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Fair Value Disclosures

3 Months Ended

Mar. 31, 2020

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
March 31, 2020
Available-for-sale debt securities:(1)
Residential mortgage-backed securities	$	—	$	4,688	$	—
Tax-exempt asset-backed securities	—		—		191,474
CRT securities	—		—		8,015
Equity securities(1)(2)	17,368		7,239		—
Loans held for sale(3)	—		767,370		6,694
Loans held for investment(4)	—		—		121,037
Derivative assets(5)	—		125,913		—
Derivative liabilities(5)	—		126,459		—
Non-qualified deferred compensation plan liabilities(6)	17,668		—		—

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)	—		—		109,585
Derivative assets(5)	—		48,684		—
Derivative liabilities(5)	—		51,310		—
Non-qualified deferred compensation plan liabilities(6)	18,484		—		—


(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 certain collateral-dependent loans held for investment for which a specific allocation of the allowance for credit losses is based upon the fair value of the loan’s underlying collateral. These loans held for investment are measured on a nonrecurring basis, generally annually or more often as warranted by market and economic conditions.


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


(6)	Non-qualified deferred compensation plan liabilities represent the fair value of the obligation to the employee, which generally corresponds 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
Three months ended March 31, 2020
Available-for-sale debt securities:(1)
Tax-exempt asset-backed securities	$	197,027	$	—	$	(4,353	)	$	—		$	(1,200	)	$	191,474
CRT securities	$	11,964	$	—	$	—		$	—		$	(3,949	)	$	8,015
Loans held for sale(2)	$	7,043	$	213	$	(684	)	$	28		$	94		$	6,694
Three months ended March 31, 2019
Available-for-sale debt securities:(1)
Tax-exempt asset-backed securities	$	95,804	$	92,010	$	—		$	—		$	4,030		$	191,844
CRT securities	$	—	$	15,044	$	—		$	(331	)	$	(4,076	)	$	10,637
Loans held for sale(2)	$	16,415	$	—	$	(3,878	)	$	216		$	293		$	13,046


(1)	Unrealized gains/(losses) on available-for-sale debt securities are recorded in AOCI and all relate to assets held at March 31, 2020. 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 March 31, 2020, the discount rates utilized ranged from 3.04% to 3.05% and the weighted-average life ranged from 5.5 years to 8.0 years. On a combined amortized cost weighted-average basis a discount rate of 3.05% and weighted-average life of 6.8 years were utilized to determine the fair value of these securities at March 31, 2020. At December 31, 2019, the combined weighted-average discount rate and weighted-average life utilized were 2.99% and 7.0 years, respectively.

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 March 31, 2020, the discount rates utilized ranged from 7.35% to 13.74% and the weighted-average life ranged from 6.8 years to 11.4 years. On a combined amortized cost weighted-average basis a discount rate of 9.48% and a weighted-average life of 8.4 years were utilized to determine the fair value of these securities at March 31, 2020. At December 31, 2019, the combined weighted-average discount rate and combined weighted-average life utilized were 4.54% and 9.3 years, respectively.

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 March 31, 2020, the fair value of these loans was calculated using a weighted-average discounted price of 95.0%, compared to 94.1% at December 31, 2019.

Loans held for investment

Certain collateral-dependent loans held for investment are reported at fair value when, based upon an individual evaluation, the specific allocation of the allowance for credit losses that is deducted from the loan's amortized cost is based upon the fair value of the loan's underlying collateral. The $121.0 million fair value of loans held for investment at March 31, 2020 reported above includes loans held for investment with a carrying value of $177.8 million that were reduced by specific allowance allocations totaling $56.8 million based on collateral valuations utilizing Level 3 inputs. The $109.6 million fair value of loans held for investment at December 31, 2019 reported above includes loans with a carrying value of $145.4 million that were reduced by specific allowance allocations totaling $35.8 million based on collateral valuations utilizing Level 3 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:



	March 31, 2020				December 31, 2019
(in thousands)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Level 1 inputs:
Cash and cash equivalents	$	9,660,575	$	9,660,575	$	4,425,583	$	4,425,583
Investment securities	17,368		17,368		18,484		18,484
Level 2 inputs:
Investment securities	11,927		11,927		12,396		12,396
Loans held for sale	767,370		767,370		2,570,091		2,570,091
Derivative assets	125,913		125,913		48,684		48,684
Level 3 inputs:
Investment securities	199,489		199,489		208,991		208,991
Loans held for sale	6,694		6,694		7,043		7,043
Loans held for investment, net	24,205,424		24,170,104		24,451,215		24,478,586
Financial liabilities:
Level 2 inputs:
Federal funds purchased	289,165		289,165		132,270		132,270
Customer repurchase agreements	6,102		6,102		9,496		9,496
Other borrowings	4,900,000		4,900,000		2,400,000		2,400,000
Subordinated notes	282,219		281,793		282,129		292,302
Trust preferred subordinated debentures	113,406		113,406		113,406		113,406
Derivative liabilities	126,459		126,459		51,310		51,310
Level 3 inputs:
Deposits	27,134,263		30,302,466		26,478,593		29,357,121

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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