120	$	970	$	1,069
Additions	—		3,350		149
Principal paydown	(323)		(200)		(248)

Balance, end of period	$	3,797	$	4,120	$	970

Loan servicing rights
Balance, beginning of period	$	2,255	$	3,087	$	4,074

Realized and unrealized loss ¹	(952)		(832)		(987)
Balance, end of period	$	1,303	$	2,255	$	3,087


1 Realized and unrealized (loss) related to loan servicing rights are reported as a component of mortgage banking income, net on the consolidated statements of income.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Following is a description of the valuation methodologies used for assets and liabilities 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 and liabilities pursuant to the valuation hierarchy.

Other Repossessed Property

Other repossessed property consists of loan collateral that has been repossessed through foreclosure. This collateral is comprised of commercial and residential real estate and other repossessed assets. Other repossessed property is recorded initially at fair value of the collateral less estimated selling costs. Subsequent to foreclosure, valuations are updated periodically, and the assets may be marked down further to fair value less selling costs, reflecting a valuation allowance. Fair value measurements may be based upon appraisals, third-party price opinions, or internally developed pricing methods. These measurements are classified as Level 3.

Impaired Loans (Collateral Dependent)

Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for estimating fair value include using the fair value of the collateral for collateral dependent loans or, where a loan is determined not to be collateral dependent, using the discounted cash flow method.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of the impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor, if necessary, to the appraised value and including costs to sell. Because many of these inputs are not observable, the measurements are classified as Level 3.

Mortgage Loans Held for Sale

Fair value of mortgage loans held for sale is based on either quoted prices for the same or similar loans, or values obtained from third parties, or are estimated for portfolios of loans with similar financial characteristics and are therefore considered a Level 2 valuation.

Property Held for Sale

This real estate property is carried in premises and equipment as property held for sale at fair value based upon the transactional price if available, or the appraised value of the property.

The following table presents the fair value measurement of assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2020 and 2019.


	Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
As of September 30, 2020
Other repossessed property	$	17,991	$	—	$	—	$	17,991
Impaired loans	669,968		—		—		669,968
Mortgage loans held for sale, at lower of cost or fair value	12,371		—		12,371		—
Property held for sale	600		—		—		600
As of September 30, 2019
Other repossessed property	$	34,721	$	—	$	—	$	34,721
Impaired loans	413,644		—		—		413,644
Mortgage loans held for sale, at lower of cost or fair value	7,351		—		7,351		—
Property held for sale	2,757		—		—		2,757

The valuation techniques and significant unobservable inputs used to measure Level 3 fair value measurements at September 30, 2020 were as follows.

Fair Value of Assets / (Liabilities) at September 30, 2020

Valuation
Technique(s)

Unobservable
Input

Range

Weighted
Average

(dollars in thousands)

Other repossessed property

17,991

Appraisal value

Collateral specific adjustment

N/A

Impaired loans

669,968

Appraisal value

Collateral specific adjustment

N/A

Property held for sale

600

Appraisal value

Collateral specific adjustment

N/A

Disclosures about Fair Value of Financial Instruments

Significant assets and liabilities that are not considered financial instruments include premises and equipment, deferred income taxes, goodwill, and core deposit and other intangibles. Additionally, in accordance with the disclosure guideline, receivables and payables due in one year or less, insurance contracts, equity investments not accounted for at fair value, and deposits with no defined or contractual maturities are excluded. Off-balance sheet instruments (commitments to extend credit and standby letters of credit) are generally short-term and at variable rates. Therefore, both the carrying amount and the estimated fair value associated with these instruments are immaterial. Fair values for on-balance sheet instruments as of September 30, 2020 and September 30, 2019 are as follows.


		September 30, 2020				September 30, 2019
	Level in Fair Value Hierarchy	Carrying Amount		Fair Value		Carrying Amount		Fair Value
		(dollars in thousands)
Assets
Cash and cash equivalents	Level 1	$	432,887	$	432,887	$	243,474	$	243,474
Loans, net, excluding fair valued loans, loans held for sale and impaired loans ¹	Level 3	8,738,617		8,768,314		8,472,777		8,533,612
Liabilities
Time deposits	Level 2	$	1,282,978	$	1,287,814	$	2,095,676	$	2,101,239
FHLB advances and other borrowings	Level 2	195,000		204,715		340,000		351,517
Securities sold under repurchase agreements	Level 2	65,506		65,506		68,992		68,992
Subordinated debentures and subordinated notes payable	Level 2	108,832		96,424		108,636		101,164

1 Includes $29.0 million and $13.9 million of net deferred loan fees at September 30, 2020 and 2019, respectively, of which carrying value approximates fair value.

- 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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