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Fair Value Accounting and Measurement

3 Months Ended

Mar. 31, 2020

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.

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 March 31, 2020 and December 31, 2019 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
March 31, 2020	(in thousands)
Assets
Debt securities available for sale:
U.S. government agency and government-sponsored enterprise mortgage-back securities and collateralized mortgage obligations	$	2,766,137	$	—	$	2,766,137	$	—
Other asset-backed securities	203,512		—		203,512		—
State and municipal securities	448,060		—		448,060		—
U.S. government agency and government-sponsored enterprise securities	135,419		—		135,419		—
Total debt securities available for sale	$	3,553,128	$	—	$	3,553,128	$	—
Other assets:
Interest rate contracts	$	49,775	$	—	$	49,775	$	—
Interest rate collar	$	37,209	$	—	$	37,209	$	—
Liabilities
Other liabilities:
Interest rate contracts	$	49,777	$	—	$	49,777	$	—



	Fair Value		Fair Value Measurements at Reporting Date Using
	Fair Value		Level 1		Level 2		Level 3
December 31, 2019	(in thousands)
Assets
Debt securities available for sale:
U.S. government agency and government-sponsored enterprise mortgage-back securities and collateralized mortgage obligations	$	2,892,950	$	—	$	2,892,950	$	—
Other asset-backed securities	196,050		—		196,050		—
State and municipal securities	488,802		—		488,802		—
U.S. government agency and government-sponsored enterprise securities	168,340		—		168,340		—
Total debt securities available for sale	$	3,746,142	$	—	$	3,746,142	$	—
Other assets:
Interest rate contracts	$	19,144	$	—	$	19,144	$	—
Interest rate collar	$	14,727	$	—	$	14,727	$	—
Liabilities
Other liabilities:
Interest rate contracts	$	19,145	$	—	$	19,145	$	—

Nonrecurring Measurements

Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as collateral dependent loans. The following valuation techniques and inputs were used to estimate the fair value of collateral dependent loans and OREO.

Collateral dependent loans - A collateral dependent loan is a loan in which repayment is expected to be provided solely by the underlying collateral. The fair market value of the collateral is determined by either the discounted expected future cash flows from the operation of the collateral or the appraised value of the collateral, less costs to sell. The collateral dependent loan valuations are performed in conjunction with the allowance for credit losses process on a quarterly basis.

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 for credit losses, or in the event of a write-up without previous losses charged to the allowance for credit losses, 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 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 March 31, 2020		Fair Value Measurements at Reporting Date Using						Losses During the Three Months Ended March 31, 2020
	Fair Value at March 31, 2020		Level 1		Level 2		Level 3		Losses During the Three Months Ended March 31, 2020
	(in thousands)
Collateral dependent loans	$	3,043	$	—	$	—	$	3,043	$	5,138
	$	3,043	$	—	$	—	$	3,043	$	5,138



	Fair Value at March 31, 2019		Fair Value Measurements at Reporting Date Using						Losses During the Three Months Ended March 31, 2019
	Fair Value at March 31, 2019		Level 1		Level 2		Level 3		Losses During the Three Months Ended March 31, 2019
	(in thousands)
Collateral dependent loans	$	3,840	$	—	$	—	$	3,840	$	2,597
OREO	530		—		—		530		195
	$	4,370	$	—	$	—	$	4,370	$	2,792

The losses on collateral dependent loans disclosed above represent the amount of the allowance for credit losses and/or charge-offs during the period applicable to loans held at period end. The amount of the allowance is included in the ACL. The losses on OREO disclosed above represent the write-downs taken at foreclosure that were charged to the ACL 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 March 31, 2020		Valuation Technique	Unobservable Input	Range (Weighted Average) (1)
	(dollars in thousands)
Collateral dependent loans (2)	$	3,043	Fair Market Value of Collateral	Adjustment to Stated Value	0.00% - 100.00% (59.78%)

__________

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

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



	Fair Value at March 31, 2019		Valuation Technique	Unobservable Input	Range (Weighted Average) (1)
	(dollars in thousands)
Collateral dependent loans (3)	$	3,840	Fair Market Value of Collateral	Adjustment to Stated Value	0.00% - 100.00% (44.53%)
OREO	$	530	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 during the current period.

(3) Collateral consists of accounts receivable, fixed assets, inventory, 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 March 31, 2020 and December 31, 2019:



	March 31, 2020
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
	(in thousands)
Assets
Cash and due from banks	$	190,399	$	190,399	$	190,399	$	—	$	—
Interest-earning deposits with banks	25,357		25,357		25,357		—		—
Debt securities available for sale	3,553,128		3,553,128		—		3,553,128		—
FHLB stock	38,280		38,280		—		38,280		—
Loans held for sale	9,701		9,701		—		9,701		—
Loans	8,811,247		8,998,063		—		—		8,998,063
Interest rate contracts	49,775		49,775		—		49,775		—
Interest rate collar	37,209		37,209		—		37,209		—
Liabilities
Time deposits	$	353,536	$	353,578	$	—	$	353,578	$	—
FHLB advances and FRB borrowings	712,455		714,022		—		714,022		—
Repurchase agreements	29,252		29,252		—		29,252		—
Subordinated debentures	35,231		35,309		—		35,309		—
Revolving line of credit	5,000		5,005		—		5,005		—
Interest rate contracts	49,777		49,777		—		49,777		—



	December 31, 2019
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
	(in thousands)
Assets
Cash and due from banks	$	223,541	$	223,541	$	223,541	$	—	$	—
Interest-earning deposits with banks	24,132		24,132		24,132		—		—
Debt securities available for sale	3,746,142		3,746,142		—		3,746,142		—
FHLB stock	48,120		48,120		—		48,120		—
Loans held for sale	17,718		17,718		—		17,718		—
Loans	8,659,497		8,883,865		—		—		8,883,865
Interest rate contracts	19,144		19,144		—		19,144		—
Interest rate collar	14,727		14,727		—		14,727		—
Liabilities
Time deposits	$	400,070	$	397,736	$	—	$	397,736	$	—
FHLB advances	953,469		952,762		—		952,762		—
Repurchase agreements	64,437		64,437		—		64,437		—
Subordinated debentures	35,277		35,491		—		35,491		—
Interest rate contracts	19,145		19,145		—		19,145		—

- 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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