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Fair Value of Financial Instruments | 6 Months Ended
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Jun. 30, 2022
Fair Value Disclosures [Abstract] |
Fair Value of Financial Instruments | Note 5 - Fair Value of Financial Instruments Fair value is the exchange price that is expected to be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Certain assets and liabilities are recorded in the Company's consolidated financial statements at fair value. Some are recorded on a recurring basis and some on a non-recurring basis. The Company utilizes fair value measurement to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The determination of fair values of financial instruments often requires the use of estimates. In cases where quoted market values in an active market are not available, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach to estimate the fair values of its financial instruments. Such valuation techniques are consistently applied. A hierarchy for fair value has been established, which categorizes the valuation techniques into three levels used to measure fair value. The three levels are as follows: Level 1 - Fair value is based on unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 - Fair value is based on significant other observable inputs that are generally determined based on a single price for each financial instrument provided to the Company by an unrelated third-party pricing service and is based on one or more of the following: •Quoted prices for similar, but not identical, assets or liabilities in active markets; •Quoted prices for identical or similar assets or liabilities in markets that are not active; •Inputs other than quoted prices that are observable, such as interest rate and yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates; and •Other inputs derived from or corroborated by observable market inputs. Level 3 - Prices or valuation techniques that require inputs that are both significant and unobservable in the market. These instruments are valued using the best information available, some of which is internally developed, and reflects the Company's own assumptions about the risk premiums that market participants would generally require and the assumptions they would use. There were no transfers between fair value reporting levels for any period presented. Fair Values of Assets and Liabilities Recorded on a Recurring Basis The following tables summarize financial assets and financial liabilities recorded at fair value on a recurring basis at June 30, 2022, and December 31, 2021, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value. There were no changes in the valuation techniques during 2022 or 2021.
| June 30, 2022 |
(Dollars in thousands) | Level 1 |  | Level 2 |  | Level 3 |  | Total |
State and municipal securities | $ | — |  |  | $ | 344,379 |  |  | $ | 57,565 |  |  | $ | 401,944 |  |
Corporate bonds | — |  |  | 79,593 |  |  | — |  |  | 79,593 |  |
U.S. treasury securities | 115,642 |  |  | — |  |  | — |  |  | 115,642 |  |
U.S. government agency securities | — |  |  | 141,405 |  |  | — |  |  | 141,405 |  |
Commercial mortgage-backed securities | — |  |  | 110,697 |  |  | — |  |  | 110,697 |  |
Residential mortgage-backed securities | — |  |  | 649,126 |  |  | — |  |  | 649,126 |  |
Commercial collateralized mortgage obligations | — |  |  | 40,965 |  |  | — |  |  | 40,965 |  |
Residential collateralized mortgage obligations | — |  |  | 188,591 |  |  | — |  |  | 188,591 |  |
Asset-backed securities | — |  |  | 76,407 |  |  | — |  |  | 76,407 |  |
Securities available for sale | 115,642 |  |  | 1,631,163 |  |  | 57,565 |  |  | 1,804,370 |  |
Securities carried at fair value through income | — |  |  | — |  |  | 6,630 |  |  | 6,630 |  |
Loans held for sale | — |  |  | 31,840 |  |  | — |  |  | 31,840 |  |
Mortgage servicing rights | — |  |  | — |  |  | 22,127 |  |  | 22,127 |  |
Other assets - derivatives | — |  |  | 17,328 |  |  | — |  |  | 17,328 |  |
Total recurring fair value measurements - assets | $ | 115,642 |  |  | $ | 1,680,331 |  |  | $ | 86,322 |  |  | $ | 1,882,295 |  |
Other liabilities - derivatives | $ | — |  |  | $ | (15,824) |  |  | $ | — |  |  | $ | (15,824) |  |
Total recurring fair value measurements - liabilities | $ | — |  |  | $ | (15,824) |  |  | $ | — |  |  | $ | (15,824) |  |
| December 31, 2021 |
(Dollars in thousands) | Level 1 |  | Level 2 |  | Level 3 |  | Total |
State and municipal securities | $ | — |  |  | $ | 364,357 |  |  | $ | 41,461 |  |  | $ | 405,818 |  |
Corporate bonds | — |  |  | 82,734 |  |  | — |  |  | 82,734 |  |
U.S. treasury securities | 92,245 |  |  | — |  |  | — |  |  | 92,245 |  |
U.S. government agency securities | — |  |  | 5,413 |  |  | — |  |  | 5,413 |  |
Commercial mortgage-backed securities | — |  |  | 64,243 |  |  | — |  |  | 64,243 |  |
Residential mortgage-backed securities | — |  |  | 557,801 |  |  | — |  |  | 557,801 |  |
Commercial collateralized mortgage obligations | — |  |  | 19,672 |  |  | — |  |  | 19,672 |  |
Residential collateralized mortgage obligations | — |  |  | 193,740 |  |  | — |  |  | 193,740 |  |
Asset-backed securities | — |  |  | 83,062 |  |  | — |  |  | 83,062 |  |
Securities available for sale | 92,245 |  |  | 1,371,022 |  |  | 41,461 |  |  | 1,504,728 |  |
Securities carried at fair value through income | — |  |  | — |  |  | 7,497 |  |  | 7,497 |  |
Loans held for sale | — |  |  | 37,032 |  |  | — |  |  | 37,032 |  |
Mortgage servicing rights | — |  |  | — |  |  | 16,220 |  |  | 16,220 |  |
Other assets - derivatives | — |  |  | 11,459 |  |  | — |  |  | 11,459 |  |
Total recurring fair value measurements - assets | $ | 92,245 |  |  | $ | 1,419,513 |  |  | $ | 65,178 |  |  | $ | 1,576,936 |  |
Other liabilities - derivatives | $ | — |  |  | $ | (11,494) |  |  | $ | — |  |  | $ | (11,494) |  |
Total recurring fair value measurements - liabilities | $ | — |  |  | $ | (11,494) |  |  | $ | — |  |  | $ | (11,494) |  |
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the six months ended June 30, 2022 and 2021, are summarized as follows:
(Dollars in thousands) |  |  | MSRs |  | Securities Available for Sale |  | Securities at Fair Value Through Income |
Balance at January 1, 2022 |  |  | $ | 16,220 |  |  | $ | 41,461 |  |  | $ | 7,497 |  |
Gain (loss) recognized in earnings: |  |  |  |  |  |  |  |
Mortgage banking revenue(1) |  |  | 4,443 |  |  | — |  |  | — |  |
Other noninterest income |  |  | — |  |  | — |  |  | (592) |  |
Loss recognized in AOCI |  |  | — |  |  | (4,491) |  |  | — |  |
Purchases, issuances, sales and settlements: |  |  |  |  |  |  |  |
Originations |  |  | 1,464 |  |  | — |  |  | — |  |
Purchases |  |  | — |  |  | 23,877 |  |  | — |  |
Settlements |  |  | — |  |  | (3,282) |  |  | (275) |  |
Balance at June 30, 2022 |  |  | $ | 22,127 |  |  | $ | 57,565 |  |  | $ | 6,630 |  |
(Dollars in thousands) | Loans at Fair Value |  | MSRs |  | Securities Available for Sale |  | Securities at Fair Value Through Income
Balance at January 1, 2021 | $ | 17,011 |  |  | $ | 13,660 |  |  | $ | 44,065 |  |  | $ | 11,554 |
Gain (loss) recognized in earnings: |  |  |  |  |  |  |
Mortgage banking revenue(1) | — |  |  | (772) |  |  | — |  |  | — |
Other noninterest income | (125) |  |  | — |  |  | — |  |  | (316) |
Loss recognized in AOCI | — |  |  | — |  |  | (595) |  |  | — |
Purchases, issuances, sales and settlements: |  |  |  |  |  |  |
Originations | — |  |  | 3,193 |  |  | — |  |  | — |
Purchases | — |  |  | — |  |  | 1,000 |  |  | — |
Settlements | (11,443) |  |  | — |  |  | (2,180) |  |  | (265) |
Balance at June 30, 2021 | $ | 5,443 |  |  | $ | 16,081 |  |  | $ | 42,290 |  |  | $ | 10,973 |
___________________________ (1)Total mortgage banking revenue includes changes in fair value due to market changes and run-off. The Company obtains fair value measurements for loans at fair value, securities available for sale and securities at fair value through income from an independent pricing service; therefore, quantitative unobservable inputs are unknown. The following methodologies were used to measure the fair value of financial assets and liabilities valued on a recurring basis: Securities Available for Sale Securities classified as available for sale are reported at fair value utilizing Level 1, Level 2 or Level 3 inputs. For Level 1 securities, the Company obtains the fair value measurements for those identical assets from an independent pricing service. For Level 2 securities, the Company obtains fair value measurements from an independent 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, market consensus prepayment speeds, credit information and the security's terms and conditions, among other things. In order to ensure the fair values are consistent with ASC 820, Fair Value Measurements and Disclosures, the Company periodically checks the fair value by comparing them to other pricing sources, such as Bloomberg LP. The third-party pricing service is subject to an annual review of internal controls in accordance with the Statement on Standards for Attestation Engagements No. 16, which was made available to the Company. In certain cases where Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Mortgage Servicing Rights ("MSRs") The carrying amounts of the MSRs equal fair value, which are determined using a discounted cash flow valuation model. The significant assumptions used to value MSRs were as follows:
| June 30, 2022 |  | December 31, 2021
| Range |  | Weighted Average(1) |  | Range |  | Weighted Average(1)
Prepayment speeds | 5.70% - 17.11% |  | 6.76 | % |  | 9.10% - 36.51% |  | 15.63 | %
Discount rates | 9.19 - 12.21 |  | 9.98 |  |  | 8.89 - 10.39 |  | 9.32 |
__________________________ (1)The weighted average was calculated with reference to the principal balance of the underlying mortgages. In recent years, there have been significant market-driven fluctuations in the assumptions listed above. Loans with higher average coupon rates have a greater likelihood of prepayment during comparatively low interest rate environments, while loans with lower average coupon rates have a lower likelihood of prepayment. The increase in rates since the year ended December 31, 2021, has caused a decrease in our weighted average prepayment speed and an increase in our discount rate assumptions used in the MSR valuation. These fluctuations can be rapid and may continue to be significant. Therefore, estimating these assumptions within ranges that market participants would use in determining the fair value of MSRs requires significant management judgment. Derivatives Fair values for interest rate swap agreements are based upon the amounts that would be required to settle the contracts. Fair values for derivative loan commitments and forward loan sale commitments are based on the fair values of the underlying mortgage loans and the probability of such commitments being exercised. Significant management judgment and estimation is required in determining these fair value measurements. Fair Values of Assets Recorded on a Recurring Basis for which the Fair Value Option has been Elected Certain assets are measured at fair value on a recurring basis due to the Company's election to adopt fair value accounting treatment for those assets. This election allows for a more effective offset of the changes in fair values of the assets and the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting under ASC Topic 815, Derivatives and Hedging. For assets for which the fair value has been elected, the earned current contractual interest payment is recognized in interest income, loan origination costs and fees on fair value option loans are recognized in earnings as incurred and not deferred. At June 30, 2022, and December 31, 2021, there were no gains or losses recorded attributable to changes in instrument-specific credit risk. The following tables summarize the difference between the fair value and the unpaid principal balance for financial instruments for which the fair value option has been elected:
| June 30, 2022
(Dollars in thousands) | Aggregate Fair Value |  | Aggregate Unpaid Principal Balance |  | Difference
Loans held for sale(1) | $ | 31,840 |  |  | $ | 31,312 |  |  | $ | 528 |
Securities carried at fair value through income | 6,630 |  |  | 7,100 |  |  | (470) |
Total | $ | 38,470 |  |  | $ | 38,412 |  |  | $ | 58 |
____________________________ (1)$2.5 million of loans held for sale were designated as nonaccrual or 90 days or more past due at June 30, 2022. Of this balance, $1.9 million was guaranteed by U.S. Government agencies.
| December 31, 2021
(Dollars in thousands) | Aggregate Fair Value |  | Aggregate Unpaid Principal Balance |  | Difference
Loans held for sale(1) | $ | 37,032 |  |  | $ | 36,072 |  |  | $ | 960 |
Securities carried at fair value through income | 7,497 |  |  | 7,375 |  |  | 122 |
Total | $ | 44,529 |  |  | $ | 43,447 |  |  | $ | 1,082 |
____________________________ (1)$1.8 million of loans held for sale were designated as nonaccrual or 90 days or more past due at December 31, 2021. Of this balance, $1.2 million was guaranteed by U.S. Government agencies. Changes in the fair value of assets for which the Company elected the fair value option are classified in the consolidated statement of income line items reflected in the following table:
(Dollars in thousands) | Three Months Ended June 30, |  | Six Months Ended June 30, |  |
Changes in fair value included in noninterest income: | 2022 |  | 2021 |  | 2022 |  | 2021 |  |  |  |  |  |
Mortgage banking revenue (loans held for sale) | $ | 65 |  |  | $ | (177) |  |  | $ | (432) |  |  | $ | (4,302) |  |  |  |  |  |  |
Other income: |  |  |  |  |  |  |  |  |  |  |  |  |
Loans at fair value held for investment | — |  |  | (66) |  |  | — |  |  | (125) |  |  |  |  |  |  |
Securities carried at fair value through income | (154) |  |  | 161 |  |  | (592) |  |  | (316) |  |  |  |  |  |  |
Total impact on other income | (154) |  |  | 95 |  |  | (592) |  |  | (441) |  |  |  |  |  |  |
Total fair value option impact on noninterest income (1) | $ | (89) |  |  | $ | (82) |  |  | $ | (1,024) |  |  | $ | (4,743) |  |  |  |  |  |  |
____________________________ (1)The fair value option impact on noninterest income is offset by the derivative gain/loss recognized in noninterest income. Please see Note 6 - Mortgage Banking for more detail. The following methodologies were used to measure the fair value of financial assets valued on a recurring basis for which the fair value option was elected: Securities at Fair Value through Income Securities carried at fair value through income are valued using a discounted cash flow with a credit spread applied to each instrument based on the creditworthiness of each issuer. Credit spreads ranged from 83 to 227 basis points at both June 30, 2022, and December 31, 2021. The Company believes the fair value approximates an exit price. Loans Held for Sale Fair values for loans held for sale are established using anticipated sale prices for loans allocated to a sale commitment, and those unallocated to a commitment are valued based on the interest rate and term for similar loans allocated. The Company believes the fair value approximates an exit price. Fair Value of Assets Recorded on a Nonrecurring Basis Equity Securities without Readily Determinable Fair Values Equity securities without readily determinable fair values totaled $76.8 million and $45.2 million at June 30, 2022, and December 31, 2021, respectively, and are shown on the face of the consolidated balance sheets. The majority of the Company's equity investments qualify for the practical expedient allowed for equity securities without a readily determinable fair value, such that the Company has elected to carry these securities at cost adjusted for any observable transactions during the period, less any impairment. To date, no impairment has been recorded on the Company's investments in equity securities that do not have readily determinable fair values. Government National Mortgage Association Repurchase Asset The Company recorded $30.7 million and $43.4 million, respectively, at June 30, 2022, and December 31, 2021, for Government National Mortgage Association ("GNMA") repurchase assets included in loans held for sale on the consolidated balance sheets. The assets are valued at the lower of cost or market and, where market is lower than cost, valued using anticipated sale prices for loans allocated to a sale commitment, and those unallocated to a commitment are valued based on the interest rate and term for similar loans allocated. The Company believes the fair value approximates an exit price. Please see Note 6 - Mortgage Banking for more information on the GNMA repurchase asset. Collateral Dependent Loans with Credit Losses Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured to determine if any credit loss exists. Allowable methods for determining the amount of credit loss include estimating the fair value using the fair value of the collateral for collateral-dependent loans. If the loan is identified as collateral-dependent, the fair value method of measuring the amount of credit loss is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. Loans that have experienced a credit loss that are collateral-dependent are classified within Level 3 of the fair value hierarchy when the credit loss is determined using the fair value method. The fair value of loans that have experienced a credit loss with specific allocated losses was approximately $4.2 million and $4.8 million at June 30, 2022, and December 31, 2021, respectively. Non-Financial Assets Foreclosed assets held for sale are the only non-financial assets valued on a non-recurring basis that are initially recorded by the Company at fair value, less estimated costs to sell. At foreclosure, if the fair value, less estimated costs to sell, of the real estate acquired is less than the Company's recorded investment in the related loan, a write-down is recognized through a charge to the allowance for loan credit losses. Additionally, valuations are periodically performed by management, and any subsequent reduction in value is recognized by a charge to income. The carrying value and fair value of foreclosed assets held for sale was estimated using Level 3 inputs based on observable market data and was $1.8 million at June 30, 2022, and December 31, 2021. At June 30, 2022, the Company had $10,000 in principal amount of residential mortgage loans in the process of foreclosure. Fair Values of Financial Instruments Not Recorded at Fair Value Loans The estimated fair value approximates carrying value for variable-rate loans that reprice frequently and with no significant change in credit risk. The fair value of fixed rate loans and variable-rate loans, which reprice on an infrequent basis, is estimated by discounting future cash flows using exit level pricing, which combines the current interest rates at which similar loans with similar terms would be made to borrowers of similar credit quality and an estimated additional rate to reflect a liquidity premium. An overall valuation adjustment is made for specific credit risks as well as general portfolio credit risk. Deposits The estimated fair value approximates carrying value for demand deposits. The fair value of fixed rate deposit liabilities with defined maturities is estimated by discounting future cash flows using the interest rates currently available for funding from the FHLB. The estimated fair value of deposits does not take into account the value of our long-term relationships with depositors, commonly known as core deposit intangibles, which are separate intangible assets, and not considered financial instruments. Nonetheless, the Company would likely realize a core deposit premium if the deposit portfolio were sold in the principal market for such deposits. Borrowed Funds The estimated fair value approximates carrying value for short-term borrowings. The fair value of long-term fixed rate and fixed-to-floating-rate borrowings is estimated using quoted market prices, if available, or by discounting future cash flows using current interest rates for similar financial instruments. The estimated fair value approximates carrying value for variable-rate junior subordinated debentures that reprice quarterly. The carrying value and estimated fair values of financial instruments not recorded at fair value are as follows:
(Dollars in thousands) | June 30, 2022 |  | December 31, 2021 |
Financial assets: Level 1 inputs: | Carrying Value |  | Estimated Fair Value |  | Carrying Value |  | Estimated Fair Value |
Cash and cash equivalents | $ | 323,920 |  |  | $ | 323,920 |  |  | $ | 705,618 |  |  | $ | 705,618 |  |
Level 2 inputs: |  |  |  |  |  |  |  |
Non-marketable equity securities held in other financial institutions | 76,822 |  |  | 76,822 |  |  | 45,192 |  |  | 45,192 |  |
Accrued interest and loan fees receivable | 24,277 |  |  | 24,277 |  |  | 23,402 |  |  | 23,402 |  |
Level 3 inputs: |  |  |  |  |  |  |  |
Securities held to maturity | 4,288 |  |  | 5,448 |  |  | 22,767 |  |  | 25,117 |  |
LHFI, net | 5,464,970 |  |  | 5,421,977 |  |  | 5,166,745 |  |  | 5,133,257 |  |
Financial liabilities: |  |  |  |  |  |  |  |
Level 2 inputs: |  |  |  |  |  |  |  |
Deposits | 6,303,158 |  |  | 6,293,928 |  |  | 6,570,693 |  |  | 6,572,215 |  |
FHLB advances and other borrowings | 894,581 |  |  | 846,980 |  |  | 309,801 |  |  | 305,374 |  |
Subordinated indebtedness | 157,540 |  |  | 147,836 |  |  | 157,417 |  |  | 156,629 |  |
Accrued interest payable | 2,460 |  |  | 2,460 |  |  | 2,696 |  |  | 2,696 |  |

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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 https://asc.fasb.org/extlink&oid=126976982&loc=d3e19207-110258 + Details
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