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FAIR VALUE MEASURES

3 Months Ended

Mar. 31, 2022

NOTE 8 – 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 under the fair value option are comprised of the following:


(dollars in thousands)	March 31, 2022		December 31, 2021
Mortgage loans held for sale	$	899,009	$	1,247,997
SBA loans held for sale	2,541		6,635
Total loans held for sale	$	901,550	$	1,254,632

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.

A net loss of $43.9 million resulting from changes in fair value of these mortgage loans was recorded in income during the three months ended March 31, 2022. For the three months ended March 31, 2021, a net loss of $25.1 million resulting from changes in fair value of these mortgage loans was recorded in income. A net gain of $26.0 million resulting from changes in the fair value of the related derivative financial instruments used to hedge exposure to the market-related risks associated with these mortgage loans was recorded in income during the three months ended March 31, 2022. For the three months ended March 31, 2021, a net gain of $27.5 million resulting from changes in the fair value of the related derivative financial instruments was recorded in income. The changes in fair value of both mortgage loans held for sale and the related derivative financial 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 March 31, 2022 and December 31, 2021:


(dollars in thousands)	March 31, 2022		December 31, 2021
Aggregate fair value of mortgage loans held for sale	$	899,009	$	1,247,997
Aggregate unpaid principal balance of mortgage loans held for sale	906,552		1,211,646
Past-due loans of 90 days or more	466		746
Nonaccrual loans	466		746
Unpaid principal balance of nonaccrual loans	475		718

The following table summarizes the difference between the fair value and the principal balance for SBA loans held for sale measured at fair value as of March 31, 2022 and December 31, 2021:


(dollars in thousands)	March 31, 2022		December 31, 2021
Aggregate fair value of SBA loans held for sale	$	2,541	$	6,635
Aggregate unpaid principal balance of SBA loans held for sale	2,427		5,825
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, loans held for sale under the fair value option and derivative financial instruments 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 collateral-dependent loans, loan servicing rights and OREO. Additionally, the Company is required to disclose, but not record, the fair value of other financial instruments.

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 March 31, 2022 and December 31, 2021:


	Recurring Basis Fair Value Measurements
	March 31, 2022
(dollars in thousands)	Fair Value		Level 1		Level 2		Level 3
Financial assets:
Investment securities available-for-sale:
U.S. government sponsored agencies	$	7,072	$	—	$	7,072	$	—
State, county and municipal securities	43,844		—		43,844		—
Corporate debt securities	28,178		—		26,828		1,350
SBA pool securities	36,949		—		36,949		—
Mortgage-backed securities	463,161		—		463,161		—
Loans held for sale	901,550		—		901,550		—
Mortgage banking derivative instruments	37,182		—		37,182		—
Total recurring assets at fair value	$	1,517,936	$	—	$	1,516,586	$	1,350


	Recurring Basis Fair Value Measurements
	December 31, 2021
(dollars in thousands)	Fair Value		Level 1		Level 2		Level 3
Financial assets:
Investment securities available-for-sale:
U.S. government sponsored agencies	$	7,172	$	—	$	7,172	$	—
State, county and municipal securities	47,812		—		47,812		—
Corporate debt securities	28,496		—		27,116		1,380
SBA pool securities	45,201		—		45,201		—
Mortgage-backed securities	463,940		—		463,940		—
Loans held for sale	1,254,632		—		1,254,632		—
Mortgage banking derivative instruments	11,940		—		11,940		—
Total recurring assets at fair value	$	1,859,193	$	—	$	1,857,813	$	1,380
Financial liabilities:
Mortgage banking derivative instruments	$	710	$	—	$	710	$	—
Total recurring liabilities at fair value	$	710	$	—	$	710	$	—

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 March 31, 2022 and December 31, 2021:


	Nonrecurring Basis Fair Value Measurements
(dollars in thousands)	Fair Value		Level 1		Level 2		Level 3
March 31, 2022
Collateral-dependent loans	$	25,510	$	—	$	—	$	25,510
Other real estate owned	399		—		—		399
Mortgage servicing rights	232,236		—		—		232,236

Total nonrecurring assets at fair value	$	258,145	$	—	$	—	$	258,145

December 31, 2021
Collateral-dependent loans	$	44,181	$	—	$	—	$	44,181

Mortgage servicing rights	206,944		—		—		206,944

Total nonrecurring assets at fair value	$	251,125	$	—	$	—	$	251,125

The inputs used to determine estimated fair value of collateral-dependent loans include market conditions, loan term, underlying collateral characteristics and discount rates. The inputs used to determine fair value of OREO include market conditions, estimated marketing period or holding period, underlying collateral characteristics and discount rates.

For the three months ended March 31, 2022 and the year ended December 31, 2021, 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:


(dollars in thousands)	Fair Value		Valuation Technique	Unobservable Inputs	Range of Discounts	Weighted Average Discount
March 31, 2022
Recurring:
Debt securities available-for-sale	$	1,350	Discounted par values	Discount rate	10.0%	10.0%
Nonrecurring:
Collateral-dependent loans	$	25,510	Third-party appraisals and discounted cash flows	Collateral discounts and discount rates	0% - 50%	34%
Other real estate owned	$	399	Third-party appraisals and sales contracts	Collateral discounts and estimated costs to sell	15% - 47%	21%
Mortgage servicing rights	$	232,236	Discounted cash flows	Discount rate	10% - 11%	10%
				Prepayment speed	5% - 23%	8%

December 31, 2021
Recurring:
Debt securities available-for-sale	$	1,380	Discounted par values	Discount Rate	8.0%	8.0%
Nonrecurring:
Collateral-dependent loans	$	44,181	Third-party appraisals and discounted cash flows	Collateral discounts and discount rates	0% - 50%	39%

Mortgage servicing rights	$	206,944	Discounted cash flows	Discount rate	9% - 10%	9%
				Prepayment speed	10% - 40%	13%

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
			March 31, 2022
(dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and due from banks	$	257,316	$	257,316	$	—	$	—	$	257,316
Federal funds sold and interest-bearing accounts	3,541,144		3,541,144		—		—		3,541,144

Debt securities held-to-maturity	91,454		—		82,489		—		82,489

Loans, net	15,957,040		—		—		15,927,461		15,927,461
Accrued interest receivable	53,036		—		2,598		50,438		53,036
Financial liabilities:
Deposits	19,588,441		—		19,590,158		—		19,590,158
Securities sold under agreements to repurchase	2,065		2,065		—		—		2,065
Other borrowings	425,520		—		431,131		—		431,131
Subordinated deferrable interest debentures	126,827		—		117,196		—		117,196
Accrued interest payable	6,121		—		6,121		—		6,121


			Fair Value Measurements
			December 31, 2021
(dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and due from banks	$	307,813	$	307,813	$	—	$	—	$	307,813
Federal funds sold and interest-bearing accounts	3,756,844		3,756,844		—		—		3,756,844

Debt securities held-to-maturity	79,850		—		78,206		—		78,206
Loans, net	15,662,495		—		—		15,509,410		15,509,410
Accrued interest receivable	56,917		—		2,373		54,544		56,917
Financial liabilities:
Deposits	19,665,553		—		19,667,612		—		19,667,612
Securities sold under agreements to repurchase	5,845		5,845		—		—		5,845
Other borrowings	739,879		—		760,829		—		760,829
Subordinated deferrable interest debentures	126,328		—		117,764		—		117,764
Accrued interest payable	4,313		—		4,313		—		4,313

- 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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