Disclosures about fair value of assets and liabilities

12 Months Ended

Dec. 31, 2021

Text Block [Abstract]

Disclosures about fair value of assets and liabilities

Disclosures about fair value of assets and liabilities

The Fair Value Measurements topic of the FASB ASC defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. There are 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

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

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying consolidated financial statements, as well as the general classification of such instruments pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended December 31, 2021.

Available for sale securities

When quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. 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. Level 2 securities include U.S. Treasury and federal agency securities, state and municipal securities, federal agency mortgage obligations and mortgage–backed pools, private–label mortgage–backed pools and corporate notes. Level 2 securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs. Observable inputs include dealer quotes, market spreads, cash flow analysis, the U.S. Treasury yield curve, trade execution data, market consensus prepayment spreads and available credit information and the bond’s terms and conditions. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available

market information including quoted prices of securities with similar characteristics and, because many fixed–income securities do not trade on a daily basis, apply available information through processes such as benchmark curves, benchmarking of like securities, sector grouping, and matrix pricing. In addition, model processes, such as an option adjusted spread model is used to develop prepayment and interest rate scenarios for securities with prepayment features. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include state and municipal securities, U.S. Government–sponsored mortgage–backed securities and corporate securities. Level 3 fair value for securities was determined using grid pricing that incorporates market estimates based on interest rates, maturity dates, coupon rates and ratings. Level 3 fair value for securities that have little to no market activity can also be priced at book value for lack of another reasonable pricing source or methodology.

Hedged loans

Certain fixed rate loans have been converted to variable rate loans by entering into interest rate swap agreements. The fair value of those fixed rate loans is based on discounting the estimated cash flows using interest rates determined by the respective interest rate swap agreement. Loans are classified within Level 2 of the valuation hierarchy based on the unobservable inputs used.

Interest rate swap agreements

The fair value of the Company’s interest rate swap agreements is estimated by a third party using inputs that are primarily unobservable including a yield curve, adjusted for liquidity and credit risk, contracted terms and discounted cash flow analysis, and therefore, are classified within Level 2 of the valuation hierarchy.

The following table presents the fair value measurements of assets and liabilities recognized in the accompanying financial statements measured at fair value on a recurring basis and the level within the FASB ASC fair value hierarchy in which the fair value measurements fall at the following:

	December 31, 2021
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale securities
U.S. Treasury and federal agencies	$	116,979	$	—	$	116,979	$	—
State and municipal	639,746		—		519,282		120,464
Federal agency collateralized mortgage obligations	61,577		—		61,577		—
Federal agency mortgage–backed pools	226,074		—		226,074		—
Private labeled mortgage–backed pools	31,617		—		31,617		—
Corporate notes	84,819		—		79,787		5,032
Total available for sale securities	1,160,812		—		1,035,316		125,496
Interest rate swap agreements asset	14,419		—		14,419		—
Forward sale commitments	1,037		—		1,037		—
Interest rate swap agreements liability	(18,092)		—		(18,092)		—
Commitments to originate loans	(238)		—		(238)		—

	December 31, 2020
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale securities
U.S. Treasury and federal agencies	$	19,715	$	—	$	19,715	$	—
State and municipal	837,843		—		837,843		—
Federal agency collateralized mortgage obligations	147,453		—		147,453		—
Federal agency mortgage–backed pools	118,799		—		118,799		—
Corporate notes	10,215		—		10,215		—
Total available for sale securities	1,134,025		—		1,134,025		—
Interest rate swap agreements asset	35,388		—		35,388		—
Forward sale commitments	1,045		—		1,045		—
Interest rate swap agreements liability	(43,631)		—		(43,631)		—

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheets using significant unobservable Level 3 inputs for the year ended December 31, 2021.

	Available for Sale Securities
	Years Ended December 31
	2021
Beginning balance	$	—
Included in other comprehensive income	(134)
Purchases, issuances and settlements	125,630
Principal payments	—
Ending balance	$	125,496

Realized gains and losses included in net income for the periods are reported in the consolidated statements of income as follows:

	Years Ended December 31
Non–interest Income	2021		2020		2019
Total gains and losses from:
Hedged loans	$	(19,588)	$	(20,962)	$	(11,380)
Fair value interest rate swap agreements	19,588		20,962		11,380
Derivative loan commitments	(246)		819		91
	$	(246)	$	819	$	91

Certain other assets are measured at fair value on a nonrecurring basis in the ordinary course of business and are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment):

	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2021
Collateral dependent loans	$	15,176	$	—	$	—	$	15,176
Mortgage servicing rights	15,186		—		—		15,186
December 31, 2020
Collateral dependent loans	$	13,123	$	—	$	—	$	13,123
Mortgage servicing rights	12,472		—		—		12,472

Collateral Dependent Loans: For loans identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.

Collateral dependent loans are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

Mortgage Servicing Rights (MSRs): MSRs do not trade in an active market with readily observable prices. Accordingly, the fair value of these assets is classified as Level 3. The Company determines the fair value of MSRs using an income approach model based upon the Company’s month–end interest rate curve and prepayment assumptions. The model utilizes assumptions to estimate future net servicing income cash flows, including estimates of time decay, payoffs and changes in valuation inputs and assumptions. The Company reviews the valuation assumptions against this market data for reasonableness and adjusts the assumptions if deemed appropriate. The carrying amount of the MSRs were reduced by $2.6 million in 2021 and $5.2 million in 2020 for the fair value.

The following table presents qualitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements, other than goodwill, at December 31, 2021 and 2020.

	December 31, 2021
	Fair Value		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
State and municipal securities	$	120,464	Grid pricing	Maturity date, Weighted average coupon	1 month–16 years, 2.05%
Corporate securities	5,032		Grid pricing	Maturity date, Weighted average coupon	9 years–17 years, 3.97%
Collateral dependent loans	15,176		Collateral based measurement	Discount to reflect current market conditions and ultimate collectability	0.0%–54.0% (4.8%)
Mortgage servicing rights	15,186		Discounted cash flows	Discount rate, Constant prepayment rate, Probability of default	8.0%–8.0% (8.0%), 8.4%–14.6% (11.6%), 0.0%–2.0%(0.4%)

	December 31, 2020
	Fair Value		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Collateral dependent loans	$	13,123	Collateral based measurement	Discount to reflect current market conditions and ultimate collectability	0.0%–72.0% (12.4%)
Mortgage servicing rights	12,472		Discounted cash flows	Discount rate, Constant prepayment rate, Probability of default	7.8%–7.8% (7.8%), 11.5%–20.9% (17.5%), 0.0%–1.0%(0.8%)