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Fair Value of Financial Instruments
12 Months Ended
Dec. 31, 2022
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments
Note 17 – Fair Value of Financial Instruments
 
The fair value of an asset or liability is the exchange price that would be received to sell that asset or paid to transfer that liability (exit price) in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including both those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis and a non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value are discussed below.

In accordance with accounting guidance, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows:

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, prepayment speeds, volatilities, etc.) or model-based valuation techniques where all significant assumptions are observable, either directly or indirectly, in the market.

Level 3 - Valuation is generated from model-based techniques where one or more significant inputs are not observable, either directly or indirectly, 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. Valuation techniques may include use of matrix pricing, discounted cash flow models, and similar techniques.
 
Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented. Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Management maximizes the use of observable inputs and attempts to minimize the use of unobservable inputs when determining fair value measurements. Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following is a description of both the general and specific valuation methodologies used for certain instruments measured at fair value, as well as the general classification of these instruments pursuant to the valuation hierarchy.

AFS Investment Securities – Investment securities are generally valued based upon quotes obtained from an independent third-party pricing service, which uses evaluated pricing applications and model processes. Observable market inputs, such as, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data are considered as part of the evaluation. The inputs are related directly to the security being evaluated, or indirectly to a similarly situated security. Market assumptions and market data are utilized in the valuation models. The Company reviews the market prices provided by the third-party pricing service for reasonableness based on the Company’s understanding of the market place and credit issues related to the securities. The Company has not made any adjustments to the market quotes provided by them and, accordingly, the Company categorized its investment portfolio within Level 2 of the fair value hierarchy.

Equity Securities With Readily Determinable Fair Values – The Company’s equity securities with readily determinable fair values consist of investments in public companies and qualify for CRA purposes. The fair value is based on the closing price on nationally recognized securities exchanges at the end of each period and classified as Level 1 of the fair value hierarchy. The Company has elected to apply the practical expedient to measure certain investments based on their NAV when such investments qualify for use of the practical expedient. These investments consist of CRA related funds. Equity investments measured at NAV are not classified in the fair value hierarchy.

Interest Rate Swaps – The Company originates a variable rate loan and enters into a variable-to-fixed interest rate swap with the customer. The Company also enters into an offsetting swap with a correspondent bank. These back-to-back swap agreements are intended to offset each other and allow the Company to originate a variable rate loan, while providing a contract for fixed interest payments for the customer. The Company also enters into interest rate swap contracts with institutional counterparties to hedge against certain fixed-rate loans. The net cash flow for the Company is equal to the interest income received from a variable rate loan originated with the customer. The fair value of these derivatives is based on a market standard discounted cash flow approach. The Company incorporates credit value adjustments on derivatives to properly reflect the respective counterparty’s nonperformance risk in the fair value measurements of its derivatives. The Company has determined that the observable nature of the majority of inputs used in deriving the fair value of these derivative contracts fall within Level 2 of the fair value hierarchy, and the credit valuation adjustments are not significant to the overall valuation of its derivative financial instruments. As a result, the valuation of interest rate swaps is classified as Level 2 of the fair value hierarchy.
Equity Warrant Assets – The Company acquired equity warrant assets as a result of the acquisition of Opus. Opus received equity warrant assets through its lending activities as part of loan origination fees. The warrants provide the Bank the right to purchase a specific number of equity shares of the underlying company’s equity at a certain price before expiration and contain net settlement terms qualifying as derivatives under ASC Topic 815. The fair value of equity warrant assets is determined using a Black-Scholes option pricing model and are classified as Level 3 of the fair value hierarchy due to the extent of unobservable inputs. The key assumptions used in determining the fair value include the exercise price of the warrants, valuation of the underlying entity's outstanding stock, expected term, risk-free interest rate, marketability discount for private company warrants, and price volatility.

Foreign Exchange Contracts – The Company enters into foreign exchange contracts to accommodate the business needs of its customers. The Company also enters into offsetting contracts with institutional counterparties to mitigate the Company’s foreign exchange exposure with its customers, or enters into bilateral collateral and master netting agreements with certain customer counterparties to manage its credit exposure. The Company measures the fair value of foreign exchange contracts based on quoted prices for identical instruments in active markets, a Level 1 measurement.

The following fair value hierarchy tables present information about the Company’s assets measured at fair value on a recurring basis at the dates indicated:
 December 31, 2022
 Fair Value Measurement Using 
(Dollars in thousands)Level 1Level 2Level 3Total
Fair Value
Financial assets
AFS investment securities:    
U.S. Treasury$— $47,017 $— $47,017 
Agency— 431,438 — 431,438 
Corporate— 542,548 — 542,548 
Collateralized mortgage obligation— 764,229 — 764,229 
Mortgage-backed securities— 815,781 — 815,781 
Total AFS investment securities$— $2,601,013 $— $2,601,013 
Equity securities (1)
$925 $— $— $13,526 
Derivative assets:
Foreign exchange contracts$$— $— $
Interest rate swaps (2)
— 7,053 — 7,053 
Equity warrants— — 1,894 1,894 
Total derivative assets$$7,053 $1,894 $8,948 
Financial liabilities
Derivative liabilities:
Foreign exchange$$— $— $
Interest rate swaps— 12,530 — 12,530 
Total derivative liabilities$$12,530 $— $12,531 
_______________________________________________________
(1) Includes equity securities that are measured based on the NAV (or its equivalent) practical expedient of $12.6 million at December 31, 2022 and are excluded from the fair value hierarchy.
(2) Represents amounts after the application of variation margin payments as settlements with central counterparties, where applicable. See Note 19 – Derivative Instruments for additional information.
 December 31, 2021
 Fair Value Measurement Using 
(Dollars in thousands)Level 1Level 2Level 3Total
Fair Value
Financial assets
AFS investment securities:    
U.S. Treasury$— $57,866 $— $57,866 
Agency— 432,135 $— 432,135 
Corporate— 453,861 $— 453,861 
Municipal bonds— 1,089,913 — 1,089,913 
Collateralized mortgage obligation— 676,643 — 676,643 
Mortgage-backed securities— 1,563,446 — 1,563,446 
Total AFS investment securities$— $4,273,864 $— $4,273,864 
Derivative assets:
Interest rate swaps$— $10,100 $— $10,100 
Equity warrants— — 1,889 1,889 
Total derivative assets$— $10,100 $1,889 $11,989 
Financial liabilities
Derivative liabilities:
Interest rate swaps$— $5,263 $— $5,263 

The following table is a reconciliation of the fair value of the equity warrants that are classified as Level 3 and measured on a recurring basis as of:
(Dollars in thousands)20222021
Beginning Balance$1,889 $1,914 
Change in fair value (1)
(25)
Ending balance$1,894 $1,889 
______________________________________________________
(1) The changes in fair value are included in other income on the consolidated statement of income.

The following table presents quantitative information about Level 3 of fair value measurements for assets measured at fair value on a recurring basis at December 31, 2022 and 2021.
   Range
(Dollars in thousands)Fair ValueValuation Technique(s)Unobservable Input(s)MinMaxWeighted Average
December 31, 2022
Equity warrants$1,894 Black-Scholes
option pricing
model
Volatility
Risk-free interest rate
Marketability discount
30.00%
4.32%
6.00%
35.00%
4.41%
16.00%
31.14%
4.39%
13.60%
December 31, 2021
Equity warrants$1,889 Black-Scholes
option pricing
model
Volatility
Risk-free interest rate
Marketability discount
30.00%
0.39%
6.00%
35.00%
0.97%
16.00%
31.14%
0.52%
13.61%
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Individually Evaluated Loans – A loan is individually evaluated for expected credit losses when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement and it does not share similar risk characteristics with other loans. Individually evaluated loans are measured based on the fair value of the underlying collateral or the discounted expected future cash flows. Collateral generally consists of accounts receivable, inventory, fixed assets, real estate, and cash. The Company measures impairment on all nonaccrual loans for which it has reduced the principal balance to the value of the underlying collateral less the anticipated selling cost.

The fair value of individually evaluated collateral dependent loans were determined using Level 3 assumptions, and represents individually evaluated loan for which a specific reserve has been established or on which a write down has been taken. For real estate loans, generally, the Company obtains third party appraisals (or property valuations) and/or collateral audits in conjunction with internal analysis based on historical experience on its individually evaluated loans to determine fair value. In determining the net realizable value of the underlying collateral for individually evaluated loans, the Company then discounts the valuation to cover both market price fluctuations and selling costs, typically ranging from 7% to 10% of the collateral value, that the Company expected would be incurred in the event of foreclosure. In addition to the discounts taken, the Company’s calculation of net realizable value considered any other senior liens in place on the underlying collateral. For non-real estate loans, fair value of the loan’s collateral may be determined using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions, and management’s expertise and knowledge of the client and client’s business.

At December 31, 2022, the Company’s individually evaluated collateral dependent loans were evaluated based on the fair value of their underlying collateral based upon the most recent appraisals available to management. The Company completed partial charge-offs on certain individually evaluated loans based on recent real estate or property appraisals and recorded the related reserves where applicable during the year ended December 31, 2022.
    
The following table presents our assets measured at fair value on a nonrecurring basis at December 31, 2022 and 2021.
(Dollars in thousands)Level 1Level 2Level 3Total
Fair Value
December 31, 2022
Financial assets   
Collateral dependent loans$— $— $3,180 $3,180 

December 31, 2021
Financial assets    
Collateral dependent loans$— $— $937 $937 
The following table presents quantitative information about Level 3 of fair value measurements for assets measured at fair value on a nonrecurring basis at December 31, 2022 and 2021.
   Range
(Dollars in thousands)Fair ValueValuation Technique(s)Unobservable Input(s)MinMaxWeighted Average
December 31, 2022
Commercial loans
Commercial and industrial$3,180 Fair value of collateralCollateral discount and cost to sell6.00%6.00%6.00%
Total individually evaluated loans$3,180 
December 31, 2021
Investor loans secured by real estate
SBA secured by real estate (1)
$937 Fair value of collateralCollateral discount and cost to sell10.00%10.00%10.00%
Total individually evaluated loans$937 
_________________________________________________
(1) SBA loans that are collateralized by hotel/motel real property.


Fair Values of Financial Instruments

The fair value estimates presented herein are based on pertinent information available to management as of the dates indicated, representing an exit price.
 December 31, 2022
(Dollars in thousands)Carrying
Amount
Level 1Level 2Level 3Estimated
Fair Value
Assets:     
Cash and cash equivalents$1,101,249 $1,101,249 $— $— $1,101,249 
Interest-bearing time deposits with financial institutions1,734 1,734 — — 1,734 
HTM investment securities1,388,103 — 1,097,096 — 1,097,096 
AFS investment securities2,601,013 — 2,601,013 — 2,601,013 
Equity securities (1)
13,526 925 — — 13,526 
Loans held for sale2,643 — 2,755 — 2,755 
Loans held for investment, net14,676,298 — — 13,846,403 13,846,403 
Derivative assets (2)
8,948 7,053 1,894 8,948 
Accrued interest receivable73,784 — 73,784 — 73,784 
Liabilities:     
Deposit accounts17,352,401 — 17,334,219 — 17,334,219 
FHLB advances1,000,000 — 982,695 — 982,695 
Subordinated debentures331,204 — 327,609 — 327,609 
Derivative liabilities12,531 12,530 — 12,531 
Accrued interest payable14,661 — 14,661 — 14,661 
_________________________________________________________
(1) Includes equity securities that are measured at NAV per share (or its equivalent) as a practical expedient of $12.6 million at December 31, 2022 and are excluded from the fair value hierarchy.
(2) Represents amounts after the application of variation margin payments as settlements with central counterparties, where applicable. See Note 19 – Derivative Instruments for additional information.
 December 31, 2021
(Dollars in thousands)Carrying
Amount
Level 1Level 2Level 3Estimated
Fair Value
Assets:     
Cash and cash equivalents$304,703 $304,703 $— $— $304,703 
Interest-bearing time deposits with financial institutions2,216 2,216 — — 2,216 
HTM investment securities381,674 — 384,423 — 384,423 
AFS investment securities4,273,864 — 4,273,864 — 4,273,864 
Loans held for sale10,869 — 11,959 — 11,959 
Loans held for investment, net14,295,897 — — 14,392,684 14,392,684 
Derivative assets11,989 — 10,100 1,889 11,989 
Accrued interest receivable65,728 65,728 — — 65,728 
Liabilities: 
Deposit accounts17,115,589 16,057,316 1,058,822 — 17,116,138 
FHLB advances550,000 — 550,093 — 550,093 
Other borrowings8,000 — 8,000 — 8,000 
Subordinated debentures330,567 — 350,359 — 350,359 
Derivative liabilities5,263 — 5,263 — 5,263 
Accrued interest payable2,366 2,366 — — 2,366