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FAIR VALUE

9 Months Ended

Sep. 30, 2020

GAAP provides entities the option to measure eligible financial assets, financial liabilities and commitments at fair value (i.e. the fair value option), on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability or upon entering into a commitment. Subsequent changes in fair value must be recorded in earnings. The Company applies the fair value option on residential mortgage loans held for sale. The fair value option on residential mortgage loans held for sale allows the recognition of gains on the sale of mortgage loans to more accurately reflect the timing and economics of the transaction.

The standard for fair value measurement establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below.

Basis of Fair Value Measurement:

Level 1- Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2- Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Level 3- Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

Changes to interest rates may result in changes in the cash flows due to prepayments or extinguishments. Accordingly, changes to interest rates could result in higher or lower measurements of the fair values.

Assets and Liabilities

Residential mortgage loans held for sale

Residential mortgage loans held for sale are valued based on quotations from the secondary market for similar instruments and are classified as Level 2 in the fair value hierarchy.

Investments available-for-sale

U.S. treasuries and government agencies securities and mortgage-backed and asset-backed securities

Valuations are based on active market data and use of evaluated broker pricing models that vary based by asset class and includes available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary

models, descriptive terms, and databases coupled with extensive quality control programs. Quality control evaluation processes use available market, credit and deal level information to support the evaluation of the security. Additionally, proprietary models and pricing systems, mathematical tools, actual transacted prices, integration of market developments and experienced evaluators are used to determine the value of a security based on a hierarchy of market information regarding a security or securities with similar characteristics. The Company does not adjust the quoted price for such securities. Such instruments are classified within Level 2 in the fair value hierarchy.

State and municipal securities

The Company primarily uses prices obtained from third-party pricing services to determine the fair value of securities. The Company independently evaluates and corroborates the fair value received from pricing services through various methods and techniques, including references to dealer or other market quotes, by reviewing valuations of comparable instruments, and by comparing the prices realized on the sale of similar securities. Such securities are classified within Level 2 in the fair value hierarchy.

Corporate debt

The fair value of corporate debt is determined by utilizing a discounted cash flow valuation technique employed by a third-party valuation specialist. The third-party specialist uses assumptions related to yield, prepayment speed, conditional default rates and loss severity based on certain factors such as, credit worthiness of the counterparty, prevailing market rates, and analysis of similar securities. The Company evaluates the fair values provided by the third-party specialist for reasonableness and classifies them as level 3 in the fair value hierarchy.

Interest rate swap agreements

Interest rate swap agreements are measured by alternative pricing sources using a discounted cash flow method that incorporates current market interest rates. Based on the complex nature of interest rate swap agreements, the markets these instruments trade in are not as efficient and are less liquid than that of the more mature Level 1 markets. These characteristics classify interest rate swap agreements as Level 2 in the fair value hierarchy.

Assets Measured at Fair Value on a Recurring Basis

The following tables set forth the Company’s financial assets and liabilities at the dates indicated that were accounted for or disclosed at fair value. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:


	September 30, 2020
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Residential mortgage loans held for sale (1)	$	—	$	88,728	$	—	$	88,728
Investments available-for-sale:
U.S. treasuries and government agencies	—		139,405		—		139,405
State and municipal	—		352,987		—		352,987
Mortgage-backed and asset-backed	—		852,314		—		852,314
Corporate debt	—		—		12,499		12,499
Total investments available-for-sale	—		1,344,706		12,499		1,357,205
Interest rate swap agreements	—		10,223		—		10,223
Total assets	$	—	$	1,443,657	$	12,499	$	1,456,156

Liabilities:
Interest rate swap agreements	$	—	$	(10,223)	$	—	$	(10,223)
Total liabilities	$	—	$	(10,223)	$	—	$	(10,223)

(1) The outstanding principal balance for residential loans held for sale as of September 30, 2020 was $85.8 million.


	December 31, 2019
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Residential mortgage loans held for sale	$	—	$	53,701	$	—	$	53,701
Investments available-for-sale:
U.S. treasuries and government agencies	—		258,495		—		258,495
State and municipal	—		233,649		—		233,649
Mortgage-backed and asset-backed	—		570,759		—		570,759
Corporate debt	—		—		9,552		9,552
Trust preferred	—		—		310		310
Total debt securities	—		1,062,903		9,862		1,072,765
Marketable equity securities	—		568		—		568
Total investments available-for-sale	—		1,063,471		9,862		1,073,333
Interest rate swap agreements	—		2,507		—		2,507
Total assets	$	—	$	1,119,679	$	9,862	$	1,129,541

Liabilities:
Interest rate swap agreements	$	—	$	(2,507)	$	—	$	(2,507)
Total liabilities	$	—	$	(2,507)	$	—	$	(2,507)

(1) The outstanding principal balance for residential loans held for sale as of December 31, 2019 was $52.6 million.

The following table provides a change in the fair value of assets measured in the Condensed Consolidated Statements of Condition at fair value with significant unobservable inputs (Level 3) on a recurring basis for the period indicated:


	Significant Unobservable Inputs
(In thousands)	(Level 3)
Investments available-for-sale:
Balance at January 1, 2020	$	9,862
Additions of Level 3 assets	3,050
Sales of Level 3 assets	(349)
Total unrealized loss included in other comprehensive income/ (loss)	(64)
Balance at September 30, 2020	$	12,499

Assets Measured at Fair Value on a Nonrecurring Basis

The following tables set forth the Company’s financial assets subject to fair value adjustments on a nonrecurring basis at the date indicated that are valued at the lower of cost or market. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:


	September 30, 2020
(In thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Total Losses
Loans	$	—	$	—	$	14,325	$	14,325	$	(11,326)
Other real estate owned	—		—		1,671		1,671		(282)
Total	$	—	$	—	$	15,996	$	15,996	$	(11,608)


	December 31, 2019
(In thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Total Losses
Loans	$	—	$	—	$	6,886	$	6,886	$	(6,299)
Other real estate owned	—		—		1,482		1,482		(281)
Total	$	—	$	—	$	8,368	$	8,368	$	(6,580)

At September 30, 2020, loans totaling $56.1 million were written down to fair value of $47.8 million as a result of individual credit loss allowances of $8.3 million associated with the collateral dependent loans. Loans totaling $24.8 million were written down to fair value of $19.3 million at December 31, 2019 as a result of individual credit loss allowances of $5.5 million associated with the collateral dependent loans.

Fair value of the collateral dependent loans is measured based on the loan’s observable market price or the fair value of the collateral (less estimated selling costs). Collateral may be real estate and/or business assets such as equipment, inventory and/or accounts receivable. The value of business equipment, inventory and accounts receivable collateral is based on net book value on the business’ financial statements and, if necessary, discounted based on management’s review and analysis. Appraised and reported values may be discounted based on management’s historical experience, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Collateral dependent loans are reviewed and evaluated on at least a quarterly basis for additional individual reserve and adjusted accordingly, based on the factors identified above.

OREO is adjusted to fair value upon acquisition of the real estate collateral. Subsequently, OREO is carried at the lower of carrying value or fair value. The estimated fair value for OREO included in Level 3 is determined by independent market based appraisals and other available market information, less costs to sell, that may be reduced further based on market expectations or an executed sales agreement. If the fair value of the collateral deteriorates subsequent to initial recognition, the Company records the OREO as a nonrecurring Level 3 adjustment. Valuation techniques are consistent with those techniques applied in prior periods.

Fair Value of Financial Instruments

The Company discloses fair value information, based on the exit price notion, of financial instruments that are not measured at fair value in the financial statements. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by a quoted market price, if one exists.

Quoted market prices, where available, are shown as estimates of fair market values. Because no quoted market prices are available for a significant portion of the Company's financial instruments, the fair value of such instruments has been derived based on the amount and timing of future cash flows and estimated discount rates based on observable inputs (“Level 2”) or unobservable inputs (“Level 3”).

Present value techniques used in estimating the fair value of many of the Company's financial instruments are significantly affected by the assumptions used. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate cash settlement of the instrument. Additionally, the accompanying estimates of fair values are only representative of the fair values of the individual financial assets and liabilities, and should not be considered an indication of the fair value of the Company. Management utilizes internal models used in asset liability management to determine the fair values disclosed below.

The carrying amounts and fair values of the Company’s financial instruments at the dates indicated are presented in the following tables:


					Fair Value Measurements
	September 30, 2020				Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
(In thousands)	Carrying Amount		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	224,883	$	224,883	$	224,883	$	—	$	—
Residential mortgage loans held for sale	88,728		88,728		—		88,728		—
Investments available-for-sale	1,357,205		1,357,205		—		1,344,706		12,499
Equity securities	68,528		68,528		68,528		—		—
Loans, net of allowance	10,163,621		10,332,039		—		—		10,332,039
Interest rate swap agreements	10,223		10,223		—		10,223		—
Accrued interest receivable	48,176		48,176		48,176		—		—
Bank owned life insurance	126,182		126,182		—		126,182		—

Financial liabilities:
Time deposits	$	1,868,285	$	1,889,807	$	—	$	1,889,807	$	—
Other deposits	8,096,684		8,096,684		8,096,684		—		—
Securities sold under retail repurchase agreements and
federal funds purchased	462,706		462,889		—		462,889		—
Advances from FHLB	444,210		457,875		—		457,875		—
Subordinated debt	230,300		234,808		—		—		234,808
Interest rate swap agreements	10,223		10,223		—		10,223		—
Accrued interest payable	6,822		6,822		6,822		—		—


					Fair Value Measurements
	December 31, 2019				Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
(In thousands)	Carrying Amount		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	146,103	$	146,103	$	146,103	$	—	$	—
Residential mortgage loans held for sale	53,701		53,701		—		53,701		—
Investments available-for-sale	1,073,333		1,073,333		—		1,063,471		9,862
Equity securities	51,803		51,803		51,803		—		—
Loans, net of allowance	6,649,100		6,628,054		—		—		6,628,054
Interest rate swap agreements	2,507		2,507		—		2,507		—
Accrued interest receivable	23,282		23,282		23,282		—		—
Bank owned life insurance	113,171		113,171		—		113,171		—

Financial liabilities:
Time deposits	$	1,542,322	$	1,547,116	$	—	$	1,547,116	$	—
Other deposits	4,897,997		4,897,997		4,897,997		—		—
Securities sold under retail repurchase agreements and
federal funds purchased	213,605		213,605		—		213,605		—
Advances from FHLB	513,777		520,729		—		520,729		—
Subordinated debt	209,406		200,864		—		—		200,864
Interest rate swap agreements	2,507		2,507		—		2,507		—
Accrued interest payable	4,194		4,194		4,194		—		—

- 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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