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Fair Value Measurements
 6 Months Ended
Jun. 30, 2019
Fair Value Disclosures [Abstract]  
Fair Value Measurements Fair Value Measurements
Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date reflecting assumptions that a market participant would use when pricing an asset or liability. There are three levels of inputs that may be used to measure fair value. The fair value inputs of the instruments are classified and disclosed in one of the following categories pursuant to ASC 820:
Level 1 -
Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. The quoted price shall not be adjusted for any blockage factor (i.e., size of the position relative to trading volume).
Level 2 - Pricing inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Fair value is determined through the use of models or other valuation methodologies, including the use of pricing matrices. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3 - Pricing inputs are unobservable for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. The inputs into the determination of fair value require significant management judgment or estimation.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
The Company uses the following methods and assumptions in estimating fair value disclosures for financial instruments. Financial assets and liabilities recorded at fair value on a recurring and non-recurring basis are listed as follows:
Securities Available for Sale
The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).
The fair values of the Company’s Level 3 securities available for sale were measured using an income approach valuation technique. The primary inputs and assumptions used in the fair value measurement was derived from the security’s underlying collateral, which included discount rate, prepayment speeds, payment delays, and an assessment of the risk of default of the underlying collateral, among other factors. Significant increases or decreases in any of the inputs or assumptions could result in a significant increase or decrease in the fair value measurement.
Equity Investments With Readily Determinable Fair Value
The fair value of the Company’s equity investments with readily determinable fair value is comprised of mutual funds and equity stock. The fair value for these investments is obtained from unadjusted quoted prices in active markets on the date of measurement and is therefore classified as Level 1.
Interest Rate Swaps
The Company offers interest rate swaps to certain loan customers to allow them to hedge the risk of rising interest rates on their variable rate loans. The Company originates a variable rate loan and enters into a variable-to-fixed interest rate swap with the customer. The Company also enters into an offsetting swap with a correspondent bank. These back-to-back agreements are intended to offset each other and allow the Company to originate a variable rate loan, while providing a contract for fixed interest payments for the customer. The net cash flow for the Company is equal to the interest income received from a variable rate loan originated with the customer. The fair value of these derivatives is based on a discounted cash flow approach. Due to the observable nature of the inputs used in deriving the fair value of these derivative contracts, the valuation of interest rate swaps is classified as Level 2.
Mortgage banking derivatives
Mortgage banking derivative instruments consist of interest rate lock commitments and forward sale contracts that trade in liquid markets. The fair value is based on the prices available from third party investors. Due to the observable nature of the inputs used in deriving the fair value, the valuation of mortgage banking derivatives are classified as Level 2.
Impaired Loans
The fair values of impaired loans are generally measured for impairment using the practical expedients permitted by FASB ASC 310-10-35 including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation, less costs to sell of 8.5%. Appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and income approach. Adjustment may be made in the appraisal process by the independent appraiser to adjust for differences between the comparable sales and income data available for similar loans and the underlying collateral. For commercial and industrial and asset backed loans, independent valuations may include a 20-60% discount for eligible accounts receivable and a 50-70% discount for inventory. These result in a Level 3 classification.
OREO
OREO is fair valued at the time the loan is foreclosed upon and the asset is transferred to OREO. The value is based primarily on third party appraisals, less costs to sell of 8.5% and result in a Level 3 classification of the inputs for determining fair value. OREO is reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted to lower of cost or market accordingly, based on the same factors identified above.
Loans held for sale
Loans held for sale are carried at the lower of cost or fair value, as determined by outstanding commitments from investors, or based on recent comparable sales (Level 2 inputs), if available, and if not available, are based on discounted cash flows using current market rates applied to the estimated life and credit risk (Level 3 inputs) or may be assessed based upon the fair value of the collateral, which is obtained from recent real estate appraisals (Level 3 inputs). These appraisals may utilize a single valuation approach or a combination of approaches including the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in Level 3 classification of the inputs for determining fair value.
Assets and liabilities measured at fair value on a recurring basis are summarized below:
 
 

Fair Value Measurements at the End of
the Reporting Period Using
 
June 30, 2019

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
 
(Dollars in thousands)
Assets:







Securities available for sale:







U.S. Government agency and U.S. Government sponsored enterprises:
 
 
 
 
 
 
 
Collateralized mortgage obligations
$
844,899

 
$
—

 
$
844,899

 
$
—

Mortgage-backed securities:
 
 

 
 
 

Residential
367,176

 
—

 
367,176

 
—

Commercial
540,931

 
—

 
540,931

 
—

Corporate securities
3,880


—


3,880


—

Municipal securities
70,017


—


68,930


1,087

Equity investments with readily determinable fair value
22,061

 
22,061

 
—

 
—

Interest rate swaps
9,060

 
—

 
9,060

 
—

Mortgage banking derivatives
165

 
—

 
165

 
—

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Interest rate swaps
9,060

 
—

 
9,060

 
—

Mortgage banking derivatives
96

 
—

 
96

 
—


 
 
 
Fair Value Measurements at the End of
the Reporting Period Using
 
December 31, 2018
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(Dollars in thousands)
Assets:
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
U.S. Government agency and U.S. Government sponsored enterprises:
 
 
 
 
 
 
 
Collateralized mortgage obligations
$
895,122

 
$
—

 
$
895,122

 
$
—

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
402,605

 
—

 
402,605

 
—

Commercial
469,126

 
—

 
469,126

 
—

Corporate securities
3,826

 
—

 
3,826

 
—

Municipal securities
75,586

 
—

 
74,527

 
1,059

Equity investments with readily determinable fair value
23,405

 
23,405

 
—

 
—

Interest rate swaps
7,059

 
—

 
7,059

 
—

Mortgage banking derivatives
10

 
—

 
10

 
—

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Interest rate swaps
7,059

 
—

 
7,059

 
—

Mortgage banking derivatives
3

 
—

 
3

 
—


There were no transfers between Level 1, 2, and 3 during the three and six months ended June 30, 2019 and 2018.
The table below presents a reconciliation and income statement classification of losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2019 and 2018:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(Dollars in thousands)
Beginning Balance
 
$
1,068

 
$
1,079

 
$
1,059

 
$
1,108

Change in fair value included in other comprehensive income (loss)
 
19

 
(14
)
 
28

 
(43
)
Ending Balance
 
$
1,087

 
$
1,065

 
$
1,087

 
$
1,065

 
 
 
 
 
 
 
 
 

The Company measures certain assets at fair value on a non-recurring basis including impaired loans (excluding PCI loans), loans held for sale, and OREO. These fair value adjustments result from impairments recognized during the period, application of the lower of cost or fair value on loans held for sale, and the application of fair value less cost to sell on OREO.
Assets measured at fair value on a non-recurring basis are summarized below:
 
 

Fair Value Measurements at the End of
the Reporting Period Using
 
June 30, 2019

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
 
(Dollars in thousands)
Assets:
 
 
 
 
 
 
 
Impaired loans at fair value:
 
 
 
 
 
 
 
Real estate loans
$
9,014


$
—


$
—


$
9,014

Commercial business
13,511


—


—


13,511

Trade finance
2,721

 
—

 
—

 
2,721

OREO
4,497


—


—


4,497


 
 
 
Fair Value Measurements at the End of
the Reporting Period Using
 
December 31, 2018
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(Dollars in thousands)
Assets:
 
 
 
 
 
 
 
Impaired loans at fair value:
 
 
 
 
 
 
 
Real estate loans
$
9,379

 
$
—

 
$
—

 
$
9,379

Commercial business
9,951

 
—

 
—

 
9,951

Consumer
66

 
—

 
—

 
66

OREO
5,659

 
—

 
—

 
5,659


For assets measured at fair value on a non-recurring basis, the total net gains (losses), which include charge offs, recoveries, specific reserves, and recognized gains and losses on sales are summarized below:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in thousands)
Assets:
 
 
 
 
 
 
 
Impaired loans at fair value:
 
 
 
 
 
 
 
Real estate loans
$
525

 
$
966

 
$
1,573

 
$
(4,606
)
Commercial business
(336
)
 
1,513

 
(3,567
)
 
614

Trade Finance
(333
)
 
(240
)
 
(333
)
 
(225
)
Consumer
(343
)
 
448

 
(628
)
 
(763
)
OREO
77

 
192

 
139

 
264



Fair Value of Financial Instruments
Carrying amounts and estimated fair values of financial instruments, not previously presented, at June 30, 2019 and December 31, 2018 were as follows:
 
June 30, 2019
 
Carrying
Amount

Estimated
Fair Value
 
Fair Value Measurement Using
 
(Dollars in thousands)
Financial Assets:



 

Cash and cash equivalents
$
609,795


$
609,795

 
Level 1
Interest bearing deposits in other financial institutions
30,632

 
30,714

 
Level 2
Equity investments without readily determinable fair values
26,689

 
26,689

 
Level 2
Loans held for sale
6,426


6,516

 
Level 2
Loans receivable—net
11,883,068


11,756,995

 
Level 3
Accrued interest receivable
33,980


33,980

 
Level 2/3
Servicing assets, net
19,997

 
21,693

 
Level 3
Customers’ liabilities on acceptances
1,696


1,696

 
Level 2
Financial Liabilities:
 
 
 
 
 
Noninterest bearing deposits
$
3,009,218


$
3,009,218

 
Level 2
Saving and other interest bearing demand deposits
3,482,806


3,482,806

 
Level 2
Time deposits
5,680,360


5,707,901

 
Level 2
FHLB advances
695,000


697,013

 
Level 2
Convertible notes, net
196,977

 
199,030

 
Level 1
Subordinated debentures
102,477


117,726

 
Level 2
Accrued interest payable
36,987


36,987

 
Level 2
Acceptances outstanding
1,696


1,696

 
Level 2
 
 
 
 
 
 
 
December 31, 2018
 
Carrying
Amount

Estimated
Fair Value
 
Fair Value Measurement Using
 
(Dollars in thousands)
Financial Assets:



 
 
Cash and cash equivalents
$
459,606


$
459,606

 
Level 1
Interest bearing deposits in other financial institutions
29,409

 
29,374

 
Level 2
Equity investments without readily determinable fair values
26,430

 
26,430

 
Level 2
Loans held for sale
25,128


25,943

 
Level 2
Loans receivable—net
12,005,558


11,913,906

 
Level 3
Accrued interest receivable
32,225


32,225

 
Level 2/3
Servicing assets, net
23,132

 
24,762

 
Level 3
Customers’ liabilities on acceptances
2,281


2,281

 
Level 2
Financial Liabilities:
 
 
 
 
 
Noninterest bearing deposits
$
3,022,633


$
3,022,633

 
Level 2
Saving and other interest bearing demand deposits
3,262,399


3,262,399

 
Level 2
Time deposits
5,870,624


5,889,030

 
Level 2
FHLB advances
821,280


810,812

 
Level 2
Convertible debt
194,543

 
180,525

 
Level 1
Subordinated debentures
101,929


116,542

 
Level 2
Accrued interest payable
31,374


31,374

 
Level 2
Acceptances outstanding
2,281


2,281

 
Level 2


During the first quarter of 2018, the Company adopted ASU 2016-01, “Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.” Among other things, the guidance requires the Company to base their fair value disclosures for financial instruments that are not measured at fair value in the financial statements on the exit price notion as opposed to an entry pricing notion. Prior to the adoption of ASU 2016-01, the Company used the entry prices to measure the fair value of certain assets and liabilities including loans, deposits, and subordinated debentures as permitted by ASC 820-10. However, upon adoption of ASU 2016-01, the Company began measuring these assets and liabilities based on the exit price notion. Although the exit price notion represents the value that would be received to sell an asset or paid to transfer a liability, the actual price received for a sale of assets or paid to transfer liabilities could be different from exit price disclosed.
The methods and assumptions used to estimate fair value are described as follows:
The carrying amount is the estimated fair value for cash and cash equivalents, savings and other interest bearing demand deposits, equity investments without readily determinable fair values, customer’s and Bank’s liabilities on acceptances, noninterest bearing deposits, short-term debt, secured borrowings and variable rate loans or deposits that reprice frequently and fully. For loans the fair value is determined through a discounted cash flow analysis which incorporates probability of default and loss given default rates on an individual loan basis. The discount rate is based on the LIBOR Swap Rate for fixed rate loans, while variable loans start with the corresponding index rate and an adjustment was made on certain loans which considered factors such as servicing costs, capital charges, duration, asset type incremental costs, and use of projected cash flows. Residential real estate loans fair values included Fannie Mae and Freddie Mac prepayment speed assumptions or a third party index based on historical prepayment speeds. Fair value of time deposits is based discounted cash flow analysis using recent issuance rates over the prior three months and a market rate analysis of recent offering rates for retail products. Wholesale time deposits fair values incorporated brokered time deposit offering rates. The fair value of the Company’s debt is based on current rates for similar financing. Fair value for the Company’s convertible notes is based on the actual last traded price of the notes. The fair value of commitments to fund loans represents fees currently charged to enter into similar agreements with similar remaining maturities and is not presented herein. The fair value of these financial instruments is not material to the consolidated financial statements.