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Fair Value Measurements | 9 Months Ended
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Sep. 30, 2020
Fair Value Disclosures [Abstract] |
Fair Value Measurements | Fair Value Measurements (In Thousands) Fair Value Measurements and the Fair Level Hierarchy ASC 820, “Fair Value Measurements and Disclosures,” provides guidance for using fair value to measure assets and liabilities and also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to a valuation based on quoted prices in active markets for identical assets and liabilities (Level 1), moderate priority to a valuation based on quoted prices in active markets for similar assets and liabilities and/or based on assumptions that are observable in the market (Level 2), and the lowest priority to a valuation based on assumptions that are not observable in the market (Level 3). Recurring Fair Value Measurements The Company carries certain assets and liabilities at fair value on a recurring basis in accordance with applicable standards. The Company’s recurring fair value measurements are based on the requirement to carry such assets and liabilities at fair value or the Company’s election to carry certain eligible assets and liabilities at fair value. Assets and liabilities that are required to be carried at fair value on a recurring basis include securities available for sale and derivative instruments. The Company has elected to carry mortgage loans held for sale at fair value on a recurring basis as permitted under the guidance in ASC 825, “Financial Instruments” (“ASC 825”). The following methods and assumptions are used by the Company to estimate the fair values of the Company’s financial assets and liabilities that are measured on a recurring basis: Securities available for sale: Securities available for sale consist primarily of debt securities, such as obligations of U.S. Government agencies and corporations, obligations of states and political subdivisions, mortgage-backed securities and trust preferred securities. Where quoted market prices in active markets are available, securities are classified within Level 1 of the fair value hierarchy. If quoted prices from active markets are not available, fair values are based on quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active, or model-based valuation techniques where all significant assumptions are observable in the market. Such instruments are classified within Level 2 of the fair value hierarchy. When assumptions used in model-based valuation techniques are not observable in the market, the assumptions used by management reflect estimates of assumptions used by other market participants in determining fair value. When there is limited transparency around the inputs to the valuation, the instruments are classified within Level 3 of the fair value hierarchy. Derivative instruments: Most of the Company’s derivative contracts are extensively traded in over-the-counter markets and are valued using discounted cash flow models which incorporate observable market based inputs including current market interest rates, credit spreads, and other factors. Such instruments are categorized within Level 2 of the fair value hierarchy and include interest rate swaps and other interest rate contracts such as interest rate caps and/or floors. The Company’s interest rate lock commitments are valued using current market prices for mortgage-backed securities with similar characteristics, adjusted for certain factors including servicing and risk. The value of the Company’s forward commitments is based on current prices for securities backed by similar types of loans. Because these assumptions are observable in active markets, the Company’s interest rate lock commitments and forward commitments are categorized within Level 2 of the fair value hierarchy. Mortgage loans held for sale in loans held for sale: Mortgage loans held for sale are primarily agency loans which trade in active secondary markets. The fair value of these instruments is derived from current market pricing for similar loans, adjusted for differences in loan characteristics, including servicing and risk. Because the valuation is based on external pricing of similar instruments, mortgage loans held for sale are classified within Level 2 of the fair value hierarchy. The following table presents assets and liabilities that are measured at fair value on a recurring basis as of the dates presented:
| Level 1 |  | Level 2 |  | Level 3 |  | Totals
September 30, 2020 |  |  |  |  |  |  |
Financial assets: |  |  |  |  |  |  |
Trust preferred securities | $ | — |  |  | $ | — |  |  | $ | 8,492 |  |  | $ | 8,492 |
Other available for sale securities | — |  |  | 1,284,896 |  |  | — |  |  | 1,284,896 |
Total securities available for sale | — |  |  | 1,284,896 |  |  | 8,492 |  |  | 1,293,388 |
Derivative instruments | — |  |  | 40,278 |  |  | — |  |  | 40,278 |
Mortgage loans held for sale in loans held for sale | — |  |  | 399,773 |  |  | — |  |  | 399,773 |
Total financial assets | $ | — |  |  | $ | 1,724,947 |  |  | $ | 8,492 |  |  | $ | 1,733,439 |
Financial liabilities: |  |  |  |  |  |  |
Derivative instruments: | $ | — |  |  | $ | 23,081 |  |  | $ | — |  |  | $ | 23,081 |
| Level 1 |  | Level 2 |  | Level 3 |  | Totals
December 31, 2019 |  |  |  |  |  |  |
Financial assets: |  |  |  |  |  |  |
Trust preferred securities | $ | — |  |  | $ | — |  |  | $ | 9,986 |  |  | $ | 9,986 |
Other available for sale securities | — |  |  | 1,280,627 |  |  | — |  |  | 1,280,627 |
Total securities available for sale | — |  |  | 1,280,627 |  |  | 9,986 |  |  | 1,290,613 |
Derivative instruments | — |  |  | 8,498 |  |  | — |  |  | 8,498 |
Mortgage loans held for sale in loans held for sale | — |  |  | 318,272 |  |  | — |  |  | 318,272 |
Total financial assets | $ | — |  |  | $ | 1,607,397 |  |  | $ | 9,986 |  |  | $ | 1,617,383 |
Financial liabilities: |  |  |  |  |  |  |
Derivative instruments | $ | — |  |  | $ | 10,000 |  |  | $ | — |  |  | $ | 10,000 |
The Company reviews fair value hierarchy classifications on a quarterly basis. Changes in the Company’s ability to observe inputs to the valuation may cause reclassification of certain assets or liabilities within the fair value hierarchy. Transfers between levels of the hierarchy are deemed to have occurred at the end of period. There were no such transfers between levels of the fair value hierarchy during the nine months ended September 30, 2020. The following tables provide a reconciliation for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs, or Level 3 inputs, as of the dates presented:
| 2020 |  |  |  | 2019
Three Months Ended September 30, 2020 | Trust preferred securities |  |  |  | Trust preferred securities |  |
Three Months Ended September 30, |  |  |  |  |  |  |
Balance at beginning of period | $ | 7,679 |  |  |  |  | $ | 10,386 |  |  |
Accretion included in net income | 8 |  |  |  |  | 9 |  |  |
Unrealized gains (losses) included in other comprehensive income | 840 |  |  |  |  | (439) |  |  |
Settlements | (35) |  |  |  |  | (94) |  |  |
Balance at end of period | $ | 8,492 |  |  |  |  | $ | 9,862 |  |  |
Nine Months Ended September 30, |  |  |  |  |  |  |
Balance at beginning of period | $ | 9,986 |  |  |  |  | $ | 10,633 |  |  |
Accretion included in net income | 26 |  |  |  |  | 26 |  |  |
Unrealized losses included in other comprehensive income | (1,382) |  |  |  |  | (572) |  |  |
Settlements | (138) |  |  |  |  | (225) |  |  |
Balance at end of period | $ | 8,492 |  |  |  |  | $ | 9,862 |  |  |
For each of the three and nine months ended September 30, 2020 and 2019, respectively, there were no gains or losses included in earnings that were attributable to the change in unrealized gains or losses related to assets or liabilities held at the end of each respective period that were measured on a recurring basis using significant unobservable inputs. The following table presents information as of September 30, 2020 about significant unobservable inputs (Level 3) used in the valuation of assets measured at fair value on a recurring basis:
Financial instrument | Fair Value |  | Valuation Technique |  | Significant Unobservable Inputs |  | Range of Inputs
Trust preferred securities | $ | 8,492 |  |  | Discounted cash flows |  | Default rate |  | 0-100%
Nonrecurring Fair Value Measurements Certain assets and liabilities may be recorded at fair value on a nonrecurring basis. These nonrecurring fair value adjustments typically are a result of the application of the lower of cost or market accounting or a write-down occurring during the period. The following table provides the fair value measurement for assets measured at fair value on a nonrecurring basis that were still held on the Consolidated Balance Sheets as of the dates presented and the level within the fair value hierarchy each is classified:
September 30, 2020 | Level 1 |  | Level 2 |  | Level 3 |  | Totals
Impaired loans | $ | — |  |  | $ | — |  |  | $ | 11,050 |  |  | $ | 11,050 |
OREO | — |  |  | — |  |  | 1,788 |  |  | 1,788 |
Mortgage servicing rights | — |  |  | — |  |  | 57,600 |  |  | 57,600 |
Total | $ | — |  |  | $ | — |  |  | $ | 70,438 |  |  | $ | 70,438 |
December 31, 2019 | Level 1 |  | Level 2 |  | Level 3 |  | Totals
Impaired loans | $ | — |  |  | $ | — |  |  | $ | 27,348 |  |  | $ | 27,348 |
OREO | — |  |  | — |  |  | 2,820 |  |  | 2,820 |
Mortgage servicing rights | — |  |  | — |  |  | 53,208 |  |  | 53,208 |
Total | $ | — |  |  | $ | — |  |  | $ | 83,376 |  |  | $ | 83,376 |
The following methods and assumptions are used by the Company to estimate the fair values of the Company’s financial assets measured on a nonrecurring basis: Impaired loans: Loans considered impaired are reserved for at the time the loan is identified as impaired taking into account the fair value of the collateral less estimated selling costs. Collateral may be real estate and/or business assets including but not limited to equipment, inventory and accounts receivable. The fair value of real estate is determined based on appraisals by qualified licensed appraisers. The fair value of the business assets is generally based on amounts reported on the business’s financial statements. Appraised and reported values may be adjusted based on changes in market conditions from the time of valuation and management’s knowledge of the client and the client’s business. Since not all valuation inputs are observable, these nonrecurring fair value determinations are classified as Level 3. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors previously identified. Impaired loans that were measured or re-measured at fair value had a carrying value of $19,775 and $29,606 at September 30, 2020 and December 31, 2019, respectively, and a specific reserve for these loans of $8,725 and $2,258 was included in the allowance for credit losses as of such dates. Other real estate owned: OREO is comprised of commercial and residential real estate obtained in partial or total satisfaction of loan obligations. OREO acquired in settlement of indebtedness is recorded at the fair value of the real estate less estimated costs to sell. Subsequently, it may be necessary to record nonrecurring fair value adjustments for declines in fair value. Fair value, when recorded, is determined based on appraisals by qualified licensed appraisers and adjusted for management’s estimates of costs to sell. Accordingly, values for OREO are classified as Level 3. The following table presents OREO measured at fair value on a nonrecurring basis that was still held on the Consolidated Balance Sheets as of the dates presented:
| September 30, 2020 |  | December 31, 2019
Carrying amount prior to remeasurement | $ | 2,750 |  |  | $ | 3,726 |
Impairment recognized in results of operations | (962) |  |  | (906) |
Fair value | $ | 1,788 |  |  | $ | 2,820 |
Mortgage servicing rights: Mortgage servicing rights are carried at the lower of amortized cost or fair value. Fair value is determined using an income approach with various assumptions including expected cash flows, market discount rates, prepayment speeds, servicing costs, and other factors. Because these factors are not all observable and include management’s assumptions, mortgage servicing rights are classified within Level 3 of the fair value hierarchy. Mortgage servicing rights were carried at amortized cost at September 30, 2020 and December 31, 2019. There were $13,694 of valuation adjustments on MSRs during the nine months ended September 30, 2020 and $1,836 of valuation adjustments recognized during the twelve months ended December 31, 2019. The following table presents information as of September 30, 2020 about significant unobservable inputs (Level 3) used in the valuation of assets measured at fair value on a nonrecurring basis:
Financial instrument | Fair Value |  | Valuation Technique |  | Significant Unobservable Inputs |  | Range of Inputs
Impaired loans | $ | 11,050 |  |  | Appraised value of collateral less estimated costs to sell |  | Estimated costs to sell |  | 4-10%
OREO | $ | 1,788 |  |  | Appraised value of property less estimated costs to sell |  | Estimated costs to sell |  | 4-10%
Fair Value Option The Company elected to measure all mortgage loans originated for sale on or after July 1, 2012 at fair value under the fair value option as permitted under ASC 825. Electing to measure these assets at fair value reduces certain timing differences and better matches the changes in fair value of the loans with changes in the fair value of derivative instruments used to economically hedge them. Net gains of $10,876 and $3,895 resulting from fair value changes of these mortgage loans were recorded in income during the nine months ended September 30, 2020 and 2019, respectively. The amount does not reflect changes in fair values of related derivative instruments used to hedge exposure to market-related risks associated with these mortgage loans. The change in fair value of both mortgage loans held for sale and the related derivative instruments are recorded in “Mortgage banking income” in the Consolidated Statements of Income. The Company’s valuation of mortgage loans held for sale incorporates an assumption for credit risk; however, given the short-term period that the Company holds these loans, valuation adjustments attributable to instrument-specific credit risk is nominal. Interest income on mortgage loans held for sale measured at fair value is accrued as it is earned based on contractual rates and is reflected in loan interest income on the Consolidated Statements of Income. The following table summarizes the differences between the fair value and the principal balance for mortgage loans held for sale measured at fair value as of September 30, 2020 and December 31, 2019:
| Aggregate Fair Value |  | Aggregate Unpaid Principal Balance |  | Difference
September 30, 2020 |  |  |  |  |
Mortgage loans held for sale measured at fair value | $ | 399,773 |  |  | $ | 378,785 |  |  | $ | 20,988 |
December 31, 2019 |  |  |  |  |
Mortgage loans held for sale measured at fair value | $ | 318,272 |  |  | $ | 308,160 |  |  | $ | 10,112 |
Fair Value of Financial Instruments The carrying amounts and estimated fair values of the Company’s financial instruments, including those assets and liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis, were as follows as of the dates presented:
|  |  | Fair Value
As of September 30, 2020 | Carrying Value |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Financial assets |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $ | 414,105 |  |  | $ | 414,105 |  |  | $ | — |  |  | $ | — |  |  | $ | 414,105 |
Securities available for sale | 1,293,388 |  |  | — |  |  | 1,284,896 |  |  | 8,492 |  |  | 1,293,388 |
Loans held for sale | 399,773 |  |  | — |  |  | 399,773 |  |  | — |  |  | 399,773 |
Loans, net | 10,916,640 |  |  | — |  |  | — |  |  | 10,847,520 |  |  | 10,847,520 |
Mortgage servicing rights | 57,600 |  |  | — |  |  | — |  |  | 57,600 |  |  | 57,600 |
Derivative instruments | 40,278 |  |  | — |  |  | 40,278 |  |  | — |  |  | 40,278 |
Financial liabilities |  |  |  |  |  |  |  |  |
Deposits | $ | 11,934,140 |  |  | $ | 10,100,060 |  |  | $ | 1,852,653 |  |  | $ | — |  |  | $ | 11,952,713 |
Short-term borrowings | 42,624 |  |  | 42,624 |  |  | — |  |  | — |  |  | 42,624 |
Federal Home Loan Bank advances | 152,210 |  |  | — |  |  | 158,952 |  |  | — |  |  | 158,952 |
Junior subordinated debentures | 110,649 |  |  | — |  |  | 89,591 |  |  | — |  |  | 89,591 |
Subordinated notes | 212,223 |  |  | — |  |  | 212,550 |  |  | — |  |  | 212,550 |
Derivative instruments | 23,081 |  |  | — |  |  | 23,081 |  |  | — |  |  | 23,081 |
|  |  | Fair Value
As of December 31, 2019 | Carrying Value |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Financial assets |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $ | 414,930 |  |  | $ | 414,930 |  |  | $ | — |  |  | $ | — |  |  | $ | 414,930 |
Securities available for sale | 1,290,613 |  |  | — |  |  | 1,280,627 |  |  | 9,986 |  |  | 1,290,613 |
Loans held for sale | 318,272 |  |  | — |  |  | 318,272 |  |  | — |  |  | 318,272 |
Loans, net | 9,637,476 |  |  | — |  |  | — |  |  | 9,321,039 |  |  | 9,321,039 |
Mortgage servicing rights | 53,208 |  |  | — |  |  | — |  |  | 53,208 |  |  | 53,208 |
Derivative instruments | 8,498 |  |  | — |  |  | 8,498 |  |  | — |  |  | 8,498 |
Financial liabilities |  |  |  |  |  |  |  |  |
Deposits | $ | 10,213,168 |  |  | $ | 8,052,536 |  |  | $ | 2,158,431 |  |  | $ | — |  |  | $ | 10,210,967 |
Short-term borrowings | 489,091 |  |  | 489,091 |  |  | — |  |  | — |  |  | 489,091 |
Federal Home Loan Bank advances | 152,337 |  |  | — |  |  | 152,321 |  |  | — |  |  | 152,321 |
Junior subordinated debentures | 110,215 |  |  | — |  |  | 104,480 |  |  | — |  |  | 104,480 |
Subordinated notes | 113,955 |  |  | — |  |  | 117,963 |  |  | — |  |  | 117,963 |
Derivative instruments | 10,000 |  |  | — |  |  | 10,000 |  |  | — |  |  | 10,000 |

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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