Fair Value Disclosures

6 Months Ended

Jun. 30, 2019

Fair Value Disclosures [Abstract]

Fair Value Disclosures

Note 12 – Fair Value Disclosures

The authoritative accounting guidance for fair value measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.

The authoritative accounting guidance requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the authoritative guidance 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 reporting entity 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 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 (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

• Level 3 Inputs – Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. 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.

Securities classified as available-for-sale and trading are reported at fair value utilizing Level 1 and Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include market spreads, cash flows, the United States Treasury yield curve, live trading levels, trade execution data, dealer quotes, market consensus prepayments speeds, credit information and the security’s terms and conditions, among other items.

See notes 6 and 7 related to the determination of fair value for loans held-for-sale, IRLCs and forward mortgage-backed securities trades.

There were no transfers between Level 1 and Level 2 or Level 2 and Level 3 during the three and six months ended June 30, 2019 and 2018, and the year ended December 31, 2018.

The following table summarizes the Company’s available-for-sale securities which are measured at fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):

June 30, 2019	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
Available-for-sale investment securities:
U.S. Treasury securities	$	10,020	$	—	$	—	$	10,020
Obligations of states and political subdivisions		—		1,157,214		—		1,157,214
Corporate bonds		—		228		—		228
Residential mortgage-backed securities		—		1,596,175		—		1,596,175
Commercial mortgage-backed securities		—		491,389		—		491,389
Other securities		4,466		—		—		4,466
Total	$	14,486	$	3,245,006	$	—	$	3,259,492
Loans held-for-sale	$	—	$	18,981	$	—	$	18,981
IRLCs	$	—	$	1,525	$	—	$	1,525
Forward mortgage-backed securities trades	$	—	$	254	$	—	$	254

June 30, 2018	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
Available-for-sale investment securities:
U.S. Treasury securities	$	9,965	$	—	$	—	$	9,965
Obligations of U. S. government sponsored enterprises and agencies		—		303		—		303
Obligations of states and political subdivisions		—		1,284,775		—		1,284,775
Corporate bonds		—		451		—		451
Residential mortgage-backed securities		—		1,435,257		—		1,435,257
Commercial mortgage-backed securities		—		462,485		—		462,485
Other securities		4,331		—		—		4,331
Total	$	14,296	$	3,183,271	$	—	$	3,197,567
Loans held-for-sale	$	—	$	5,061	$	—	$	5,061
IRLCs	$	—	$	501	$	—	$	501
Forward mortgage-backed securities trades	$	—	$	47	$	—	$	47

  

December 31, 2018	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
Available-for-sale investment securities:
U.S. Treasury securities	$	9,962	$	—	$	—	$	9,962
Obligations of U. S. government sponsored enterprises and agencies		—		301		—		301
Obligations of states and political subdivisions		—		1,257,871		—		1,257,871
Corporate bonds		—		450		—		450
Residential mortgage-backed securities		—		1,454,545		—		1,454,545
Commercial mortgage-backed securities		—		431,300		—		431,300
Other securities		4,348		—		—		4,348
Total	$	14,310	$	3,144,467	$	—	$	3,158,777
Loans held-for-sale	$	—	$	19,185	$	—	$	19,185
IRLCs	$	—	$	765	$	—	$	765
Forward mortgage-backed securities trades	$	—	$	403	$	—	$	403

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring 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). Financial assets and financial liabilities measured at fair value on a non-recurring basis include the following at June 30, 2019:

Impaired Loans – Impaired loans are reported at the fair value of the underlying collateral less selling costs if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 inputs based on observable market data. At June 30, 2019, impaired loans with a carrying value of $14,701,000 were reduced by specific valuation reserves totaling $3,866,000 resulting in a net fair value of $10,835,000. The Company also had impaired loans of $11,707,000 with no specific valuation reserve at June 30, 2019, due to the loans carrying value generally being lower than the value of the collateral associated with the loan.

Loans Held-for-Sale – Loans held-for-sale are reported at either the fair value option or the lower of cost or fair value (see notes 6 and 7).

IRLCs and Forward Mortgage-Backed Securities Trades – IRLCs and forward mortgage-backed securities trades are reported at fair value (see note 7).

Certain non-financial assets and non-financial liabilities measured at fair value on a non-recurring basis include other real estate owned, goodwill and other intangible assets and other non-financial long-lived assets. Non-financial assets measured at fair value on a non-recurring basis during the three months and six months ended June 30, 2019 and 2018 include other real estate owned which, subsequent to their initial transfer to other real estate owned from loans, were re-measured at fair value through a write-down included in gain (loss) on sale of foreclosed assets. During the reported periods, all fair value measurements for foreclosed assets utilized Level 2 inputs based on observable market data, generally third-party appraisals, or Level 3 inputs based on customized discounting criteria. These appraisals are evaluated individually and discounted as necessary due to the age of the appraisal, lack of comparable sales, expected holding periods of property or special use type of the property. Such discounts vary by appraisal based on the above factors but generally range from 5% to 25% of the appraised value. Re-evaluation of other real estate owned is performed at least annually as required by regulatory guidelines or more often if particular circumstances arise.

The following table presents other real estate owned that were re-measured subsequent to their initial transfer to other real estate owned (dollars in thousands):

	Three Months Ended June 30,
	2019		2018
Carrying value of other real estate owned prior to re-measurement	$	—	$	526
Write-downs included in gain (loss) on sale of other real estate owned		—		(126	)
Fair value	$	—	$	400
	Six Months Ended June 30,
	2019		2018
Carrying value of other real estate owned prior to re-measurement	$	—	$	526
Write-downs included in gain (loss) on sale of other real estate owned		—		(126	)
Fair value	$	—	$	400

At June 30, 2019 and 2018, and December 31, 2018, other real estate owned totaled $635,000, $642,000 and $448,000, respectively.

The Company is required under current authoritative accounting guidance to disclose the estimated fair value of their financial instrument assets and liabilities including those subject to the requirements discussed above. For the Company, as for most financial institutions, substantially all of its assets and liabilities are considered financial instruments. Many of the Company’s financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction.

The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.

Cash and due from banks, federal funds sold, interest-bearing deposits and time deposits in banks and accrued interest receivable and payable are liquid in nature and considered Levels 1 or 2 of the fair value hierarchy.

Financial instruments with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating current market for similar assets and liabilities and are considered Levels 2 and 3 of the fair value hierarchy. Financial instrument liabilities with no stated maturities have an estimated fair value equal to both the amount payable on demand and the carrying value and are considered Level 1 of the fair value hierarchy.

The carrying value and the estimated fair value of the Company’s contractual off-balance-sheet unfunded lines of credit, loan commitments and letters of credit, which are generally priced at market at the time of funding, are not material.

The estimated fair values and carrying values of all financial instruments under current authoritative guidance were as follows (in thousands).

	June 30,								December 31,
	2019				2018				2018
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value		Fair Value Hierarchy
Cash and due from banks	$	178,345	$	178,345	$	178,217	$	178,217	$	207,835	$	207,835		Level 1
Federal funds sold		700		700		8,450		8,450		—		—		Level 1
Interest-bearing deposits in banks		128,652		128,652		99,499		99,499		40,812		40,812		Level 1
Interest-bearing time deposits in banks		960		960		1,458		1,458		1,458		1,458		Level 2
Available-for-sale securities		3,259,492		3,259,492		3,197,567		3,197,567		3,158,777		3,158,777		Levels 1 and 2
Loans held for investment		3,989,132		4,026,543		3,781,529		3,807,267		3,902,434		3,947,391		Level 3
Loans held for sale		22,305		22,347		24,289		24,550		21,672		21,779		Level 2
Accrued interest receivable		36,954		36,954		36,513		36,513		36,765		36,765		Level 2
Deposits with stated maturities		433,511		433,811		483,230		484,230		442,161		441,727		Level 2
Deposits with no stated maturities		5,936,255		5,936,255		5,727,377		5,727,377		5,738,228		5,738,228		Level 1
Borrowings		362,005		362,005		456,935		456,935		468,706		468,706		Level 2
Accrued interest payable		694		694		223		223		408		408		Level 2
IRLCs		1,525		1,525		501		501		765		765		Level 2
Forward mortgage backed securities trades		254		254		47		47		403		403		Level 2