Fair Value

6 Months Ended

Jun. 30, 2024

Fair Value

Fair Value

16. Fair Value

The Company determines the fair values of its financial instruments based on the requirements established in Accounting Standards Codification Topic 820 (“Topic 820”), Fair Value Measurements, which provides a framework for measuring fair value under GAAP and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Topic 820 defines fair value as the exit price, the price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions.

Fair Value Hierarchy

Topic 820 establishes three levels of fair values based on the markets in which the assets or liabilities are traded and the reliability of the assumptions used to determine fair value. The levels are:

◾ Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.

◾ Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets and 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: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability (“Company-level data”). Level 3 assets and liabilities include financial instruments whose value is determined using unobservable inputs to pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Topic 820 requires that the Company disclose estimated fair values for certain financial instruments. Financial instruments include such items as investment securities, loans, deposits, interest rate and foreign exchange contracts, swaps and other instruments as defined by the standard. The Company has an organized and established process for determining and reviewing the fair value of financial instruments reported in the Company’s financial statements. The fair value measurements are reviewed to ensure they are reasonable and in line with market experience in similar asset and liability classes.

Additionally, the Company may be required to record at fair value other assets on a nonrecurring basis, such as collateral-dependent loans, other real estate owned, other customer relationships, and other intangible assets. These nonrecurring fair value adjustments typically involve the application of lower-of-cost-or-fair-value accounting or write-downs of individual assets.

Disclosure of fair values is not required for certain items such as lease financing, obligations for pension and other postretirement benefits, premises and equipment, prepaid expenses, deposit liabilities with no defined or contractual maturity, and income tax assets and liabilities.

Reasonable comparisons of fair value information with that of other financial institutions cannot necessarily be made because the standard permits many alternative calculation techniques, and numerous assumptions have been used to estimate the Company’s fair values.

Valuation Techniques Used in the Fair Value Measurement of Assets and Liabilities Carried at Fair Value

For the assets and liabilities measured at fair value on a recurring basis (categorized in the valuation hierarchy table below), the Company applies the following valuation techniques:

Available-for-sale securities

Available-for-sale debt securities are recorded at fair value on a recurring basis. Fair value measurement is based on quoted prices, including estimates by third-party pricing services, if available. If quoted prices are not available, fair values are measured using proprietary valuation models that utilize market observable parameters from active market makers and inter-dealer brokers whereby securities are valued based upon available market data for securities with similar characteristics. Management reviews the pricing information received from the Company’s third-party pricing service to evaluate the inputs and valuation methodologies used to place securities into the appropriate level of the fair value hierarchy and transfers of securities within the fair value hierarchy are made if necessary. On a monthly basis, management reviews the pricing information received from the third-party pricing service which includes a comparison to non-binding third-party broker quotes, as well as a review of market-related conditions impacting the information provided by the third-party pricing service. Management also identifies investment securities which may have traded in illiquid or inactive markets by identifying instances of a significant decrease in the volume or frequency of trades, relative to historical levels, as well as instances of a significant widening of the bid-ask spread in the brokered markets. The Company’s third-party pricing service has also established processes for the Company to submit inquiries regarding quoted prices. Periodically, the Company will challenge the quoted prices provided by the third-party pricing service. The Company’s third-party pricing service will review the inputs to the evaluation in light of the new market data presented by the Company. The Company’s third-party pricing service may then affirm the original quoted price or may update the evaluation on a going forward basis. The Company classifies all available-for-sale securities as Level 2.

Derivatives

Most of the Company’s derivatives are traded in over-the-counter markets where quoted market prices are not readily available. For those derivatives, the Company measures fair value on a recurring basis using proprietary valuation models that primarily use market observable inputs, such as yield curves, and option volatilities. The fair value of derivatives includes values associated with counterparty credit risk and the Company’s own credit standing. The Company classifies these derivatives, included in other assets and other liabilities, as Level 2.

Concurrent with the sale of the Visa Class B restricted shares, the Company entered into an agreement with the buyer that requires payment to the buyer in the event Visa reduces each member bank’s Class B conversion rate to unrestricted Class A common shares. During 2018 through 2023, Visa funded its litigation escrow account, thereby reducing each member bank’s Class B conversion rate to unrestricted Class A common shares from 1.6483 to the current conversion rate of 1.5875. As a result of the Visa Exchange Offer, the buyer now holds a combination of Visa Class B-2 shares and Visa Class C shares, of which the Visa derivative’s notional is based on. Visa Class B-2 shares and Visa Class C shares have a current conversion rate to Class A common shares of 1.5875 and 4.0000, respectively. The Visa derivative of $2.3 million was included in the unaudited interim consolidated balance sheets at both June 30, 2024 and December 31, 2023 to provide for the fair value of this liability. The potential liability related to this funding swap agreement was determined based on management’s estimate of the timing and the amount of Visa’s litigation settlement and the resulting payments due to the counterparty under the terms of the contract. As such, the funding swap agreement is classified as Level 3 in the fair value hierarchy. The significant unobservable inputs used in the fair value measurement of the Company’s funding swap agreement are the potential future changes in the Class B-2 conversion rate, expected term and growth rate of the market price of Visa Class A common shares. Material increases (or decreases) in any of those inputs may result in a significantly higher (or lower) fair value measurement.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis as of June 30, 2024 and December 31, 2023 are summarized below:

	Fair Value Measurements as of June 30, 2024
	Quoted Prices in		Significant
	Active Markets for		Other		Significant
	Identical Assets		Observable		Unobservable
(dollars in thousands)	(Level 1)		Inputs (Level 2)		Inputs (Level 3)		Total
Assets
U.S. Treasury and government agency debt securities	$	—	$	12,969	$	—	$	12,969
Government-sponsored enterprises debt securities		—		19,668		—		19,668
Mortgage-backed securities:
Residential - Government agency(1)		—		9,335		—		9,335
Residential - Government-sponsored enterprises(1)		—		721,145		—		721,145
Commercial - Government agency		—		208,228		—		208,228
Commercial - Government-sponsored enterprises		—		82,492		—		82,492
Commercial - Non-agency		—		22,000		—		22,000
Collateralized mortgage obligations:
Government agency		—		434,856		—		434,856
Government-sponsored enterprises		—		339,235		—		339,235
Collateralized loan obligations		—		218,028		—		218,028
Total available-for-sale securities		—		2,067,956		—		2,067,956
Other assets(2)		108		12,773		—		12,881
Liabilities
Other liabilities(3)		—		(3,539)		(2,300)		(5,839)
Total	$	108	$	2,077,190	$	(2,300)	$	2,074,998

(1) Backed by residential real estate.

(2) Other assets classified as Level 1 include money market funds that have quoted prices in active markets and are related to the Company’s deferred compensation plans. Other assets classified as Level 2 include derivative assets.

(3) Other liabilities include derivative liabilities.

	Fair Value Measurements as of December 31, 2023
	Quoted Prices in		Significant
	Active Markets for		Other		Significant
	Identical Assets		Observable		Unobservable
(dollars in thousands)	(Level 1)		Inputs (Level 2)		Inputs (Level 3)		Total
Assets
U.S. Treasury and government agency debt securities	$	—	$	32,503	$	—	$	32,503
Government-sponsored enterprises debt securities		—		19,592		—		19,592
Mortgage-backed securities:
Residential - Government agency(1)		—		10,182		—		10,182
Residential - Government-sponsored enterprises(1)		—		783,297		—		783,297
Commercial - Government agency		—		218,674		—		218,674
Commercial - Government-sponsored enterprises		—		86,431		—		86,431
Commercial - Non-agency		—		21,683		—		21,683
Collateralized mortgage obligations:
Government agency		—		471,150		—		471,150
Government-sponsored enterprises		—		363,970		—		363,970
Collateralized loan obligations		—		247,854		—		247,854
Total available-for-sale securities		—		2,255,336		—		2,255,336
Other assets(2)		517		12,768		—		13,285
Liabilities
Other liabilities(3)		—		(2,320)		(2,300)		(4,620)
Total	$	517	$	2,265,784	$	(2,300)	$	2,264,001

(1) Backed by residential real estate.

(2) Other assets classified as Level 1 include money market funds that have quoted prices in active markets and are related to the Company’s deferred compensation plans. Other assets classified as Level 2 include derivative assets.

(3) Other liabilities include derivative liabilities.

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of June 30, 2024 and December 31, 2023, the significant unobservable inputs used in the fair value measurements were as follows:

	Quantitative Information about Level 3 Fair Value Measurements at June 30, 2024
				Significant
(dollars in thousands)	Fair value		Valuation Technique	Unobservable Input	Range
Collateral-dependent loans	$	14,441	Financial Statement Values	Discounts to reflect estimated selling costs	0% - 50%
Collateral-dependent loans		2,560	Appraisal Value(1)	Discounts to reflect estimated selling costs	7% - 8%
Visa derivative		(2,300)	Discounted Cash Flow	Expected Conversion Rate - 1.5875(2)	1.5289-1.5875
				Expected Term - 6 months(3)	n/m(3)
				Growth Rate - 14%(4)	-2% - 21%

	Quantitative Information about Level 3 Fair Value Measurements at December 31, 2023
				Significant
(dollars in thousands)	Fair value		Valuation Technique	Unobservable Input	Range
Visa derivative	$	(2,300)	Discounted Cash Flow	Expected Conversion Rate - 1.5875(2)	1.5289-1.5875
				Expected Term - 5 months(5)	n/m(5)
				Growth Rate - 10%(4)	-6% - 25%

(1) Fair value is generally determined through appraisals of the underlying collateral. The Company may also use another available source of collateral assessment, such as purchase offers, letters of intent, or broker price opinions, to determine a reasonable estimate of the fair value of the collateral.

(2) Due to the uncertainty in the movement of the conversion rate, the current conversion rate as of the respective consolidated balance sheet dates was utilized in the fair value calculation.

(3) The expected term was based on an August 2024 claim filing deadline and subsequent period for claims to be processed. As such, a range is not meaningful to disclose.

(4) The growth rate was based on the arithmetic average of analyst price targets.

(5) The expected term was based on a May 2024 claim filing deadline. As such, a range is not meaningful to disclose.

Changes in Fair Value Levels

For the three and six months ended June 30, 2024 and 2023, there were no transfers between fair value hierarchy levels.

The changes in Level 3 liabilities measured at fair value on a recurring basis for the three and six months ended June 30, 2024 and 2023 are summarized below:

	Visa Derivative
(dollars in thousands)	2024		2023
Three Months Ended June 30,
Balance as of April 1,	$	(2,300)	$	(1,200)
Total net losses included in other noninterest income		(1,354)		(1,816)
Settlements		1,354		1,816
Balance as of June 30,	$	(2,300)	$	(1,200)
Total net losses included in net income attributable to the change in unrealized losses related to liabilities still held as of June 30,	$	(1,354)	$	(1,816)
Six Months Ended June 30,
Balance as of January 1,	$	(2,300)	$	(851)
Total net losses included in other noninterest income		(2,830)		(3,779)
Settlements		2,830		3,430
Balance as of June 30,	$	(2,300)	$	(1,200)
Total net losses included in net income attributable to the change in unrealized losses related to liabilities still held as of June 30,	$	(2,830)	$	(3,779)

Assets and Liabilities Carried at Other Than Fair Value

The following tables summarize for the periods indicated the estimated fair value of the Company’s financial instruments that are not required to be carried at fair value on a recurring basis, excluding leases and deposit liabilities with no defined or contractual maturity.

	June 30, 2024
			Fair Value Measurements
			Quoted Prices in		Significant		Significant
			Active Markets		Other		Unobservable
			for Identical		Observable		Inputs
(dollars in thousands)	Book Value		Assets (Level 1)		Inputs (Level 2)		(Level 3)		Total
Financial assets:
Cash and cash equivalents	$	1,114,759	$	290,501	$	824,258	$	—	$	1,114,759
Investment securities held-to-maturity		3,917,175		—		3,401,006		—		3,401,006
Loans held for sale		2,820		—		2,836		—		2,836
Loans(1)		13,934,709		—		—		13,192,228		13,192,228
Financial liabilities:
Time deposits(2)	$	3,294,705	$	—	$	3,270,205	$	—	$	3,270,205
Short-term borrowings		500,000		—		499,105		—		499,105
										(continued)

	December 31, 2023
			Fair Value Measurements
			Quoted Prices in		Significant		Significant
			Active Markets		Other		Unobservable
(continued)			for Identical		Observable		Inputs
(dollars in thousands)	Book Value		Assets (Level 1)		Inputs (Level 2)		(Level 3)		Total
Financial assets:
Cash and cash equivalents	$	1,739,897	$	185,015	$	1,554,882	$	—	$	1,739,897
Investment securities held-to-maturity		4,041,449		—		3,574,856		—		3,574,856
Loans held for sale		190		—		192		—		192
Loans(1)		13,973,688		—		—		13,385,683		13,385,683
Financial liabilities:
Time deposits(2)	$	3,456,158	$	—	$	3,432,330	$	—	$	3,432,330
Short-term borrowings		500,000		—		495,306		—		495,306

(1) Excludes financing leases of $425.2 million at June 30, 2024 and $379.8 million at December 31, 2023.

(2) Excludes deposit liabilities with no defined or contractual maturity of $17.0 billion as of June 30, 2024 and $17.9 billion as of December 31, 2023.

Unfunded loan and lease commitments and letters of credit are not included in the tables above. As of June 30, 2024 and December 31, 2023, the Company had $6.4 billion and $6.5 billion, respectively, of unfunded loan and lease commitments and letters of credit. The Company believes that a reasonable estimate of the fair value of these instruments is the carrying value of deferred fees plus the related reserve for unfunded commitments, which totaled $47.2 million and $49.8 million at June 30, 2024 and December 31, 2023, respectively. No active trading market exists for these instruments, and the estimated fair value does not include value associated with the borrower relationship. The Company does not estimate the fair values of certain unfunded loan and lease commitments that can be canceled by providing notice to the borrower. As Company-level data is incorporated into the fair value measurement, unfunded loan and lease commitments and letters of credit are classified as Level 3.

Valuation Techniques Used in the Fair Value Measurement of Assets and Liabilities Carried at the Lower of Cost or Fair Value

The Company applies the following valuation techniques to assets measured at the lower of cost or fair value:

Mortgage servicing rights

MSRs are carried at the lower of cost or fair value and are therefore subject to fair value measurements on a nonrecurring basis. The fair value of MSRs is determined using models which use significant unobservable inputs, such as estimates of prepayment rates, the resultant weighted average lives of the MSRs and the option-adjusted spread levels. Accordingly, the Company classifies MSRs as Level 3.

Collateral-dependent loans

Collateral-dependent loans are those for which repayment is expected to be provided substantially through the operation or sale of the collateral. These loans are measured at fair value on a nonrecurring basis using collateral values as a practical expedient. The fair values of collateral are primarily based on real estate appraisal reports prepared by third-party appraisers less estimated selling costs. The Company may also use another available source of collateral assessment, such as purchase offers, letters of intent, or broker price opinions, to determine a reasonable estimate of the fair value of the collateral. The fair value of other collateral such as business assets is typically ascertained by assessing inventory listings and borrower’s financial statements less estimated selling costs. The Company measures the estimated credit losses on collateral-dependent loans by performing a lower of cost or fair value analysis. If the estimated credit losses are determined by the value of the collateral, the net carrying amount is adjusted to fair value on a nonrecurring basis as Level 3 by recognizing an ACL.

Other real estate owned

The Company values these properties at fair value at the time the Company acquires them, which establishes their new cost basis. After acquisition, the Company carries such properties at the lower of cost or fair value less estimated selling costs on a nonrecurring basis. Fair value is measured on a nonrecurring basis using collateral values as a practical expedient. The fair values of collateral for other real estate owned are primarily based on real estate appraisal reports prepared by third-party appraisers less disposition costs, and are classified as Level 3.

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company may be required to record certain assets at fair value on a nonrecurring basis in accordance with GAAP. These assets are subject to fair value adjustments that result from the application of lower of cost or fair value accounting or write-downs of individual assets to fair value.

The following table provides the level of valuation inputs used to determine each fair value adjustment and the fair value of the related individual assets or portfolio of assets with fair value adjustments on a nonrecurring basis as of June 30, 2024:

(dollars in thousands)	Level 1		Level 2		Level 3
June 30, 2024
Collateral-dependent loans	$	—	$	—	$	17,001

Total expected credit losses recognized on collateral-dependent loans were $0.7 million and $1.7 million for the three and six months ended June 30, 2024, respectively.

There were no assets with nonrecurring fair value adjustments held as of December 31, 2023. Additionally, there were no nonrecurring fair value adjustments for the three and six months ended June 30, 2023.