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Fair Value Accounting and Measurement

9 Months Ended

Sep. 30, 2019

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 equity securities, which are considered a Level 1 input method.

Interest rate contracts and the interest rate collar 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 September 30, 2019 and December 31, 2018 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		Fair Value Measurements at Reporting Date Using
	Fair Value		Level 1		Level 2		Level 3
September 30, 2019	(in thousands)
Assets
Debt securities available for sale:
U.S. government agency and government-sponsored enterprise mortgage-back securities and collateralized mortgage obligations (1)	$	2,482,835	$	—	$	2,482,835	$	—
Other asset-backed securities (1)	171,578		—		171,578		—
State and municipal debt securities	497,314		—		497,314		—
U.S. government agency and government-sponsored enterprise securities	215,595		—		215,595		—
U.S. government securities	250		250		—		—
Total debt securities available for sale	$	3,367,572	$	250	$	3,367,322	$	—
Other assets:
Interest rate contracts	$	25,045	$	—	$	25,045	$	—
Interest rate collar	$	19,703	$	—	$	19,703	$	—
Liabilities
Other liabilities:
Interest rate contracts	$	25,046	$	—	$	25,046	$	—



	Fair Value		Fair Value Measurements at Reporting Date Using
	Fair Value		Level 1		Level 2		Level 3
December 31, 2018	(in thousands)
Assets
Debt securities available for sale:
U.S. government agency and government-sponsored enterprise mortgage-back securities and collateralized mortgage obligations (1)	$	2,013,355	$	—	$	2,013,355	$	—
Other asset-backed securities (1)	174,935		—		174,935		—
State and municipal debt 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	$	—

__________

(1) Beginning July 2019, other asset-backed securities were presented separately in this table. Prior period amounts that were previously reported in U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations have been reclassified to conform to current period presentation.

There were no transfers between Level 1 and Level 2 of the valuation hierarchy during the nine month periods ended September 30, 2019 and 2018. 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. The following method was used to estimate the fair value of impaired loans:

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 allowance process on a quarterly basis by officers in the Special Credits group, which reports to the Chief Credit Officer. The 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.

OREO—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 allowance, or in the event of a write-up without previous losses charged to the allowance, 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 tables set forth information related to the Company’s assets that were measured using fair value estimates on a nonrecurring basis during the current and prior year quarterly periods:



	Fair value at September 30, 2019		Fair Value Measurements at Reporting Date Using						Losses During the Three Months Ended September 30, 2019		Losses During the Nine Months Ended September 30, 2019
	Fair value at September 30, 2019		Level 1		Level 2		Level 3		Losses During the Three Months Ended September 30, 2019		Losses During the Nine Months Ended September 30, 2019
	(in thousands)
Impaired loans	$	8,990	$	—	$	—	$	8,990	$	1,722	$	3,299
	$	8,990	$	—	$	—	$	8,990	$	1,722	$	3,299



	Fair value at September 30, 2018		Fair Value Measurements at Reporting Date Using						Losses During the Three Months Ended September 30, 2018		Losses During the Nine Months Ended September 30, 2018
	Fair value at September 30, 2018		Level 1		Level 2		Level 3		Losses During the Three Months Ended September 30, 2018		Losses During the Nine Months Ended September 30, 2018
	(in thousands)
Impaired loans	$	14,616	$	—	$	—	$	14,616	$	1,208	$	1,208
OREO	1,240		—		—		1,240		445		445
	$	15,856	$	—	$	—	$	15,856	$	1,653	$	1,653

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 ALLL. The losses on OREO disclosed above represent the write-downs taken at foreclosure that were charged to the ALLL, as well as subsequent changes in 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, along with the valuation techniques used, are shown in the following table:



	Fair value at September 30, 2019		Valuation Technique	Unobservable Input	Range (Weighted Average) (1)
	(dollars in thousands)
Impaired loans - collateral-dependent (2)	$	8,990	Fair Market Value of Collateral	Adjustment to Stated Value	0.00% - 100.00% (42.09%)

__________

(1) Discount applied to appraised value or stated value (in the case of accounts receivable, fixed assets and inventory).

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



	Fair value at September 30, 2018		Valuation Technique	Unobservable Input	Range (Weighted Average) (1)
	(dollars in thousands)
Impaired loans - collateral-dependent (3)	$	14,616	Fair Market Value of Collateral	Adjustment to Stated Value	0.00% - 54.51% (6.66%)
OREO	$	1,240	Fair Market Value of Collateral	Adjustment to Appraisal Value	N/A (2)

__________

(1) Discount applied to appraisal value or stated value (in the case of accounts receivable, fixed assets and inventory).

(2) Quantitative disclosures are not provided for OREO because there were no adjustments made to the appraisal values.

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

The following tables summarize carrying amounts and estimated fair values of selected financial instruments by level within the fair value hierarchy at September 30, 2019 and December 31, 2018:



	September 30, 2019
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
	(in thousands)
Assets
Cash and due from banks	$	278,461	$	278,461	$	278,461	$	—	$	—
Interest-earning deposits with banks	20,144		20,144		20,144		—		—
Debt securities available for sale	3,367,572		3,367,572		250		3,367,322		—
FHLB stock	29,680		29,680		—		29,680		—
Loans held for sale	15,036		15,036		—		15,036		—
Loans	8,673,695		8,895,564		—		—		8,895,564
Interest rate contracts	25,045		24,045		—		24,045		—
Interest rate collar	19,703		19,703		—		19,703		—
Liabilities
Time deposits	$	366,773	$	361,195	$	—	$	361,195	$	—
FHLB advances	492,482		493,736		—		493,736		—
Repurchase agreements	24,489		24,489		—		24,489		—
Subordinated debentures	35,323		35,255		—		35,255		—
Interest rate contracts	25,046		25,046		—		25,046		—



	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		—
FHLB 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	$	—
FHLB 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		—

- 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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