Fair Value of Financial Instruments and Fair Value Measurements

3 Months Ended

Mar. 31, 2021

Fair Value of Financial Instruments and Fair Value Measurements

Fair value is the exchange price that would 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. There are three levels of inputs that may be used to measure fair values:

•Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

•Level 2 – Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

•Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

For information regarding the valuation methodologies used to measure the Company's assets recorded at fair value (under ASC Topic 820), and for estimating fair value for financial instruments not recorded at fair value (under ASC Topic 825, as amended by ASU 2016-01 and ASU 2018-03), see Note 1. Nature of Business and Significant Accounting Policies and Note 20. Estimated Fair Value of Financial Instruments and Fair Value Measurements to the consolidated financial statements in the Company's 2020 Annual Report on Form 10-K, filed with the SEC on March 11, 2021.

The Company uses fair value to measure certain assets and liabilities on a recurring basis, primarily available for sale debt securities, derivatives and mortgage servicing rights. For assets measured at the lower of cost or fair value, the fair value measurement criteria may or may not be met during a reporting period and such measurements are therefore considered "nonrecurring" for purposes of disclosing the Company's fair value measurements. Fair value is used on a nonrecurring basis to adjust carrying values for collateral dependent individually analyzed loans and other real estate owned.

Recurring Basis

The following table summarizes assets and liabilities measured at fair value on a recurring basis as of the dates indicated, by level within the fair value hierarchy:


	Fair Value Measurement at March 31, 2021 Using
(in thousands)	Total		Level 1		Level 2		Level 3
Assets:
Available for sale debt securities:
U.S. Government agencies and corporations	$	340	$	—	$	340	$	—
State and political subdivisions	673,923		—		673,923		—
Mortgage-backed securities	79,005		—		79,005		—
Collateralized mortgage obligations	715,981		—		715,981		—
Corporate debt securities	427,645		—		427,645		—
Derivative assets	6,894		—		6,894		—
Mortgage servicing rights	5,928		—		5,928		—

Liabilities:
Derivative liabilities	$	7,694	$	—	$	7,694	$	—


	Fair Value Measurement at December 31, 2020 Using
(in thousands)	Total		Level 1		Level 2		Level 3
Assets:
Debt securities available for sale:
U.S. Government agencies and corporations	$	361	$	—	$	361	$	—
State and political subdivisions	628,346		—		628,346		—
Mortgage-backed securities	94,018		—		94,018		—
Collateralized mortgage obligations	565,836		—		565,836		—
Corporate debt securities	368,820		—		368,820		—
Derivative assets	10,796		—		10,796		—
Mortgage servicing rights	5,137		—		5,137		—

Liabilities:
Derivative liabilities	$	13,267	$	—	$	13,267	$	—

There were no transfers of assets between Level 3 and other levels of the fair value hierarchy during the three months ended March 31, 2021 or the year ended December 31, 2020.

Changes in the fair value of available for sale debt securities are included in other comprehensive income.

Nonrecurring Basis

The following tables presents assets measured at fair value on a nonrecurring basis as of the dates indicated:


	Fair Value Measurement at March 31, 2021 Using
(in thousands)	Total		Level 1		Level 2		Level 3
Collateral dependent individually analyzed loans	$	36,235	$	—	$	—	$	36,235
Foreclosed assets, net	1,487		—		—		1,487


	Fair Value Measurement at December 31, 2020 Using
(in thousands)	Total		Level 1		Level 2		Level 3
Collateral dependent individually analyzed loans	$	34,265	$	—	$	—	$	34,265
Foreclosed assets, net	2,316		—		—		2,316

The following table presents the valuation technique(s), unobservable inputs, and quantitative information about the unobservable inputs used for fair value measurements of the financial instruments held by the Company and categorized within Level 3 of the fair value hierarchy as of the dates indicated:


	Fair Value at
(dollars in thousands)	March 31, 2021		December 31, 2020		Valuation Techniques(s)	Unobservable Input	Range of Inputs					Weighted Average
Collateral dependent individually analyzed loans	$	36,235	$	34,265	Fair value of collateral	Valuation adjustments	—	%	-	91	%	22	%
Foreclosed assets, net	$	1,487	$	2,316	Fair value of collateral	Valuation adjustments	8	%	-	66	%	32	%

Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values.

The carrying amount and estimated fair value of financial instruments at March 31, 2021 and December 31, 2020 were as follows:


	March 31, 2021
(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	145,769	$	145,769	$	145,769	$	—	$	—
Debt securities available for sale	1,896,894		1,896,894		—		1,896,894		—
Loans held for sale	58,333		58,608		—		58,608		—
Loans held for investment, net	3,307,511		3,341,347		—		—		3,341,347
Interest receivable	19,749		19,749		—		19,749		—
FHLB stock	12,170		12,170		—		12,170		—
Derivative assets	6,894		6,894		—		6,894		—
Financial liabilities:
Noninterest bearing deposits	958,526		958,526		958,526		—		—
Interest bearing deposits	3,836,037		3,838,265		2,937,232		901,033		—
Short-term borrowings	175,785		175,785		175,785		—		—
Finance leases payable	1,061		1,061		—		1,061		—
FHLB borrowings	84,174		85,986		—		85,986		—
Junior subordinated notes issued to capital trusts	41,807		34,066		—		34,066		—
Subordinated debentures	74,654		78,388		—		78,388		—

Derivative liabilities	7,694		7,694		—		7,694		—


	December 31, 2020
(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	82,659	$	82,659	$	82,659	$	—	$	—

Debt securities available for sale	1,657,381		1,657,381		—		1,657,381		—

Loans held for sale	59,956		60,039		—		60,039		—
Loans held for investment, net	3,426,723		3,469,515		—		—		3,469,515
Interest receivable	21,706		21,706		—		21,706		—
FHLB stock	13,784		13,784		—		13,784		—
Derivative assets	10,796		10,796		—		10,796		—
Financial liabilities:
Noninterest bearing deposits	910,655		910,655		910,655		—		—
Interest bearing deposits	3,636,394		3,640,365		2,800,046		840,319
Short-term borrowings	230,789		230,789		230,789		—		—
Finance leases payable	1,096		1,096		—		1,096		—
FHLB borrowings	91,198		93,380		—		93,380
Junior subordinated notes issued to capital trusts	41,763		33,986		—		33,986
Subordinated debentures	74,634		77,228		—		77,228

Derivative liabilities	13,267		13,267		—		13,267		—

- 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.

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