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Fair Value Measurements and Fair Value of Financial Instruments | 9 Months Ended
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Sep. 30, 2017
Fair Value Measurements and Fair Value of Financial Instruments [Abstract] |
Fair Value Measurements and Fair Value of Financial Instruments |
8. | Fair Value Measurements and Fair Value of Financial Instruments
GAAP states that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value measurements are not adjusted for transaction costs. A fair value hierarchy exists within GAAP that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below: Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities, many other sovereign government obligations, liquid mortgage products, active listed equities and most money market securities. Such instruments are generally classified within Level 1 or Level 2 of the fair value hierarchy. The Company does not adjust the quoted prices for such instruments. The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency include most investment-grade and high-yield corporate bonds, less liquid mortgage products, less liquid agency securities, less liquid listed equities, state, municipal and provincial obligations and certain physical commodities. Such instruments are generally classified within Level 2 of the fair value hierarchy. Certain common equity securities are reported at fair value utilizing Level 1 inputs (exchange quoted prices). Other investment securities are reported at fair value utilizing Level 1 and Level 2 inputs. The prices for Level 2 instruments are obtained through an independent pricing service or dealer market participants with whom the Company has historically transacted both purchases and sales of investment securities. Prices obtained from these sources include prices derived from market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, amount other things. Management reviews the methodologies used in pricing the securities by its third party providers. Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate will be used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Subsequent to inception, management only changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt markets and changes in financial ratios or cash flows. For the three and nine month periods ended September 30, 2017, the Company has made no transfers of assets between Level 1 and Level 2 and has had no Level 3 activity. The following tables set forth the Company’s financial assets and liabilities measured on a recurring basis that were accounted for at fair value. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:
(In thousands) |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Balance as of September 30, 2017 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |
AFS securities: |  |  |  |  |  |  |  |  |  |  |  |
Federal agency |  | $ | - |  |  | $ | 139,418 |  |  | $ | - |  |  | $ | 139,418 |
State & municipal |  |  | - |  |  |  | 42,919 |  |  |  | - |  |  |  | 42,919 |
Mortgage-backed |  |  | - |  |  |  | 584,226 |  |  |  | - |  |  |  | 584,226 |
Collateralized mortgage obligations |  |  | - |  |  |  | 571,312 |  |  |  | - |  |  |  | 571,312 |
Other securities |  |  | 11,438 |  |  |  | 8,301 |  |  |  | - |  |  |  | 19,739 |
Total AFS securities |  | $ | 11,438 |  |  | $ | 1,346,176 |  |  | $ | - |  |  | $ | 1,357,614 |
Trading securities |  |  | 10,883 |  |  |  | - |  |  |  | - |  |  |  | 10,883 |
Derivatives |  |  | - |  |  |  | 6,653 |  |  |  | - |  |  |  | 6,653 |
Total |  | $ | 22,321 |  |  | $ | 1,352,829 |  |  | $ | - |  |  | $ | 1,375,150 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives |  | $ | - |  |  | $ | 4,128 |  |  | $ | - |  |  | $ | 4,128 |
Total |  | $ | - |  |  | $ | 4,128 |  |  | $ | - |  |  | $ | 4,128 |
(In thousands) |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Balance as of December 31, 2016 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |
AFS securities: |  |  |  |  |  |  |  |  |  |  |  |
Federal agency |  | $ | - |  |  | $ | 174,408 |  |  | $ | - |  |  | $ | 174,408 |
State & municipal |  |  | - |  |  |  | 46,726 |  |  |  | - |  |  |  | 46,726 |
Mortgage-backed |  |  | - |  |  |  | 529,844 |  |  |  | - |  |  |  | 529,844 |
Collateralized mortgage obligations |  |  | - |  |  |  | 566,573 |  |  |  | - |  |  |  | 566,573 |
Other securities |  |  | 11,493 |  |  |  | 9,246 |  |  |  | - |  |  |  | 20,739 |
Total AFS securities |  | $ | 11,493 |  |  | $ | 1,326,797 |  |  | $ | - |  |  | $ | 1,338,290 |
Trading securities |  |  | 9,259 |  |  |  | - |  |  |  | - |  |  |  | 9,259 |
Derivatives |  |  | - |  |  |  | 3,210 |  |  |  | - |  |  |  | 3,210 |
Total |  | $ | 20,752 |  |  | $ | 1,330,007 |  |  | $ | - |  |  | $ | 1,350,759 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives |  | $ | - |  |  | $ | 506 |  |  | $ | - |  |  | $ | 506 |
Total |  | $ | - |  |  | $ | 506 |  |  | $ | - |  |  | $ | 506 |
GAAP requires disclosure of assets and liabilities measured and recorded at fair value on a non-recurring basis such as loans held for sale, other real estate owned, collateral-dependent impaired loans, mortgage servicing rights and held to maturity securities. The only non-recurring fair value measurements recorded during the three and nine month periods ended September 30, 2017 and September 30, 2016 were related to impaired loans and a write-down of other real estate owned. The Company uses the fair value of underlying collateral, less costs to sell, to estimate the specific reserves for collateral dependent impaired loans. The appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses ranging from 10% to 35%. Based on the valuation techniques used, the fair value measurements for collateral dependent impaired loans are classified as Level 3. As of September 30, 2017 and December 31, 2016, the Company had $0.1 million and $7.0 million, respectively, of loans recorded at fair value with specific allowance reserves of $30 thousand and $1.5 million, respectively. The following table sets forth information with regard to estimated fair values of financial instruments. This table excludes financial instruments for which the carrying amount approximates fair value. Financial instruments for which the fair value approximates carrying value include cash and cash equivalents, securities AFS, trading securities, accrued interest receivable, non-maturity deposits, short-term borrowings, accrued interest payable and interest rate swaps.
|  |  |  |  | September 30, 2017 |  |  | December 31, 2016 |
(In thousands) |  | Fair Value Hierarchy |  |  | Carrying amount |  |  | Estimated fair value |  |  | Carrying amount |  |  | Estimated fair value |
Financial assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
HTM securities |  |  | 2 |  |  | $ | 494,309 |  |  | $ | 495,411 |  |  | $ | 527,948 |  |  | $ | 525,050 |
Net loans |  |  | 3 |  |  |  | 6,398,584 |  |  |  | 6,557,674 |  |  |  | 6,132,857 |  |  |  | 6,273,233 |
Financial liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Time deposits |  |  | 2 |  |  | $ | 776,756 |  |  | $ | 773,160 |  |  | $ | 872,411 |  |  | $ | 868,153 |
Long-term debt |  |  | 2 |  |  |  | 88,914 |  |  |  | 88,948 |  |  |  | 104,087 |  |  |  | 104,113 |
Junior subordinated debt |  |  | 2 |  |  |  | 101,196 |  |  |  | 104,584 |  |  |  | 101,196 |  |  |  | 102,262 |
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature, and involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on and off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Company has a substantial trust and investment management operation that contributes net fee income annually. The trust and investment management operation is not considered a financial instrument and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities include the benefits resulting from the low-cost funding of deposit liabilities as compared to the cost of borrowing funds in the market and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimate of fair value. Securities Held to Maturity The fair value of the Company’s investment securities held to maturity is primarily measured using information from a third party pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Net Loans The fair value of the Company’s loans was estimated by discounting the expected future cash flows using the current interest rates at which similar loans would be made for the same remaining maturities. Loans were first segregated by type and then further segmented into fixed and variable rate and loan quality categories. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments. Time Deposits The fair value of time deposits was estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments. The fair values of the Company’s time deposit liabilities do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value. Long-Term Debt The fair value of long-term debt was estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments. Junior Subordinated Debt The fair value of junior subordinated debt has been estimated using a discounted cash flow analysis. Interest Rate Swaps The Company enters into interest rate swaps to facilitate customer transactions and meet their financing needs. These swaps are considered derivatives, but are not designated in hedging relationships. These instruments have interest rate and credit risk associated with them. To mitigate the interest rate risk, the Company enters into offsetting interest rate swaps with counterparties. The counterparty swaps are also considered derivatives and are also not designated in hedging relationships. Interest rate swaps are recorded within other assets or other liabilities on the unaudited interim consolidated balance sheet at their estimated fair value. Changes to the fair value of assets and liabilities arising from these derivatives are included, net, in other operating income in the unaudited interim consolidated statement of income. At September 30, 2017 the notional amount of these customer derivative agreements and the offsetting derivative counterparty positions each totaled $469.8 million and the fair values included in other assets and other liabilities on the unaudited interim consolidated balance sheet applicable to these agreements amounted to $3.9 million. At December 31, 2016, the notional amount of these customer derivative agreements and the offsetting derivative counterparty positions each totaled $371.1 million and the fair values included in other assets and other liabilities on the unaudited interim consolidated balance sheet applicable to these agreements amounted to $0.3 million. In 2016, the Company entered into interest rate swaps to modify the interest rate characteristics of certain short-term Federal Home Loan Bank advances from variable rate to fixed rate in order to reduce the impact of changes in future cash flows due to market interest rate changes. These agreements are designated as cash flow hedges. The notional amount of these interest rate derivative agreements total $250.0 million at September 30, 2017. Fair values included in other assets on the unaudited interim consolidated balance sheet applicable to these agreements amounted to $2.7 million at September 30, 2017 and $2.9 million at December 31, 2016. Fair values included in other liabilities on the unaudited interim consolidated balance sheet applicable to these agreements amounted to $0.2 million at September 30, 2017 and December 31, 2016, respectively.

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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/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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