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Fair Value Measurements
9 Months Ended
Sep. 30, 2020
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements
See Note 19, Fair Value Measurements, in the Notes to the December 31, 2019, Consolidated Financial Statements for a description of valuation methodologies for assets and liabilities measured at fair value on a recurring and non-recurring basis.
The following tables summarize the financial assets and liabilities measured at fair value on a recurring basis.
 
 
 
Fair Value Measurements at the End of the Reporting Period Using
 
Fair Value
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
September 30, 2020
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
(In Thousands)
Recurring fair value measurements
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Trading account assets:
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government agencies
$
177,180

 
$
177,180

 
$

 
$

Interest rate contracts
711,389

 

 
711,389

 

Foreign exchange contracts
37,928

 

 
37,928

 

Total trading account assets
926,497

 
177,180

 
749,317

 

Debt securities available for sale:
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government agencies
2,191,009

 
1,725,371

 
465,638

 

Mortgage-backed securities
969,922

 

 
969,922

 

Collateralized mortgage obligations
2,866,505

 

 
2,866,505

 

States and political subdivisions
636

 

 
636

 

Total debt securities available for sale
6,028,072

 
1,725,371

 
4,302,701

 

Loans held for sale
253,454

 

 
253,454

 

Derivative assets:
 
 
 
 
 
 
 
Interest rate contracts
29,351

 

 
13,046

 
16,305

Equity contracts
774

 

 
774

 

Foreign exchange contracts
2,678

 

 
2,678

 

Total derivative assets
32,803

 

 
16,498

 
16,305

Other assets:
 
 
 
 
 
 
 
Equity securities
28,035

 
28,035

 

 

MSR
28,731

 

 

 
28,731

SBIC
164,362

 

 

 
164,362

Liabilities:
 
 
 
 
 
 
 
Trading account liabilities:
 
 
 
 
 
 
 
Interest rate contracts
$
155,542

 
$

 
$
155,542

 
$

Foreign exchange contracts
35,640

 

 
35,640

 

Total trading account liabilities
191,182

 

 
191,182

 

Derivative liabilities:
 
 
 
 
 
 
 
Interest rate contracts
5,830

 

 
5,830

 

Equity contracts
625

 

 
625

 

Foreign exchange contracts
1,971

 

 
1,971

 

Total derivative liabilities
8,426

 

 
8,426

 



 
 
 
Fair Value Measurements at the End of the Reporting Period Using
 
Fair Value
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
December 31, 2019
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
(In Thousands)
Recurring fair value measurements
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Trading account assets:
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government agencies
$
137,637

 
$
137,637

 
$

 
$

Interest rate contracts
313,573

 

 
313,573

 

Foreign exchange contracts
22,766

 

 
22,766

 

Total trading account assets
473,976

 
137,637

 
336,339

 

Debt securities available for sale:
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government agencies
3,127,525

 
2,598,471

 
529,054

 

Mortgage-backed securities
1,325,857

 

 
1,325,857

 

Collateralized mortgage obligations
2,781,125

 

 
2,781,125

 

States and political subdivisions
798

 

 
798

 

Total debt securities available for sale
7,235,305

 
2,598,471

 
4,636,834

 

Loans held for sale
112,058

 

 
112,058

 

Derivative assets:
 
 
 
 
 
 
 
Interest rate contracts
13,907

 
38

 
10,781

 
3,088

Equity contracts
4,460

 

 
4,460

 

Foreign exchange contracts
276

 

 
276

 

Total derivative assets
18,643

 
38

 
15,517

 
3,088

Other assets:
 
 
 
 
 
 
 
Equity securities
19,038

 
19,038

 

 

MSR
42,022

 

 

 
42,022

SBIC
119,475

 

 

 
119,475

Liabilities:
 
 
 
 
 
 
 
Trading account liabilities:
 
 
 
 
 
 
 
Interest rate contracts
$
97,881

 
$

 
$
97,881

 
$

Foreign exchange contracts
20,678

 

 
20,678

 

Total trading account liabilities
118,559

 

 
118,559

 

Derivative liabilities:
 
 
 
 
 
 
 
Interest rate contracts
3,732

 

 
3,732

 

Equity contracts
3,765

 

 
3,765

 

Foreign exchange contracts
3,940

 

 
3,940

 

Total derivative liabilities
11,437

 

 
11,437

 


The following tables reconcile the assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Three Months Ended September 30,
Interest Rate Contracts, net
 
Other Assets - MSR
 
Other Assets - SBIC
 
(In Thousands)
Balance, June 30, 2019
$
3,847

 
$
41,966

 
$
102,065

Transfers into Level 3

 

 

Transfers out of Level 3

 

 

Total gains or losses (realized/unrealized):
 
 
 
 
 
Included in earnings (1)
191

 
(6,301
)
 
10,239

Included in other comprehensive income

 

 

Purchases, issuances, sales and settlements:
 
 
 
 
 
Purchases

 

 
7,944

Issuances

 
1,600

 

Sales

 

 

Settlements

 

 

Balance, September 30, 2019
$
4,038

 
$
37,265

 
$
120,248

Change in unrealized gains (losses) included in earnings for the period, attributable to assets and liabilities still held at September 30, 2019
$
191

 
$
(6,301
)
 
$
10,239

 
 
 
 
 
 
Balance, June 30, 2020
$
20,743

 
$
29,035

 
$
152,784

Transfers into Level 3

 

 

Transfers out of Level 3

 

 

Total gains or losses (realized/unrealized):
 
 
 
 
 
Included in earnings (1)
(4,438
)
 
(3,548
)
 
7,846

Included in other comprehensive income

 

 

Purchases, issuances, sales and settlements:
 
 
 
 
 
Purchases

 

 
3,732

Issuances

 
3,244

 

Sales

 

 

Settlements

 

 

Balance, September 30, 2020
$
16,305

 
$
28,731

 
$
164,362

Change in unrealized gains (losses) included in earnings for the period, attributable to assets and liabilities still held at September 30, 2020
$
(4,438
)
 
$
(3,548
)
 
$
7,846

(1)
Included in noninterest income in the Unaudited Condensed Consolidated Statements of Income.
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Nine Months Ended September 30,
Interest Rate Contracts, net
 
Other Assets - MSR
 
Other Assets - SBIC
 
(In Thousands)
Balance, December 31, 2018
$
2,012

 
$
51,539

 
$
80,074

Transfers into Level 3

 

 

Transfers out of Level 3

 

 

Total gains or losses (realized/unrealized):
 
 
 
 
 
Included in earnings (1)
2,026

 
(18,579
)
 
24,310

Included in other comprehensive income

 

 

Purchases, issuances, sales and settlements:
 
 
 
 
 
Purchases

 

 
15,864

Issuances

 
4,305

 

Sales

 

 

Settlements

 

 

Balance, September 30, 2019
$
4,038

 
$
37,265

 
$
120,248

Change in unrealized gains (losses) included in earnings for the period, attributable to assets and liabilities still held at September 30, 2019
$
2,026

 
$
(18,579
)
 
$
24,310

 
 
 
 
 
 
Balance, December 31, 2019
$
3,088

 
$
42,022

 
$
119,475

Transfers into Level 3

 

 

Transfers out of Level 3

 

 

Total gains or losses (realized/unrealized):
 
 
 
 
 
Included in earnings (1)
13,217

 
(20,945
)
 
30,388

Included in other comprehensive income

 

 

Purchases, issuances, sales and settlements:
 
 
 
 
 
Purchases

 

 
14,499

Issuances

 
7,654

 

Sales

 

 

Settlements

 

 

Balance, September 30, 2020
$
16,305

 
$
28,731

 
$
164,362

Change in unrealized gains (losses) included in earnings for the period, attributable to assets and liabilities still held at September 30, 2020
$
13,217

 
$
(20,945
)
 
$
30,388

(1)
Included in noninterest income in the Unaudited Condensed Consolidated Statements of Income.

Assets Measured at Fair Value on a Nonrecurring Basis
Periodically, certain assets may be recorded at fair value on a non-recurring basis. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or write-downs of individual assets due to impairment. The following tables represent those assets that were subject to fair value adjustments during the three and nine months ended September 30, 2020 and 2019, and still held as of the end of the period, and the related gains and losses from fair value adjustments on assets sold during the period as well as assets still held as of the end of the period.
 
 
 
Fair Value Measurements at the End of the Reporting Period Using
 
 
 
 
 
Fair Value
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
Total Gains (Losses)
 
September 30, 2020
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Three Months Ended September 30, 2020
 
Nine Months Ended September 30, 2020
 
(In Thousands)
Nonrecurring fair value measurements
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
OREO
$
15,051

 
$

 
$

 
$
15,051

 
$
(5
)
 
$
(913
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurements at the End of the Reporting Period Using
 
 
 
 
 
Fair Value
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
Total Gains (Losses)
 
September 30, 2019
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
 
(In Thousands)
Nonrecurring fair value measurements
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
Debt securities held to maturity
$
1,036

 
$

 
$

 
$
1,036

 
$

 
$
(113
)
Impaired loans (1)
6,270

 

 

 
6,270

 
(69,615
)
 
(113,140
)
OREO
18,931

 
$

 

 
18,931

 
(1,169
)
 
(3,928
)
(1)
Total gains (losses) represent charge-offs on impaired loans for which adjustments are based on the appraised value of the collateral.
The following is a description of the methodologies applied for valuing these assets:
OREO – OREO is recorded at the lower of recorded balance or fair value, which is based on appraisals and third-party price opinions, less estimated costs to sell. The fair value is classified as Level 3.
The tables below present information about the significant unobservable inputs for material assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring and nonrecurring basis.
 
 
 
Quantitative Information about Level 3 Fair Value Measurements
 
Fair Value at
 
 
 
 
 
Range of Unobservable Inputs
 
September 30, 2020
 
Valuation Technique
 
Unobservable Input(s)
 
(Weighted Average)
 
(In Thousands)
 
 
 
 
 
 
Recurring fair value measurements:
 
 
 
 
 
 
Interest rate contracts, net
$
16,305

 
Discounted cash flow
 
Closing ratios (pull-through)
 
1.6% - 100.0% (51.7%)
 
 
 
 
 
Cap grids
 
0.1% - 2.7% (0.9%)
Other assets - MSRs
28,731

 
Discounted cash flow
 
Option adjusted spread
 
6.0% - 8.3% (6.2%)
 
 
 
 
 
Constant prepayment rate or life speed
 
3.5% - 90.3% (19.9%)
 
 
 
 
 
Cost to service
 
$65 - $4,000 ($94)
Other assets - SBIC investments
164,362

 
Transaction price
 
Transaction price
 
N/A
Nonrecurring fair value measurements:
 
 
 
 
 
 
OREO
15,051

 
Appraised value
 
Appraised value
 
8.0% (1)
(1)
Represents discount to appraised value for estimated costs to sell.
 
 
 
Quantitative Information about Level 3 Fair Value Measurements
 
Fair Value at
 
 
 
 
 
Range of Unobservable Inputs
 
December 31, 2019
 
Valuation Technique
 
Unobservable Input(s)
 
(Weighted Average)
 
(In Thousands)
 
 
 
 
 
 
Recurring fair value measurements:
 
 
 
 
 
 
Interest rate contracts, net
$
3,088

 
Discounted cash flow
 
Closing ratios (pull-through)
 
16.8% - 100.0% (60.1%)
 
 
 
 
 
Cap grids
 
0.5% - 2.5% (0.9%)
Other assets - MSRs
42,022

 
Discounted cash flow
 
Option adjusted spread
 
6.0% - 9.0% (6.4%)
 
 
 
 
 
Constant prepayment rate or life speed
 
0.0% - 80.0% (14.6%)
 
 
 
 
 
Cost to service
 
$65 - $4,000 ($90)
Other assets - SBIC investments
119,475

 
Transaction price
 
Transaction price
 
N/A
Nonrecurring fair value measurements:
 
 
 
 
 
 
Debt securities held to maturity
$
2,177

 
Discounted cash flow
 
Prepayment rate
 
13.7% - 14.7% (14.2%)
 
 
 
 
 
Default rate
 
3.1% - 4.9% (4.0%)
 
 
 
 
 
Loss severity
 
50.3% - 61.9% (56.1%)
Impaired loans
484

 
Appraised value
 
Appraised value
 
0.0% - 70.0% (9.7%)
OREO
21,583

 
Appraised value
 
Appraised value
 
8.0% (1)

(1)
Represents discount to appraised value for estimated costs to sell.
The following provides a description of the sensitivity of the valuation technique to changes in unobservable inputs for recurring fair value measurements.
Recurring Fair Value Measurements Using Significant Unobservable Inputs
Interest Rate Contracts - Interest Rate Lock Commitments
Significant unobservable inputs used in the valuation of interest rate contracts are pull-through and cap grids. Increases or decreases in the pull-through or cap grids will have a corresponding impact in the value of interest rate contracts.
Other Assets - MSRs
The significant unobservable inputs used in the fair value measurement of MSRs are option-adjusted spreads, constant prepayment rate or life speed, and cost to service assumptions. The impact of prepayments and changes in the option-adjusted spread are based on a variety of underlying inputs. Increases or decreases to the underlying cash flow inputs will have a corresponding impact on the value of the MSR asset. The impact of the costs to service assumption will have a directionally opposite change in the fair value of the MSR asset.
Other Assets - SBIC Investments
The significant unobservable inputs used in the fair value measurement of SBIC Investments are initially based upon transaction price. Increases or decreases in valuation factors such as recent or proposed purchase or sale of debt or equity of the issuer, pricing by other dealers in similar securities, size of position held, liquidity of the market will have a corresponding impact in the value of SBIC investments.
Fair Value of Financial Instruments
The carrying amounts and estimated fair values, as well as the level within the fair value hierarchy, of the Company’s financial instruments, excluding financial instruments measured at fair value on a recurring basis, are as follows:
 
September 30, 2020
 
Carrying Amount
 
Estimated Fair Value
 
Level 1
 
Level 2
 
Level 3
 
(In Thousands)
Financial Instruments:
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
15,076,845

 
$
15,076,845

 
$
15,076,845

 
$

 
$

Debt securities held to maturity
9,444,036

 
9,779,195

 
1,412,275

 
7,838,912

 
528,008

Loans
66,180,612

 
65,384,443

 

 

 
65,384,443

Liabilities:
 
 
 
 
 
 
 
 
 
Deposits
$
86,371,032

 
$
86,400,715

 
$

 
$
86,400,715

 
$

FHLB and other borrowings
3,560,973

 
3,444,859

 

 
3,444,859

 

Federal funds purchased and securities sold under agreements to repurchase
189,474

 
189,474

 

 
189,474

 

 
December 31, 2019
 
Carrying Amount
 
Estimated Fair Value
 
Level 1
 
Level 2
 
Level 3
 
(In Thousands)
Financial Instruments:
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
6,938,698

 
$
6,938,698

 
$
6,938,698

 
$

 
$

Debt securities held to maturity
6,797,046

 
6,921,158

 
1,340,448

 
4,912,399

 
668,311

Loans
63,946,857

 
60,869,662

 

 

 
60,869,662

Liabilities:
 
 
 
 
 
 
 
 
 
Deposits
$
74,985,283

 
$
75,024,350

 
$

 
$
75,024,350

 
$

FHLB and other borrowings
3,690,044

 
3,721,949

 

 
3,721,949

 

Federal funds purchased and securities sold under agreements to repurchase
173,028

 
173,028

 

 
173,028

 


Fair Value Option
The Company has elected to apply the fair value option for single family real estate mortgage loans originated for resale in the secondary market. The election allows for a more effective offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting. The Company has not elected the fair value option for other loans held for sale primarily because they are not economically hedged using derivative instruments.
At both September 30, 2020 and December 31, 2019, no loans held for sale for which the fair value option was elected were 90 days or more past due or were in nonaccrual. Interest income on mortgage loans held for sale is recognized based on contractual rates and is reflected in interest and fees on loans in the Company's Unaudited Condensed Consolidated Statements of Income. Net gains of $425 thousand and $887 thousand resulting from changes in fair value of these loans were recorded in noninterest income during the three months ended September 30, 2020 and 2019, respectively. Net gains of $9.2 million and $1.6 million resulting from changes in fair value of these loans were recorded in noninterest income during the nine months ended September 30, 2020 and 2019, respectively.
The Company also had fair value changes on forward contracts related to residential mortgage loans held for sale of approximately $2.1 million and $530 thousand for the three months ended September 30, 2020 and 2019, respectively, and $(1.0) million and $481 thousand for the nine months ended September 30, 2020 and 2019, respectively. An immaterial portion of these amounts was attributable to changes in instrument-specific credit risk.
The following table summarizes the difference between the aggregate fair value and the aggregate unpaid principal balance for residential mortgage loans measured at fair value.
 
Aggregate Fair Value
 
Aggregate Unpaid Principal Balance
 
Difference
 
(In Thousands)
September 30, 2020
 
 
 
 
 
Residential mortgage loans held for sale
$
253,454

 
$
240,518

 
$
12,936

December 31, 2019
 
 
 
 
 
Residential mortgage loans held for sale
$
112,058

 
$
108,345

 
$
3,713