FAIR VALUE MEASURES

9 Months Ended

Sep. 30, 2020

NOTE 10 – FAIR VALUE MEASURES

The fair value of an asset or liability is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various assets and liabilities. In cases where quoted market prices are not available, fair value is based on discounted cash flows or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the asset or liability. The accounting standard for disclosures about the fair value measures excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The Company's loans held for sale under the fair value option are comprised of the following:


(dollars in thousands)	September 30, 2020		December 31, 2019
Mortgage loans held for sale	$	1,348,193	$	1,647,900
SBA loans held for sale	19,851		8,811
Total loans held for sale	$	1,368,044	$	1,656,711

The Company has elected to record mortgage loans held for sale at fair value in order to eliminate the complexities and inherent difficulties of achieving hedge accounting and to better align reported results with the underlying economic changes in value of the loans and related hedge instruments. This election impacts the timing and recognition of origination fees and costs, as well as servicing value, which are now recognized in earnings at the time of origination. Interest income on mortgage loans held for sale is recorded on an accrual basis in the consolidated statements of income and comprehensive income under the heading interest income – interest and fees on loans. The servicing value is included in the fair value of the interest rate lock commitments (“IRLCs”) with borrowers. The mark to market adjustments related to mortgage loans held for sale and the associated economic hedges are captured in mortgage banking activities.

A net loss of $23.3 million and a net gain of $17.8 million resulting from fair value changes of these mortgage loans were recorded in income during the three and nine-month periods ended September 30, 2020, respectively. For the three and nine-months ended September 30, 2019, a net gain of $20.3 million and $23.0 million, respectively, resulting from fair value changes of these mortgage loans were recorded in income. A net gain of $21.4 million and $55.2 million resulting from changes in the fair value of the related derivative financial instruments used to hedge exposure to the market-related risks associated with these mortgage loans were recorded in income during the three and nine-month periods ended September 30, 2020, respectively. For the three and nine-months ended September 30, 2019, a net loss of $1.0 million and a net gain of $2.1 million, respectively, resulting from changes in the fair value of the related derivative financial instruments were recorded in income. The change in fair value of both mortgage loans held for sale and the related derivative financial instruments are recorded in mortgage banking activity in the consolidated statements of income and comprehensive income. The Company’s valuation of mortgage loans held for sale incorporates an assumption for credit risk; however, given the short-term period that the Company holds these loans, valuation adjustments attributable to instrument-specific credit risk is nominal.

The following table summarizes the difference between the fair value and the principal balance for mortgage loans held for sale measured at fair value as of September 30, 2020 and December 31, 2019:


(dollars in thousands)	September 30, 2020		December 31, 2019
Aggregate fair value of mortgage loans held for sale	$	1,348,193	$	1,647,900
Aggregate unpaid principal balance of mortgage loans held for sale	1,280,559		1,598,057
Past-due loans of 90 days or more	—		1,649
Nonaccrual loans	—		1,649
Unpaid principal balance of nonaccrual loans	—		1,616

The following table summarizes the difference between the fair value and the principal balance for SBA loans held for sale measured at fair value as of September 30, 2020 and December 31, 2019:


(dollars in thousands)	September 30, 2020		December 31, 2019
Aggregate fair value of SBA loans held for sale	$	19,851	$	8,811
Aggregate unpaid principal balance of SBA loans held for sale	17,867		8,206
Past-due loans of 90 days or more	—		—
Nonaccrual loans	—		—

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available for sale, loans held for sale and derivative financial instruments are recorded at fair value on a recurring basis. From time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as collateral-dependent impaired loans, loan servicing rights and OREO. Additionally, the Company is required to disclose, but not record, the fair value of other financial instruments.

The following table presents the fair value measurements of assets and liabilities measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall as of September 30, 2020 and December 31, 2019:


	Recurring Basis Fair Value Measurements
	September 30, 2020
(dollars in thousands)	Fair Value		Level 1		Level 2		Level 3
Financial assets:
U.S. government sponsored agencies	$	17,604	$	—	$	17,604	$	—
State, county and municipal securities	87,648		—		87,648		—
Corporate debt securities	52,141		—		50,956		1,185
SBA pool securities	65,116		—		65,116		—
Mortgage-backed securities	894,927		—		894,927		—
Loans held for sale	1,368,044		—		1,368,044		—

Mortgage banking derivative instruments	64,694		—		64,694		—
Total recurring assets at fair value	$	2,550,174	$	—	$	2,548,989	$	1,185
Financial liabilities:

Mortgage banking derivative instruments	$	6,177	$	—	$	6,177	$	—
Total recurring liabilities at fair value	$	6,177	$	—	$	6,177	$	—


	Recurring Basis Fair Value Measurements
	December 31, 2019
(dollars in thousands)	Fair Value		Level 1		Level 2		Level 3
Financial assets:
U.S. government sponsored agencies	$	22,362	$	—	$	22,362	$	—
State, county and municipal securities	105,260		—		105,260		—
Corporate debt securities	52,999		—		51,499		1,500
SBA pool securities	73,912		—		73,912		—
Mortgage-backed securities	1,148,870		—		1,148,870		—
Loans held for sale	1,656,711		—		1,656,711		—

Mortgage banking derivative instruments	7,814		—		7,814		—
Total recurring assets at fair value	$	3,067,928	$	—	$	3,066,428	$	1,500
Financial liabilities:
Derivative financial instruments	$	187	$	—	$	187	$	—
Mortgage banking derivative instruments	4,471		—		4,471		—
Total recurring liabilities at fair value	$	4,658	$	—	$	4,658	$	—

The following table presents the fair value measurements of assets measured at fair value on a non-recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy as of September 30, 2020 and December 31, 2019:


	Nonrecurring Basis Fair Value Measurements
(dollars in thousands)	Fair Value		Level 1		Level 2		Level 3
September 30, 2020
Collateral-dependent loans	$	148,083	$	—	$	—	$	148,083
Other real estate owned	4,239		—		—		4,239
Mortgage servicing rights	114,396		—		114,396		—
SBA servicing rights	6,062		—		6,062		—
Total nonrecurring assets at fair value	$	272,780	$	—	$	120,458	$	152,322

December 31, 2019
Impaired loans carried at fair value	$	43,788	$	—	$	—	$	43,788
Other real estate owned	17,289		—		—		17,289
Total nonrecurring assets at fair value	$	61,077	$	—	$	—	$	61,077

The inputs used to determine estimated fair value of impaired loans include market conditions, loan terms, underlying collateral characteristics and discount rates. The inputs used to determine fair value of OREO include market conditions, estimated marketing period or holding period, underlying collateral characteristics and discount rates.

For the nine months ended September 30, 2020 and the year ended December 31, 2019, there was not a change in the methods and significant assumptions used to estimate fair value.

The following table shows significant unobservable inputs used in the fair value measurement of Level 3 assets:


(dollars in thousands)	Fair Value		Valuation Technique	Unobservable Inputs	Range of Discounts	Weighted Average Discount
September 30, 2020
Recurring:
Investment securities available for sale	$	1,185	Discounted cash flows	Probability of default	14.6%	14.6%
				Loss given default	31%	31%
Nonrecurring:
Collateral-dependent loans	$	148,083	Third-party appraisals and discounted cash flows	Collateral discounts and discount rates	20% - 77%	45%
Other real estate owned	$	4,239	Third-party appraisals and sales contracts	Collateral discounts and estimated costs to sell	0% - 75%	21%

December 31, 2019
Recurring:
Investment securities available for sale	$	1,500	Discounted par values	Credit quality of underlying issuer	0%	0%
Nonrecurring:
Impaired loans	$	43,788	Third-party appraisals and discounted cash flows	Collateral discounts and discount rates	1% - 95%	27%
Other real estate owned	$	17,289	Third-party appraisals and sales contracts	Collateral discounts and estimated costs to sell	9% - 89%	31%

The carrying amount and estimated fair value of the Company’s financial instruments, not shown elsewhere in these financial statements, were as follows.


			Fair Value Measurements
			September 30, 2020
(dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and due from banks	$	257,026	$	257,026	$	—	$	—	$	257,026
Federal funds sold and interest-bearing accounts	494,765		494,765		—		—		494,765
Time deposits in other banks	249		—		249		—		249

Loans, net	14,563,586		—		—		14,657,861		14,657,861
Accrued interest receivable	79,403		—		4,485		74,918		79,403
Financial liabilities:
Deposits	16,063,806		—		16,076,073		—		16,076,073
Securities sold under agreements to repurchase	9,103		9,103		—		—		9,103
Other borrowings	875,255		—		877,424		—		877,424
Subordinated deferrable interest debentures	123,860		—		116,193		—		116,193
FDIC loss-share payable	19,476		—		—		19,639		19,639

Accrued interest payable	6,443		—		6,443		—		6,443


			Fair Value Measurements
			December 31, 2019
(dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and due from banks	$	246,234	$	246,234	$	—	$	—	$	246,234
Federal funds sold and interest-bearing accounts	375,615		375,615		—		—		375,615
Time deposits in other banks	249		—		249		—		249
Loans, net	12,736,499		—		—		12,806,709		12,806,709
Accrued interest receivable	52,362		—		5,179		47,183		52,362
Financial liabilities:
Deposits	14,027,073		—		14,035,686		—		14,035,686
Securities sold under agreements to repurchase	20,635		20,635		—		—		20,635
Other borrowings	1,398,709		—		1,402,510		—		1,402,510
Subordinated deferrable interest debentures	127,560		—		126,815		—		126,815
FDIC loss-share payable	19,642		—		—		19,657		19,657
Accrued interest payable	11,524		—		11,524		—		11,524

- 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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