Fair Value Disclosures

9 Months Ended

Sep. 30, 2021

Note 9 - 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 2 and Level 3 during the three and nine-months ended September 30, 2021 and 2020, and the year ended December 31, 2020.

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):

September 30, 2021


	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
Available-for-sale investment securities:
Obligations of states and political subdivisions	$	—	$	2,665,367	$	—	$	2,665,367
Corporate bonds		—		32,984		—		32,984
Residential mortgage-backed securities		—		3,028,149		—		3,028,149
Commercial mortgage-backed securities		—		389,016		—		389,016
Other securities		4,468		—		—		4,468
Total	$	4,468	$	6,115,516	$	—	$	6,119,984
Loans held-for-sale	$	—	$	46,081	$	—	$	46,081
IRLCs	$	—	$	1,701	$	—	$	1,701
Forward mortgage-backed securities trades asset	$	—	$	828	$	—	$	828

September 30, 2020


	Level 1 Inputs		Level 2 Inputs			Level 3 Inputs		Total Fair Value
Available-for-sale investment securities:
Obligations of states and political subdivisions	$	—	$	2,367,489		$	—	$	2,367,489
Residential mortgage-backed securities		—		1,509,054			—		1,509,054
Commercial mortgage-backed securities		—		550,168			—		550,168
Other securities		4,569		—			—		4,569
Total	$	4,569	$	4,426,711		$	—	$	4,431,280
Loans held-for-sale	$	—	$	94,666		$	—	$	94,666
IRLCs	$	—	$	5,967		$	—	$	5,967
Forward mortgage-backed securities trades liability	$	—	$	(872	)	$	—	$	(872	)

December 31, 2020


	Level 1 Inputs		Level 2 Inputs			Level 3 Inputs		Total Fair Value
Available-for-sale investment securities:
Obligations of state and political subdivisions	$	—	$	2,426,876		$	—	$	2,426,876
Residential mortgage-backed securities		—		1,472,280			—		1,472,280
Commercial mortgage-backed securities		—		489,316			—		489,316
Other securities		4,557		—			—		4,557
Total	$	4,557	$	4,388,472		$	—	$	4,393,029
Loans held-for-sale	$	—	$	79,585		$	—	$	79,585
IRLCs	$	—	$	4,618		$	—	$	4,618
Forward mortgage-backed securities trades liability	$	—	$	(1,560	)	$	—	$	(1,560	)

The following table summarizes the Company’s loans held-for-sale at fair value and the net unrealized gains as of the balance sheet dates shown below (in thousands):


	September 30,				December 31,
	2021		2020		2020
Unpaid principal balance on loans held-for-sale	$	44,784	$	91,091	$	76,602
Net unrealized gains on loans held-for-sale		1,297		3,575		2,983
Loans held-for-sale at fair value	$	46,081	$	94,666	$	79,585

The following table summarizes the Company’s gains on sale and fees of mortgage loans for the three and nine-months ended September 30, 2021 and 2020 (in thousand):


	Three-Months ended September 30,					Nine-Months ended September 30,
	2021			2020		2021			2020
Realized gain on sale and fees on mortgage loans*	$	9,050		$	13,494	$	29,245		$	25,676
Change in fair value on loans held-for-sale and IRLCs		(1,466	)		1,508		(4,659	)		7,800
Change in forward mortgage-backed securities trades		1,204			226		2,387			(720	)
Total gain on sale of mortgage loans	$	8,788		$	15,228	$	26,973		$	32,756

* This includes gains on loans held-for-sale carried under the fair value method and lower of cost or market.

No residential mortgage loans held-for-sale were 90 days or more past due or considered impaired as of September 30, 2021 or 2020, or December 31, 2020. No significant credit losses were recognized on residential mortgage loans held-for-sale for the three and nine-months ended September 30, 2021 and 2020.

Certain non-financial assets and non-financial liabilities measured at fair value on a nonrecurring 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 nine-months ended September 30, 2021 and 2020 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 nine-months ended September 30, 2021 and 2020.

At September 30, 2021 and 2020, and December 31, 2020, other real estate owned totaled $28,000, $157,000 and $119,000, 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).


	September 30,										December 31,
	2021				2020						2020
	Carrying Value		Estimated Fair Value		Carrying Value			Estimated Fair Value			Carrying Value			Estimated Fair Value			Fair Value Hierarchy
Cash and due from banks	$	201,901	$	201,901	$	175,088		$	175,088		$	211,113		$	211,113		Level 1
Interest-bearing demand deposits in banks		359,241		359,241		58,933			58,933			517,971			517,971		Level 1
Available-for-sale securities		6,119,984		6,119,984		4,431,280			4,431,280			4,393,029			4,393,029		Levels 1 and 2
Loans held-for-investment, net of allowance for credit losses		5,223,124		5,236,471		5,217,641			5,212,972			5,104,499			5,109,885		Level 3
Loans held-for-sale		47,721		47,748		101,055			101,480			83,969			84,233		Level 2
Accrued interest receivable		43,516		43,516		39,804			39,804			53,433			53,433		Level 2
Deposits with stated maturities		469,867		470,985		469,978			472,193			475,542			477,218		Level 2
Deposits with no stated maturities		9,423,250		9,423,250		7,824,910			7,824,910			8,200,275			8,200,275		Level 1
Borrowings		648,679		648,679		503,163			503,163			430,093			430,093		Level 2
Accrued interest payable		294		294		485			485			377			377		Level 2
IRLCs		1,701		1,701		5,967			5,967			4,618			4,618		Level 2
Forward mortgage-backed securities trades asset (liability)		828		828		(872	)		(872	)		(1,560	)		(1,560	)	Level 2

- 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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