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FAIR VALUE MEASURES
6 Months Ended
Jun. 30, 2017
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASURES
NOTE 13 – FAIR VALUE MEASURES
 
The fair value of an asset or liability is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various assets and liabilities. In cases where quoted market prices are not available, fair value is based on discounted cash flows or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the asset or liability. The accounting standard for disclosures about the fair value measures excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
 
The Company’s loans held for sale are carried at fair value and are comprised of the following:
 
 
 
June 30,
 
December 31,
 
(dollars in thousands)
 
2017
 
2016
 
Mortgage loans held for sale
 
$
123,119
 
$
105,924
 
SBA loans held for sale
 
 
23,647
 
 
-
 
Total loans held for sale
 
$
146,766
 
$
105,924
 
 
The Company has elected to record mortgage loans held for sale at fair value in order to eliminate the complexities and inherent difficulties of achieving hedge accounting and to better align reported results with the underlying economic changes in value of the loans and related hedge instruments. This election impacts the timing and recognition of origination fees and costs, as well as servicing value, which are now recognized in earnings at the time of origination. Interest income on mortgage loans held for sale is recorded on an accrual basis in the consolidated statements of income and comprehensive income under the heading interest income – interest and fees on loans. The servicing value is included in the fair value of the interest rate lock commitments (“IRLCs”) with borrowers. The mark to market adjustments related to mortgage loans held for sale and the associated economic hedges are captured in mortgage banking activities. Net gains of $4.2 million and $3.9 million resulting from fair value changes of these mortgage loans were recorded in income during the six months ended June 30, 2017 and 2016, respectively. The amount does not reflect changes in fair values of related derivative instruments used to hedge exposure to market-related risks associated with these mortgage loans. The change in fair value of both mortgage loans held for sale and the related derivative instruments are recorded in mortgage banking activity in the consolidated statements of income and comprehensive income. The Company’s valuation of mortgage loans held for sale incorporates an assumption for credit risk; however, given the short-term period that the Company holds these loans, valuation adjustments attributable to instrument-specific credit risk is nominal.
 
The following table summarizes the difference between the fair value and the principal balance for mortgage loans held for sale measured at fair value as of June 30, 2017 and December 31, 2016:
 
 
 
June 30,
 
December 31,
 
(dollars in thousands)
 
2017
 
2016
 
Aggregate fair value of mortgage loans held for sale
 
$
123,119
 
$
105,924
 
Aggregate unpaid principal balance
 
 
118,900
 
 
103,691
 
Past-due loans of 90 days or more
 
 
-
 
 
-
 
Nonaccrual loans
 
 
-
 
 
-
 
 
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available for sale, mortgage loans held for sale and derivatives are recorded at fair value on a recurring basis. From time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans and OREO. Additionally, the Company is required to disclose, but not record, the fair value of other financial instruments.
 
Fair Value Hierarchy
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
 
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.
 
The following methods and assumptions were used by the Company in estimating the fair value of its assets and liabilities recorded at fair value and for estimating the fair value of its financial instruments:
 
Cash, Due From Banks, Federal Funds Sold and Interest-Bearing Accounts: The carrying amount of cash, due from banks, federal funds sold and interest-bearing deposits in banks approximates fair value.
  
Investment Securities Available for Sale: The fair value of securities available for sale is determined by various valuation methodologies. Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Level 2 securities include certain U.S. agency bonds, mortgage-backed securities, collateralized mortgage and debt obligations, and municipal securities. The Level 2 fair value pricing is provided by an independent third party and is based upon similar securities in an active market. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include certain residual municipal securities and other less liquid securities.
 
Other Investments: FHLB stock, Federal Reserve Bank stock and the Company’s minority equity investment in USPF are included in other investment securities at original cost basis. These investments do not have readily determinable fair values and are carried at original cost basis. It is not practical to determine the fair value of these investments due to restrictions placed on transferability. These investments are periodically evaluated for impairment based on ultimate recovery of par value or cost basis. Cost basis approximates fair value for these investments.
 
Loans Held for Sale: The Company records loans held for sale at fair value. The fair value of loans held for sale is determined on outstanding commitments from third party investors in the secondary markets and is classified within Level 2 of the valuation hierarchy.
 
Loans: The carrying amount of variable-rate loans that reprice frequently and have no significant change in credit risk approximates fair value. The fair value of fixed-rate loans is estimated based on discounted contractual cash flows, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. The fair value of impaired loans is estimated based on discounted contractual cash flows or underlying collateral values, where applicable. A loan is determined to be impaired if the Company believes it is probable that all principal and interest amounts due according to the terms of the note will not be collected as scheduled. The fair value of impaired loans is determined in accordance with ASC 310-10, Accounting by Creditors for Impairment of a Loan, and generally results in a specific reserve established through a charge to the provision for loan losses. Losses on impaired loans are charged to the allowance when management believes the uncollectability of a loan is confirmed. Management has determined that the majority of impaired loans are Level 3 assets due to the extensive use of market appraisals.
 
Other Real Estate Owned: The fair value of other real estate owned (“OREO”) is determined using certified appraisals, internal evaluations and broker price opinions that value the property at its highest and best uses by applying traditional valuation methods common to the industry. The Company does not hold any OREO for profit purposes and all other real estate is actively marketed for sale. In most cases, management has determined that additional write-downs are required beyond what is calculable from the appraisal to carry the property at levels that would attract buyers. Because this additional write-down is not based on observable inputs, management has determined that other real estate owned should be classified as Level 3.
 
Intangible Assets: Intangible assets consist of core deposit premiums acquired in connection with business combinations and are based on the established value of acquired customer deposits. The core deposit premium is initially recognized based on a valuation performed as of the consummation date and is amortized over an estimated useful life of seven to ten years.
 
FDIC Loss-Share Receivable/Payable: Because the FDIC will reimburse the Company for certain acquired loans should the Company experience a loss, an indemnification asset is recorded at fair value at the acquisition date. The indemnification asset is recognized at the same time as the indemnified loans, and measured on the same basis, subject to collectability or contractual limitations. The shared loss agreements on the acquisition date reflect the reimbursements expected to be received from the FDIC, using an appropriate discount rate, which reflects counterparty credit risk and other uncertainties. The shared loss agreements continue to be measured on the same basis as the related indemnified loans, and the loss-share receivable/payable is impacted by changes in estimated cash flows associated with these loans.
 
Accrued Interest Receivable/Payable:  The carrying amount of accrued interest receivable and accrued interest payable approximates fair value.
 
Cash Value of Bank Owned Life Insurance: The carrying value of cash value of bank owned life insurance approximates fair value.
 
Deposits: The carrying amount of demand deposits, savings deposits and variable-rate certificates of deposit approximates fair value. The fair value of fixed-rate certificates of deposit is estimated based on discounted contractual cash flows using interest rates currently being offered for certificates of similar maturities.
 
Securities Sold under Agreements to Repurchase and Other Borrowings: The carrying amount of variable rate borrowings and securities sold under repurchase agreements approximates fair value and are classified as Level 1. The fair value of fixed rate other borrowings is estimated based on discounted contractual cash flows using the current incremental borrowing rates for similar borrowing arrangements and are classified as Level 2.
 
Subordinated Deferrable Interest Debentures: The fair value of the Company’s trust preferred securities is based primarily upon discounted cash flows using rates for securities with similar terms and remaining maturities and are classified as Level 2.
 
Off-Balance-Sheet Instruments: Because commitments to extend credit and standby letters of credit are typically made using variable rates and have short maturities, the carrying value and fair value are immaterial for disclosure.
  
Derivatives: The Company has entered into derivative financial instruments to manage interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivatives. This analysis reflects the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair value of the derivatives is determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments are based on an expectation of future interest rates (forward curves derived from observable market interest rate curves).
 
The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting any applicable credit enhancements such as collateral postings, thresholds, mutual puts and guarantees.
 
Although the Company has determined that the majority of the inputs used to value its derivative fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself or the counterparty. However, as of June 30, 2017 and December 31, 2016, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustment is not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuation in its entirety is classified in Level 2 of the fair value hierarchy.
 
The following table presents the fair value measurements of assets and liabilities measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall as of June 30, 2017 and December 31, 2016:
 
 
 
Fair Value Measurements on a Recurring Basis
 
 
 
As of June 30, 2017
 
(dollars in thousands)
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Financial assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government sponsored agencies
 
$
1,009
 
$
-
 
$
1,009
 
$
-
 
State, county and municipal securities
 
 
145,108
 
 
-
 
 
145,108
 
 
-
 
Corporate debt securities
 
 
47,612
 
 
-
 
 
46,112
 
 
1,500
 
Mortgage-backed securities
 
 
624,964
 
 
-
 
 
624,964
 
 
-
 
Loans held for sale
 
 
146,766
 
 
-
 
 
146,766
 
 
-
 
Mortgage banking derivative instruments
 
 
4,899
 
 
-
 
 
4,899
 
 
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total recurring assets at fair value
 
$
970,358
 
$
-
 
$
968,858
 
$
1,500
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments
 
$
867
 
$
-
 
$
867
 
$
-
 
Mortgage banking derivative instruments
 
 
306
 
 
-
 
 
306
 
 
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total recurring liabilities at fair value
 
$
1,173
 
$
-
 
$
1,173
 
$
-
 
 
 
 
Fair Value Measurements on a Recurring Basis
 
 
 
As of December 31, 2016
 
(dollars in thousands)
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Financial assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government sponsored agencies
 
$
1,020
 
$
-
 
$
1,020
 
$
-
 
State, county and municipal securities
 
 
152,035
 
 
-
 
 
152,035
 
 
-
 
Corporate debt securities
 
 
32,172
 
 
-
 
 
30,672
 
 
1,500
 
Mortgage-backed securities
 
 
637,508
 
 
-
 
 
637,508
 
 
-
 
Loans held for sale
 
 
105,924
 
 
-
 
 
105,924
 
 
-
 
Mortgage banking derivative instruments
 
 
4,314
 
 
-
 
 
4,314
 
 
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total recurring assets at fair value
 
$
932,973
 
$
-
 
$
931,473
 
$
1,500
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments
 
$
978
 
$
-
 
$
978
 
$
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total recurring liabilities at fair value
 
$
978
 
$
-
 
$
978
 
$
-
 
 
The following table presents the fair value measurements of assets measured at fair value on a non-recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy as of June 30, 2017 and December 31, 2016:
 
 
 
Fair Value Measurements on a Nonrecurring Basis
 
(dollars in thousands)
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans carried at fair value
 
$
26,605
 
$
-
 
$
-
 
$
26,605
 
Other real estate owned
 
 
453
 
 
-
 
 
-
 
 
453
 
Purchased other real estate owned
 
 
11,330
 
 
-
 
 
-
 
 
11,330
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total nonrecurring assets at fair value
 
$
38,388
 
$
-
 
$
-
 
$
38,388
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans carried at fair value
 
$
28,253
 
$
-
 
$
-
 
$
28,253
 
Other real estate owned
 
 
1,172
 
 
-
 
 
-
 
 
1,172
 
Purchased other real estate owned
 
 
12,540
 
 
-
 
 
-
 
 
12,540
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total nonrecurring assets at fair value
 
$
41,965
 
$
-
 
$
-
 
$
41,965
 
 
The inputs used to determine estimated fair value of impaired loans include market conditions, loan terms, underlying collateral characteristics and discount rates. The inputs used to determine fair value of other real estate owned include market conditions, estimated marketing period or holding period, underlying collateral characteristics and discount rates.
 
For the six months ended June 30, 2017 and the year ended December 31, 2016, there was not a change in the methods and significant assumptions used to estimate fair value.
 
The following table shows significant unobservable inputs used in the fair value measurement of Level 3 assets and liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted
 
 
 
 
 
 
 
 
 
 
Range of
 
 
Average
 
(dollars in thousands)
 
Fair Value
 
 
Valuation Technique
 
Unobservable Inputs
 
Discounts
 
 
Discount
 
 
 
 
 
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recurring:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities available for sale
 
$
1,500
 
 
Discounted par values
 
Credit quality of underlying issuer
 
 
0%
 
 
 
0%
 
Nonrecurring:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans
 
$
26,605
 
 
Third-party appraisals and discounted cash flows
 
Collateral discounts and discount rates
 
 
11% - 100%
 
 
 
29%
 
Other real estate owned
 
$
453
 
 
Third-party appraisals, sales contracts, broker price opinions
 
Collateral discounts and estimated costs to sell
 
 
15% - 45%
 
 
 
17%
 
Purchased other real estate owned
 
$
11,330
 
 
Third-party appraisals
 
Collateral discounts and estimated costs to sell
 
 
10% - 74%
 
 
 
14%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recurring:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities available for sale
 
$
1,500
 
 
Discounted par values
 
Credit quality of underlying issuer
 
 
0%
 
 
 
0%
 
Nonrecurring:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans
 
$
28,253
 
 
Third-party appraisals and discounted cash flows
 
Collateral discounts and discount rates
 
 
15% - 100%
 
 
 
28%
 
Other real estate owned
 
$
1,172
 
 
Third-party appraisals, sales contracts, broker price opinions
 
Collateral discounts and estimated costs to sell
 
 
15% - 74%
 
 
 
22%
 
Purchased other real estate owned
 
$
12,540
 
 
Third-party appraisals
 
Collateral discounts and estimated costs to sell
 
 
10% - 74%
 
 
 
15%
 
 
The carrying amount and estimated fair value of the Company’s financial instruments, not shown elsewhere in these financial statements, were as follows:
 
 
 
 
 
 
Fair Value Measurements at June 30, 2017 Using:
 
 
 
Carrying
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
 
Amount
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
Financial assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
$
139,500
 
 
$
139,500
 
 
$
-
 
 
$
-
 
 
$
139,500
 
Federal funds sold and interest-bearing accounts
 
 
137,811
 
 
 
137,811
 
 
 
-
 
 
 
-
 
 
 
137,811
 
Loans, net
 
 
5,619,135
 
 
 
-
 
 
 
-
 
 
 
5,609,246
 
 
 
5,609,246
 
Accrued interest receivable
 
 
22,006
 
 
 
22,006
 
 
 
-
 
 
 
-
 
 
 
22,006
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
5,793,397
 
 
$
-
 
 
$
5,793,319
 
 
$
-
 
 
$
5,793,319
 
Securities sold under agreements to repurchase
 
 
18,400
 
 
 
18,400
 
 
 
-
 
 
 
-
 
 
 
18,400
 
Other borrowings
 
 
679,591
 
 
 
-
 
 
 
680,861
 
 
 
-
 
 
 
680,861
 
Subordinated deferrable interest debentures
 
 
84,889
 
 
 
-
 
 
 
69,471
 
 
 
-
 
 
 
69,471
 
FDIC loss-share payable
 
 
7,992
 
 
 
-
 
 
 
-
 
 
 
9,014
 
 
 
9,014
 
Accrued interest payable
 
 
3,167
 
 
 
3,167
 
 
 
-
 
 
 
-
 
 
 
3,167
 
  
 
 
 
 
 
Fair Value Measurements at December 31, 2016 Using:
 
 
 
Carrying
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
 
Amount
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
Financial assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
$
127,164
 
 
$
127,164
 
 
$
-
 
 
$
-
 
 
$
127,164
 
Federal funds sold and interest-bearing accounts
 
 
71,221
 
 
 
71,221
 
 
 
-
 
 
 
-
 
 
 
71,221
 
Loans, net
 
 
5,212,153
 
 
 
-
 
 
 
-
 
 
 
5,236,034
 
 
 
5,236,034
 
Accrued interest receivable
 
 
22,278
 
 
 
22,278
 
 
 
-
 
 
 
-
 
 
 
22,278
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
5,575,163
 
 
$
-
 
 
$
5,575,288
 
 
$
-
 
 
$
5,575,288
 
Securities sold under agreements to repurchase
 
 
53,505
 
 
 
53,505
 
 
 
-
 
 
 
-
 
 
 
53,505
 
Other borrowings
 
 
492,321
 
 
 
-
 
 
 
492,321
 
 
 
-
 
 
 
492,321
 
Subordinated deferrable interest debentures
 
 
84,228
 
 
 
-
 
 
 
67,321
 
 
 
-
 
 
 
67,321
 
FDIC loss-share payable
 
 
6,313
 
 
 
-
 
 
 
-
 
 
 
8,243
 
 
 
8,243
 
Accrued interest payable
 
 
1,501
 
 
 
1,501
 
 
 
-
 
 
 
-
 
 
 
1,501