FIRST FINANCIAL BANKSHARES INCFFIN
FIRST FINANCIAL BANKSHARES INC Fair Value Disclosure
10.
FAIR VALUE DISCLOSURES:
The authoritative accounting guidance for fair value measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. 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 and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.
The authoritative accounting guidance requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the authoritative guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follow
s
: • |
Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. |
• |
Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar 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 for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
• |
Level 3 Inputs – Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities. |
A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Securities classified as and trading are reported at fair value utilizing Level 1 and Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include market spreads, cash flows, the United States Treasury yield curve, live trading levels, trade execution data, dealer quotes, market consensus prepayments speeds, credit information and the security’s terms and conditions, among other items.
available-for-sale
See Notes 4 and 5 related to the determination of fair value for loans IRLCs and forward mortgage-backed securities trades.
held-for-sale,
There were no transfers between Level 2 and Level 3 during the years ended December 31, 2020, 2019 and 2018.
The following table summarizes the Company’s securities, loans and derivatives which are measured at fair value on a recurring basis as of December 31, 2020 and 2019 segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
available-for-sale
held-for-sale,
December 31, 2020 |
Level 1 Inputs |
Level 2 Inputs |
Level 3 Inputs |
Total Fair Value |
||||||||||||
Available-for-sale |
||||||||||||||||
Obligations of state and political subdivisions |
$ | — | $ | 2,426,876 | $ | — | $ | 2,426,876 | ||||||||
Residential mortgage-backed securities |
— | 1,472,280 | — | 1,472,280 | ||||||||||||
Commercial mortgage-backed securities |
— | 489,316 | — | 489,316 | ||||||||||||
Other securities |
4,557 | — | — | 4,557 | ||||||||||||
Total |
$ | 4,557 | $ | 4,388,472 | $ | — | $ | 4,393,029 | ||||||||
Loans held-for-sale |
$ | — | $ | 79,585 | $ | — | $ | 79,585 | ||||||||
IRLCs |
$ | — | $ | 4,618 | $ | — | $ | 4,618 | ||||||||
Forward mortgage-backed securities traded |
$ | — | $ | (1,560 |
) |
$ | — | $ | (1,560 | ) | ||||||
December 31, 2019 |
Level 1 Inputs |
Level 2 Inputs |
Level 3 Inputs |
Total Fair Value |
||||||||||||
Available-for-sale |
||||||||||||||||
U.S Treasury securities |
$ | 10,019 | $ | — | $ | — | $ | 10,019 | ||||||||
Obligations of state and political subdivisions |
— | 1,288,983 | — | 1,288,983 | ||||||||||||
Corporate bonds |
— | 230 | — | 230 | ||||||||||||
Residential mortgage-backed securities |
— | 1,608,863 | — | 1,608,863 | ||||||||||||
Commercial mortgage-backed securities |
— | 500,744 | — | 500,744 | ||||||||||||
Other securities |
4,478 | — | — | 4,478 | ||||||||||||
Total |
$ | 14,497 | $ | 3,398,820 | $ | — | $ | 3,413,317 | ||||||||
Loans held-for-sale |
$ | — | $ | 23,076 | $ | — | $ | 23,076 | ||||||||
IRLCs |
$ | — | $ | 886 | $ | — | $ | 886 | ||||||||
Forward mortgage-backed securities traded |
$ | — | $ | (152 |
) |
$ | — | $ | (152 | ) | ||||||
The following table summarizes the Company’s loans at fair value and the net unrealized gains as of the balance sheet dates shown below (in thousands):
held-for-sale
December 31, |
||||||||
2020 |
2019 |
|||||||
Unpaid principal balance on loans held-for-sale |
$ | 76,602 | $ | 22,340 | ||||
Net unrealized gains on loans held-for-sale |
2,983 | 736 | ||||||
Loans held-for-sale |
$ | 79,585 | $ | 23,076 | ||||
The following table summarizes the Company’s gains on sale and fees of mortgage loans for the years ended December 31, 2020, 2019 and 2018 (in thousands):
Years ended December 31, |
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2020 |
2019 |
2018 |
||||||||||
Realized gain on sale and fees on mortgage loans* |
$ | 39,378 | $ | 17,748 | $ | 14,595 | ||||||
Change in fair value on loans held-for-sale |
5,900 | 145 | 919 | |||||||||
Change in forward mortgage-backed securities trades |
(1,406 | ) | 251 | (357 | ) | |||||||
Total gain on sale of mortgage loans |
$ | 43,872 | $ | 18,144 | $ | 15,157 | ||||||
* This includes gain on loans carried under the fair value method and lower of cost or market.
held-for-sale
No residential 31, 2020 or 2019. No significant credit losses were recognized on mortgage loans for the years ended December 31, 2020, 2019 and 2018.
mortgage loans held-for-sale were 90 days or more past due or considered nonaccrual as of December
held-for-sale
Certain
non-financial
assets and non-financial
liabilities measured at fair value on a nonrecurring basis include other real estate owned, goodwill and other intangible assets and other non-financial
long-lived assets. Non-financial
assets measured at fair value on a nonrecurring basis during the years ended December 31, 2020 and 2019 include other real estate owned which, subsequent to their initial transfer to other real estate owned from loans, were re-measured
at fair value through a write-down included in gain (loss) on sale of foreclosed assets. During the reported periods, all fair value measurements for foreclosed assets utilized Level 2 inputs based on observable market data, generally third-party appraisals, or Level 3 inputs based on customized discounting criteria. These appraisals are evaluated individually and discounted as necessary due to the age of the appraisal, lack of comparable sales, expected holding periods of property or special use type of the property. Such discounts vary by appraisal based on the above factors but generally range from 5% to 25% of the appraised value. Re-evaluation
of other real estate owned is performed at least annually as required by regulatory guidelines or more often if particular circumstances arise. There were no other real estate owned properties that were re-measured
subsequent to their initial transfer to other real estate owned during the years ended December 31, 2020 and 2019. At December 31, 2020 and 2019, other real estate owned totaled $119,000 and $982,000, respectively.
The Company is required under current authoritative accounting guidance to disclose the estimated fair value of their financial instrument assets and liabilities including those subject to the requirements discussed above. For the Company, as for most financial institutions, substantially all of its assets and liabilities are considered financial instruments. Many of the Company’s financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction.
The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.
Cash and due from banks, federal funds sold, interest-bearing deposits in banks and accrued interest receivable and payable are liquid in nature and considered Levels 1 or 2 of the fair value hierarchy.
Financial instruments with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating current market for similar assets and liabilities and are considered Levels 2 and 3 of the fair value hierarchy. Financial instrument liabilities with no stated maturities have an estimated fair value equal to both the amount payable on demand and the carrying value and are considered Level 1 of the fair value hierarch
y
. The carrying value and the estimated fair value of the Company’s contractual
off-balance-sheet
unfunded lines of credit, loan commitments and letters of credit, which are generally priced at market at the time of funding, are not material. The estimated fair values and carrying values of all financial instruments under current authoritative guidance at December 31, 2020 and 2019, were as follows (in thousands):
2020 |
2019 |
|
| |||||||||||||||||
Carrying |
Estimated |
Carrying |
Estimated |
Fair Value |
| |||||||||||||||
Value |
Fair Value |
Value |
Fair Value |
Hierarchy |
| |||||||||||||||
| Cash and due from banks |
$ | 211,113 | $ | 211,113 | $ | 231,534 | $ | 231,534 | |
Level 1 | | |||||||||
| Federal funds sold |
— | — | 3,150 | 3,150 | |
Level 1 | | |||||||||||||
| Interest-bearing demand deposits in banks |
517,971 | 517,971 | 47,920 | 47,920 | |
Level 1 | | |||||||||||||
| Available-for-sale |
4,393,029 | 4,393,029 | 3,413,317 | 3,413,317 | |
Levels 1 and 2 |
| |||||||||||||
| Loans held-for-investment, |
5,104,499 | 5,109,885 | 4,142,470 | 4,157,327 | |
Level 3 | | |||||||||||||
| Loans held-for-sale |
83,969 | 84,233 | 28,228 | 28,343 | |
Level 2 | | |||||||||||||
| Accrued interest receivable |
53,433 | 53,433 | 36,894 | 36,894 | |
Level 2 | | |||||||||||||
| Deposits with stated maturities |
475,542 | 477,218 | 420,013 | 421,397 | |
Level 2 | | |||||||||||||
| Deposits with no stated maturities |
8,200,275 | 8,200,275 | 6,183,793 | 6,183,793 | |
Level 1 | | |||||||||||||
| Borrowings |
430,093 | 430,093 | 381,356 | 381,356 | |
Level 2 | | |||||||||||||
| Accrued interest payable |
377 | 377 | 628 | 628 | |
Level 2 | | |||||||||||||
| IRLCs |
4,618 | 4,618 | 886 | 886 | |
Level 2 | | |||||||||||||
| Forward mortgage-backed securities trades |
(1,560 | ) | (1,560 | ) | (152 | ) | (152 | ) | |
Level 2 |
| |||||||||
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.