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Fair Value Measurement | 9 Months Ended
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Sep. 30, 2016
Fair Value Disclosures [Abstract] |
Fair Value Measurements | We use fair value measurements when recording and disclosing certain financial assets and liabilities. Securities available-for-sale, trading assets and derivative financial instruments are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record other assets at fair value on a nonrecurring basis, such as loans held for sale, impaired loans, other real estate owned, or OREO, and other repossessed assets, mortgage servicing rights, or MSRs, and certain other assets. Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. In determining fair value, we use various valuation approaches, including market, income and cost approaches. The fair value standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability, which is developed, based on market data we have obtained from independent sources. Unobservable inputs reflect our estimates of assumptions that market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances. The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows: Level 1: valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets. Level 2: valuation is based upon 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 and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by market data. Level 3: valuation is derived from other valuation methodologies, including discounted cash flow models and similar techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in determining fair value. 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. Our policy is to recognize transfers between any of the fair value hierarchy levels at the end of the reporting period in which the transfer occurred. The following are descriptions of the valuation methodologies that we use for financial instruments recorded at fair value on either a recurring or nonrecurring basis. Recurring Basis Securities Available-for-Sale Securities available-for-sale include both debt and equity securities. We obtain fair values for debt securities from a third-party pricing service which utilizes several sources for valuing fixed-income securities. We validate prices received from our pricing service through comparison to a secondary pricing service and broker quotes. We review the methodologies of the pricing service which provides us with a sufficient understanding of the valuation models, assumptions, inputs and pricing to reasonably measure the fair value of our debt securities. The market evaluation sources for debt securities include observable inputs rather than significant unobservable inputs and are classified as Level 2. The service provider utilizes pricing models that vary by asset class and include available trade, bid and other market information. Generally, the methodologies include broker quotes, proprietary models and vast descriptive terms and conditions databases, as well as extensive quality control programs. Marketable equity securities that have an active, quotable market are classified as Level 1. Marketable equity securities that are quotable, but are thinly traded or inactive, are classified as Level 2. Marketable equity securities that are not readily traded and do not have a quotable market are classified as Level 3. Trading Assets We use quoted market prices to determine the fair value of our trading assets. Our trading assets are held in a Rabbi Trust under a deferred compensation plan and are invested in readily quoted mutual funds. Accordingly, these assets are classified as Level 1. Derivative Financial Instruments We use derivative instruments, including interest rate swaps for commercial loans with our customers, interest rate lock commitments and the sale of mortgage loans in the secondary market. We calculate the fair value for derivatives using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. Each valuation considers the contractual terms of the derivative, including the period to maturity, and uses observable market based inputs, such as interest rate curves and implied volatilities. Accordingly, derivatives are classified as Level 2. We incorporate credit valuation adjustments into the valuation models to appropriately reflect both our own nonperformance risk and the respective counterparties' nonperformance risk in calculating fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements and collateral postings. Nonrecurring Basis Loans Held for Sale Loans held for sale consist of 1-4 family residential loans originated for sale in the secondary market and, from time to time, certain loans transferred from the loan portfolio to loans held for sale, all of which are carried at the lower of cost or fair value. The fair value of 1-4 family residential loans is based on the principal or most advantageous market currently offered for similar loans using observable market data. The fair value of the loans transferred from the loan portfolio is based on the amounts offered for these loans in currently pending sales transactions. Loans held for sale carried at fair value are classified as Level 3. Impaired Loans Impaired loans are carried at the lower of carrying value or fair value. Fair value is determined as the recorded investment balance less any specific reserve. We establish specific reserves based on the following three impairment methods: 1) the present value of expected future cash flows discounted at the loan’s original effective interest rate; 2) the loan’s observable market price; or 3) the fair value of the collateral less estimated selling costs when the loan is collateral dependent and we expect to liquidate the collateral. However, if repayment is expected to come from the operation of the collateral, rather than liquidation, then we do not consider estimated selling costs in determining the fair value of the collateral. Collateral values are generally based upon appraisals by approved, independent state certified appraisers. Appraisals may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or our knowledge of the borrower and the borrower’s business. Impaired loans carried at fair value are classified as Level 3. OREO and Other Repossessed Assets OREO and other repossessed assets obtained in partial or total satisfaction of a loan are recorded at the lower of recorded investment in the loan or fair value less cost to sell. Subsequent to foreclosure, these assets are carried at the lower of the amount recorded at acquisition date or fair value less cost to sell. Accordingly, it may be necessary to record nonrecurring fair value adjustments. Fair value, when recorded, is generally based upon appraisals by approved, independent state certified appraisers. Like impaired loans, appraisals on OREO may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or other information available to us. OREO and other repossessed assets carried at fair value are classified as Level 3. Mortgage Servicing Rights The fair value of MSRs is determined by calculating the present value of estimated future net servicing cash flows, considering expected mortgage loan prepayment rates, discount rates, servicing costs and other economic factors, which are determined based on current market conditions. The expected rate of mortgage loan prepayments is the most significant factor driving the value of MSRs. MSRs are considered impaired if the carrying value exceeds fair value. The valuation model includes significant unobservable inputs; therefore, MSRs are classified as Level 3. Other Assets We measure certain other assets at fair value on a nonrecurring basis. Fair value is based on the application of lower of cost or fair value accounting, or write-downs of individual assets. Valuation methodologies used to measure fair value are consistent with overall principles of fair value accounting and consistent with those described above. Financial Instruments In addition to financial instruments recorded at fair value in our financial statements, fair value accounting guidance requires disclosure of the fair value of all of an entity’s assets and liabilities that are considered financial instruments. The majority of our assets and liabilities are considered financial instruments. Many of these instruments lack an available trading market as characterized by a willing buyer and willing seller engaged in an exchange transaction. Also, it is our general practice and intent to hold our financial instruments to maturity and to not engage in trading or sales activities with respect to such financial instruments. For fair value disclosure purposes, we substantially utilize the fair value measurement criteria as required and explained above. In cases where quoted fair values are not available, we use present value methods to determine the fair value of our financial instruments. Cash and Cash Equivalents The carrying amounts reported in the Consolidated Balance Sheets for cash and due from banks, including interest-bearing deposits, approximate fair value. Loans The fair value of variable rate performing loans that may reprice frequently at short-term market rates is based on carrying values adjusted for credit risk. The fair value of variable rate performing loans that reprice at intervals of one year or longer, such as adjustable rate mortgage products, is estimated using discounted cash flow analyses that utilize interest rates currently being offered for similar loans and adjusted for credit risk. The fair value of fixed rate performing loans is estimated using a discounted cash flow analysis that utilizes interest rates currently being offered for similar loans and adjusted for credit risk. The fair value of nonperforming loans is the carrying value less any specific reserve on the loan if it is impaired. The carrying amount of accrued interest approximates fair value. Bank Owned Life Insurance Fair value approximates net cash surrender value of bank owned life insurance. Federal Home Loan Bank, or FHLB, and Other Restricted Stock It is not practical to determine the fair value of our FHLB and other restricted stock due to the restrictions placed on the transferability of these stocks; it is presented at carrying value. Deposits The fair values disclosed for deposits without defined maturities (e.g., noninterest and interest-bearing demand, money market and savings accounts) are by definition equal to the amounts payable on demand. The carrying amounts for variable rate, fixed-term time deposits approximate their fair values. Estimated fair values for fixed rate and other time deposits are based on discounted cash flow analysis using interest rates currently offered for time deposits with similar terms. The carrying amount of accrued interest approximates fair value. Short-Term Borrowings The carrying amounts of securities sold under repurchase agreements, or REPOs, and other short-term borrowings approximate their fair values. Long-Term Borrowings The fair values disclosed for fixed rate long-term borrowings are determined by discounting their contractual cash flows using current interest rates for long-term borrowings of similar remaining maturities. The carrying amounts of variable rate long-term borrowings approximate their fair values. Junior Subordinated Debt Securities The interest rate on the variable rate junior subordinated debt securities is reset quarterly; therefore, the carrying values approximate their fair values. Loan Commitments and Standby Letters of Credit Off-balance sheet financial instruments consist of commitments to extend credit and letters of credit. Except for interest rate lock commitments, estimates of the fair value of these off-balance sheet items are not made because of the short-term nature of these arrangements and the credit standing of the counterparties. Other Estimates of fair value are not made for items that are not defined as financial instruments, including such items as our core deposit intangibles and the value of our trust operations. Assets and Liabilities Recorded at Fair Value on a Recurring Basis The following tables present our assets and liabilities that are measured at fair value on a recurring basis by fair value hierarchy level at September 30, 2016 and December 31, 2015. There were no transfers between Level 1 and Level 2 for items measured at fair value on a recurring basis during the periods presented.
| September 30, 2016
(dollars in thousands) | Level 1 | Level 2 | Level 3 | Total
ASSETS |  |  |  |
Securities available-for-sale: |  |  |  |
U.S. Treasury securities | $ | — |  | $ | 15,056 |  | $ | — |  | $ | 15,056 |
Obligations of U.S. government corporations and agencies | — |  | 250,924 |  | — |  | 250,924 |
Collateralized mortgage obligations of U.S. government corporations and agencies | — |  | 137,460 |  | — |  | 137,460 |
Residential mortgage-backed securities of U.S. government corporations and agencies | — |  | 36,285 |  | — |  | 36,285 |
Commercial mortgage-backed securities of U.S. government corporations and agencies | — |  | 88,499 |  | — |  | 88,499 |
Obligations of states and political subdivisions | — |  | 132,536 |  | — |  | 132,536 |
Marketable equity securities | — |  | 10,368 |  | — |  | 10,368 |
Total securities available-for-sale | — |  | 671,128 |  | — |  | 671,128 |
Trading securities held in a Rabbi Trust | 4,312 |  | — |  | — |  | 4,312 |
Total securities | 4,312 |  | 671,128 |  | — |  | 675,440 |
Derivative financial assets: |  |  |  |
Interest rate swap contracts - commercial loans | — |  | 15,255 |  | — |  | 15,255 |
Interest rate lock commitments - mortgage loans | — |  | 739 |  | — |  | 739 |
Total Assets | $ | 4,312 |  | $ | 687,122 |  | $ | — |  | $ | 691,434 |
LIABILITIES |  |  |  |
Derivative financial liabilities: |  |  |  |
Interest rate swap contracts - commercial loans | $ | — |  | $ | 15,202 |  | $ | — |  | $ | 15,202 |
Forward sale contracts - mortgage loans | — |  | 98 |  | — |  | 98 |
Total Liabilities | $ | — |  | $ | 15,300 |  | $ | — |  | $ | 15,300 |
| December 31, 2015
(dollars in thousands) | Level 1 | Level 2 | Level 3 | Total
ASSETS |  |  |  |
Securities available-for-sale: |  |  |  |
U.S. Treasury securities | $ | — |  | $ | 14,941 |  | $ | — |  | $ | 14,941 |
Obligations of U.S. government corporations and agencies | — |  | 263,303 |  | — |  | 263,303 |
Collateralized mortgage obligations of U.S. government corporations and agencies | — |  | 128,835 |  | — |  | 128,835 |
Residential mortgage-backed securities of U.S. government corporations and agencies | — |  | 40,125 |  | — |  | 40,125 |
Commercial mortgage-backed securities of U.S. government corporations and agencies | — |  | 69,204 |  | — |  | 69,204 |
Obligations of states and political subdivisions | — |  | 134,886 |  | — |  | 134,886 |
Marketable equity securities | — |  | 9,669 |  | — |  | 9,669 |
Total securities available-for-sale | — |  | 660,963 |  | — |  | 660,963 |
Trading securities held in a Rabbi Trust | 4,021 |  | — |  | — |  | 4,021 |
Total securities | 4,021 |  | 660,963 |  | — |  | 664,984 |
Derivative financial assets: |  |  |  |
Interest rate swap contracts - commercial loans | — |  | 11,295 |  | — |  | 11,295 |
Interest rate lock commitments - mortgage loans | — |  | 261 |  | — |  | 261 |
Total Assets | $ | 4,021 |  | $ | 672,519 |  | $ | — |  | $ | 676,540 |
LIABILITIES |  |  |  |
Derivative financial liabilities: |  |  |  |
Interest rate swap contracts - commercial loans | $ | — |  | $ | 11,276 |  | $ | — |  | $ | 11,276 |
Forward sale contracts - mortgage loans | — |  | 5 |  | — |  | 5 |
Total Liabilities | $ | — |  | $ | 11,281 |  | $ | — |  | $ | 11,281 |
We may be required to measure certain assets and liabilities at fair value on a nonrecurring basis. Nonrecurring assets are recorded at the lower of cost or fair value in our financial statements. There were no liabilities measured at fair value on a nonrecurring basis at either September 30, 2016 or December 31, 2015. The following table presents our assets that are measured at fair value on a nonrecurring basis by the fair value hierarchy level as of the dates presented:
| September 30, 2016 |  | December 31, 2015
(dollars in thousands) | Level 1 | Level 2 | Level 3 | Total |  | Level 1 | Level 2 | Level 3 | Total
ASSETS(1) |  |  |  |  |  |  |  |  |
Impaired loans | — |  | — |  | 9,000 |  | 9,000 |  |  | — |  | — |  | 9,373 |  | 9,373 |
Other real estate owned | — |  | — |  | 181 |  | 181 |  |  | — |  | — |  | 158 |  | 158 |
Mortgage servicing rights | — |  | — |  | 3,253 |  | 3,253 |  |  | — |  | — |  | 3,396 |  | 3,396 |
Total Assets | $ | — |  | $ | — |  | $ | 12,434 |  | $ | 12,434 |  |  | $ | — |  | $ | — |  | $ | 12,927 |  | $ | 12,927 |
(1)This table presents only the nonrecurring items that are recorded at fair value in our financial statements.
The carrying values and fair values of our financial instruments at September 30, 2016 and December 31, 2015 are presented in the following tables:
| Carrying Value(1) | Fair Value Measurements at September 30, 2016
(dollars in thousands) | Total | Level 1 | Level 2 | Level 3
ASSETS |  |  |  |  |
Cash and due from banks, including interest-bearing deposits | $ | 125,163 |  | $ | 125,163 |  | $ | 125,163 |  | $ | — |  | $ | — |
Securities available-for-sale | 671,128 |  | 671,128 |  | — |  | 671,128 |  | — |
Loans held for sale | 11,695 |  | 12,176 |  | — |  | — |  | 12,176 |
Portfolio loans, net of unearned income | 5,418,234 |  | 5,406,298 |  | — |  | — |  | 5,406,298 |
Bank owned life insurance | 71,523 |  | 71,523 |  | — |  | 71,523 |  | — |
FHLB and other restricted stock | 28,331 |  | 28,331 |  | — |  | — |  | 28,331 |
Trading securities held in a Rabbi Trust | 4,312 |  | 4,312 |  | 4,312 |  | — |  | — |
Mortgage servicing rights | 3,252 |  | 3,253 |  | — |  | — |  | 3,253 |
Interest rate swap contracts - commercial loans | 15,255 |  | 15,255 |  | — |  | 15,255 |  | — |
Interest rate lock commitments - mortgage loans | 739 |  | 739 |  | — |  | 739 |  | — |
LIABILITIES |  |  |  |  |
Deposits | $ | 5,145,431 |  | $ | 5,151,031 |  | $ | — |  | $ | — |  | $ | 5,151,031 |
Securities sold under repurchase agreements | 40,949 |  | 40,949 |  | — |  | — |  | 40,949 |
Short-term borrowings | 565,000 |  | 565,000 |  | — |  | — |  | 565,000 |
Long-term borrowings | 15,303 |  | 16,111 |  | — |  | — |  | 16,111 |
Junior subordinated debt securities | 45,619 |  | 45,619 |  | — |  | — |  | 45,619 |
Interest rate swap contracts - commercial loans | 15,202 |  | 15,202 |  | — |  | 15,202 |  | — |
Forward sale contracts - mortgage loans | 98 |  | 98 |  | — |  | 98 |  | — |
(1) As reported in the Consolidated Balance Sheets |  |  |  |  |
| Carrying Value(1) | Fair Value Measurements at December 31, 2015
(dollars in thousands) | Total | Level 1 | Level 2 | Level 3
ASSETS |  |  |  |  |
Cash and due from banks, including interest-bearing deposits | $ | 99,399 |  | $ | 99,399 |  | $ | 99,399 |  | $ | — |  | $ | — |
Securities available-for-sale | 660,963 |  | 660,963 |  | — |  | 660,963 |  | — |
Loans held for sale | 35,321 |  | 35,500 |  | — |  | — |  | 35,500 |
Portfolio loans, net of unearned income | 5,027,612 |  | 5,001,004 |  | — |  | — |  | 5,001,004 |
Bank owned life insurance | 70,175 |  | 70,175 |  | — |  | 70,175 |  | — |
FHLB and other restricted stock | 23,032 |  | 23,032 |  | — |  | — |  | 23,032 |
Trading securities held in a Rabbi Trust | 4,021 |  | 4,021 |  | 4,021 |  | — |  | — |
Mortgage servicing rights | 3,237 |  | 3,396 |  | — |  | — |  | 3,396 |
Interest rate swap contracts - commercial loans | 11,295 |  | 11,295 |  | — |  | 11,295 |  | — |
Interest rate lock commitments - mortgage loans | 261 |  | 261 |  | — |  | 261 |  | — |
LIABILITIES |  |  |  |  |
Deposits | $ | 4,876,611 |  | $ | 4,881,718 |  | $ | — |  | $ | — |  | $ | 4,881,718 |
Securities sold under repurchase agreements | 62,086 |  | 62,086 |  | — |  | — |  | 62,086 |
Short-term borrowings | 356,000 |  | 356,000 |  | — |  | — |  | 356,000 |
Long-term borrowings | 117,043 |  | 117,859 |  | — |  | — |  | 117,859 |
Junior subordinated debt securities | 45,619 |  | 45,619 |  | — |  | — |  | 45,619 |
Interest rate swap contracts - commercial loans | 11,276 |  | 11,276 |  | — |  | 11,276 |  | — |
Forward sale contracts - mortgage loans | 5 |  | 5 |  | — |  | 5 |  | — |
(1) As reported in the Consolidated Balance Sheets |  |  |  |  |

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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 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=66048111&loc=d3e19207-110258 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=73719730&loc=d3e13537-108611 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=73719730&loc=d3e13504-108611 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=73719730&loc=d3e13433-108611 + Details
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