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Assets and Liabilities Measured at Fair Value

9 Months Ended

Sep. 30, 2020

Assets and Liabilities Measured at Fair Value

Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, United uses a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). United has processes in place to review the significant valuation inputs and to reassess how the instruments are classified in the valuation framework.

Fair Value Hierarchy

Level 1 Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities that United has the ability to access.

Level 2 Valuation is based upon quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.

Level 3 Valuation is generated from model-based techniques that use at least one significant assumption based on unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity.

In instances when the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The following is a description of the valuation methodologies used for assets and liabilities recorded at fair value.

Investment Securities

Debt securities available-for-sale and equity securities with readily determinable fair values are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds, corporate debt securities and asset-backed securities and are valued based on observable inputs that include: quoted market prices for similar assets, quoted market prices that are not in an active market, or other inputs that are observable in the market and can be corroborated by observable market data for substantially the full term of the securities. Securities classified as Level 3 include those traded in less liquid markets and are valued based on estimates obtained from broker-dealers that are not directly observable.

Deferred Compensation Plan Assets and Liabilities

Included in other assets in the consolidated balance sheet are assets related to employee deferred compensation plans. The assets associated with these plans are invested in mutual funds and classified as Level 1. Deferred compensation liabilities, also classified as Level 1, are carried at the fair value of the obligation to the employee, which mirrors the fair value of the invested assets and is included in other liabilities in the consolidated balance sheet.

Mortgage Loans Held for Sale

United has elected the fair value option for most of its newly originated mortgage loans held for sale in order to reduce certain timing differences and better match changes in fair values of the loans with changes in the value of derivative instruments used to economically hedge them. The fair value of mortgage loans held for sale is determined using quoted prices for a similar asset, adjusted for specific attributes of that loan (Level 2).

Derivative Financial Instruments

United uses derivatives to manage interest rate risk. The valuation of these instruments is typically determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. United also uses best effort and mandatory delivery forward loan sale commitments to hedge risk in its mortgage lending business.

United incorporates credit valuation adjustments (“CVAs”) as necessary to appropriately reflect the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, United has considered the effect of netting and any applicable credit enhancements, such as collateral postings, thresholds and guarantees.

Management has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy. However, the CVAs associated with these derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. Generally, management’s assessment of the significance of the CVAs has indicated that they are not a significant input to the overall valuation of the derivatives. In cases where management’s assessment indicates that the CVA is a significant input, the related derivative is disclosed as a Level 3 value. During the second quarter of 2020, certain derivative assets were transferred from Level 2 to Level 3 of the fair value hierarchy due to a change in the assessment of significance of the CVA.

Other derivatives classified as Level 3 include structured derivatives for which broker quotes, used as a key valuation input, were not observable. Risk participation agreements are classified as Level 3 instruments due to the incorporation of significant Level 3 inputs used to evaluate the probability of funding and the likelihood of customer default. Interest rate lock commitments, which relate to mortgage loan commitments, are categorized as Level 3 instruments as the fair value of these instruments is based on unobservable inputs for commitments that United does not expect to fund.

Servicing Rights for Residential and SBA/USDA Loans

United recognizes servicing rights upon the sale of residential and SBA/USDA loans sold with servicing retained. Management has elected to carry these assets at fair value. Given the nature of these assets, the key valuation inputs are unobservable and management classifies these assets as Level 3.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The table below presents United’s assets and liabilities measured at fair value on a recurring basis as of the dates indicated, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).


September 30, 2020	Level 1		Level 2		Level 3		Total
Assets:
Debt securities available-for-sale:
U.S. Treasuries	$	128,534	$	—	$	—	$	128,534
U.S. Government agencies	—		51,745		—		51,745
State and political subdivisions	—		259,176		—		259,176
Residential mortgage-backed securities	—		1,299,804		—		1,299,804
Commercial mortgage-backed securities	—		394,517		—		394,517
Corporate bonds	—		97,520		1,750		99,270
Asset-backed securities	—		457,402		—		457,402
Equity securities with readily available fair values	573		830		—		1,403
Mortgage loans held for sale	—		128,587		—		128,587
Deferred compensation plan assets	9,001		—		—		9,001
Servicing rights for SBA/USDA loans	—		—		6,761		6,761
Residential mortgage servicing rights	—		—		14,367		14,367
Derivative financial instruments	—		90,590		12,798		103,388
Total assets	$	138,108	$	2,780,171	$	35,676	$	2,953,955

Liabilities:
Deferred compensation plan liability	$	9,007	$	—	$	—	$	9,007
Derivative financial instruments	—		31,037		2,482		33,519
Total liabilities	$	9,007	$	31,037	$	2,482	$	42,526


December 31, 2019	Level 1		Level 2		Level 3		Total
Assets:
Debt securities available-for-sale
U.S. Treasuries	$	154,618	$	—	$	—	$	154,618
U.S. Agencies	—		3,035		—		3,035
State and political subdivisions	—		226,490		—		226,490
Residential mortgage-backed securities	—		1,299,025		—		1,299,025
Commercial mortgage-backed securities	—		284,953		—		284,953
Corporate bonds	—		202,093		998		203,091
Asset-backed securities	—		103,369		—		103,369
Equity securities with readily available fair values	1,973		—		—		1,973
Mortgage loans held for sale	—		58,484		—		58,484
Deferred compensation plan assets	8,133		—		—		8,133
Servicing rights for SBA/USDA loans	—		—		6,794		6,794
Residential mortgage servicing rights	—		—		13,565		13,565
Derivative financial instruments	—		27,769		7,238		35,007
Total assets	$	164,724	$	2,205,218	$	28,595	$	2,398,537

Liabilities:
Deferred compensation plan liability	$	8,132	$	—	$	—	$	8,132
Derivative financial instruments	—		6,957		8,559		15,516
Total liabilities	$	8,132	$	6,957	$	8,559	$	23,648

The following table shows a reconciliation of the beginning and ending balances for the periods indicated for assets measured at fair value on a recurring basis using significant unobservable inputs that are classified as Level 3 values (in thousands).


	2020										2019
	Derivative Assets		Derivative Liabilities		Servicing rights for SBA/USDA loans		Residential mortgage servicing rights		Debt Securities Available-for-Sale		Derivative Assets		Derivative Liabilities		Servicing rights for SBA/USDA loans		Residential mortgage servicing rights		Debt Securities Available-for-Sale
Three Months Ended September 30,
Balance at beginning of period	$	12,107	$	2,569	$	6,034	$	12,492	$	1,000	$	7,744	$	9,012	$	7,380	$	10,679	$	995

Additions	99		—		296		3,055		750		—		—		486		1,789		—

Sales and settlements	—		—		(100)		(723)		—		—		—		(286)		(416)		—
Other comprehensive income	—		—		—		—		—		—		—		—		—		3
Amounts included in earnings - fair value adjustments	592		(87)		531		(457)		—		(1,501)		(2,299)		(334)		(963)		—
Balance at end of period	$	12,798	$	2,482	$	6,761	$	14,367	$	1,750	$	6,243	$	6,713	$	7,246	$	11,089	$	998

Nine Months Ended September 30,
Balance at beginning of period	$	7,238	$	8,559	$	6,794	$	13,565	$	998	$	11,841	$	15,732	$	7,510	$	11,877	$	995

Additions	106		—		694		8,387		1,750		—		—		1,266		3,880		—
Transfers into Level 3	583		—		—		—		—		—		—		—		—		—
Sales and settlements	—		—		(441)		(1,898)		(1,000)		(1,135)		(2,330)		(837)		(719)		—
Other comprehensive income	—		—		—		—		2		—		—		—		—		3
Amounts included in earnings - fair value adjustments	4,871		(6,077)		(286)		(5,687)		—		(4,463)		(6,689)		(693)		(3,949)		—
Balance at end of period	$	12,798	$	2,482	$	6,761	$	14,367	$	1,750	$	6,243	$	6,713	$	7,246	$	11,089	$	998

The following table presents quantitative information about Level 3 fair value measurements for fair value on a recurring basis as of the dates indicated.


			Weighted Average
Level 3 Assets and Liabilities		Valuation Technique		September 30, 2020		December 31, 2019
	Unobservable Inputs
Servicing rights for SBA/USDA loans		Discounted cash flow	Discount rate	7.6	%	12.3	%
			Prepayment rate	18.2	%	16.5	%
Residential mortgage servicing rights		Discounted cash flow	Discount rate	10.0	%	10.0	%
			Prepayment rate	18.7	%	14.1	%
Corporate bonds		Indicative bid provided by a broker	Multiple factors, including but not limited to, current operations, financial condition, cash flows, and similar financing transactions executed in the market	N/A		N/A
Derivative assets - customer derivative positions		Internal model	Probability of default rate	53.7	%	N/A
			Loss given default rate	100	%	N/A
Derivative assets - mortgage		Internal model	Pull through rate	83.2	%	83.6	%
Derivative assets and liabilities - other		Dealer priced	Dealer priced	N/A		N/A
Derivative assets & liabilities - risk participations		Internal model	Probable exposure rate	1.05	%	0.36	%
			Probability of default rate	1.88	%	1.80	%

Fair Value Option

United records mortgage loans held for sale at fair value under the fair value option. Interest income on these loans is calculated based on the note rate of the loan and is recorded in interest revenue. The following tables present the fair value and outstanding principal balance of these loans, as well as the gain or loss recognized resulting from the change in fair value for the periods indicated (in thousands).


	Mortgage Loans Held for Sale
	September 30, 2020		December 31, 2019
Outstanding principal balance	$	121,687	$	56,613
Fair value	128,587		58,484






	Amount of Gain (Loss) Recognized on Mortgage Loans Held for Sale
Location	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Mortgage loan gains and other related fees	$	1,758	$	(2)	$	5,029	$	873

Changes in fair value were mostly offset by hedging activities. An immaterial portion of these amounts was attributable to changes in instrument-specific credit risk.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

United may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from the application of the lower of the amortized cost or fair value accounting or write-downs of individual assets due to impairment. The following table presents the fair value hierarchy and carrying value of all assets that were still held as of September 30, 2020 and December 31, 2019, for which a nonrecurring fair value adjustment was recorded during the year-to-date periods presented (in thousands).


	Level 1		Level 2		Level 3		Total
September 30, 2020
Loans	$	—	$	—	$	16,350	$	16,350

December 31, 2019
Loans	$	—	$	—	$	20,977	$	20,977

Loans that are reported above as being measured at fair value on a nonrecurring basis are generally impaired loans that have either been partially charged off or have specific reserves assigned to them. Nonaccrual loans that are collateral dependent are generally written down to 80% of appraised value, which considers the estimated costs to sell. Specific reserves that are established based on appraised value of collateral are considered nonrecurring fair value adjustments as well. When the fair value of the collateral is based on an observable market price or a current appraised value, United records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, United records the impaired loan as nonrecurring Level 3.

Assets and Liabilities Not Measured at Fair Value

For financial instruments that have quoted market prices, those quotes are used to determine fair value. Financial instruments that have no defined maturity, have a remaining maturity of 180 days or less, or reprice frequently to a market rate, are assumed to have a fair value that approximates reported book value, after taking into consideration any applicable credit risk. If no market quotes are available, financial instruments are valued by discounting the expected cash flows using an estimated current market interest rate for the financial instrument. For off-balance sheet derivative instruments, fair value is estimated as the amount that United would receive or pay to terminate the contracts at the reporting date, taking into account the current unrealized gains or losses on open contracts.

Cash and cash equivalents and repurchase agreements have short maturities and therefore the carrying value approximates fair value. Due to the short-term settlement of accrued interest receivable and payable, the carrying amount closely approximates fair value.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect the premium or discount on any particular financial instrument that could result from the sale of United’s entire holdings. All estimates are inherently subjective in nature. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include the mortgage banking operation, brokerage network, deferred income taxes, premises and equipment and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

Off-balance sheet instruments (commitments to extend credit and standby letters of credit) for which draws can be reasonably predicted are generally short-term in maturity and are priced at variable rates. Therefore, the estimated fair value associated with these instruments is immaterial.

The carrying amount and fair values as of the dates indicated for other financial instruments that are not measured at fair value on a recurring basis are as follows (in thousands).


			Fair Value Level
	Carrying Amount		Level 1		Level 2		Level 3		Total
September 30, 2020
Assets:
Securities held-to-maturity	$	398,373	$	—	$	413,820	$	—	$	413,820
Loans and leases, net	11,664,654		—		—		11,651,643		11,651,643


Liabilities:
Deposits	14,603,376		—		14,604,902		—		14,604,902

Long-term debt	326,703		—		—		332,869		332,869

December 31, 2019
Assets:
Securities held-to-maturity	$	283,533	$	—	$	287,904	$	—	$	287,904
Loans and leases, net	8,750,464		—		—		8,714,592		8,714,592


Liabilities:
Deposits	10,897,244		—		10,897,465		—		10,897,465

Long-term debt	212,664		—		—		217,665		217,665

- 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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