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Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2024

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 - Financial Instruments, 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 ASC Topic 820 - Fair Value Measurement, 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 fair value hierarchy.

AFS Investment Securities – Investment securities are generally valued based upon quotes obtained from independent third-party pricing services, which use 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 marketplace 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 these securities 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.

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. 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 - Derivatives and Hedging. The fair value of equity warrant assets is determined using a Black-Scholes option pricing model and are classified as Level 3 within 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. During 2023, the equity warrant assets were either settled or written off as the warrants were determined to not be exercisable until the underlying company’s fair market value is greater than the value established in the warrant agreement.

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 table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis at the dates indicated:


	March 31, 2024
	Fair Value Measurement Using						Total Fair Value
(Dollars in thousands)	Level 1		Level 2		Level 3
Financial assets
AFS investment securities:
U.S. Treasury	$	—	$	564,939	$	—	$	564,939
Agency	—		1,670		—		1,670
Corporate	—		438,882		—		438,882

Collateralized mortgage obligations	—		148,530		—		148,530

Total AFS investment securities	$	—	$	1,154,021	$	—	$	1,154,021


Equity securities	$	631	$	—	$	—	$	631

Derivative assets:
Foreign exchange contracts	$	8	$	—	$	—	$	8
Interest rate swaps (1)	—		6,488		—		6,488

Total derivative assets	$	8	$	6,488	$	—	$	6,496



Financial liabilities
Derivative liabilities:

Interest rate swaps	$	—	$	12,019	$	—	$	12,019
Total derivative liabilities	$	—	$	12,019	$	—	$	12,019

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(1) Represents amounts after the application of variation margin payments as settlements with central counterparties, where applicable. See Note 11 – Derivative Instruments for additional information.


	December 31, 2023
	Fair Value Measurement Using						Total Fair Value
(Dollars in thousands)	Level 1		Level 2		Level 3
Financial assets
AFS investment securities:
U.S. Treasury	$	—	$	539,256	$	—	$	539,256
Agency	—		1,868		—		1,868
Corporate	—		446,343		—		446,343

Collateralized mortgage obligations	—		152,604		—		152,604

Total AFS investment securities	$	—	$	1,140,071	$	—	$	1,140,071

Equity securities	$	759	$	—	$	—	$	759

Derivative assets:
Foreign exchange contracts	$	1	$	—	$	—	$	1
Interest rate swaps (1)	—		5,643		—		5,643

Total derivative assets	$	1	$	5,643	$	—	$	5,644

Financial liabilities
Derivative liabilities:
Foreign exchange	$	10	$	—	$	—	$	10
Interest rate swaps	—		10,705		—		10,705
Total derivative liabilities	$	10	$	10,705	$	—	$	10,715

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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:


	Three Months Ended
	March 31,		March 31,
(Dollars in thousands)	2024		2023
Beginning balance	$	—	$	1,894
Change in fair value (1)	—		(20)
Net exercise	—		(1,462)
Ending balance	$	—	$	412

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(1) The changes in fair value are included in other income on the consolidated statement of income.

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 at fair value when they are deemed collateral dependent. Fair value on such loans is measured based on the underlying collateral. Collateral generally consists of accounts receivable, inventory, fixed assets, real estate, and cash. The Company measures impairment on all individually evaluated loans for which it has reduced the principal balance to the value of the underlying collateral less the anticipated selling costs.

Other Real Estate Owned – OREO is initially recorded at the fair value less estimated costs to sell at the date of transfer. This amount becomes the property’s new basis. Any fair value adjustments based on the property’s fair value less estimated costs to sell at the date of acquisition are charged to the allowance for credit losses.

The fair value of individually evaluated collateral dependent loans and OREO 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 and OREO, 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 expects 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 March 31, 2024, 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 three months ended March 31, 2024.

The following table presents our assets measured at fair value on a nonrecurring basis at the dates indicated.


(Dollars in thousands)	Fair Value Measurement Using						Total Fair Value
March 31, 2024	Level 1		Level 2		Level 3
Financial assets
Collateral dependent loans	$	—	$	—	$	3,923	$	3,923

Total assets	$	—	$	—	$	3,923	$	3,923


December 31, 2023
Financial assets
Collateral dependent loans	$	—	$	—	$	1,569	$	1,569
Other real estate owned	—		—		248		248
Total assets	$	—	$	—	$	1,817	$	1,817

The following table presents quantitative information about Level 3 fair value measurements for assets measured at fair value on a nonrecurring basis at the dates indicated.


					Range
(Dollars in thousands)	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Min	Max	Weighted Average
March 31, 2024
Investor loans secured by real estate
CRE non-owner-occupied	$	3,852	Fair value of collateral	Cost to sell	10.00%	10.00%	10.00%


SBA secured by real estate (1)	71		Fair value of collateral	Cost to sell	10.00%	10.00%	10.00%















Total individually evaluated loans	3,923

Total assets	$	3,923


December 31, 2023
Investor loans secured by real estate



SBA secured by real estate (1)	$	419	Fair value of collateral	Cost to sell	10.00%	10.00%	10.00%






Commercial loans
Commercial and industrial	1,150		Fair value of collateral	Cost to sell	7.00%	7.00%	7.00%







Total individually evaluated loans	1,569
Other real estate owned	248		Fair value of property	Cost to sell	10.00%	10.00%	10.00%
Total assets	$	1,817

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(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.


	March 31, 2024
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Estimated Fair Value
Assets
Cash and cash equivalents	$	1,028,818	$	1,028,818	$	—	$	—	$	1,028,818
Interest-bearing time deposits with financial institutions	995		995		—		—		995
HTM investment securities	1,720,481		—		1,447,697		—		1,447,697
AFS investment securities	1,154,021		—		1,154,021		—		1,154,021
Equity securities	631		631		—		—		631

Loans held for investment, net	13,012,071		—		—		12,304,608		12,304,608
Derivative assets (1)	6,496		8		6,488		—		6,496

Accrued interest receivable	67,642		—		67,642		—		67,642

Liabilities
Deposit accounts	$	15,187,828	$	—	$	15,200,489	$	—	$	15,200,489
FHLB advances	200,000		—		199,084		—		199,084

Subordinated debentures	332,001		—		321,657		—		321,657
Derivative liabilities	12,019		—		12,019		—		12,019
Accrued interest payable	13,903		—		13,903		—		13,903

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	December 31, 2023
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Estimated Fair Value
Assets
Cash and cash equivalents	$	936,473	$	936,473	$	—	$	—	$	936,473
Interest-bearing time deposits with financial institutions	995		995		—		—		995
HTM investment securities	1,729,541		—		1,485,506		—		1,485,506
AFS investment securities	1,140,071		—		1,140,071		—		1,140,071
Equity securities	759		759		—		—		759

Loans held for investment, net	13,289,020		—		—		12,562,323		12,562,323
Derivative assets (1)	5,644		1		5,643		—		5,644
Accrued interest receivable	68,516		—		68,516		—		68,516

Liabilities
Deposit accounts	$	14,995,626	$	—	$	15,003,769	$	—	$	15,003,769
FHLB advances	600,000		—		592,480		—		592,480

Subordinated debentures	331,842		—		320,687		—		320,687
Derivative liabilities	10,715		10		10,705		—		10,715
Accrued interest payable	18,671		—		18,671		—		18,671

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- 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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