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Fair Value

12 Months Ended

Dec. 31, 2020

Note 26—Fair Value

FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value under accounting principles generally accepted in the United States, and enhances disclosures about fair value measurements. FASB ASC 820 clarifies that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Available-for-sale and trading securities, derivative contracts, and mortgage servicing rights (“MSRs”) are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans, OREO, and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

FASB ASC 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:


Level 1	Observable inputs such as quoted prices in active markets;
Level 2	Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3	Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

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

Trading Securities

The fair values of trading securities are determined as follows: (1) for those securities that have traded prior to the date of the consolidated balance sheet but have not settled (date of sale) until after such date, the sales price is used as the fair value; and, (2) for those securities which have not traded as of the date of the consolidated balance sheet, the fair value was determined by broker price indications of similar or same securities.

Investment Securities

Securities available-for-sale are valued on a recurring basis at quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange and The NASDAQ Stock Market. Level 2 securities include mortgage-backed securities and debentures issued by government sponsored entities, municipal bonds and corporate debt securities, or U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Securities held-to-maturity are valued at quoted market prices or dealer quotes similar to securities available-for-sale. The carrying value of FHLB and FRB stock approximates fair value based on the redemption provisions.

Mortgage Loans Held for Sale

Mortgage loans held for sale are carried at the fair market value with changes in fair value recognized in current period earnings. The fair values of mortgage loans held for sale are based on commitments on hand from investors

within the secondary market for loans with similar characteristics. As such, the fair value adjustments for mortgage loans held for sale are recurring Level 2.

Loans

We do not record loans at fair value on a recurring basis. However, from time to time, a loan may be considered impaired and an ACL may be established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, Management measures impairment using estimated fair value methodologies. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At December 31, 2020, approximately half of the impaired loans were evaluated based on the fair value of the collateral because such loans were considered collateral dependent. Impaired loans, where an allowance is established based on the fair value of collateral; require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, we consider 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, we consider the impaired loan as nonrecurring Level 3.

Other Real Estate Owned (“OREO”)

Typically, OREO, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs (Level 2). However, OREO is considered Level 3 in the fair value hierarchy because management has qualitatively applied a discount due to the size, supply of inventory, and the incremental discounts applied to the appraisals. Management also considers other factors, including changes in absorption rates, length of time the property has been on the market, and anticipated sales values, which have resulted in adjustments to the collateral value estimates indicated in certain appraisals. At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses. Gains or losses on sale and generally any subsequent adjustments to the value are recorded as a component of OREO expense.

Derivative Financial Instruments

Fair value is estimated using pricing models of derivatives with similar characteristics or discounted cash flow models where future floating cash flows are projected and discounted back; and accordingly, these derivatives are classified within Level 2 of the fair value hierarchy. See Note 29—Derivative Financial Instruments for additional information.

Mortgage servicing rights (“MSRs”)

The estimated fair value of MSRs is obtained through an independent derivatives dealer analysis of future cash flows. The evaluation utilizes assumptions market participants would use in determining fair value including market discount rates, prepayment speeds, servicing income, servicing costs, default rates and other market driven data, as well as the market’s perception of future interest rate movements. MSRs are classified as Level 3.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis.


					Quoted Prices
					In Active			Significant
					Markets			Other			Significant
					for Identical			Observable			Unobservable
					Assets			Inputs			Inputs
(Dollars in thousands)		Fair Value			(Level 1)			(Level 2)			(Level 3)
December 31, 2020:
Assets
Derivative financial instruments		$	813,899		$	—		$	813,899		$	—
Loans held for sale			290,467			—			290,467			—
Trading securities			10,674			—			10,674			—
Securities available-for-sale:
Government-sponsored entities debt			29,256			—			29,256			—
State and municipal obligations			520,039			—			520,039			—
Mortgage-backed securities			2,767,675			—			2,767,675			—
Corporate securities			13,702			—			13,702			—
Total securities available-for-sale			3,330,672			—			3,330,672			—
Mortgage servicing rights			43,820			—			—			43,820
		$	4,489,532		$	—		$	4,445,712		$	43,820
Liabilities
Derivative financial instruments		$	804,832		$	—		$	804,832		$	—

December 31, 2019:
Assets
Derivative financial instruments		$	16,252		$	—		$	16,252		$	—
Loans held for sale			59,363			—			59,363			—
Securities available-for-sale:
Government-sponsored entities debt			25,941			—			25,941			—
State and municipal obligations			208,415			—			208,415			—
Mortgage-backed securities			1,721,691			—			1,721,691			—
Total securities available-for-sale			1,956,047			—			1,956,047			—
Mortgage servicing rights			30,525			—			—			30,525
		$	2,062,187		$	—		$	2,031,662		$	30,525
Liabilities
Derivative financial instruments		$	31,273		$	—		$	31,273		$	—

There were no financial instruments transferred between Level 1 and Level 2 of the valuation hierarchy for the years ended December 31, 2020 and 2019.

Changes in Level 3 Fair Value Measurements

When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, since Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources), the gains and losses below include changes in fair value due in part to observable factors that are part of the valuation methodology.

There were no changes in hierarchy classifications of Level 3 assets or liabilities for the year ended December 31, 2020. A reconciliation of the beginning and ending balances of Level 3 assets and liabilities recorded at fair value on a recurring basis for the years ended December 31, 2020 and 2019 is as follows:


(Dollars in thousands)		Assets			Liabilities
Fair value, January 1, 2020		$	30,525		$	—
Servicing assets that resulted from transfers of financial assets			28,456			—
Changes in fair value due to valuation inputs or assumptions			(6,991)			—
Changes in fair value due to decay			(8,170)			—
Fair value, December 31, 2020		$	43,820		$	—

Fair value, January 1, 2019		$	34,727		$	—
Servicing assets that resulted from transfers of financial assets			7,363			—
Changes in fair value due to valuation inputs or assumptions			(6,976)			—
Changes in fair value due to decay			(4,589)			—
Fair value, December 31, 2019		$	30,525		$	—

There were no unrealized losses included in accumulated other comprehensive income related to Level 3 financial assets and liabilities at December 31, 2020 or 2019.

See Note 30—Loan Servicing, Mortgage Obligation, and Loans Held for Sale for information about recurring Level 3 fair value measurements of mortgage servicing rights.

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The tables below present the recorded amount of assets and liabilities measured at fair value on a nonrecurring basis:


					Quoted Prices
					In Active			Significant
					Markets			Other			Significant
					for Identical			Observable			Unobservable
					Assets			Inputs			Inputs
(Dollars in thousands)		Fair Value			(Level 1)			(Level 2)			(Level 3)
December 31, 2020:
OREO		$	11,914		$	—		$	—		$	11,914
Bank property held for sale			36,006			—			—			36,006
Impaired loans			17,609			—			—			17,609
December 31, 2019:
OREO		$	6,539		$	—		$	—		$	6,539
Bank property held for sale			5,425			—			—			5,425
Non-acquired impaired loans			15,444			—			—			15,444

Quantitative Information about Level 3 Fair Value Measurements


						Weighted Average
						December 31,			December 31,
		Valuation Technique		Unobservable Input		2020			2019
Nonrecurring measurements:
Impaired loans		Discounted appraisals and discounted cash flows		Collateral discounts		5	%		2	%
OREO and premises held for sale		Discounted appraisals		Collateral discounts and estimated costs to sell		14	%		31	%

Fair Value of Financial Instruments

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those models are significantly affected by the assumptions used, including the discount rates and estimates of future cash flows. 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 settlement

of the instrument. The use of different methodologies may have a material effect on the estimated fair value amounts. The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2020 and 2019. Such amounts have not been revalued for purposes of these consolidated financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Cash Equivalents—The carrying amount is a reasonable estimate of fair value.

Trading Securities — The fair values of trading securities are determined as follows: (1) for those securities that have traded prior to the date of the consolidated balance sheet but have not settled (date of sale) until after such date, the sales price is used as the fair value; and, (2) for those securities which have not traded as of the date of the consolidated balance sheet, the fair value was determined by broker price indications of similar or same securities.

Investment Securities—Securities held-to-maturity are valued at quoted market prices or dealer quotes. The carrying value of FHLB stock approximates fair value based on the redemption provisions. The carrying value of the Company’s investment in unconsolidated subsidiaries approximates fair value. See Note 4—Investment Securities for additional information, as well as page F-76 regarding fair value.

Loans held for sale — The fair values disclosed for loans held for sale are based on commitments from investors for loans with similar characteristics.

Loans — ASU 2016-01 - Financial Instruments – Overall – Recognition and Measurement of Financial Assets and Financial Liabilities became effective for us on January 1, 2018. This accounting standard requires us to calculate the fair value of our loans for disclosure purposes based on an estimated exit price. With ASU 2016-01, to estimate an exit price, all loans (fixed and variable) are being valued with a discounted cash flow analyses for loans that includes our estimate of future credit losses expected to be incurred over the life of the loans. Fair values for certain mortgage loans (e.g., one-to-four family residential) and other consumer loans are estimated using discounted cash flow analyses based on our current rates offered for new loans of the same type, structure and credit quality. Fair values for other loans (e.g., commercial real estate and investment property mortgage loans, commercial and industrial loans) are estimated using discounted cash flow analyses-using interest rates we currently offer for loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans are estimated using a discounted cash flow analysis.

Deposit Liabilities—The fair values disclosed for demand deposits (e.g., interest and non-interest bearing checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts, and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Federal Funds Purchased and Securities Sold Under Agreements to Repurchase—The carrying amount of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within ninety days approximate their fair values.

Other Borrowings—The fair value of other borrowings is estimated using discounted cash flow analysis on the Company’s current incremental borrowing rates for similar types of instruments.

Accrued Interest—The carrying amounts of accrued interest approximate fair value.

Derivative Financial Instruments—The fair value of derivative financial instruments (including interest rate swaps) is estimated using pricing models of derivatives with similar characteristics or discounted cash flow models where future floating cash flows are projected and discounted back .

Commitments to Extend Credit, Standby Letters of Credit and Financial Guarantees—The fair values of commitments to extend credit are estimated using the fees currently charged to enter into similar agreements, taking into

account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of guarantees and letters of credit are based on fees currently charged for similar agreements or on the estimated costs to terminate them or otherwise settle the obligations with the counterparties at the reporting date.

The estimated fair value, and related carrying amount, of the Company’s financial instruments are as follows:


		Carrying			Fair
(Dollars in thousands)		Amount			Value			Level 1			Level 2			Level 3
December 31, 2020
Financial assets:
Cash and cash equivalents		$	4,609,255		$	4,609,255		$	4,609,255		$	—		$	—
Trading securities			10,674			10,674			—			10,674			—
Investment securities			4,446,657			4,448,300			160,443			4,287,857			—
Loans held for sale			290,467			290,467			—			290,467			—
Loans, net of allowance for loan losses			24,206,825			24,757,859			—			—			24,757,859
Accrued interest receivable			107,601			107,601			—			12,952			94,649
Mortgage servicing rights			43,820			43,820			—			—			43,820
Interest rate swap - non-designated hedge			802,763			802,763			—			802,763			—
Other derivative financial instruments (mortgage banking related)			11,136			11,136			—			11,136			—
Financial liabilities:
Deposits			30,693,882			30,719,416			—			30,719,416			—
Federal funds purchased and securities sold under agreements to repurchase			779,666			779,666			—			779,666			—
Other borrowings			390,179			386,126			—			386,126			—
Accrued interest payable			7,103			7,103			—			7,103			—
Interest rate swap - non-designated hedge			804,832			804,832			—			804,832			—
Off balance sheet financial instruments:
Commitments to extend credit			—			136,726			—			136,726			—
December 31, 2019
Financial assets:
Cash and cash equivalents		$	688,704		$	688,704		$	688,704		$	—		$	—
Investment securities			2,005,171			2,005,171			49,124			1,956,047			—
Loans held for sale			59,363			59,363			—			59,363			—
Loans, net of allowance for loan losses			11,313,113			11,452,003			—			—			11,452,003
Accrued interest receivable			36,774			36,774			—			8,500			28,274
Mortgage servicing rights			30,525			30,525			—			—			30,525
Interest rate swap - non-designated hedge			15,350			15,350			—			15,350			—
Other derivative financial instruments (mortgage banking related)			902			902			—			902			—
Financial liabilities:
Deposits			12,177,096			11,406,477			—			11,406,477			—
Federal funds purchased and securities sold under agreements to repurchase			298,741			298,741			—			298,741			—
Other borrowings			815,936			818,210			—			818,210			—
Accrued interest payable			4,916			4,916			—			4,916			—
Interest rate swap - non-designated hedge			16,693			16,693			—			16,693			—
Interest rate swap - cash flow hedge			13,791			13,791			—			13,791			—
Other derivative financial instruments (mortgage banking related)			789			789			—			789			—
Off balance sheet financial instruments:
Commitments to extend credit			—			36,031			—			36,031			—

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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