Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUE MEASUREMENTS

v3.22.2
FAIR VALUE MEASUREMENTS
6 Months Ended
Jun. 30, 2022
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASUREMENTS

10. FAIR VALUE MEASUREMENTS

The Company follows ASC 820 to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. ASC 820 clarifies that fair value of certain assets and liabilities 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 willing market participants.

ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy under ASC 820 based on these two types of inputs are as follows:

Level 1  Valuation is based on quoted prices in active markets for identical assets and liabilities.

Level 2  Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the markets.

Level 3  Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market. These unobservable inputs reflect the Company’s assumptions about what market participants would use and information that is reasonably available under the circumstances without undue cost and effort.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements.

Derivative Instruments

As discussed in Note 8 “Derivatives”, the Company records derivative instruments at fair value on a recurring basis. The Company utilizes derivative instruments as part of the management of interest rate risk to modify the re-pricing characteristics of certain portions of the Company’s interest-bearing assets and liabilities. The Company has contracted with a third-party vendor to provide valuations for derivatives using standard valuation techniques and therefore classifies such valuations as Level 2. Third party valuations are validated by the Company using BVAL derivative pricing functions. No material differences were identified during the validation as of June 30, 2022 and December 31, 2021. The Company has considered counterparty credit risk in the valuation of its derivative assets and has considered its own credit risk in the valuation of its derivative liabilities. Mortgage banking derivatives as of June 30, 2022 and December 31, 2021 did not have a material impact on the Company’s Consolidated Financial Statements.

AFS Securities

AFS securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data (Level 2). If the inputs used to provide the evaluation for certain securities are unobservable and/or there is little, if any, market activity, then the security would fall to the lowest level of the hierarchy (Level 3).

The Company’s investment portfolio is primarily valued using fair value measurements that are considered to be Level 2. The Company has contracted with a third-party portfolio accounting service vendor for valuation of its securities portfolio. The vendor’s primary source for security valuation is ICE, which evaluates securities based on market data. ICE utilizes evaluated pricing models that vary by asset class and include available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.

The vendor utilizes proprietary valuation matrices for valuing all municipals securities. The initial curves for determining the price, movement, and yield relationships within the municipal matrices are derived from industry benchmark curves or sourced from a municipal trading desk. The securities are further broken down according to issuer, credit support, state of issuance, and rating to incorporate additional spreads to the industry benchmark curves.

The Company primarily uses BVAL an independent information source that draws on quantitative models and market data contributed from over 4,000 market participants, to validate third party valuations. Any material differences between valuation sources are researched by further analyzing the various inputs that are utilized by each pricing source. No material differences were identified during the validation as of June 30, 2022 and December 31, 2021.

The carrying value of restricted FRB and FHLB stock approximates fair value based on the redemption provisions of each entity and is therefore excluded from the table below.

Loans Held for Sale

Residential loans originated for sale in the open market are carried at fair value. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). Gains and losses on the sale of loans are recorded in current period earnings as a component of "Mortgage banking income" on the Company’s Consolidated Statements of Income.

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis at June 30, 2022 and December 31, 2021 (dollars in thousands):

    

Fair Value Measurements at June 30, 2022 using

    

    

Significant

    

    

Quoted Prices in

Other

Significant

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

Level 1

Level 2

Level 3

Balance

ASSETS

  

 

  

 

  

 

  

AFS securities:

  

 

  

 

  

 

  

U.S. government and agency securities

$

58,817

$

6,923

$

$

65,740

Obligations of states and political subdivisions

 

 

822,427

 

 

822,427

Corporate and other bonds(1)

 

 

177,892

 

 

177,892

MBS

 

 

1,883,713

 

 

1,883,713

Other securities

 

 

1,649

 

 

1,649

LHFS

 

 

15,866

 

 

15,866

Derivatives:

 

  

 

  

 

  

 

  

Interest rate contracts

 

 

34,354

 

 

34,354

Fair value hedges

 

 

1,171

 

 

1,171

LIABILITIES

Derivatives:

 

  

 

  

 

  

 

  

Interest rate contracts

$

$

146,260

$

$

146,260

Fair value hedges

37

 

37

(1) Other bonds include asset-backed securities.

    

Fair Value Measurements at December 31, 2021 using

    

    

Significant

    

    

Quoted Prices in

Other

Significant

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

Level 1

Level 2

Level 3

Balance

ASSETS

  

 

  

 

  

 

  

AFS securities:

  

 

  

 

  

 

  

U.S. government and agency securities

$

64,474

$

9,375

$

$

73,849

Obligations of states and political subdivisions

1,008,396

1,008,396

Corporate and other bonds(1)

 

 

153,376

 

 

153,376

MBS

 

 

2,244,389

 

 

2,244,389

Other securities

 

 

1,640

 

 

1,640

LHFS

20,861

20,861

Derivatives:

 

  

 

  

 

  

 

  

Interest rate contracts

 

 

73,696

 

 

73,696

LIABILITIES

 

  

 

  

 

  

 

  

Derivatives:

 

  

 

  

 

  

 

  

Interest rate contracts

$

$

49,051

$

$

49,051

Fair value hedges

 

 

5,387

 

 

5,387

(1) Other bonds include asset-backed securities.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets are measured at fair value on a nonrecurring basis in accordance with U.S. GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets after they are evaluated for impairment. The primary assets accounted for at fair value on a nonrecurring basis are related to foreclosed properties, former bank premises, and collateral-dependent loans that are individually assessed. When the asset is secured by real estate, the Company measures the fair value utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data. Management may discount the value from the appraisal in determining the fair value if, based on its understanding of the market conditions, the collateral had been impaired below the appraised value (Level 3). The assets for which a nonrecurring fair value measurement was recorded were $9.4 million and $11.3 million during the periods ended June 30, 2022 and December 31, 2021 respectively. The nonrecurring valuation adjustments for these assets did not have a material impact on the Company’s consolidated financial statements.

Fair Value of Financial Instruments

ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments for interim periods and excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

Cash and Cash Equivalents

For those short-term instruments, the carrying amount is a reasonable estimate of fair value.

HTM Securities

The Company’s investment portfolio is primarily valued using fair value measurements that are considered to be Level 2. The Company has contracted with a third-party portfolio accounting service vendor for valuation of its securities portfolio. The vendor’s primary source for security valuation is ICE, which evaluates securities based on market data. ICE utilizes evaluated pricing models that vary by asset class and include available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.

The vendor utilizes proprietary valuation matrices for valuing all municipals securities. The initial curves for determining the price, movement, and yield relationships within the municipal matrices are derived from industry benchmark curves or sourced from a municipal trading desk. The securities are further broken down according to issuer, credit support, state of issuance, and rating to incorporate additional spreads to the industry benchmark curves.

The Company primarily uses BVAL, an independent information source that draws on quantitative models and market data contributed from over 4,000 market participants, to validate third party valuations. Any material differences between valuation sources are researched by further analyzing the various inputs that are utilized by each pricing source. No material differences were identified during the validation as of June 30, 2022 and December 31, 2021. The Company’s Level 3 securities are a result of the Access acquisition and are comprised of asset-backed securities and municipal bonds. Valuations of the asset-backed securities are provided by a third party vendor specializing in the SBA markets, and are based on underlying loan pool information, market data, and recent trading activity for similar securities. Valuations of the municipal bonds are provided by a third party vendor that specializes in hard-to-value securities, and are based on a discounted cash flow model and considerations for the complexity of the instrument, likelihood it will be called and credit ratings. The Company reviews the valuation of both security types for reasonableness in the context of market conditions and to similar bonds in the Company’s portfolio. Any material differences between valuation sources are researched by further analyzing the various inputs that are utilized by each pricing source. No material differences were identified during the validation as of June 30, 2022 and December 31, 2021.

Loans and Leases

The fair value of loans and leases were estimated using an exit price, representing the amount that would be expected to be received if the Company sold the loans and leases. The fair value of performing loans and leases were estimated through use of discounted cash flows.  Credit loss assumptions were based on market PD/LGD for loan and lease cohorts.  The discount rate was based primarily on recent market origination rates. Fair value of loans and leases individually assessed and their respective levels within the fair value hierarchy are described in the previous section related to fair value measurements of assets that are measured on a nonrecurring basis.

Bank Owned Life Insurance

The carrying value of BOLI approximates fair value. The Company records these policies at their cash surrender value, which is estimated using information provided by insurance carriers.

Deposits

The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposits were valued using a discounted cash flow calculation that includes a market rate analysis of the current rates offered by market participants for certificates of deposits that mature in the same period.

Accrued Interest

The carrying amounts of accrued interest approximate fair value.

The carrying values and estimated fair values of the Company’s financial instruments at June 30, 2022 and December 31, 2021 are as follows (dollars in thousands):

Fair Value Measurements at June 30, 2022 using

    

    

Quoted Prices

    

Significant

    

    

in Active

Other

Significant

Markets for

Observable

Unobservable

Total Fair

Identical Assets

Inputs

Inputs

Value

Carrying

 

Value

Level 1

Level 2

Level 3

Balance

ASSETS

Cash and cash equivalents

$

241,376

$

241,376

$

$

$

241,376

AFS securities

 

2,951,421

 

58,817

 

2,892,604

 

 

2,951,421

HTM securities

 

780,749

 

 

738,397

 

4,822

 

743,219

Restricted stock

 

87,908

 

 

87,908

 

 

87,908

LHFS

 

15,866

 

 

15,866

 

 

15,866

Net loans

 

13,551,224

 

 

 

13,058,756

 

13,058,756

Derivatives:

 

  

 

  

 

  

 

  

 

  

Interest rate contracts

 

34,354

 

 

34,354

 

 

34,354

Fair value hedges

 

1,171

 

 

1,171

 

 

1,171

Accrued interest receivable

 

67,231

 

 

67,231

 

 

67,231

BOLI

 

436,703

 

 

436,703

 

 

436,703

LIABILITIES

 

  

 

  

 

  

 

  

 

  

Deposits

$

16,128,635

$

$

16,142,580

$

$

16,142,580

Borrowings

 

797,948

 

 

466,601

 

 

466,601

Accrued interest payable

 

1,349

 

 

1,349

 

 

1,349

Derivatives:

 

  

 

  

 

  

 

  

 

  

Interest rate contracts

 

146,260

 

 

146,260

 

 

146,260

Fair value hedges

 

37

 

 

37

 

 

37

    

Fair Value Measurements at December 31, 2021 using

Quoted Prices

Significant

in Active

Other

Significant

Markets for

Observable

Unobservable

Total Fair

Identical Assets

Inputs

Inputs

Value

Carrying

Value

Level 1

Level 2

Level 3

Balance

ASSETS

Cash and cash equivalents

$

802,501

$

802,501

$

$

$

802,501

AFS securities

 

3,481,650

 

64,474

 

3,417,176

 

 

3,481,650

HTM securities

 

628,000

 

 

686,733

 

7,041

 

693,774

Restricted stock

 

76,825

 

 

76,825

 

 

76,825

LHFS

20,861

 

20,861

 

20,861

Net loans

 

13,096,056

 

 

 

12,861,274

 

12,861,274

Derivatives:

 

  

 

  

 

  

 

  

 

  

Interest rate contracts

 

73,696

 

 

73,696

 

 

73,696

Accrued interest receivable

 

65,015

 

 

65,015

 

 

65,015

BOLI

 

431,517

 

 

431,517

 

 

431,517

LIABILITIES

 

  

 

  

 

  

 

  

 

  

Deposits

$

16,611,068

$

$

16,630,087

$

$

16,630,087

Borrowings

 

506,594

 

 

488,796

 

 

488,796

Accrued interest payable

 

933

 

 

933

 

 

933

Derivatives:

 

  

 

  

 

  

 

  

 

  

Interest rate contracts

 

49,051

 

 

49,051

 

 

49,051

Fair value hedges

 

5,387

 

 

5,387

 

 

5,387

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when market interest rates change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. Borrowers with fixed rate obligations, however, are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.