Fair Value Measurements

3 Months Ended

Mar. 31, 2021

Fair Value Measurements

Fair Value Measurements

Note 11: Fair Value Measurements

The fair value of an asset or liability is the price that would be received by selling that asset or paid in transferring that liability (exit price) in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. ASC Topic 820, Fair Value Measurement, establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

● Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

● Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include 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, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

● Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to those Company assets and liabilities that are carried at fair value.

In general, fair value is based upon quoted market prices, when available. If such quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable data. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect, among other things, counterparty credit quality and the company's creditworthiness as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. While management believes the Company's valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Debt Securities Available for Sale

Debt securities classified as available for sale are reported at fair value utilizing Level 2 measurements. The Company obtains fair value measurements from an independent pricing service. The independent pricing service utilizes evaluated pricing models that vary by asset class and incorporate available trade, bid, and other market information. Because many fixed income securities do not trade on a daily basis, the independent pricing service applies available information, focusing on observable market data such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing, to prepare evaluations.

The independent pricing service uses model processes, such as the Option Adjusted Spread model, to assess interest rate impact and develop prepayment scenarios. The models and processes take into account market conventions. For each asset class, a team of evaluators gathers information from market sources and integrates relevant credit information, perceived market movements, and sector news into the evaluated pricing applications and models.

Market inputs that the independent pricing service normally seeks for evaluations of securities, listed in approximate order of priority, include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. The independent pricing service also monitors market indicators, industry, and economic events. For certain security types, additional inputs may be used or some of the market inputs may not be applicable. Evaluators may prioritize inputs differently on any given day for any security based on market conditions, and not all inputs listed are available for use in the evaluation process for each security evaluation on a given day. Because the data utilized was observable, the securities have been classified as Level 2.

Equity Securities

Equity securities are reported at fair value utilizing Level 1 or Level 2 measurements. For mutual funds, unadjusted quoted prices in active markets for identical assets are utilized to determine fair value at the measurement date and have been classified as Level 1. For stock, quoted prices for identical or similar assets in markets that are not active are utilized and classified as Level 2.

Loans Held for Sale

Loans held for sale are reported at fair value utilizing Level 2 measurements. The fair value of the mortgage loans held for sale are measured using observable quoted market or contract prices or market price equivalents and are classified as Level 2.

Derivative Assets and Derivative Liabilities

Derivative assets and derivative liabilities are reported at fair value utilizing Level 2 measurements. The fair value of derivative assets and liabilities is determined based on prices that are obtained from a third-party which uses observable market inputs. Derivative assets and liabilities are classified as Level 2.

The following tables summarize financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 2021, and December 31, 2020, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):

	Level 1		Level 2		Level 3		Total
March 31, 2021	Inputs		Inputs		Inputs		Fair Value
Debt securities available for sale:
U.S. Treasury securities	$	—	$	23,757	$	—	$	23,757
Obligations of U.S. government corporations and agencies		—		66,578		—		66,578
Obligations of states and political subdivisions		—		287,462		—		287,462
Commercial mortgage-backed securities		—		498,518		—		498,518
Residential mortgage-backed securities		—		1,786,320		—		1,786,320
Corporate debt securities		—		134,320		—		134,320
Equity securities		—		7,146		—		7,146
Loans held for sale		—		38,272		—		38,272
Derivative assets		—		22,623		—		22,623
Derivative liabilities		—		25,173		—		25,173

	Level 1		Level 2		Level 3		Total
December 31, 2020	Inputs		Inputs		Inputs		Fair Value
Debt securities available for sale:
U.S. Treasury securities	$	—	$	27,837	$	—	$	27,837
Obligations of U.S. government corporations and agencies		—		69,519		—		69,519
Obligations of states and political subdivisions		—		304,711		—		304,711
Commercial mortgage-backed securities		—		418,616		—		418,616
Residential mortgage-backed securities		—		1,368,315		—		1,368,315
Corporate debt securities		—		72,189		—		72,189
Equity securities		—		5,530		—		5,530
Loans held for sale		—		42,813		—		42,813
Derivative assets		—		33,918		—		33,918
Derivative liabilities		—		38,403		—		38,403

Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

Loans Evaluated Individually

The Company does not record portfolio loans at fair value on a recurring basis. However, periodically, a loan is evaluated individually and is reported at the fair value of the underlying collateral, less estimated costs to sell, if repayment is expected solely from the collateral. If the collateral value is not sufficient, a specific reserve is recorded. Collateral values are estimated using a combination of observable inputs, including recent appraisals, and unobservable inputs based on customized discounting criteria. Due to the significance of unobservable inputs, fair values of individually evaluated collateral dependent loans have been classified as Level 3.

OREO

Non-financial assets measured at fair value include OREO (upon initial recognition or subsequent impairment). OREO properties are measured using a combination of observable inputs, including recent appraisals, and unobservable inputs. Due to the significance of unobservable inputs, all OREO fair values have been classified as Level 3.

Bank Property Held for Sale

Bank property held for sale represents certain banking center office buildings which the Company has closed and consolidated with other existing banking centers. Bank property held for sale is measured at the lower of amortized cost or fair value less estimated costs to sell. Fair values were based upon discounted appraisals or real estate listing prices. Due to the significance of unobservable inputs, fair values of all bank property held for sale have been classified as Level 3.

The following tables summarize assets and liabilities measured at fair value on a non-recurring basis as of March 31, 2021, and December 31, 2020, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):

	Level 1		Level 2		Level 3		Total
March 31, 2021	Inputs		Inputs		Inputs		Fair Value
Loans evaluated individually	$	—	$	—	$	2,334	$	2,334
OREO		—		—		51		51
Bank property held for sale		—		—		9,101		9,101

	Level 1		Level 2		Level 3		Total
December 31, 2020	Inputs		Inputs		Inputs		Fair Value
Loans evaluated individually	$	—	$	—	$	2,771	$	2,771
OREO		—		—		106		106
Bank property held for sale		—		—		10,676		10,676

The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis for which the Company has utilized Level 3 inputs to determine fair value (dollars in thousands):

	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value		Valuation	Unobservable	Range
March 31, 2021	Estimate		Techniques	Input	(Weighted Average)
Loans evaluated individually	$	2,334	Appraisal of collateral	Appraisal adjustments	-42.8	%	to	-100.0	%	(-51.8)	%
OREO		51	Appraisal of collateral	Appraisal adjustments	-33.0	%	to	-100.0	%	(-67.9)	%
Bank property held for sale		9,101	Appraisal of collateral or real estate listing price	Appraisal adjustments	-6.2	%	to	-64.9	%	(-41.3)	%
December 31, 2020
Loans evaluated individually	$	2,771	Appraisal of collateral	Appraisal adjustments	-30.0	%	to	-100.0	%	(-37.0)	%
OREO		106	Appraisal of collateral	Appraisal adjustments	-25.0	%	to	-100.0	%	(-54.5)	%
Bank property held for sale		10,676	Appraisal of collateral or real estate listing price	Appraisal adjustments	-6.2	%	to	-64.9	%	(-42.8)	%

Estimated fair values of financial instruments that are reported at amortized cost in the Company’s unaudited Consolidated Balance Sheets, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value, were as follows (dollars in thousands):

	March 31, 2021				December 31, 2020
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Level 1 inputs:
Cash and cash equivalents	$	404,802	$	404,802	$	688,537	$	688,537
Level 2 inputs:
Accrued interest receivable		31,876		31,876		33,240		33,240
Level 3 inputs:
Portfolio loans, net		6,685,357		6,740,655		6,713,129		6,755,425
Mortgage servicing rights		10,409		12,461		10,912		11,107
Other servicing rights		1,528		2,055		1,434		1,966
Financial liabilities:
Level 2 inputs:
Time deposits	$	1,022,468	$	1,031,778	$	1,119,348	$	1,132,107
Securities sold under agreements to repurchase		210,132		210,132		175,614		175,614
Short-term borrowings		4,663		4,669		4,658		4,661
Long-term debt		4,584		4,806		4,757		5,014
Junior subordinated debt owed to unconsolidated trusts		71,509		56,511		71,468		59,943
Accrued interest payable		5,671		5,671		3,401		3,401
Level 3 inputs:
Senior notes, net of unamortized issuance costs		39,843		40,066		39,809		40,104
Subordinated notes, net of unamortized issuance costs		182,370		184,819		182,226		187,697