Fair Value Accounting and Measurement

The Fair Value Measurements and Disclosures topic of the FASB ASC defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value. We hold fixed and variable rate interest-bearing securities, investments in marketable equity securities and certain other financial instruments, which are carried at fair value. Fair value is determined based upon quoted prices when available or through the use of alternative approaches, such as matrix or model pricing, when market quotes are not readily accessible or available.

The valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our own market assumptions. These two types of inputs create the following fair value hierarchy:

Level 1 – Quoted prices for identical instruments in active markets that are accessible at the measurement date.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.

Fair values are determined as follows:

Securities at fair value are priced using a combination of market activity, industry recognized information sources, yield curves, discounted cash flow models and other factors. These fair value calculations are considered a Level 2 input method under the provisions of the Fair Value Measurements and Disclosures topic of the FASB ASC for all securities other than U.S. Treasury Notes and other securities, which are considered a Level 1 input method.

Interest rate contract positions are valued in models, which use as their basis, readily observable market parameters and are classified within Level 2 of the valuation hierarchy.

The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis at December 31, 2018 and 2017 by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:



	Fair value at December 31, 2018		Fair Value Measurements at Reporting Date Using
	Fair value at December 31, 2018		Level 1		Level 2		Level 3
	(in thousands)
Assets
Debt securities available for sale
U.S. government agency and sponsored enterprise mortgage-back securities and collateralized mortgage obligations	$	2,188,290	$	—	$	2,188,290	$	—
State and municipal securities	574,323		—		574,323		—
U.S. government agency and government-sponsored enterprise securities	404,587		—		404,587		—
U.S. government securities	248		248		—		—
Total debt securities available for sale	$	3,167,448	$	248	$	3,167,200	$	—
Other assets (Interest rate contracts)	$	7,033	$	—	$	7,033	$	—
Liabilities
Other liabilities (Interest rate contracts)	$	7,033	$	—	$	7,033	$	—



	Fair value at December 31, 2017		Fair Value Measurements at Reporting Date Using
	Fair value at December 31, 2017		Level 1		Level 2		Level 3
	(in thousands)
Assets
Debt securities available for sale
U.S. government agency and sponsored enterprise mortgage-back securities and collateralized mortgage obligations	$	1,726,725	$	—	$	1,726,725	$	—
State and municipal debt securities	596,004		—		596,004		—
U.S. government agency and government-sponsored enterprise securities	414,774		—		414,774		—
U.S. government securities	248		248		—		—
Total debt securities available for sale	$	2,737,751	$	248	$	2,737,503	$	—
Equity securities	$	5,080	$	5,080	$	—	$	—
Other assets (Interest rate contracts)	$	6,707	$	—	$	6,707	$	—
Liabilities
Other liabilities (Interest rate contracts)	$	6,714	$	—	$	6,714	$	—

There were no transfers between Level 1 and Level 2 of the valuation hierarchy during the year ended December 31, 2018. During the year ended December 31, 2017, there was a transfer of $5.1 million out of Level 2 of the valuation hierarchy and a corresponding transfer into Level 1 of the valuation hierarchy related to the Company’s equity securities. The Company recognizes transfers between levels of the valuation hierarchy based on the valuation level at the end of the reporting period.

Nonrecurring Measurements

Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as loans measured for impairment and OREO. The following methods were used to estimate the fair value of each such class of financial instrument:

Impaired loans—A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both interest and principal) according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, a loan’s observable market price, or the fair market value of the collateral less estimated costs to sell if the loan is a collateral-dependent loan. The impairment evaluations are performed in conjunction with the ALLL process on a quarterly basis by officers in the Special Credits group, which reports to the Chief Credit Officer. The Real Estate Appraisal Services Department (“REASD”), which also reports to the Chief Credit Officer, is responsible for obtaining appraisals from third-parties or performing internal evaluations. If an appraisal is obtained from a third-party, the REASD reviews the appraisal to evaluate the adequacy of the appraisal report, including its scope, methods, accuracy, and reasonableness.

Other real estate owned —OREO is real property that the Bank has taken ownership of in partial or full satisfaction of a loan or loans. OREO is generally measured based on the property’s fair market value as indicated by an appraisal or a letter of intent to purchase. OREO is initially recorded at the fair value less estimated costs to sell. This amount becomes the property’s new basis. Any fair value adjustments based on the property’s fair value less estimated costs to sell at the date of acquisition are charged to the ALLL, or in the event of a write-up without previous losses charged to the ALLL, a credit to earnings is recorded. Management periodically reviews OREO in an effort to ensure the property is recorded at its fair value, net of estimated costs to sell. Any fair value adjustments subsequent to acquisition are charged or credited to earnings. The initial and subsequent evaluations are performed by officers in the Special Credits group, which reports to the Chief Credit Officer. The REASD obtains appraisals from third-parties for OREO and performs internal evaluations. If an appraisal is obtained from a third-party, the REASD reviews the appraisal to evaluate the adequacy of the appraisal report, including its scope, methods, accuracy, and reasonableness.

The following table sets forth the Company’s assets that were measured using fair value estimates on a nonrecurring basis during the years ended December 31, 2018 and 2017:



	Fair value at December 31, 2018		Fair Value Measurements at Reporting Date Using						Losses During the Year Ended December 31, 2018
	Fair value at December 31, 2018		Level 1		Level 2		Level 3		Losses During the Year Ended December 31, 2018
	(in thousands)
Impaired loans	$	11,555	$	—	$	—	$	11,555	$	1,821
	$	11,555	$	—	$	—	$	11,555	$	1,821



	Fair value at December 31, 2017		Fair Value Measurements at Reporting Date Using						Losses During the Year Ended December 31, 2017
	Fair value at December 31, 2017		Level 1		Level 2		Level 3		Losses During the Year Ended December 31, 2017
	(in thousands)
Impaired loans	$	6,577	$	—	$	—	$	6,577	$	2,507
OREO	1,423		—		—		1,423		239
	$	8,000	$	—	$	—	$	8,000	$	2,746

The losses on impaired loans disclosed above represent the amount of the specific reserve and/or charge-offs during the period applicable to loans held at period end. The amount of the specific reserve is included in the “Allowance for loan and lease losses.” The losses on OREO disclosed above represent the write-downs taken at foreclosure that were charged to the allowance for loan and lease losses, as well as subsequent changes in any valuation allowances from updated appraisals that were recorded to earnings.

Quantitative information about Level 3 fair value measurements

The range and weighted average of the significant unobservable inputs used to fair value our Level 3 nonrecurring assets during 2018 and 2017, along with the valuation techniques used, are shown in the following tables:



	Fair value at December 31, 2018		Valuation Technique	Unobservable Input	Range (Weighted Average) (1)
	(dollars in thousands)
Impaired loans - collateral-dependent (2)	$	8,394	Fair Market Value of Collateral	Adjustment to Stated Value	0.00% - 70.04% (7.02%)
Impaired loans - other (3)	$	3,161	Discounted Cash Flow	Discount Rate	0.34	%

__________

(1) Discount rate applied to discounted cash flow valuation or appraisal value and stated value (in the case of fixed assets and inventory).

(2) Collateral consists of accounts receivable, inventory, fixed assets, real estate and cash.

(3) As there was only one impaired loan remeasured using discounted cash flows, a range of discounts could not be provided.



	Fair value at December 31, 2017		Valuation Technique	Unobservable Input	Range (Weighted Average) (1)
	(dollars in thousands)
Impaired loans - collateral-dependent (3)	$	3,519	Fair Market Value of Collateral	Adjustment to Stated Value	N/A (2)
Impaired loans - other	$	3,058	Discounted Cash Flow	Discount Rate	3.75% - 7.75% (4.12%)
OREO	$	1,423	Fair Market Value of Collateral	Adjustment to Appraisal Value	N/A (2)

__________

(1) Discount rate used in discounted cash flow valuation.

(2) Quantitative disclosures are not provided for collateral-dependent impaired loans and OREO because there were no adjustments made to the appraisal values or stated values during the current period.

(3) Collateral consists of real property and a government agency guarantee.

The following tables summarize carrying amounts and estimated fair values of selected financial instruments for the periods indicated:



	December 31, 2018
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
	(in thousands)
Assets
Cash and due from banks	$	260,180	$	260,180	$	260,180	$	—	$	—
Interest-earning deposits with banks	17,407		17,407		17,407		—		—
Debt securities available for sale	3,167,448		3,167,448		248		3,167,200		—
Federal Home Loan Bank stock	25,960		25,960		—		25,960		—
Loans held for sale	3,849		3,849		—		3,849		—
Loans	8,308,142		8,316,946		—		—		8,316,946
Interest rate contracts	7,033		7,033		—		7,033		—
Liabilities
Time deposits	$	414,443	$	407,659	$	—	$	407,659	$	—
Federal Home Loan Bank advances	399,523		400,085		—		400,085		—
Repurchase agreements	61,094		61,094		—		61,094		—
Subordinated debentures	35,462		34,897		—		34,897		—
Interest rate contracts	7,033		7,033		—		7,033		—



	December 31, 2017
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
	(in thousands)
Assets
Cash and due from banks	$	244,615	$	244,615	$	244,615	$	—	$	—
Interest-earning deposits with banks	97,918		97,918		97,918		—		—
Debt securities available for sale	2,737,751		2,737,751		248		2,737,503		—
Equity securities	5,080		5,080		5,080		—		—
Federal Home Loan Bank stock	10,440		10,440		—		10,440		—
Loans held for sale	5,766		5,766		—		5,766		—
Loans	8,283,011		8,055,817		—		—		8,055,817
Interest rate contracts	6,707		6,707		—		6,707		—
Liabilities
Time deposits	$	490,288	$	483,095	$	—	$	483,095	$	—
Federal Home Loan Bank advances	11,579		12,281		—		12,281		—
Repurchase agreements	79,059		79,070		—		79,070		—
Subordinated debentures	35,647		35,895		—		35,895		—
Junior subordinated debentures	8,248		8,248		—		8,248		—
Interest rate contracts	6,714		6,714		—		6,714		—