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Fair Value Measurements

9 Months Ended

Sep. 30, 2021

(In Thousands)

Fair Value Measurements and the Fair Level Hierarchy

FASB Accounting Standards Codification Topic (“ASC”) 820, “Fair Value Measurements and Disclosures,” provides guidance for using fair value to measure assets and liabilities and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to a valuation based on quoted prices in active markets for identical assets and liabilities (Level 1), moderate priority to a valuation based on quoted prices in active markets for similar assets and liabilities and/or based on assumptions that are observable in the market (Level 2), and the lowest priority to a valuation based on assumptions that are not observable in the market (Level 3).

Recurring Fair Value Measurements

The Company carries certain assets and liabilities at fair value on a recurring basis in accordance with applicable standards. The Company’s recurring fair value measurements are based on the requirement to carry such assets and liabilities at fair value or the Company’s election to carry certain eligible assets and liabilities at fair value. Assets and liabilities that are required to be carried at fair value on a recurring basis include securities available for sale and derivative instruments. The Company has elected to carry mortgage loans held for sale at fair value on a recurring basis as permitted under the guidance in ASC 825, “Financial Instruments” (“ASC 825”).

The following methods and assumptions are used by the Company to estimate the fair values of the Company’s financial assets and liabilities that are measured on a recurring basis:

Securities available for sale: Securities available for sale consist primarily of debt securities, such as obligations of U.S. Government agencies and corporations, obligations of states and political subdivisions, mortgage-backed securities and trust preferred securities. Where quoted market prices in active markets are available, securities are classified within Level 1 of the fair value hierarchy. If quoted prices from active markets are not available, fair values are based on quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active, or model-based valuation techniques where all significant assumptions are observable in the market. Such instruments are classified within Level 2 of the fair value hierarchy. When assumptions used in model-based valuation techniques are not observable in the market, the assumptions used by management reflect estimates of assumptions used by other market participants in determining fair value. When there is limited transparency around the inputs to the valuation, the instruments are classified within Level 3 of the fair value hierarchy.

Derivative instruments: Most of the Company’s derivative contracts are extensively traded in over-the-counter markets and are valued using discounted cash flow models which incorporate observable market based inputs including current market interest rates, credit spreads, and other factors. Such instruments are categorized within Level 2 of the fair value hierarchy and include interest rate swaps and other interest rate contracts such as interest rate caps and/or floors. The Company’s interest rate lock commitments are valued using current market prices for mortgage-backed securities with similar characteristics, adjusted for certain factors including servicing and risk. The value of the Company’s forward commitments is based on current prices for securities backed by similar types of loans. Because these assumptions are observable in active markets, the Company’s interest rate lock commitments and forward commitments are categorized within Level 2 of the fair value hierarchy.

Mortgage loans held for sale in loans held for sale: Mortgage loans held for sale are primarily agency loans which trade in active secondary markets. The fair value of these instruments is derived from current market pricing for similar loans, adjusted for differences in loan characteristics, including servicing and risk. Because the valuation is based on external pricing of similar instruments, mortgage loans held for sale are classified within Level 2 of the fair value hierarchy.

The following tables present assets and liabilities that are measured at fair value on a recurring basis as of the dates presented:


	Level 1		Level 2		Level 3		Totals
September 30, 2021
Financial assets:

Securities available for sale	$	—	$	2,544,643	$	—	$	2,544,643
Derivative instruments	—		28,134		—		28,134
Mortgage loans held for sale in loans held for sale	—		452,869		—		452,869
Total financial assets	$	—	$	3,025,646	$	—	$	3,025,646
Financial liabilities:
Derivative instruments:	$	—	$	14,543	$	—	$	14,543


	Level 1		Level 2		Level 3		Totals
December 31, 2020
Financial assets:
Trust preferred securities	$	—	$	—	$	9,012	$	9,012
Other available for sale securities	—		1,334,445		—		1,334,445
Total securities available for sale	—		1,334,445		9,012		1,343,457
Derivative instruments	—		33,574		—		33,574
Mortgage loans held for sale in loans held for sale	—		417,771		—		417,771
Total financial assets	$	—	$	1,785,790	$	9,012	$	1,794,802
Financial liabilities:
Derivative instruments	$	—	$	21,107	$	—	$	21,107

The Company reviews fair value hierarchy classifications on a quarterly basis. Changes in the Company’s ability to observe inputs to the valuation may cause reclassification of certain assets or liabilities within the fair value hierarchy. Transfers between levels of the hierarchy are deemed to have occurred at the end of period. There were no such transfers between levels of the fair value hierarchy during the nine months ended September 30, 2021.

The following tables provide a reconciliation for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs, or Level 3 inputs, as of the dates presented:


	2021		2020
Three Months Ended September 30, 2021	Trust preferred securities		Trust preferred securities
Three Months Ended September 30,
Balance at beginning of period	$	—	$	7,679
Accretion included in net income	—		8
Unrealized losses included in other comprehensive income	—		840





Settlements	—		(35)


Balance at end of period	$	—	$	8,492

Nine Months Ended September 30,
Balance at beginning of period	$	9,012	$	9,986
Accretion included in net income	7		26
Unrealized gains (losses) included in other comprehensive income	941		(1,382)

Realized losses	2,061		—
Sales	(12,021)		—


Settlements	—		(138)


Balance at end of period	$	—	$	8,492

For each of the three and nine months ended September 30, 2021 and 2020, respectively, there were no gains or losses included in earnings that were attributable to the change in unrealized gains or losses related to assets or liabilities held at the end of each respective period that were measured on a recurring basis using significant unobservable inputs.

Nonrecurring Fair Value Measurements

Certain assets and liabilities may be recorded at fair value on a nonrecurring basis. These nonrecurring fair value adjustments typically are a result of the application of the lower of cost or market accounting or a write-down occurring during the period. The following tables provide the fair value measurement for assets measured at fair value on a nonrecurring basis that were still held on the Consolidated Balance Sheets as of the dates presented and the level within the fair value hierarchy each is classified:


September 30, 2021	Level 1		Level 2		Level 3		Totals
Individually evaluated loans, net of allowance for credit losses	$	—	$	—	$	9,410	$	9,410
OREO	—		—		170		170
Mortgage servicing rights	—		—		86,387		86,387
Total	$	—	$	—	$	95,967	$	95,967


December 31, 2020	Level 1		Level 2		Level 3		Totals
Individually evaluated loans, net of allowance for credit losses	$	—	$	—	$	24,145	$	24,145
OREO	—		—		2,736		2,736
Mortgage servicing rights	—		—		62,994		62,994
Total	$	—	$	—	$	89,875	$	89,875

The following methods and assumptions are used by the Company to estimate the fair values of the Company’s financial assets measured on a nonrecurring basis:

Individually evaluated loans: Loans are individually evaluated for credit losses each quarter taking into account the fair value of the collateral less estimated selling costs. Collateral may be real estate and/or business assets including but not limited to equipment, inventory and accounts receivable. The fair value of real estate is determined based on appraisals by qualified licensed appraisers. The fair value of the business assets is generally based on amounts reported on the business’s financial statements. Appraised and reported values may be adjusted based on changes in market conditions from the time of valuation and management’s knowledge of the client and the client’s business. Since not all valuation inputs are observable, these nonrecurring fair value determinations are classified as Level 3. Individually evaluated loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors previously identified. Individually evaluated loans that were measured or re-measured at fair value had a carrying value of $17,959 and $36,990 at September 30, 2021 and December 31, 2020, respectively, and a specific reserve for these loans of $8,549 and $12,845 was included in the allowance for credit losses as of such dates.

Other real estate owned: OREO is comprised of commercial and residential real estate obtained in partial or total satisfaction of loan obligations. OREO acquired in settlement of indebtedness is recorded at the fair value of the real estate less estimated costs to sell. Subsequently, it may be necessary to record nonrecurring fair value adjustments for declines in fair value. Fair value, when recorded, is determined based on appraisals by qualified licensed appraisers and adjusted for management’s estimates of costs to sell. Accordingly, values for OREO are classified as Level 3.

The following table presents OREO measured at fair value on a nonrecurring basis that was still held on the Consolidated Balance Sheets as of the dates presented:


	September 30, 2021		December 31, 2020







Carrying amount prior to remeasurement	$	445	$	4,051
Impairment recognized in results of operations	(275)		(1,315)
Fair value	$	170	$	2,736

Mortgage servicing rights: Mortgage servicing rights are carried at the lower of amortized cost or fair value. Fair value is determined using an income approach with various assumptions including expected cash flows, market discount rates, prepayment speeds, servicing costs, and other factors. Because these factors are not all observable and include management’s assumptions, mortgage servicing rights are classified within Level 3 of the fair value hierarchy. Mortgage servicing rights were carried at amortized cost at September 30, 2021 and fair value at December 31, 2020. There were $13,561 of positive valuation adjustments on MSRs during the nine months ended September 30, 2021 and $13,694 of negative valuation adjustments recognized during the nine months ended September 30, 2020.

The following table presents information as of September 30, 2021 about significant unobservable inputs (Level 3) used in the valuation of assets measured at fair value on a nonrecurring basis:

Financial instrument

Fair
Value

Valuation Technique

Significant
Unobservable Inputs

Range of Inputs

Individually evaluated loans, net of allowance for credit losses

9,410

Appraised value of collateral less estimated costs to sell

Estimated costs to sell

4-10%

OREO

170

Appraised value of property less estimated costs to sell

Estimated costs to sell

4-10%

Fair Value Option

The Company has elected to measure all mortgage loans held for sale at fair value under the fair value option as permitted under ASC 825. Electing to measure these assets at fair value reduces certain timing differences and better matches the changes in fair value of the loans with changes in the fair value of derivative instruments used to economically hedge them.

Net losses of $10,425 and net gains of $10,876 resulting from fair value changes of these mortgage loans were recorded in income during the nine months ended September 30, 2021 and 2020, respectively. The amount does not reflect changes in fair values of related derivative instruments used to hedge exposure to market-related risks associated with these mortgage loans. The change in fair value of both mortgage loans held for sale and the related derivative instruments are recorded in “Mortgage banking income” in the Consolidated Statements of Income.

The Company’s valuation of mortgage loans held for sale incorporates an assumption for credit risk; however, given the short-term period that the Company holds these loans, valuation adjustments attributable to instrument-specific credit risk is nominal. Interest income on mortgage loans held for sale measured at fair value is accrued as it is earned based on contractual rates and is reflected in loan interest income on the Consolidated Statements of Income.

The following table summarizes the differences between the fair value and the principal balance for mortgage loans held for sale measured at fair value as of September 30, 2021 and December 31, 2020:


	Aggregate Fair Value		Aggregate Unpaid Principal Balance		Difference
September 30, 2021
Mortgage loans held for sale measured at fair value	$	452,869	$	441,125	$	11,744



December 31, 2020
Mortgage loans held for sale measured at fair value	$	417,771	$	395,602	$	22,169

Fair Value of Financial Instruments

The carrying amounts and estimated fair values of the Company’s financial instruments, including those assets and liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis, were as follows as of the dates presented:


			Fair Value
As of September 30, 2021	Carrying Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	1,476,141	$	1,476,141	$	—	$	—	$	1,476,141

Securities available for sale	2,544,643		—		2,544,643		—		2,544,643
Loans held for sale	452,869		—		452,869		—		452,869
Loans, net	9,846,786		—		—		9,726,732		9,726,732
Mortgage servicing rights	86,387		—		—		90,738		90,738
Derivative instruments	28,134		—		28,134		—		28,134
Financial liabilities
Deposits	$	13,254,829	$	11,787,346	$	1,467,955	$	—	$	13,255,301
Short-term borrowings	11,253		11,253		—		—		11,253

Federal Home Loan Bank advances	150,425		—		155,832		—		155,832
Junior subordinated debentures	111,228		—		105,546		—		105,546
Subordinated notes	207,210		—		221,700		—		221,700
Derivative instruments	14,543		—		14,543		—		14,543


			Fair Value
As of December 31, 2020	Carrying Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	633,203	$	633,203	$	—	$	—	$	633,203

Securities available for sale	1,343,457		—		1,334,445		9,012		1,343,457
Loans held for sale	417,771		—		417,771		—		417,771
Loans, net	10,757,503		—		—		10,668,625		10,668,625
Mortgage servicing rights	62,994		—		—		62,994		62,994
Derivative instruments	33,574		—		33,574		—		33,574
Financial liabilities
Deposits	$	12,059,081	$	10,363,193	$	1,706,005	$	—	$	12,069,198
Short-term borrowings	21,340		21,340		—		—		21,340

Federal Home Loan Bank advances	152,167		—		158,914		—		158,914
Junior subordinated debentures	110,794		—		93,092		—		93,092
Subordinated notes	212,009		—		217,575		—		217,575
Derivative instruments	21,107		—		21,107		—		21,107

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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