Fair Value

9 Months Ended

Sep. 30, 2022

Fair Value.

Fair Value

Note 15 — Fair Value

FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value under accounting principles generally accepted in the United States, and enhances disclosures about fair value measurements. FASB ASC 820 clarifies that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Available for sale and trading securities, derivative contracts, mortgage loans held for sale, SBA servicing rights, and mortgage servicing rights (“MSRs”) are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans, OREO, bank properties held for sale, and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

FASB ASC Topic 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:

Level 1	Observable inputs such as quoted prices in active markets;
Level 2	Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3	Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The following is a description of valuation methodologies used for assets recorded at fair value.

Trading Securities

The fair values of trading securities are determined as follows: (1) for those securities that have traded prior to the date of the consolidated balance sheet but have not settled (date of sale) until after such date, the sales price is used as the fair value; and, (2) for those securities which have not traded as of the date of the consolidated balance sheet, the fair value was determined by broker price indications of similar or same securities.  

Investment Securities

Securities available for sale are valued on a recurring basis at quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange and The NASDAQ Stock Market. Level 2 securities include mortgage-backed securities and debentures issued by government agencies or sponsored entities, municipal bonds and corporate debt securities, or U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Securities held to maturity are valued at quoted market prices or dealer quotes similar to securities available for sale. The carrying value of FHLB and FRB stock approximates fair value based on the redemption provisions.

Mortgage Loans Held for Sale

Mortgage loans held for sale are carried at fair value with changes in fair value recognized in current period earnings. The fair values of mortgage loans held for sale are based on commitments on hand from investors within the secondary market for loans with similar characteristics. As such, the fair value adjustments for mortgage loans held for sale are recurring Level 2.

Loans

We do not record loans at fair value on a recurring basis. However, from time to time, a loan may be individually evaluated for expected credit losses if it no longer shares similar risk characteristics with other pooled loans. Once a loan is identified as an individually evaluated loan, Management measures expected credit losses using estimated fair value methodologies. The fair value of the individually evaluated loans is estimated using one of several methods,

including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those individually evaluated loans not requiring an ACL represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 30, 2022, approximately 60% of the individually evaluated loans were evaluated based on the fair value of the collateral because such loans were considered collateral dependent. Individually evaluated loans, where an allowance is established based on the fair value of collateral; require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, we consider the impaired loan as nonrecurring Level 2. When an appraised value is not available or Management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, we consider the individually evaluated loan as nonrecurring Level 3.

Other Real Estate Owned (“OREO”)

OREO, consisting of properties obtained through foreclosure or in satisfaction of loans, is typically reported at fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, and adjusted for estimated selling costs (Level 2). However, OREO is considered Level 3 in the fair value hierarchy because Management has qualitatively applied a discount due to the size, supply of inventory, and the incremental discounts applied to the appraisals. Management also considers other factors, including changes in absorption rates, length of time the property has been on the market and anticipated sales values, which have resulted in adjustments to the collateral value estimates indicated in certain appraisals. At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the ACL. Gains or losses on sale and generally any subsequent adjustments to the value are recorded as a component of OREO Expense and Loan Related Expense in the Condensed Consolidated Statements of Income.

Bank Property Held for Sale

Bank property held for sale consists of locations that Management has identified as no longer needed and reclassified from bank premises. These properties are typically reported at fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, and adjusted for estimated selling costs (Level 2). However, bank property held for sale is considered Level 3 in the fair value hierarchy because Management has qualitatively applied a discount due to the size, supply of inventory, restrictions and the incremental discounts applied to the appraisals. Management also considers other factors, including changes in absorption rates, length of time the property has been on the market and anticipated sales values, which have resulted in adjustments to the collateral value estimates indicated in certain appraisals. At the time a property is identified as held for sale, any excess of the book balance over the fair value of the real estate is treated as a charge against earnings. Gains or losses on sale and generally any subsequent write-downs to the value are recorded as a component in Other Expense in the Condensed Consolidated Statements of Income.

Derivative Financial Instruments

Fair value is estimated using pricing models of derivatives with similar characteristics or discounted cash flow models where future floating cash flows are projected and discounted back; and accordingly, these derivatives are classified within Level 2 of the fair value hierarchy. (See Note 17 — Derivative Financial Instruments for additional information).

Mortgage Servicing Rights (“MSRs”) and SBA Servicing Asset

The estimated fair value of MSRs and SBA servicing assets are obtained through a third-party vendor analysis of future cash flows. For the SBA servicing assets, the Company began using the third-party vendor analysis of future cash flows to determine the fair value of the servicing asset during the second quarter of 2022. In prior periods, the SBA servicing asset was recorded at amortized cost. The evaluations for the servicing assets use assumptions market participants would use in determining fair value including market discount rates, prepayment speeds, servicing income, servicing costs, default rates and other market driven data, as well as the market’s perception of future interest rate movements. MSRs and SBA servicing assets are classified as Level 3.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis:

			Quoted Prices
			In Active		Significant
			Markets		Other		Significant
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(Dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2022:
Assets
Derivative financial instruments	$	1,083,803	$	—	$	1,083,803	$	—
Loans held for sale		34,477		—		34,477		—
Trading securities		51,940		—		51,940		—
Securities available for sale:
U.S. Treasuries		264,425		—		264,425		—
U.S. Government agencies		218,623		—		218,623		—
Residential mortgage-backed securities issued by U.S. government
agencies or sponsored enterprises		1,730,067		—		1,730,067		—
Residential collateralized mortgage-obligations issued by U.S. government
agencies or sponsored enterprises		627,812		—		627,812		—
Commercial mortgage-backed securities issued by U.S. government
agencies or sponsored enterprises		1,027,776		—		1,027,776		—
State and municipal obligations		1,003,318		—		1,003,318		—
Small Business Administration loan-backed securities		464,236		—		464,236		—
Corporate securities		33,353		—		33,353		—
Total securities available for sale		5,369,610		—		5,369,610		—
Mortgage servicing rights		90,459		—		—		90,459
SBA servicing assets		6,981		—		—		6,981
	$	6,637,270	$	—	$	6,539,830	$	97,440
Liabilities
Derivative financial instruments	$	1,082,948	$	—	$	1,082,948	$	—
December 31, 2021:
Assets
Derivative financial instruments	$	414,742	$	—	$	414,742	$	—
Loans held for sale		191,723		—		191,723		—
Trading securities		77,689		—		77,689		—
Securities available for sale:
U.S. Government agencies		97,117		—		97,117		—
Residential mortgage-backed securities issued by U.S. government
agencies or sponsored enterprises		1,831,039		—		1,831,039		—
Residential collateralized mortgage-obligations issued by U.S. government
agencies or sponsored enterprises		725,995		—		725,995		—
Commercial mortgage-backed securities issued by U.S. government
agencies or sponsored enterprises		1,207,241		—		1,207,241		—
State and municipal obligations		812,689		—		812,689		—
Small Business Administration loan-backed securities		500,663		—		500,663		—
Corporate securities		18,734		—		18,734		—
Total securities available for sale		5,193,478		—		5,193,478		—
Mortgage servicing rights		65,620		—		—		65,620
	$	5,943,252	$	—	$	5,877,632	$	65,620
Liabilities
Derivative financial instruments	$	410,137	$	—	$	410,137	$	—

Changes in Level 1, 2 and 3 Fair Value Measurements

When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, since Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources), the gains and losses below include changes in fair value due in part to observable factors that are part of the valuation methodology.

There were no changes in hierarchy classifications of Level 3 assets or liabilities for the nine months ended September 30, 2022. A reconciliation of the beginning and ending balances of Level 3 assets, comprised of Mortgage Servicing Rights, and liabilities recorded at fair value on a recurring basis for the nine months ended September 30, 2022 is as follows:

(Dollars in thousands)	Assets		Liabilities
Fair value, January 1, 2022	$	65,620	$	—
Servicing assets that resulted from transfers of financial assets		14,617		—
Changes in fair value due to valuation inputs or assumptions		18,274		—
Changes in fair value due to decay		(8,052)		—
Fair value, September 30, 2022	$	90,459	$	—

There were no unrealized losses included in accumulated other comprehensive income related to Level 3 financial assets and liabilities at September 30, 2022.

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The tables below present the recorded amount of assets and liabilities measured at fair value on a nonrecurring basis:

			Quoted Prices
			In Active		Significant
			Markets		Other		Significant
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(Dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2022:
OREO	$	2,160	$	—	$	—	$	2,160
Bank property held for sale		25,043		—		—		25,043
Individually evaluated loans		52,368		—		—		52,368
December 31, 2021:
OREO	$	2,736	$	—	$	—	$	2,736
Bank property held for sale		9,578		—		—		9,578
Individually evaluated loans		20,802		—		—		20,802

Quantitative Information about Level 3 Fair Value Measurement

			Weighted Average
			September 30,		December 31,
	Valuation Technique	Unobservable Input	2022		2021
Nonrecurring measurements:
Individually evaluated loans	Discounted appraisals and discounted cash flows	Collateral discounts	25	%	9	%
OREO and premises held for sale	Discounted appraisals	Collateral discounts and estimated costs to sell	15	%	24	%

Fair Value of Financial Instruments

We used the following methods and assumptions in estimating our fair value disclosures for financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those models are significantly affected by the assumptions used, including the discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The use of different methodologies may have a material effect on the estimated fair value amounts. The fair value estimates presented herein are based on pertinent information available to Management as of September 30, 2022 and December 31, 2021. Such amounts have not been revalued for purposes of these consolidated financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Cash Equivalents — The carrying amount is a reasonable estimate of fair value.

Trading Securities — The fair values of trading securities are determined as follows: (1) for those securities that have traded prior to the date of the consolidated balance sheet but have not settled (date of sale) until after such date, the

sales price is used as the fair value; and, (2) for those securities which have not traded as of the date of the consolidated balance sheet, the fair value was determined by broker price indications of similar or same securities.

Investment Securities — Securities available for sale are valued at quoted market prices or dealer quotes. Securities held to maturity are valued at quoted market prices or dealer quotes similar to securities available for sale. The carrying value of FHLB and FRB stock approximates fair value based on the redemption provisions. The carrying value of our investment in unconsolidated subsidiaries approximates fair value. See Note 5 — Investment Securities for additional information, as well as page 32 regarding fair value.

Loans held for sale — The fair values disclosed for loans held for sale are based on commitments from investors for loans with similar characteristics.

Loans — The fair value of loans is based on an exit price. To estimate an exit price, all loans (fixed and variable) are being valued with a discounted cash flow analyses for loans that includes our estimate of future credit losses expected to be incurred over the life of the loans. Fair values for certain mortgage loans (e.g., one-to-four family residential) and other consumer loans are estimated using discounted cash flow analyses based on our current rates offered for new loans of the same type, structure and credit quality. Fair values for other loans (e.g., commercial real estate and investment property mortgage loans, commercial and industrial loans) are estimated using discounted cash flow analyses-using interest rates we currently offer for loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans are estimated using a discounted cash flow analysis.

Deposit Liabilities — The fair values disclosed for demand deposits (e.g., interest and non-interest bearing checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts, and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Federal Funds Purchased and Securities Sold Under Agreements to Repurchase — The carrying amount of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within ninety days approximate their fair values.

Other Borrowings — The fair value of other borrowings is estimated using discounted cash flow analysis on our current incremental borrowing rates for similar types of instruments.

Accrued Interest — The carrying amounts of accrued interest approximate fair value.

Derivative Financial Instruments — The fair value of derivative financial instruments (including interest rate swaps) is estimated using pricing models of derivatives with similar characteristics or discounted cash flow models where future floating cash flows are projected and discounted back.

Commitments to Extend Credit, Standby Letters of Credit and Financial Guarantees — The fair values of commitments to extend credit are estimated taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of guarantees and letters of credit are based on fees currently charged for similar agreements or on the estimated costs to terminate them or otherwise settle the obligations with the counterparties at the reporting date.

The estimated fair value, and related carrying amount, of our financial instruments are as follows:

	Carrying		Fair
(Dollars in thousands)	Amount		Value		Level 1		Level 2		Level 3
September 30, 2022
Financial assets:
Cash and cash equivalents	$	2,809,695	$	2,809,695	$	2,809,695	$	—	$	—
Trading securities		51,940		51,940		—		51,940		—
Investment securities		8,287,543		7,848,527		179,755		7,668,772		—
Loans held for sale		34,477		34,477		—		34,477		—
Loans, net of allowance for credit losses		28,511,905		28,271,062		—		—		28,271,062
Accrued interest receivable		124,553		124,553		—		28,508		96,045
Mortgage servicing rights		90,459		90,459		—		—		90,459
SBA servicing assets		6,981		—		—		—		6,981
Interest rate swap - non-designated hedge		1,081,768		1,081,768		—		1,081,768		—
Other derivative financial instruments (mortgage banking related)		2,035		2,035		—		2,035		—
Financial liabilities:
Deposits		37,666,021		37,578,773		—		37,578,773		—
Federal funds purchased and securities sold under agreements to repurchase		557,802		557,802		—		557,802		—
Other borrowings		392,368		379,992		—		379,992		—
Accrued interest payable		6,354		6,354		—		6,354		—
Interest rate swap - non-designated hedge		1,081,267		1,081,267		—		1,081,267		—
Other derivative financial instruments (mortgage banking related)		1,681		1,681		—		1,681		—
Off balance sheet financial instruments:
Commitments to extend credit		—		(92,429)		—		(92,429)		—
December 31, 2021
Financial assets:
Cash and cash equivalents	$	6,843,147	$	6,843,147	$	6,843,147	$	—	$	—
Trading securities		77,689		77,689		—		77,689		—
Investment securities		7,173,947		7,132,110		160,568		6,971,542		—
Loans held for sale		191,723		191,723		—		191,723		—
Loans, net of allowance for credit losses		23,626,359		23,921,372		—		—		23,921,372
Accrued interest receivable		90,069		90,069		—		19,241		70,828
Mortgage servicing rights		65,620		65,620		—		—		65,620
Interest rate swap - non-designated hedge		408,776		408,776		—		408,776		—
Other derivative financial instruments (mortgage banking related)		5,966		5,966		—		5,966		—
Financial liabilities:
Deposits		35,054,829		35,050,516		—		35,050,516		—
Federal funds purchased and securities sold under agreements to repurchase		781,239		781,239		—		781,239		—
Other borrowings		327,066		334,640		—		334,640		—
Accrued interest payable		3,345		3,345		—		3,345		—
Interest rate swap - non-designated hedge		410,137		410,137		—		410,137		—
Off balance sheet financial instruments:
Commitments to extend credit		—		93,501		—		93,501		—