Disclosures about Fair Value of Assets and Liabilities

9 Months Ended

Sep. 30, 2020

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Disclosures about Fair Value of Assets and Liabilities

Disclosures about Fair Value of Assets and Liabilities

The Fair Value Measurements topic of the FASB ASC defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. There are three levels of inputs that may be used to measure fair value:

Level 1 –Quoted prices in active markets for identical assets or liabilities

Level 2 –Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3 –Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated financial statements, as well as the general classification of such instruments pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended September 30, 2020. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Available for sale securities

When quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Treasury and federal agency securities, state and municipal securities, federal agency collateralized mortgage obligations and mortgage–backed pools and corporate notes. Level 2 securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs. Observable inputs include dealer quotes, market spreads, cash flow analysis, the U.S. Treasury yield curve, trade execution data, market consensus prepayment spreads and available credit information and the bond’s terms and conditions. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of securities with similar characteristics and, because many fixed–income securities do not trade on a daily basis, apply available information through processes such as benchmark

curves, benchmarking of like securities, sector grouping, and matrix pricing. In addition, model processes, such as an option adjusted spread model, is used to develop prepayment and interest rate scenarios for securities with prepayment features.

Hedged loans

Certain fixed rate loans have been converted to variable rate loans by entering into interest rate swap agreements. The fair value of those fixed rate loans is based on discounting the estimated cash flows using interest rates determined by the respective interest rate swap agreement. Loans are classified within Level 2 of the valuation hierarchy based on the unobservable inputs used.

Interest rate swap agreements

The fair value of the Company’s interest rate swap agreements is estimated by a third party using inputs that are primarily unobservable including a yield curve, adjusted for liquidity and credit risk, contracted terms and discounted cash flow analysis, and therefore, are classified within Level 2 of the valuation hierarchy.

The following table presents the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated financial statements measured at fair value on a recurring basis and the level within the FASB ASC fair value hierarchy in which the fair value measurements fall at the following:

	September 30, 2020
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale securities
U.S. Treasury and federal agencies	$	6,239	$	—	$	6,239	$	—
State and municipal	678,459		—		678,459		—
Federal agency collateralized mortgage obligations	185,849		—		185,849		—
Federal agency mortgage–backed pools	132,472		—		132,472		—
Corporate notes	12,324		—		12,324		—
Total available for sale securities	1,015,343		—		1,015,343		—
Interest rate swap agreements asset	40,434		—		40,434		—
Forward sale commitments	1,584		—		1,584		—
Interest rate swap agreements liability	(49,331)		—		(49,331)		—

	December 31, 2019
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale securities
U.S. Treasury and federal agencies	$	1,413	$	—	$	1,413	$	—
State and municipal	405,768		—		405,768		—
Federal agency collateralized mortgage obligations	269,252		—		269,252		—
Federal agency mortgage–backed pools	146,572		—		146,572		—
Corporate notes	11,771		—		11,771		—
Total available for sale securities	834,776		—		834,776		—
Interest rate swap agreements asset	11,422		—		11,422		—
Forward sale commitments	264		—		264		—
Interest rate swap agreements liability	(15,861)		—		(15,861)		—
Commitments to originate loans	(38)		—		(38)		—

Realized gains and losses included in net income for the periods are reported in the condensed consolidated statements of income as follows:

	Three Months Ended				Nine Months Ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Non-interest Income
Total gains and losses from:
Hedged loans	$	1,944	$	(6,091)	$	(27,548)	$	(17,671)
Fair value interest rate swap agreements	(1,944)		6,091		27,548		17,671
Derivative loan commitments	994		(429)		1,358		(97)
	$	994	$	(429)	$	1,358	$	(97)

Certain other assets are measured at fair value on a non-recurring basis in the ordinary course of business and are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment):

	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2020
Collateral dependent loans	$	14,781	$	—	$	—	$	14,781
Mortgage servicing rights	11,705		—		—		11,705
December 31, 2019
Impaired loans	$	6,806	$	—	$	—	$	6,806
Mortgage servicing rights	14,327		—		—		14,327

Collateral Dependent Loans: Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.

Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

Mortgage Servicing Rights (MSRs): MSRs do not trade in an active market with readily observable prices. Accordingly, the fair value of these assets is classified as Level 3. The Company determines the fair value of MSRs using an income approach model based upon the Company’s month–end interest rate curve and prepayment assumptions. The model utilizes assumptions to estimate future net servicing income cash flows, including estimates of time decay, payoffs and changes in valuation inputs and assumptions. The Company reviews the valuation assumptions against this market data for reasonableness and adjusts the assumptions if deemed appropriate. The carrying amount of the MSRs’ fair value due to impairment decreased by $4.7 million during the first nine months of 2020 and increased by $59,000 during the first nine months of 2019.

The following table presents qualitative information about unobservable inputs used in recurring and non–recurring Level 3 fair value measurements, other than goodwill.

	September 30, 2020
	Fair Value		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Collateral dependent loans	$	14,781	Collateral based measurement	Discount to reflect current market conditions and ultimate collectibility	0.0%-76.0% (8.6%)
Mortgage servicing rights	11,705		Discounted cash flows	Discount rate, Constant prepayment rate, Probability of default	7.8%-7.8% (7.8%), 7.1%-17.3% (14.0%), 0.7%-19.7%(1.9%)

	December 31, 2019
	Fair Value		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Impaired loans	$	6,806	Collateral based measurement	Discount to reflect current market conditions and ultimate collectibility	0.0%-100.0%(7.4%)
Mortgage servicing rights	14,327		Discounted cash flows	Discount rate, Constant prepayment rate, Probability of default	8.7%-9.0% (8.7%), 10.2%-19.8%(12.2%), 0.1%-2.9%(0.7%)