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Fair Value Disclosures

12 Months Ended

Dec. 31, 2019

We determine the fair market values of our assets and liabilities measured at fair value on a recurring and nonrecurring basis using the fair value hierarchy as prescribed in ASC 820. The standard describes three levels of inputs that may be used to measure fair value as provided below.


Level 1	Quoted prices in active markets for identical assets or liabilities.


Level 2	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair values requires significant management judgment or estimation.

Assets and liabilities measured at fair value are as follows:



	Fair Value Measurements Using
(in thousands)	Level 1		Level 2		Level 3
December 31, 2019
Available-for-sale debt securities:(1)
Residential mortgage-backed securities	$	—	$	5,266	$	—
Tax-exempt asset-backed securities	—		—		197,027
CRT Securities	—		—		11,964
Equity securities(1)(2)	18,484		7,130		—
Loans held for sale(3)	—		2,564,281		7,043
Loans held for investment(4)(6)	—		—		109,585
Derivative assets(7)	—		48,684		—
Derivative liabilities(7)	—		51,310		—
Non-qualified deferred compensation plan liabilities(8)	18,484		—		—

December 31, 2018
Available-for-sale debt securities:(1)
Residential mortgage-backed securities	$	—	$	7,242	$	—
Tax-exempt asset-backed securities	—		—		95,804
Equity securities(1)(2)	10,262		6,908		—
Loans held for sale(3)	—		1,952,760		16,415
Loans held for investment(4)(6)	—		—		29,885
OREO(5)(6)	—		—		79
Derivative assets(7)	—		21,806		—
Derivative liabilities(7)	—		41,375		—
Non-qualified deferred compensation plan liabilities(8)	10,148		—		—


(1)	Securities are measured at fair value on a recurring basis, generally monthly, except for tax-exempt asset-backed securities and CRT securities which are measured quarterly.


(2)	Equity securities consist of Community Reinvestment Act funds and investments related to our non-qualified deferred compensation plan.


(3)	Loans held for sale purchased through our MCA program are measured at fair value on a recurring basis, generally monthly.


(4)	Includes impaired loans that have been measured for impairment at the fair value of the loan’s collateral.


(5)	OREO is transferred from loans to OREO at fair value less selling costs.


(6)	Loans held for investment and OREO are measured on a nonrecurring basis, generally annually or more often as warranted by market and economic conditions.


(7)	Derivative assets and liabilities are measured at fair value on a recurring basis, generally quarterly.


(8)	Non-qualified deferred compensation plan liabilities represent the fair value of the obligation to the employee, which generally correspond to the fair value of the invested assets, and are measured at fair value on a recurring basis, generally monthly.

Level 3 Valuations

The following table presents a reconciliation of the level 3 fair value category measured at fair value on a recurring basis:



								Net Realized/Unrealized Gains (Losses)
(in thousands)	Balance at Beginning of Period		Purchases / Additions		Sales / Reductions			Realized			Unrealized			Balance at End of Period
Year ended December 31, 2019
Available-for-sale debt securities:(1)
Tax-exempt asset-backed securities	$	95,804	$	92,010	$	(4,302	)	$	—		$	13,515		$	197,027
CRT Securities	$	—	$	15,044	$	—		$	(331	)	$	(2,749	)	$	11,964
Loans held for sale(2)	$	16,415	$	321	$	(10,690	)	$	190		$	807		$	7,043

Year ended December 31, 2018
Tax-exempt asset-backed securities(1)	$	—	$	95,521	$	(3	)	$	—		$	286		$	95,804
Loans held for sale(2)	$	—	$	38,430	$	(20,591	)	$	(173	)	$	(1,251	)	$	16,415


(1)	Unrealized gains/(losses) on available-for-sale debt securities are recorded in AOCI. Realized gains/(losses) are recorded in other non-interest income.


(2)	Realized and unrealized gains/(losses) on loans held for sale are recorded in gain/(loss) on sale of loans held for sale.

Tax-exempt asset-backed securities

The fair value of tax-exempt asset-backed securities is based on a discounted cash flow model, which utilizes Level 3, or unobservable, inputs, the most significant of which were a discount rate and weighted-average life. At December 31, 2019, a discount rate of 2.99% and a weighted-average life of 7.0 years were utilized to determine the fair value of these securities, compared to 4.21% and 9.2 years, respectively, at December 31, 2018.

CRT securities

The fair value of CRT securities is based on a discounted cash flow model, which utilizes Level 3, or unobservable, inputs, the most significant of which were a discount rate and weighted-average life. At December 31, 2019, a discount rate of 4.54% and a weighted-average life of 9.3 years were utilized to determine the fair value of these securities.

Loans held for sale

The fair value of loans held for sale using Level 3 inputs include loans that cannot be sold through normal sale channels and thus require significant management judgment or estimation when determining the fair value. The fair value of such loans is generally based upon quoted prices of comparable loans with a liquidity discount applied. At December 31, 2019, the fair value of these loans was calculated using a weighted-average discounted price of 94.1%, compared to 92.9% at December 31, 2018.

Loans held for investment

Certain impaired loans held for investment are reported at fair value through a specific valuation allowance allocation of the allowance for loan losses based upon the fair value of the underlying collateral. The $109.6 million fair value of loans held for investment at December 31, 2019 reported above includes impaired loans held for investment with a carrying value of $145.4 million that were reduced by specific valuation allowance allocations totaling $35.8 million based on collateral valuations utilizing Level 3 inputs. The $29.9 million fair value of loans held for investment at December 31, 2018 reported above includes impaired loans with a carrying value of $32.2 million that were reduced by specific valuation allowance allocations totaling $2.3 million based on collateral valuations utilizing Level 3 inputs.

OREO

Certain foreclosed assets, upon initial recognition, are recorded at fair value less estimated selling costs. At December 31, 2019 and 2018, OREO had a carrying value of $0 and $79,000, respectively, with no specific valuation allowance. The fair value of OREO was computed based on third party appraisals, which are Level 3 valuation inputs.

Fair Value of Financial Instruments

GAAP requires disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practical to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. This disclosure does not and is not intended to represent the fair value of the Company.

A summary of the carrying amounts and estimated fair values of financial instruments is as follows:



	December 31, 2019				December 31, 2018
(in thousands)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Level 1 inputs:
Cash and cash equivalents	$	4,425,583	$	4,425,583	$	3,080,065	$	3,080,065
Investment securities	18,484		18,484		10,262		10,262
Level 2 inputs:
Investment securities	12,396		12,396		14,150		14,150
Loans held for sale	2,570,091		2,570,091		1,953,059		1,953,059
Derivative assets	48,684		48,684		21,806		21,806
Level 3 inputs:
Investment securities	208,991		208,991		95,804		95,804
Loans held for sale	7,043		7,043		16,415		16,415
Loans held for investment, net	24,451,215		24,478,586		22,376,552		22,347,876
Financial liabilities:
Level 2 inputs:
Federal funds purchased	132,270		132,270		629,169		629,169
Customer repurchase agreements	9,496		9,496		12,005		12,005
Other borrowings	2,400,000		2,400,000		3,900,000		3,900,000
Subordinated notes	282,129		292,302		281,767		283,349
Trust preferred subordinated debentures	113,406		113,406		113,406		113,406
Derivative liabilities	51,310		51,310		41,375		41,375
Level 3 inputs:
Deposits	26,478,593		29,357,121		20,606,113		20,608,494

The estimated fair value for cash and cash equivalents, variable rate loans and variable rate debt approximates carrying value. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

Investment Securities

Within the investment securities portfolio, we hold equity securities related to our non-qualified deferred compensation plan that are valued using quoted market prices for identical equity securities in an active market, and are classified as Level 1 assets in the fair value hierarchy. The fair value of the remaining equity securities and residential mortgage-backed securities in our investment portfolio are based on prices obtained from independent pricing services that are based on quoted market prices for the same or similar securities, and are characterized as Level 2 assets in the fair value hierarchy. We have obtained documentation from our primary pricing service regarding their processes and controls applicable to pricing investment securities, and on a quarterly basis we independently verify the prices that we receive from the service provider using two additional independent pricing sources. We also hold tax-exempt asset-backed securities and CRT securities that are valued using a discounted cash flow model, which utilizes Level 3 inputs, and are classified as Level 3 assets in the fair value hierarchy.

Loans Held for Sale

Fair value for loans held for sale is derived from quoted market prices for similar loans, in which case they are characterized as Level 2 assets in the fair value hierarchy, or is derived from third party pricing models, in which case they are characterized as Level 3 assets in the fair value hierarchy.

Derivatives

The estimated fair value of interest rate swaps and caps is obtained from independent pricing services based on quoted market prices for similar derivative contracts and these financial instruments are characterized as Level 2 assets and liabilities in the fair value hierarchy. On a quarterly basis, we independently verify the fair value using an additional independent pricing source. Foreign currency forward contracts are valued based upon quoted market prices obtained from independent pricing services for similar derivative contracts. As such, these financial instruments are characterized as Level 2 assets and liabilities in the fair value hierarchy. The derivative instruments related to the loans held for sale portfolio include loan purchase commitments and forward sales commitments. Loan purchase commitments are valued based upon the fair value of the underlying mortgage loans to be purchased, which is based on observable market data for similar loans. Forward sales commitments are valued based upon quoted market prices from brokers. As such, these loan purchase commitments and forward sales commitments are characterized as Level 2 assets or liabilities in the fair value hierarchy.

- 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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