FAIR VALUE MEASURES

9 Months Ended

Sep. 30, 2023

NOTE 7 – 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)	September 30, 2023		December 31, 2022
Mortgage loans held for sale	$	381,466	$	390,583
SBA loans held for sale	—		1,495
Total loans held for sale	$	381,466	$	392,078

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 losses of $3.2 million and $857,000 resulting from changes in fair value of these mortgage loans were recorded in income during the three and nine months ended September 30, 2023, respectively. For the three and nine months ended September 30, 2022, net losses of $11.9 million and $44.7 million, respectively, resulting from changes in fair value of these mortgage loans were recorded in income. A net loss of $207,000 and a net gain of $4.9 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 were recorded in income during the three and nine months ended September 30, 2023, respectively. For the three and nine months ended September 30, 2022, net gains of $11.7 million and $10.5 million, respectively, resulting from changes in the fair value of the related derivative financial instruments were 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 September 30, 2023 and December 31, 2022:


(dollars in thousands)	September 30, 2023		December 31, 2022
Aggregate fair value of mortgage loans held for sale	$	381,466	$	390,583
Aggregate unpaid principal balance of mortgage loans held for sale	381,350		389,610
Past-due loans of 90 days or more	475		—
Nonaccrual loans	475		—
Unpaid principal balance of nonaccrual loans	470		—

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 September 30, 2023 and December 31, 2022:


(dollars in thousands)	September 30, 2023		December 31, 2022
Aggregate fair value of SBA loans held for sale	$	—	$	1,495
Aggregate unpaid principal balance of SBA loans held for sale	—		1,350
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 September 30, 2023 and December 31, 2022:


	Recurring Basis Fair Value Measurements
	September 30, 2023
(dollars in thousands)	Fair Value		Level 1		Level 2		Level 3
Financial assets:
Investment securities available-for-sale:
U.S. Treasuries	$	760,596	$	760,596	$	—	$	—
U.S. government sponsored agencies	969		—		969		—
State, county and municipal securities	27,703		—		27,703		—
Corporate debt securities	15,036		—		14,061		975
SBA pool securities	21,751		—		21,751		—
Mortgage-backed securities	598,026		—		598,026		—
Loans held for sale	381,466		—		381,466		—
Derivative financial instruments	13,199		—		13,199		—
Mortgage banking derivative instruments	8,809		—		8,809		—
Total recurring assets at fair value	$	1,827,555	$	760,596	$	1,065,984	$	975
Financial liabilities:
Derivative financial instruments	$	12,988	$	—	$	12,988	$	—

Total recurring liabilities at fair value	$	12,988	$	—	$	12,988	$	—


	Recurring Basis Fair Value Measurements
	December 31, 2022
(dollars in thousands)	Fair Value		Level 1		Level 2		Level 3
Financial assets:
Investment securities available-for-sale:
U.S. Treasuries	$	759,534	$	759,534	$	—	$	—
U.S. government sponsored agencies	979		—		979		—
State, county and municipal securities	34,195		—		34,195		—
Corporate debt securities	15,926		—		14,771		1,155
SBA pool securities	27,398		—		27,398		—
Mortgage-backed securities	662,028		—		662,028		—
Loans held for sale	392,078		—		392,078		—
Derivative financial instruments	4,580		—		4,580		—
Mortgage banking derivative instruments	3,933		—		3,933		—
Total recurring assets at fair value	$	1,900,651	$	759,534	$	1,139,962	$	1,155
Financial liabilities:
Derivative financial instruments	$	4,574	$	—	$	4,574	$	—

Total recurring liabilities at fair value	$	4,574	$	—	$	4,574	$	—

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 September 30, 2023 and December 31, 2022:


	Nonrecurring Basis Fair Value Measurements
(dollars in thousands)	Fair Value		Level 1		Level 2		Level 3
September 30, 2023
Collateral-dependent loans	$	26,656	$	—	$	—	$	26,656
Other real estate owned	1,606		—		—		1,606


Total nonrecurring assets at fair value	$	28,262	$	—	$	—	$	28,262

December 31, 2022
Collateral-dependent loans	$	31,972	$	—	$	—	$	31,972



Total nonrecurring assets at fair value	$	31,972	$	—	$	—	$	31,972

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

For the nine months ended September 30, 2023 and the year ended December 31, 2022, 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
September 30, 2023
Recurring:
Debt securities available-for-sale	$	975	Discounted cash flows	Probability of Default	12.2%	12.2%
				Loss Given Default	44%	44%
Nonrecurring:
Collateral-dependent loans	$	26,656	Third-party appraisals and discounted cash flows	Collateral discounts and discount rates	5% - 50%	30%
Other real estate owned	$	1,606	Third-party appraisals and sales contracts	Collateral discounts and estimated costs to sell	15% - 46%	26%



December 31, 2022
Recurring:
Debt securities available-for-sale	$	1,155	Discounted cash flows	Probability of Default	12.1%	12.1%
				Loss Given Default	41%	41%
Nonrecurring:
Collateral-dependent loans	$	31,972	Third-party appraisals and discounted cash flows	Collateral discounts and discount rates	0% - 48%	27%

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
			September 30, 2023
(dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and due from banks	$	241,137	$	241,137	$	—	$	—	$	241,137
Federal funds sold and interest-bearing accounts	1,304,636		1,304,636		—		—		1,304,636

Debt securities held-to-maturity	141,859		—		115,689		—		115,689

Loans, net	19,884,319		—		—		19,247,521		19,247,521
Accrued interest receivable	83,574		—		9,264		74,311		83,575
Financial liabilities:
Deposits	20,590,345		—		20,579,194		—		20,579,194

Other borrowings	1,209,553		—		1,189,399		—		1,189,399
Subordinated deferrable interest debentures	129,817		—		141,206		—		141,206
Accrued interest payable	38,836		—		38,836		—		38,836


			Fair Value Measurements
			December 31, 2022
(dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and due from banks	$	284,567	$	284,567	$	—	$	—	$	284,567
Federal funds sold and interest-bearing accounts	833,565		833,565		—		—		833,565

Debt securities held-to-maturity	134,864		—		114,538				114,538
Loans, net	19,617,604		—		—		19,067,612		19,067,612
Accrued interest receivable	77,042		—		7,694		69,348		77,042
Financial liabilities:
Deposits	19,462,738		—		19,455,187		—		19,455,187

Other borrowings	1,875,736		—		1,861,850		—		1,861,850
Subordinated deferrable interest debentures	128,322		—		125,988		—		125,988
Accrued interest payable	10,530		—		10,530		—		10,530

- 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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