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Fair Value Accounting and Measurement

12 Months Ended

Dec. 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:

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.

Loans held for sale include the fair value of residential mortgage loans originated as held for sale determined based on quoted secondary market prices for similar loans, including the implicit fair value of embedded servicing rights. The change in fair value of loans held for sale is primarily driven by changes in interest rates subsequent to loan funding and changes in the fair value of the related servicing asset, resulting in revaluation adjustments to the recorded fair value.

The fair value of the interest rate lock commitments and interest rate forward loan sales contracts are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions based on historical information, where appropriate. The pull-through rate assumptions are considered Level 3 valuation inputs and are significant to the interest rate lock commitment valuation; as such, the interest rate lock commitment derivatives are classified as Level 3.

Interest rate swap 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 December 31, 2020 and 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 at December 31, 2020		Fair Value Measurements at Reporting Date Using
			Level 1		Level 2		Level 3
	(in thousands)
Assets
Debt securities available for sale:
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations	$	3,814,387	$	—	$	3,814,387	$	—
Other asset-backed securities	357,479		—		357,479		—
State and municipal securities	753,572		—		753,572		—
U.S. government agency and government-sponsored enterprise securities	284,696		—		284,696		—

Total debt securities available for sale	$	5,210,134	$	—	$	5,210,134	$	—
Loans held for sale	$	14,760	$	—	$	14,760	$	—
Other assets:
Interest rate lock commitments	$	1,096	$	—	$	—	$	1,096
Interest rate swap contracts	$	46,184	$	—	$	46,184	$	—

Liabilities
Other liabilities:
Interest rate forward loan sales contracts	$	165	$	—	$	165	$	—
Interest rate swap contracts	$	46,637	$	—	$	46,637	$	—


	Fair Value at December 31, 2019		Fair Value Measurements at Reporting Date Using
			Level 1		Level 2		Level 3
	(in thousands)
Assets
Debt securities available for sale:
U.S. government agency and government-sponsored enterprise mortgage-backed 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 swap contracts	$	19,144	$	—	$	19,144	$	—
Interest rate collar	$	14,727	$	—	$	14,727	$	—
Liabilities
Other liabilities:

Interest rate swap contracts	$	19,145	$	—	$	19,145	$	—

Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3)

The following table provides a description of the valuation technique, significant unobservable inputs, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring basis at December 31, 2020.

Fair Value at December 31, 2020

Valuation Technique

Unobservable Input

Range (Weighted Average)

(dollars in thousands)

Interest rate lock commitments

1,096

Internal pricing model

Pull-through rate

75.43% - 96.63%

(88.13%)

An increase in the pull-through rate utilized in the fair value measurement of the interest rate lock commitment derivative will result in positive fair value adjustments (and an increase in the fair value measurement). Conversely, a decrease in the pull-through rate will result in a negative fair value adjustment (and a decrease in the fair value measurement).

The following table includes a rollforward of interest rate lock commitments which utilize Level 3 inputs to determine the fair value on a recurring basis.


	Years Ended December 31,
	2020		2019
	(in thousands)
Balance at the beginning of the period	$	—	$	—
Change included in earnings	2,795		—
Settlements	(1,699)		—
Balance at the end of the period	$	1,096	$	—

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.

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.

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. Please see Note 3 "Securities," for additional information.

The following table presents the carrying value of equity securities, without readily determinable fair values, still held as of December 31, 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.


	Years Ended December 31,
	2020		2019
Equity securities without readily determinable fair values	in thousands
Carrying value, beginning of period	$	—	$	—
Upward carrying value changes	13,425		—

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

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, 2020 and 2019:


	Fair Value at December 31, 2020		Fair Value Measurements at Reporting Date Using						Gains (Losses) During the Year Ended December 31, 2020
			Level 1		Level 2		Level 3
	(in thousands)
Collateral dependent loans	$	15,569	$	—	$	—	$	15,569	$	(8,700)
OREO	$	525	$	—	$	—	$	525	$	(70)
Equity securities	$	13,425	$	—	$	13,425	$	—	$	13,425


	Fair Value at December 31, 2019		Fair Value Measurements at Reporting Date Using						Losses During the Year Ended December 31, 2019
			Level 1		Level 2		Level 3
	(in thousands)
Collateral dependent loans	$	10,007	$	—	$	—	$	10,007	$	(7,519)

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 after foreclosure as a result of subsequent changes in valuation 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 2020 and 2019, along with the valuation techniques used, are shown in the following tables:

Fair Value at December 31, 2020

Valuation Technique

Unobservable Input

Range (Weighted Average) (1)

(dollars in thousands)

Collateral dependent loans (2)

15,569

Fair Market Value of Collateral

Adjustment to Stated Value

0.00% - 100.00%

(41.36%)

OREO

525

Fair Market Value of Collateral

Adjustment to Appraisal Value

N/A (3)

__________

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

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

(3) Quantitative disclosures are not provided for OREO because there were no adjustments made to the appraisal values or stated values during the period.

Fair Value at December 31, 2019

Valuation Technique

Unobservable Input

Range (Weighted Average) (1)

(dollars in thousands)

Collateral dependent loans (2)

10,007

Fair Market Value of Collateral

Adjustment to Stated Value

0.00% - 100.00%

(49.68%)

__________

(1) Adjustment applied to 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.

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


	December 31, 2020
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
	(in thousands)
Assets
Cash and due from banks	$	218,899	$	218,899	$	218,899	$	—	$	—
Interest-earning deposits with banks	434,867		434,867		434,867		—		—
Debt securities available for sale	5,210,134		5,210,134		—		5,210,134		—
FHLB stock	10,280		10,280		—		10,280		—
Loans held for sale	26,481		26,481		—		26,481		—
Loans	9,278,520		9,720,592		—		—		9,720,592
Interest rate contracts	46,184		46,184		—		46,184		—

Interest rate lock commitments	1,096		1,096		—		—		1,096
Liabilities
Time deposits	$	338,845	$	338,815	$	—	$	338,815	$	—
FHLB advances and FRB borrowings	7,414		9,295		—		9,295		—
Repurchase agreements	73,859		73,859		—		73,859		—
Subordinated debentures	35,092		35,414		—		35,414		—
Interest rate contracts	46,637		46,637		—		46,637		—
Interest rate forward loan sales contracts	165		165		—		165		—


	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		3,746,172		—		3,746,172		—
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 and FRB borrowings	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		—

The following table presents the difference between the aggregate fair value and the aggregate unpaid principal balance of loans held for sale sold under the mandatory delivery method and accounted for under the fair value option as of December 31, 2020 and 2019:


December 31,
2020						2019
Fair Value		Aggregate Unpaid Principal Balance		Fair Value Less Aggregate Unpaid Principal Balance		Fair Value		Aggregate Unpaid Principal Balance		Fair Value Less Aggregate Unpaid Principal Balance
(in thousands)
$	14,760	$	14,252	$	508	$	—	$	—	$	—

Residential mortgage loans held for sale that are sold under the mandatory delivery method and accounted for under the fair value option are measured initially at fair value with subsequent changes in fair value recognized in earnings. Gains and losses from such changes in fair value are reported in loan revenue. For the year ended December 31, 2020, the Company recorded a net increase in fair value of $508 thousand representing the change in fair value reflected in earnings. For the years ended December 31, 2019 and 2018, there were no such loans held for sale under the mandatory delivery method.

- 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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