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Fair Value Measurements

6 Months Ended

Jun. 30, 2024

14. Fair Value Measurements

The Financial Accounting Standards Board (FASB) defines fair value as the exchange price that would be received to sell 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. The FASB’s guidance also establishes a fair value hierarchy that prioritizes the inputs to these valuation techniques used to measure fair value, giving preference to quoted prices in active markets for identical assets or liabilities (“level 1”) and the lowest priority to unobservable inputs such as a reporting entity’s own data (“level 3”). Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in markets that are not active, observable inputs other than quoted prices, such as interest rates and yield curves, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Fair Value of Assets and Liabilities Measured on a Recurring Basis

The following tables present for each of the fair value hierarchy levels the Company’s financial assets and liabilities that are measured at fair value on a recurring basis on the consolidated balance sheets at June 30, 2024 and December 31, 2023:


	June 30, 2024
($ in thousands)	Level 1		Level 2		Level 3		Total
Assets
Available for sale debt securities:
U.S. Treasury and government agency securities	$	—	$	134,921	$	—	$	134,921
Municipal obligations		—		196,472		—		196,472
Corporate debt securities		—		20,735		—		20,735
Residential mortgage-backed securities		—		2,059,132		—		2,059,132
Commercial mortgage-backed securities		—		2,514,600		—		2,514,600
Collateralized mortgage obligations		—		39,354		—		39,354
Total available for sale securities		—		4,965,214		—		4,965,214
Mortgage loans held for sale		—		26,051		—		26,051
Derivative assets (1)		—		91,000		—		91,000
Total recurring fair value measurements - assets	$	—	$	5,082,265	$	—	$	5,082,265
Liabilities
Derivative liabilities (1)	$	—	$	223,889	$	2,553	$	226,442
Total recurring fair value measurements - liabilities	$	—	$	223,889	$	2,553	$	226,442


	December 31, 2023
($ in thousands)	Level 1		Level 2		Level 3		Total
Assets
Available for sale debt securities:
U.S. Treasury and government agency securities	$	—	$	97,808	$	—	$	97,808
Municipal obligations		—		201,412		—		201,412
Corporate debt securities		—		20,352		—		20,352
Residential mortgage-backed securities		—		2,113,866		—		2,113,866
Commercial mortgage-backed securities		—		2,437,472		—		2,437,472
Collateralized mortgage obligations		—		44,285		—		44,285
Total available for sale securities		—		4,915,195		—		4,915,195
Mortgage loans held for sale		—		13,269		—		13,269
Derivative assets (1)		—		90,712		—		90,712
Total recurring fair value measurements - assets	$	—	$	5,019,176	$	—	$	5,019,176
Liabilities
Derivative liabilities (1)	$	—	$	205,796	$	1,342	$	207,138
Total recurring fair value measurements - liabilities	$	—	$	205,796	$	1,342	$	207,138

(1) For further disaggregation of derivative assets and liabilities, see Note 6 - Derivatives.

Securities classified as level 2 include obligations of U.S. Government agencies and U.S. Government-sponsored agencies, including U.S. Treasury securities, residential and commercial mortgage-backed securities and collateralized mortgage obligations that are issued or guaranteed by U.S. government agencies, and state and municipal bonds. The level 2 fair value measurements for investment securities are obtained quarterly from a third-party pricing service that uses industry-standard pricing models. Substantially all of the model inputs are observable in the marketplace or can be supported by observable data.

The Company invests only in securities of investment grade quality with a targeted duration, for the overall portfolio, generally between two and five and a half years. Company policies generally limit investments to U.S. agency securities and municipal

securities determined to be investment grade according to an internally generated score which generally includes a rating of not less than “Baa” or its equivalent by a nationally recognized statistical rating agency.

Loans held for sale consist of residential mortgage loans carried under the fair value option. The fair value for these instruments is classified as level 2 based on market prices obtained from potential buyers.

For the Company’s derivative financial instruments designated as hedges and those under the customer interest rate program, the fair value is obtained from a third-party pricing service that uses an industry-standard discounted cash flow model that relies on inputs, Overnight Index swap rate curves and SOFR swap curves (where applicable), all observable in the marketplace. To comply with the accounting guidance, credit valuation adjustments are incorporated in the fair values to appropriately reflect nonperformance risk for both the Company and the counterparties. Although the Company has determined that the majority of the inputs used to value these derivative instruments fall within level 2 of the fair value hierarchy, the credit value adjustments utilize level 3 inputs, such as estimates of current credit spreads. The Company has determined that the impact of the credit valuation adjustments is not significant to the overall valuation of these derivatives. As a result, the Company has classified its derivative valuations for these instruments in level 2 of the fair value hierarchy. The Company’s policy is to measure counterparty credit risk quarterly for derivative instruments, which are all subject to master netting arrangements, consistent with how market participants would price the net risk exposure at the measurement date.

The Company also has certain derivative instruments associated with the Bank’s mortgage-banking activities. These derivative instruments include interest rate lock commitments on prospective residential mortgage loans and forward commitments to sell these loans to investors on a best efforts delivery basis and To Be Announced securities for mandatory delivery contracts. The fair value of these derivative instruments is measured using observable market prices for similar instruments and is classified as a level 2 measurement.

The Company’s level 3 liability consists of a derivative contract with the purchaser of 192,163 shares of Visa Class B common stock. Pursuant to the agreement, the Company retains the risks associated with the ultimate conversion of the Visa Class B common shares into shares of Visa Class A common stock, such that the counterparty will be compensated for any dilutive adjustments to the conversion ratio and the Company will be compensated for any anti-dilutive adjustments to the ratio. The agreement also requires periodic payments by the Company to the counterparty calculated by reference to the market price of Visa Class A common shares at the time of sale and a fixed rate of interest that steps up once after the eighth scheduled quarterly payment. The fair value of the liability is determined using a discounted cash flow methodology. The significant unobservable inputs used in the fair value measurement are the Company’s own assumptions about estimated changes in the conversion rate of the Visa Class B common shares into Visa Class A common shares, the date on which such conversion is expected to occur and the estimated growth rate of the Visa Class A common share price. Refer to Note 6 – Derivatives for information about the derivative contract with the counterparty.

The Company believes its valuation methods for its assets and liabilities carried at fair value are appropriate; however, the use of different methodologies or assumptions, particularly as applied to level 3 assets and liabilities, could have a material effect on the computation of their estimated fair values.

Changes in Level 3 Fair Value Measurements and Quantitative Information about Level 3 Fair Value Measurements

The table below presents a rollforward of the amounts on the consolidated balance sheets for the six months ended June 30, 2024 and the year ended December 31, 2023 for financial instruments of a material nature that are classified within level 3 of the fair value hierarchy and are measured at fair value on a recurring basis:


($ in thousands)
Balance at December 31, 2022	$	1,883
Cash settlement		(2,547	)
Losses included in earnings		2,006
Balance at December 31, 2023		1,342
Cash settlement		(859	)
Losses included in earnings		2,070
Balance at June 30, 2024	$	2,553

The table below provides an overview of the valuation techniques and significant unobservable inputs used in those techniques to measure the financial instrument measured on a recurring basis and classified within level 3 of the valuation. The range of sensitivities that management utilized in its fair value calculations is deemed acceptable in the industry with respect to the identified financial instrument. The assumptions reflected in the table below for June 30, 2024 were updated in consideration of the recent exchange offer from Visa.


($ in thousands)
	Fair Value
Level 3 Class	June 30, 2024		December 31, 2023
Derivative liability	$	2,553	$	1,342
Valuation technique	Discounted cash flow		Discounted cash flow
Unobservable inputs:
Visa Class A appreciation - range	6-12%		6-12%
Visa Class A appreciation - weighted average	9%		9%
Conversion rate - range	1.60x-1.59x		1.60x-1.59x
Conversion rate -weighted average	1.5950x		1.5950x
Time until resolution	40-50 months		3-9 months

The Company’s policy is to recognize transfers between valuation hierarchy levels as of the end of a reporting period.

Fair Value of Assets Measured on a Nonrecurring Basis

Certain assets and liabilities are measured at fair value on a nonrecurring basis. Collateral-dependent loans individually evaluated for credit loss loans are level 2 assets measured at the fair value of the underlying collateral based on independent third-party appraisals that take into consideration market-based information such as recent sales activity for similar assets in the property’s market.

Other real estate owned and foreclosed assets, including both foreclosed property and surplus banking property, are level 3 assets that are adjusted to fair value, less estimated selling costs, upon transfer from loans or property and equipment. Subsequently, other real estate owned and foreclosed assets are carried at the lower of carrying value or fair value less estimated selling costs. Fair values are determined by sales agreement or third-party appraisals as discounted for estimated selling costs, information from comparable sales, and marketability of the assets.

The fair value information presented below is not as of the period end, rather it was as of the date the fair value adjustment was recorded during the twelve months for each of the dates presented below, and excludes nonrecurring fair value measurements of assets no longer on the balance sheet.

The following tables present the Company’s financial assets that are measured at fair value on a nonrecurring basis for each of the fair value hierarchy levels.


	June 30, 2024
($ in thousands)	Level 1		Level 2		Level 3		Total
Collateral-dependent loans individually evaluated for credit loss	$	—	$	40,099	$	—	$	40,099
Other real estate owned and foreclosed assets, net		—		—		2,114		2,114
Total nonrecurring fair value measurements	$	—	$	40,099	$	2,114	$	42,213


	December 31, 2023
($ in thousands)	Level 1		Level 2		Level 3		Total
Collateral-dependent loans individually evaluated for credit loss	$	—	$	15,882	$	—	$	15,882
Other real estate owned and foreclosed assets, net		—		—		3,628		3,628
Total nonrecurring fair value measurements	$	—	$	15,882	$	3,628	$	19,510

Accounting guidance from the FASB requires the disclosure of estimated fair value information about certain on- and off-balance sheet financial instruments, including those financial instruments that are not measured and reported at fair value on a recurring basis. The significant methods and assumptions used by the Company to estimate the fair value of financial instruments are discussed below.

Cash, Short-Term Investments and Federal Funds Sold – For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Securities – The fair value measurement for securities available for sale is discussed earlier in this note. The same measurement techniques were applied to the valuation of securities held to maturity.

Loans, Net – The fair value measurement for certain collateral dependent loans that are individually evaluated for credit loss was described earlier in this note. For the remaining portfolio, fair values were generally determined by discounting scheduled cash flows using discount rates determined with reference to current market rates at which loans with similar terms would be made to borrowers of similar credit quality.

Loans Held for Sale – These loans are either carried under the fair value option or at the lower of cost or market. Given the short duration of these instruments, the carrying amount is considered a reasonable estimate of fair value.

Deposits – The accounting guidance requires that the fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, interest-bearing checking and savings accounts, be assigned fair values equal to amounts payable upon demand (“carrying amounts”). The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.

Federal Funds Purchased and Securities Sold under Agreements to Repurchase – For these short-term liabilities, the carrying amount is a reasonable estimate of fair value.

Short-Term FHLB Borrowings – At June 30, 2024, short-term FHLB borrowings consisted of two short-term fixed rate borrowings (less than 15 days outstanding). At December 31, 2023, short-term FHLB borrowings consisted of one short-term fixed rate borrowing (five calendar days outstanding). Given the short duration of the instruments, the carrying amount is a reasonable estimate of fair value.

Long-Term Debt – The fair value is estimated by discounting the future contractual cash flows using current market rates at which debt with similar terms could be obtained.

Derivative Financial Instruments – The fair value measurement for derivative financial instruments is described earlier in this note.

The following tables present the estimated fair values of the Company’s financial instruments by fair value hierarchy levels and the corresponding carrying amounts.


	June 30, 2024
							Total Fair		Carrying
($ in thousands)	Level 1		Level 2		Level 3		Value		Amount
Financial assets:
Cash, interest-bearing bank deposits, and federal funds sold	$	1,082,437	$	—	$	—	$	1,082,437	$	1,082,437
Available for sale securities		—		4,965,214		—		4,965,214		4,965,214
Held to maturity securities		—		2,347,957		—		2,347,957		2,570,622
Loans, net		—		40,099		23,020,822		23,060,921		23,595,468
Loans held for sale		—		27,354		—		27,354		27,354
Derivative financial instruments		—		91,000		—		91,000		91,000
Financial liabilities:
Deposits	$	—	$	—	$	29,185,869	$	29,185,869	$	29,200,718
Federal funds purchased		150,350		—		—		150,350		150,350
Securities sold under agreements to repurchase		563,609		—		—		563,609		563,609
FHLB short-term borrowings		650,000		—		—		650,000		650,000
Long-term debt		—		192,949		—		192,949		236,393
Derivative financial instruments		—		223,889		2,553		226,442		226,442


	December 31, 2023
($ in thousands)	Level 1		Level 2		Level 3		Total Fair Value		Carrying Amount
Financial assets:
Cash, interest-bearing bank deposits, and federal funds sold	$	1,188,284	$	—	$	—	$	1,188,284	$	1,188,284
Available for sale securities		—		4,915,195		—		4,915,195		4,915,195
Held to maturity securities		—		2,485,918		—		2,485,918		2,684,779
Loans, net		—		15,882		23,170,377		23,186,259		23,614,010
Loans held for sale		—		26,124		—		26,124		26,124
Derivative financial instruments		—		90,712		—		90,712		90,712
Financial liabilities:
Deposits	$	—	$	—	$	29,679,228	$	29,679,228	$	29,690,059
Federal funds purchased		350		—		—		350		350
Securities sold under agreements to repurchase		454,479		—		—		454,479		454,479
FHLB short-term borrowings		700,000		—		—		700,000		700,000
Long-term debt		—		196,182		—		196,182		236,317
Derivative financial instruments		—		205,796		1,342		207,138		207,138

- 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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