Fair Value Disclosures

6 Months Ended

Jun. 30, 2020

Fair Value Disclosures [Abstract]

Fair Value Disclosures

Note 10 - 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 4 and 5 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, 2020 and 2019, and the year ended December 31, 2019.

The following table summarizes the Company’s available-for-sale securities, loans held-for-sale, and derivatives 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, 2020

	Level 1 Inputs			Level 2 Inputs		Level 3 Inputs		Total Fair Value
Available-for-sale investment securities:
U.S. Treasury securities	$	10,122		$	—	$	—	$	10,122
Obligations of states and political subdivisions		—			1,950,279		—		1,950,279
Residential mortgage-backed securities		—			1,571,673		—		1,571,673
Commercial mortgage-backed securities		—			582,220		—		582,220
Other securities		4,569			—		—		4,569
Total	$	14,691		$	4,104,172	$	—	$	4,118,863
Loans held-for-sale	$	—		$	63,293	$	—	$	63,293
IRLCs	$	—		$	5,037	$	—	$	5,037
Forward mortgage-backed securities trades	$	(1,099	)	$	—	$	—	$	(1,099	)

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	)

December 31, 2019

	Level 1 Inputs			Level 2 Inputs		Level 3 Inputs		Total Fair Value
Available-for-sale investment securities:
U.S. Treasury securities	$	10,019		$	—	$	—	$	10,019
Obligations of states and political subdivisions		—			1,288,983				1,288,983
Corporate bonds		—			230		—		230
Residential mortgage-backed securities		—			1,608,863		—		1,608,863
Commercial mortgage-backed securities		—			500,744		—		500,744
Other securities		4,478			—		—		4,478
Total	$	14,497		$	3,398,820	$	—	$	3,413,317
Loans held-for-sale	$	—		$	23,076	$	—	$	23,076
IRLCs	$	—		$	886	$	—	$	886
Forward mortgage-backed securities trades	$	(152	)	$	—	$	—	$	(152	)

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). 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, 2020, impaired loans with a carrying value of $17,682,000 were reduced by specific valuation reserves totaling $3,046,000 resulting in a net fair value of $14,636,000.

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 and six-months ended June 30, 2020 and 2019 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. There were no other real estate owned properties that were re-measured subsequent to their initial transfer to other real estate owned during the three- and six-months ended June 30, 2020 and 2019.

At June 30, 2020 and 2019, and December 31, 2019, other real estate owned totaled $202,000, $635,000 and $982,000, 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,
	2020				2019				2019
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value		Fair Value Hierarchy
Cash and due from banks	$	188,373	$	188,373	$	178,345	$	178,345	$	231,534	$	231,534	Level 1
Federal Funds Sold		—		—		700		700		3,150		3,150	Level 1
Interest-bearing demand deposits in banks		196,426		196,426		128,652		128,652		47,920		47,920	Level 1
Interest-bearing time deposits in banks		—		—		960		960		—		—	Level 2
Available-for-sale securities		4,118,863		4,118,863		3,259,492		3,259,492		3,413,317		3,413,317	Levels 1 and 2
Loans held for investment		5,184,120		5,174,126		3,989,132		4,026,543		4,142,470		4,209,826	Level 3
Loans held for sale		66,370		66,630		22,305		22,347		28,228		28,343	Level 2
Accrued interest receivable		45,801		45,801		36,954		36,954		36,894		36,894	Level 2
Deposits with stated maturities		466,122		468,819		433,511		433,811		420,013		421,397	Level 2
Deposits with no stated maturities		7,691,520		7,691,520		5,936,255		5,936,255		6,183,793		6,183,793	Level 1
Borrowings		449,224		449,224		362,005		362,005		381,356		381,356	Level 2
Accrued interest payable		541		541		694		694		628		628	Level 2
IRLCs		5,037		5,037		1,525		1,525		886		886	Level 2
Forward mortgage-backed securities trades		1,099		1,099		254		254		152		152	Level 1