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Fair Value Accounting and Measurement

9 Months Ended

Sep. 30, 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:

Debt securities available for sale 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 debt securities available for sale.

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, 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
			Level 1		Level 2		Level 3
September 30, 2020	(in thousands)
Assets
Debt securities available for sale:
U.S. government agency and government-sponsored enterprise mortgage-back securities and collateralized mortgage obligations	$	3,121,642	$	—	$	3,121,642	$	—
Other asset-backed securities	293,024		—		293,024		—
State and municipal securities	557,444		—		557,444		—
U.S. government agency and government-sponsored enterprise securities	309,610		—		309,610		—

Total debt securities available for sale	$	4,281,720	$	—	$	4,281,720	$	—
Other assets:
Interest rate contracts	$	53,202	$	—	$	53,202	$	—
Interest rate collar	$	35,668	$	—	$	35,668	$	—
Liabilities
Other liabilities:
Interest rate contracts	$	53,677	$	—	$	53,677	$	—


	Fair Value		Fair Value Measurements at Reporting Date Using
			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 equity securities without readily determinable fair value.

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.

Equity securities without readily determinable fair value - The Company measures equity securities without readily determinable fair values at cost less impairment (if any), plus or minus observable price changes from an identical or similar investment of the same issuer, with such changes recognized in earnings. Our equity securities without readily determinable fair values consist of 77,683 Visa Class B shares. These shares are currently subject to certain transfer restrictions and will be convertible into Visa Class A shares upon final resolution of certain litigation matters involving Visa. For additional information, please see Note 3 to the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report.

The following table presents the carrying value of equity securities, without readily determinable fair values, still held as of September 30, 2020, that are measured under the measurement alternative and related adjustments recorded during the periods presented for those securities with observable price changes. These securities are included in the nonrecurring fair value tables when applicable price changes are observable.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Equity securities without readily determinable fair values	(in thousands)
Carrying value, beginning of period	$	13,425	$	—	$	—	$	—
Upward carrying value changes	—		—		13,425		—

Carrying value, end of period	$	13,425	$	—	$	13,425	$	—

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, 2020		Fair Value Measurements at Reporting Date Using						Gains During the Three Months Ended September 30, 2020		Losses During the Nine Months Ended September 30, 2020
			Level 1		Level 2		Level 3
	(in thousands)
Collateral dependent loans	$	11,899	$	—	$	—	$	11,899	$	(153)	$	4,941


	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
			Level 1		Level 2		Level 3
	(in thousands)
Collateral dependent loans	$	8,990	$	—	$	—	$	8,990	$	1,722	$	3,299

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.

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, 2020

Valuation Technique

Unobservable Input

Range (Weighted Average) (1)

(dollars in thousands)

Collateral dependent loans (2)

11,899

Fair Market Value of Collateral

Adjustment to Stated Value

0.00% - 100.00% (15.57%)

__________

(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 September 30, 2019

Valuation Technique

Unobservable Input

Range (Weighted Average) (1)

(dollars in thousands)

Collateral dependent loans (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.

The following tables summarize carrying amounts and estimated fair values of selected financial instruments by level within the fair value hierarchy at September 30, 2020 and December 31, 2019:


	September 30, 2020
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
	(in thousands)
Assets
Cash and due from banks	$	193,823	$	193,823	$	193,823	$	—	$	—
Interest-earning deposits with banks	736,422		736,422		736,422		—		—
Debt securities available for sale	4,281,720		4,281,720		—		4,281,720		—
Equity securities without readily determinable fair values	13,425		13,425		—		—		13,425
FHLB stock	10,280		10,280		—		10,280		—
Loans held for sale	24,407		24,407		—		24,407		—
Loans	9,531,979		9,980,912		—		—		9,980,912
Interest rate contracts	53,202		53,202		—		53,202		—
Interest rate collar	35,668		35,668		—		35,668		—
Liabilities
Time deposits	$	337,228	$	337,386	$	—	$	337,386	$	—
FHLB advances	7,427		9,354		—		9,354		—
Repurchase agreements	26,966		26,966		—		26,966		—
Subordinated debentures	35,139		35,368		—		35,368		—

Interest rate contracts	53,677		53,677		—		53,677		—


	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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