Fair Value Measurements

6 Months Ended

Jun. 30, 2022

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.

Financial Assets and Financial Liabilities Measured at Fair Value on a Recurring Basis

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.  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.  As applicable, for mutual funds, unadjusted quoted prices in active markets for identical assets are utilized to determine fair value at the measurement date and are 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 that were reported at fair value utilized Level 2 measurements at December 31, 2021.  The fair values of the mortgage loans held for sale were measured using observable quoted market or contract prices or market price equivalents and were classified as Level 2.

Derivative Assets and Derivative Liabilities

Derivative assets and derivative liabilities are reported at fair value utilizing Level 2 or Level 3 measurements.  As applicable, fair values of derivative assets and liabilities are determined based on prices that are obtained from a third-party which uses observable market inputs and are classified as Level 2.  Due to the significance of unobservable inputs, derivative assets related to our risk participation agreement are classified as Level 3.

The following tables summarize financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2022, and December 31, 2021, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):

	As of June 30, 2022
	Level 1		Level 2		Level 3		Total
	Inputs		Inputs		Inputs		Fair Value
Debt securities available for sale:
U.S. Treasury securities	$	—	$	147,140	$	—	$	147,140
Obligations of U.S. government corporations and agencies		—		29,839		—		29,839
Obligations of states and political subdivisions		—		287,612		—		287,612
Asset-backed securities		—		468,129		—		468,129
Commercial mortgage-backed securities		—		98,362		—		98,362
Residential mortgage-backed securities		—		1,441,157		—		1,441,157
Corporate debt securities		—		272,407		—		272,407
Equity securities		—		11,264		—		11,264
Derivative assets		—		25,126		3		25,129
Derivative liabilities		—		43,074		—		43,074

	As of December 31, 2021
	Level 1		Level 2		Level 3		Total
	Inputs		Inputs		Inputs		Fair Value
Debt securities available for sale:
U.S. Treasury securities	$	—	$	165,762	$	—	$	165,762
Obligations of U.S. government corporations and agencies		—		38,470		—		38,470
Obligations of states and political subdivisions		—		306,869		—		306,869
Asset-backed securities		—		492,186		—		492,186
Commercial mortgage-backed securities		—		614,998		—		614,998
Residential mortgage-backed securities		—		2,069,313		—		2,069,313
Corporate debt securities		—		293,653		—		293,653
Equity securities		—		13,571		—		13,571
Loans held for sale		—		23,875		—		23,875
Derivative assets		—		20,314		—		20,314
Derivative liabilities		—		21,501		—		21,501

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Loans Evaluated Individually

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).

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 for the periods presented, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):

	As of June 30, 2022
	Level 1		Level 2		Level 3		Total
	Inputs		Inputs		Inputs		Fair Value
Loans evaluated individually, net of related allowance	$	—	$	—	$	5,366	$	5,366
OREO with subsequent impairment		—		—		274		274
Bank property held for sale with impairment		—		—		7,923		7,923

	As of December 31, 2021
	Level 1		Level 2		Level 3		Total
	Inputs		Inputs		Inputs		Fair Value
Loans evaluated individually, net of related allowance	$	—	$	—	$	2,926	$	2,926
OREO with subsequent impairment		—		—		51		51
Bank property held for sale with impairment		—		—		10,103		10,103

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):

	As of June 30, 2022
	Fair Value		Valuation	Unobservable	Range
	Estimate		Techniques	Input	(Weighted Average)
Quantitative Information about Level 3 Fair Value Measurements
Loans evaluated individually, net of related allowance	$	5,366	Appraisal of collateral	Appraisal adjustments	-39.8	%	to	-100.0	%	(-47.5)	%
OREO with subsequent impairment		274	Appraisal of collateral	Appraisal adjustments	-16.0	%	to	-100.0	%	(-35.4)	%
Bank property held for sale with impairment		7,923	Appraisal of collateral or real estate listing price	Appraisal adjustments	-0.7	%	to	-70.1	%	(-35.1)	%

	As of December 31, 2021
	Fair Value		Valuation	Unobservable	Range
	Estimate		Techniques	Input	(Weighted Average)
Quantitative Information about Level 3 Fair Value Measurements
Loans evaluated individually, net of related allowance	$	2,926	Appraisal of collateral	Appraisal adjustments	-50.0	%	to	-100.0	%	(-55.1)	%
OREO with subsequent impairment		51	Appraisal of collateral	Appraisal adjustments	-33.0	%	to	-100.0	%	(-67.9)	%
Bank property held for sale with impairment		10,103	Appraisal of collateral or real estate listing price	Appraisal adjustments	-0.7	%	to	-70.1	%	(-41.3)	%

Financial Assets and Financial Liabilities That Are Not Carried at Fair Value

Estimated fair values of financial instruments that are not carried at fair value 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):

	As of June 30, 2022				As of December 31, 2021
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets
Level 1 inputs:
Cash and cash equivalents	$	230,852	$	230,852	$	836,095	$	836,095
Level 2 inputs:
Debt securities held to maturity		953,012		876,738		—		—
Loans held for sale (1)		4,813		4,818		—		—
Accrued interest receivable		32,886		32,886		31,064		31,064
Level 3 inputs:
Portfolio loans, net		7,409,021		7,293,303		7,101,111		7,161,466
Mortgage servicing rights		7,282		17,967		8,608		12,133
Other servicing rights		1,829		2,235		1,830		2,268
Financial liabilities
Level 2 inputs:
Time deposits	$	817,821	$	800,416	$	935,649	$	935,778
Securities sold under agreements to repurchase		228,383		228,383		270,139		270,139
Short-term borrowings		16,396		16,480		17,678		17,673
Long-term debt		36,000		36,101		46,056		46,164
Junior subordinated debt owed to unconsolidated trusts		71,721		61,349		71,635		63,586
Accrued interest payable		1,978		1,978		2,728		2,728
Level 3 inputs:
Senior notes, net of unamortized issuance costs		—		—		39,944		40,400
Subordinated notes, net of unamortized issuance costs		281,304		280,275		182,773		195,600

(1) Effective January 1, 2022, recorded at LOCOM.