Fair Value

Under ASC 820, fair value measurements for items measured at fair value on a recurring and nonrecurring basis at September 30, 2018 and December 31, 2017 included:



(In thousands)	Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2018
Available for sale debt securities ⁽¹⁾	$	923,206	$	99	$	923,107	$	—
Loans held for sale ⁽²⁾	16,172		—		16,172		—
Loans ⁽³⁾	7,268		—		2,255		5,013
Other real estate owned ⁽⁴⁾	4,715		—		64		4,651
Equity securities ⁽⁵⁾	6,145		6,145		—		—

December 31, 2017
Available for sale debt securities ⁽¹⁾⁽⁵⁾	$	949,460	$	100	$	949,360	$	—
Loans held for sale ⁽²⁾	24,306		—		24,306		—
Loans ⁽³⁾	4,192		—		3,454		738
Other real estate owned ⁽⁴⁾	7,640		—		60		7,580
Equity securities ⁽⁵⁾	6,344		6,344		—		—

(1) See Note D for further detail of fair value of individual investment categories.

(2) Recurring fair value basis determined using observable market data.

(3) See Note F. Nonrecurring fair value adjustments to loans identified as impaired reflect full or partial write-downs that are based on the loan’s observable market price or current appraised value of the collateral in accordance with ASC 310.

(4) Fair value is measured on a nonrecurring basis in accordance with ASC 360.

(5) Prior to adoption of ASU 2016-1 on January 1, 2018, an investment in shares of a mutual fund that invests primarily in CRA-qualified debt securities was classified as an available for sale security. Beginning in 2018, this security is reported at fair value in Other Assets. Fair value is determined based on market quotations.

Loans held for sale: Fair values are based upon estimated values received from independent third party purchasers. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policy on loans held for investment. None of the loans are 90 days or more past due or on nonaccrual as of September 30, 2018 and December 31, 2017. The aggregate fair value and contractual balance of loans held for sale as of September 30, 2018 and December 31, 2017 is as follows:



(In thousands)	September 30, 2018		December 31, 2017
Aggregate fair value	$	16,172	$	24,306
Contractual balance	15,722		23,627
Excess	450		679

Loans: Level 2 loans consist of impaired real estate loans which are collateral dependent. Fair value is based on recent real estate appraisals less estimated costs of sale. For residential real estate impaired loans, appraised values or internal evaluations are based on the comparative sales approach. Level 3 loans consist of commercial and commercial real estate impaired loans. For these loans evaluations may use either a single valuation approach or a combination of approaches, such as comparative sales, cost and/or income approach. A significant unobservable input in the income approach is the estimated capitalization rate for a given piece of collateral. At September 30, 2018, the capitalization rates utilized to determine fair value of the underlying collateral averaged approximately 7.6%. Adjustments to comparable sales may be made by an appraiser to reflect local market conditions or other economic factors and may result in changes in the fair value of an asset over time. As such, the fair value of these impaired loans is considered level 3 in the fair value hierarchy. Impaired loans measured at fair value total $7.3 million with a specific reserve of $6.1 million at September 30, 2018, compared to $4.2 million with a specific reserve of $2.4 million at December 31, 2017.

Other real estate owned: When appraisals are used to determine fair value and the appraisals are based on a market approach, the fair value of other real estate owned (“OREO”) is classified as a level 2 input. When the fair value of OREO is based on appraisals which require significant adjustments to market-based valuation inputs or apply an income approach based on unobservable cash flows, the fair value of OREO is classified as Level 3.

Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s monthly and/or quarter-end valuation process. There were no such transfers during the nine months ended September 30, 2018 and 2017.

For loans classified as level 3, the changes included additions of $8.2 million related to loans that became impaired during 2018, offset by paydowns and chargeoffs of $3.9 million for the nine months ended September 30, 2018.

For OREO classified as level 3 during the nine months ended September 30, 2018, changes included the addition of foreclosed loans of $0.3 million and migrated branches taken out of service of $2.0 million offset by reductions primarily consisting of sales of $5.3 million.

The carrying amount and fair value of the Company’s other financial instruments that are not measured at fair value on a recurring basis in the balance sheet as of September 30, 2018 and December 31, 2017 is as follows:



(In thousands)	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2018
Financial Assets
Debt securities held to maturity ⁽¹⁾	$	367,387	$	—	$	353,919	$	—
Time deposits with other banks	9,813		—		—		9,715
Loans, net	4,018,190		—		—		3,982,029
Financial Liabilities
Deposit liabilities	4,643,510		—		—		4,638,270
Federal Home Loan Bank (FHLB) borrowings	261,000		—		—		261,036
Subordinated debt	70,734		—		61,716		—

December 31, 2017
Financial Assets
Debt securities held to maturity ⁽¹⁾	$	416,863	$	—	$	414,470	$	—
Time deposits with other banks	12,553		—		—		12,493
Loans, net	3,786,063		—		—		3,760,754
Financial Liabilities
Deposit liabilities	4,592,720		—		—		4,588,515
Federal Home Loan Bank (FHLB) borrowings	211,000		—		—		211,000
Subordinated debt	70,521		—		61,530		—

(1) See Note D for further detail of individual investment categories.

The short maturity of Seacoast’s assets and liabilities results in having a significant number of financial instruments whose fair value equals or closely approximates carrying value. Such financial instruments are reported in the following balance sheet captions: cash and due from banks, interest bearing deposits with other banks, and securities sold under agreements to repurchase, maturing within 30 days.

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value at September 30, 2018 and December 31, 2017:

Debt securities: U.S. Treasury debt securities are reported at fair value utilizing Level 1 inputs. Other debt securities are reported at fair value utilizing Level 2 inputs. The estimated fair value of a security is determined based on market quotations when available or, if not available, by using quoted market prices for similar securities, pricing models or discounted cash flow analyses, using observable market data where available.

The Company reviews the prices supplied by independent pricing services, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices. The fair value of collateralized loan obligations is determined from broker quotes. From time to time, the Company will validate, on a sample basis, prices supplied by the independent pricing service by comparison to prices obtained from other brokers and third-party sources or derived using internal models.

Loans: Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial or mortgage. Each loan category is further segmented into fixed and adjustable rate interest terms as well as performing and nonperforming categories. The fair value of loans is calculated by discounting scheduled cash flows through the estimated life including prepayment considerations, using estimated market discount rates that reflect the risks inherent in the loan. Prior to adoption of ASU 2016-1 on January 1, 2018, the estimated fair value of the loan portfolio utilized an “entrance price” approach. Beginning in 2018, the fair value approach considers market-driven variables including credit related factors and reflects an “exit price” as defined in ASC 820.

Deposit Liabilities: The fair value of demand deposits, savings accounts and money market deposits is the amount payable at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for funding of similar remaining maturities.