Fair Value Disclosures

6 Months Ended

Jun. 30, 2021

Fair Value Disclosures [Abstract]

Fair Value Disclosures

11. Fair Value Disclosures

FASB ASC topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Valuation is based upon quoted prices for identical instruments traded in active markets. Level 1 instruments include securities traded on active exchange markets, such as the New York Stock Exchange, as well as U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets.

Level 2:  Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 2 instruments include securities traded in less active dealer or broker markets.

Level 3:  Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

We used the following methods and significant assumptions to estimate fair value:

Securities:  Where quoted market prices are available in an active market, securities available for sale are classified as Level 1 of the valuation hierarchy.  We currently do not have any Level 1 securities. If quoted market prices are not available for the specific security, then fair values are estimated by (1) using quoted market prices of securities with similar characteristics, (2) matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices, or (3) a discounted cash flow analysis whose significant fair value inputs can generally be verified and do not typically involve judgment by management. These securities are classified as Level 2 of the valuation hierarchy and primarily include agency securities, private label mortgage-backed securities, other asset backed securities, obligations of states and political subdivisions, trust preferred securities, corporate securities and foreign government securities.

Loans held for sale:  The fair value of mortgage loans held for sale, carried at fair value is based on agency cash window loan pricing for comparable assets (recurring Level 2).

Collateral dependent loans with specific loss allocations based on collateral value:  From time to time, certain collateral dependent loans will have an ACL established. When the fair value of the collateral is based on an appraised value or when an appraised value is not available we record the collateral dependent loan as nonrecurring Level 3.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments can be significant and thus will typically result in a Level 3 classification of the inputs for determining fair value.

Other real estate:  At the time of acquisition, other real estate is recorded at fair value, less estimated costs to sell, which becomes the property’s new basis. Subsequent write-downs to reflect declines in value since the time of acquisition may occur from time to time and are recorded in net (gains) losses on other real estate and repossessed assets, which is part of non-interest expense - other in the Condensed Consolidated Statements of Operations. The fair value of the property used at and subsequent to the time of acquisition is typically determined by a third party appraisal of the property. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for both collateral-dependent loans and other real estate  are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by us. Once received, an independent third party, or a member of our Collateral Evaluation Department (for commercial properties), or a member of our Special Assets Group (for residential properties) reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. We compare the actual selling price of collateral that has been sold to the most recent appraised value of our properties to determine what additional adjustment, if any, should be made to the appraisal value to arrive at fair value. For commercial and residential properties we typically discount an appraisal to account for various factors that the appraisal excludes in its assumptions. These additional discounts generally do not result in material adjustments to the appraised value.

Capitalized mortgage loan servicing rights:  The fair value of capitalized mortgage loan servicing rights is based on a valuation model used by an independent third party that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. Certain model assumptions are generally unobservable and are based upon the best information available including data relating to our own servicing portfolio, reviews of mortgage servicing assumption and valuation surveys and input from various mortgage servicers and, therefore, are recorded as Level 3.  Management evaluates the third party valuation for reasonableness each quarter as part of our financial reporting control processes.

Derivatives:  The fair value of rate-lock mortgage loan commitments is based on agency cash window loan pricing for comparable assets and the fair value of mandatory commitments to sell mortgage loans is based on mortgage backed security pricing for comparable assets (recurring Level 2). The fair value of interest rate swap, interest rate cap and swaption agreements are derived from proprietary models which utilize current market data.  The significant fair value inputs can generally be observed in the market place and do not typically involve judgment by management (recurring Level 2). The fair value of purchased and written options is based on prices of financial instruments with similar characteristics and do not typically involve judgment by management (recurring Level 2).

Assets and liabilities measured at fair value, including financial assets for which we have elected the fair value option, were as follows:

			Fair Value Measurements Using
	Fair Value Measure- ments		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Un- observable Inputs (Level 3)
	(In thousands)
June 30, 2021:
Measured at Fair Value on a Recurring Basis
Assets
Securities available for sale
U.S. agency	$	8,596	$	-	$	8,596	$	-
U.S. agency residential mortgage-backed		365,367		-		365,367		-
U.S. agency commercial mortgage-backed		19,010		-		19,010		-
Private label mortgage-backed		69,264		-		69,264		-
Other asset backed		195,226		-		195,226		-
Obligations of states and political subdivisions		519,216		-		519,216		-
Corporate		151,603		-		151,603		-
Trust preferred		1,867		-		1,867		-
Foreign government		511		-		511		-
Loans held for sale, carried at fair value		59,752		-		59,752		-
Capitalized mortgage loan servicing rights		22,431		-		-		22,431
Derivatives (1)		14,222		-		14,222		-
Liabilities
Derivatives (2)		7,738		-		7,738		-
Measured at Fair Value on a Non-recurring Basis:
Assets
Collateral dependent loans (3)
Commercial
Commercial and industrial		462		-		-		462
Commercial real estate		105		-		-		105
Mortgage
1-4 family owner occupied - non-jumbo		566		-		-		566
1-4 family non-owner occupied		143		-		-		143
1-4 family - 2nd lien		168		-		-		168
Resort lending		214		-		-		214
Installment
Boat lending		36		-		-		36
Recreational vehicle lending		19		-		-		19
Other		94		-		-		94

(1) Included in accrued income and other assets

(2) Included in accrued expenses and other liabilities

(3) Only includes individually evaluated loans with specific loss allocations based on collateral value.

(4) Only includes other real estate with subsequent write downs to fair value.

			Fair Value Measurements Using
	Fair Value Measure- ments		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Un- observable Inputs (Level 3)
	(In thousands)
December 31, 2020:
Measured at Fair Value on a Recurring Basis
Assets
Securities available for sale
U.S. agency	$	10,748	$	-	$	10,748	$	-
U.S. agency residential mortgage-backed		344,582		-		344,582		-
U.S. agency commercial mortgage-backed		7,195		-		7,195		-
Private label mortgage-backed		42,829		-		42,829		-
Other asset backed		254,181		-		254,181		-
Obligations of states and political subdivisions		324,293		-		324,293		-
Corporate		86,017		-		86,017		-
Trust preferred		1,798		-		1,798		-
Foreign government		516		-		516		-
Loans held for sale, carried at fair value		92,434		-		92,434		-
Capitalized mortgage loan servicing rights		16,904		-		-		16,904
Derivatives (1)		16,782		-		16,782		-
Liabilities
Derivatives (2)		11,754		-		11,754		-
Measured at Fair Value on a Non-recurring Basis:
Assets
Impaired loans (3)
Commercial
Commercial and industrial		1,468		-		-		1,468
Commercial real estate		6,586		-		-		6,586
Mortgage
1-4 family owner occupied - jumbo		-		-		-		-
1-4 family owner occupied - non-jumbo		321		-		-		321
1-4 family non-owner occupied		155		-		-		155
1-4 family - 2nd lien		324		-		-		324
Resort lending		61		-		-		61
Installment
Boat lending		4		-		-		4
Recreational vehicle lending		31		-		-		31
Other		124		-		-		124
Other real estate (4)
1-4 family owner occupied - non-jumbo		102		-		-		102

(1) Included in accrued income and other assets

(2) Included in accrued expenses and other liabilities

(3) Only includes impaired loans with specific loss allocations based on collateral value.

(4) Only includes other real estate with subsequent write downs to fair value.

Changes in fair values for financial assets which we have elected the fair value option for the periods presented were as follows:

	Changes in Fair Values for the Six-Month Periods Ended June 30 for Items Measured at Fair Value Pursuant to Election of the Fair Value Option
	Net Gains on Assets			Mortgage			Total Change in Fair Values Included in Current
	Mortgage Loans			Loan Servicing, net			Period Earnings
	(In thousands)
2021
Loans held for sale	$	(2,400	)	$	-		$	(2,400	)
Capitalized mortgage loan servicing rights		-			(581	)		(581	)
2020
Loans held for sale		1,387			-			1,387
Capitalized mortgage loan servicing rights		-			(11,641	)		(11,641	)

For those items measured at fair value pursuant to our election of the fair value option, interest income is recorded within the Condensed Consolidated Statements of Operations based on the contractual amount of interest income earned on these financial assets and dividend income is recorded based on cash dividends received.

The following represent impairment charges recognized during the three and six month periods ended June 30, 2021 and 2020 relating to assets measured at fair value on a non-recurring basis:

• Loans that are individually evaluated using the fair value of collateral for collateral dependent loans had a carrying amount of $1.8 million, which is net of a valuation allowance of $0.9 million at June 30, 2021, and had a carrying amount of $9.1 million, which is net of a valuation allowance of  $1.8  million  at December 31, 2020.  The provision for credit losses included in our results of operations relating to collateral dependent loans was a net expense of $0.1 million and $3.4 million for the three month periods ending June 30, 2021 and 2020, respectively, and a net expense of $0.1 million and $5.5 million for the six month periods ending June 30, 2021 and 2020, respectively.

• Other real estate, which is measured using the fair value of the property, had a carrying amount of zero which is net of a valuation allowance of $0.06 million at June 30, 2021, and a carrying amount of $0.10 million which is net of a valuation allowance of $0.09 million, at December 31, 2020. Charges included in our results of operations relating to other real estate measured at fair value were zero during both the three and six month periods ended June 30, 2021, and were zero and $0.09 million during the three and six month periods ended June 30, 2020.

A reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) follows:

	Capitalized Mortgage Loan Servicing Rights
	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
	(In thousands)						(In thousands)
Beginning balance	$	23,530		$	14,829		$	16,904		$	19,171
Total losses realized and unrealized:
Included in results of operations		(3,838	)		(4,667	)		(581	)		(11,641	)
Included in other comprehensive income (loss)		-			-			-			-
Purchases, issuances, settlements, maturities and calls		2,739			3,611			6,108			6,243
Transfers in and/or out of Level 3		-			-			-			-
Ending balance	$	22,431		$	13,773		$	22,431		$	13,773
Amount of total losses for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at June 30	$	(3,838	)	$	(4,667	)	$	(581	)	$	(11,641	)

The fair value of our capitalized mortgage loan servicing rights has been determined based on a valuation model used by an independent third party as discussed above.  The significant unobservable inputs used in the fair value measurement of the capitalized mortgage loan servicing rights are discount rate, cost to service, ancillary income, float rate and prepayment rate.  Significant changes in all five of these assumptions in isolation would result in significant changes to the value of our capitalized mortgage loan servicing rights.  Quantitative information about our Level 3 fair value measurements measured on a recurring basis follows:

	Asset Fair Value		Valuation Technique		Unobservable Inputs		Range			Weighted Average
	(In thousands)			-		-		-
June 30, 2021
Capitalized mortgage loan servicing rights	$	22,431	Present value of net		Discount rate		10.00% to 13.00%				10.09	%
			servicing revenue		Cost to service		$	51 to $329		$	82
					Ancillary income		20 to 35				22
					Float rate			0.97	%		0.97	%
					Prepayment rate		7.04% to 45.79%				15.63	%
December 31, 2020
Capitalized mortgage loan servicing rights	$	16,904	Present value of net		Discount rate		10.00% to 13.00%				10.09	%
			servicing revenue		Cost to service		$	69 to $289		$	79
					Ancillary income		20 to 37				22
					Float rate			0.43	%		0.43	%
					Prepayment rate		7.92% to 64.70%				20.85	%

Quantitative information about Level 3 fair value measurements measured on a non-recurring basis follows:

	Asset Fair Value		Valuation Technique		Unobservable Inputs		Range	Weighted Average
	(In thousands)			-		-
June 30, 2021
Collateral dependent loans
Commercial	$	567	Sales comparison approach		Adjustment for differences between comparable sales		(25.0)% to 12.0%		(2.3	)%
Mortgage and Installment(1)		1,240	Sales comparison approach		Adjustment for differences between comparable sales		(73.3) to 104.6		0.8
December 31, 2020
Collateral dependent loans
Commercial	$	8,054	Sales comparison approach		Adjustment for differences between comparable sales		(40.0)% to 75.0%		3.8	%
Mortgage and Installment(1)		1,020	Sales comparison approach		Adjustment for differences between comparable sales		(73.3) to 104.6		(1.5	)
Other real estate
Mortgage		102	Sales comparison approach		Adjustment for differences between comparable sales		(13.1) to 2.4		(3.6	)

(1) In addition to the valuation techniques and unobservable inputs discussed above, at June 30, 2021 and December 31, 2020 certain collateral dependent installment loans totaling approximately $0.15 million and $0.16 million, respectively are secured by collateral other than real estate.  For the majority of these loans, we apply internal discount rates to industry valuation guides.

The following table reflects the difference between the aggregate fair value and the aggregate remaining contractual principal balance outstanding for loans held for sale for which the fair value option has been elected for the periods presented.

	Aggregate Fair Value		Difference		Contractual Principal
	(In thousands)
Loans held for sale
June 30, 2021	$	59,752	$	1,456	$	58,296
December 31, 2020		92,434		3,856		88,578