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FAIR VALUE MEASURES

3 Months Ended

Mar. 31, 2024

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)	March 31, 2024		December 31, 2023
Mortgage loans held for sale	$	363,002	$	281,332
SBA loans held for sale	1,330		—
Total loans held for sale	$	364,332	$	281,332

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 $413,000 resulting from changes in fair value of these mortgage loans was recorded in income during the three months ended March 31, 2024. For the three months ended March 31, 2023, a net gain of $5.6 million resulting from changes in fair value of these mortgage loans was recorded in income. A net gain of $6.9 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 was recorded in income during the three months ended March 31, 2024. For the three months ended March 31, 2023, a net loss of $2.9 million resulting from changes in the fair value of the related derivative financial instruments was recorded in 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, 2024 and December 31, 2023:


(dollars in thousands)	March 31, 2024		December 31, 2023
Aggregate fair value of mortgage loans held for sale	$	363,002	$	281,332
Aggregate unpaid principal balance of mortgage loans held for sale	355,998		273,915
Past-due loans of 90 days or more	463		781
Nonaccrual loans	463		781
Unpaid principal balance of nonaccrual loans	453		774

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, 2024 and December 31, 2023:


(dollars in thousands)	March 31, 2024		December 31, 2023
Aggregate fair value of SBA loans held for sale	$	1,330	$	—
Aggregate unpaid principal balance of SBA loans held for sale	1,203		—

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, 2024 and December 31, 2023:


	Recurring Basis Fair Value Measurements
	March 31, 2024
(dollars in thousands)	Fair Value		Level 1		Level 2		Level 3
Financial assets:
Debt securities available-for-sale:
U.S. Treasuries	$	701,296	$	701,296	$	—	$	—
U.S. government sponsored agencies	980		—		980		—
State, county and municipal securities	27,004		—		27,004		—
Corporate debt securities	10,014		—		9,054		960
SBA pool securities	78,429		—		78,429		—
Mortgage-backed securities	596,696		—		596,696		—
Loans held for sale	364,332		—		364,332		—
Derivative financial instruments	10,019		—		10,019		—
Mortgage banking derivative instruments	5,752		—		5,752		—
Total recurring assets at fair value	$	1,794,522	$	701,296	$	1,092,266	$	960
Financial liabilities:
Derivative financial instruments	$	10,142	$	—	$	10,142	$	—
Risk participation agreement	32				32
Mortgage banking derivative instruments	1,030		—		1,030		—
Total recurring liabilities at fair value	$	11,204	$	—	$	11,204	$	—


	Recurring Basis Fair Value Measurements
	December 31, 2023
(dollars in thousands)	Fair Value		Level 1		Level 2		Level 3
Financial assets:
Debt securities available-for-sale:
U.S. Treasuries	$	720,877	$	720,877	$	—	$	—
U.S. government sponsored agencies	985		—		985		—
State, county and municipal securities	28,051		—		28,051		—
Corporate debt securities	10,027		—		9,037		990
SBA pool securities	51,516		—		51,516		—
Mortgage-backed securities	591,488		—		591,488		—
Loans held for sale	281,332		—		281,332		—
Derivative financial instruments	5,937		—		5,937		—
Mortgage banking derivative instruments	3,636		—		3,636		—
Total recurring assets at fair value	$	1,693,849	$	720,877	$	971,982	$	990
Financial liabilities:
Derivative financial instruments	$	6,203	$	—	$	6,203	$	—
Mortgage banking derivative instruments	5,790		—		5,790		—
Total recurring liabilities at fair value	$	11,993	$	—	$	11,993	$	—

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, 2024 and December 31, 2023:


	Nonrecurring Basis Fair Value Measurements
(dollars in thousands)	Fair Value		Level 1		Level 2		Level 3
March 31, 2024
Collateral-dependent loans	$	47,147	$	—	$	—	$	47,147
Other real estate owned	560		—		—		560


Total nonrecurring assets at fair value	$	47,707	$	—	$	—	$	47,707

December 31, 2023
Collateral-dependent loans	$	36,978	$	—	$	—	$	36,978
Other real estate owned	5,324		—		—		5,324


Total nonrecurring assets at fair value	$	42,302	$	—	$	—	$	42,302

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, 2024 and the year ended December 31, 2023, 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, 2024
Recurring:
Debt securities available-for-sale	$	960	Discounted cash flows	Probability of Default	11%	11%
				Loss Given Default	44%	44%
Nonrecurring:
Collateral-dependent loans	$	47,147	Third-party appraisals and discounted cash flows	Collateral discounts and discount rates	3% - 60%	28%
Other real estate owned	$	560	Third-party appraisals and sales contracts	Collateral discounts and estimated costs to sell	15% - 27%	23%



December 31, 2023
Recurring:
Debt securities available-for-sale	$	990	Discounted cash flows	Probability of Default	11%	11%
				Loss Given Default	42%	42%
Nonrecurring:
Collateral-dependent loans	$	36,978	Third-party appraisals and discounted cash flows	Collateral discounts and discount rates	11% - 60%	28%
Other real estate owned	$	5,324	Third-party appraisals and sales contracts	Collateral discounts and estimated costs to sell	15% - 33%	22%

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, 2024
(dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and due from banks	$	235,931	$	235,931	$	—	$	—	$	235,931
Federal funds sold and interest-bearing accounts	975,321		975,321		—		—		975,321

Debt securities held-to-maturity	147,022		—		126,581		—		126,581

Loans, net	20,233,090		—		—		19,662,474		19,662,474

Financial liabilities:
Deposits	20,997,390		—		20,945,083		—		20,945,083

Other borrowings	631,380		—		617,432		—		617,432
Subordinated deferrable interest debentures	130,814		—		141,659		—		141,659


			Fair Value Measurements
			December 31, 2023
(dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and due from banks	$	230,470	$	230,470	$	—	$	—	$	230,470
Federal funds sold and interest-bearing accounts	936,834		936,834		—		—		936,834

Debt securities held-to-maturity	141,512		—		122,731		—		122,731
Loans, net	19,925,225		—		—		19,332,899		19,332,899

Financial liabilities:
Deposits	20,708,509		—		20,707,463		—		20,707,463

Other borrowings	509,586		—		501,723		—		501,723
Subordinated deferrable interest debentures	130,315		—		141,407		—		141,407

- 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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