Fair Value Measurements

9 Months Ended

Sep. 30, 2023

We utilize fair value measurements to record or disclose the fair value on certain assets and liabilities. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The determination of fair values of financial instruments often requires the use of estimates. In cases where quoted market values in an active market are not available, we use present value techniques and other valuation methods to estimate the fair values of our financial instruments. These valuation models rely on market-based parameters when available, such as interest rate yield curves or credit spreads. Unobservable inputs may be based on management’s judgement assumptions and estimates related to credit quality, our future earnings, interest rates and other relevant inputs. These valuation methods require considerable judgement and the resulting estimates of fair value can be significantly affected by the assumptions made and the methods used.

ASC Topic 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The hierarchy is based on the transparency of the inputs used in the valuation process with the highest priority given to quoted prices available in active markets and the lowest priority to unobservable inputs where no active market exists. The three levels of inputs that may be used to measure fair value are as follows:

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

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 assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

Level 3: Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own beliefs about the assumptions that market participants would use in pricing the assets or liabilities.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input within the valuation hierarchy that is significant to the overall fair value measurement. Transfers between levels of the fair value hierarchy are recognized at the end of the reporting period.

The following table sets forth our assets and liabilities measured at fair value on a recurring basis as of:


	Level 1		Level 2		Level 3
	Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs		Total Estimated Fair Value
September 30, 2023
Available-for-sale securities	$	52,853	$	443,139	$	—	$	495,992
Loans held-for-sale	—		51,465		—		51,465
Mortgage servicing rights	—		—		81,036		81,036
Derivative financial instruments - assets	—		50,815		—		50,815
Derivative financial instruments - liabilities	—		(31,593)		—		(31,593)
Total	$	52,853	$	513,826	$	81,036	$	647,715

December 31, 2022
Available-for-sale securities	$	56,649	$	480,324	$	—	$	536,973
Loans held-for-sale	—		57,323		—		57,323
Mortgage servicing rights	—		—		74,097		74,097
Derivative financial instruments - assets	—		40,287		—		40,287
Derivative financial instruments - liabilities	—		(24,527)		—		(24,527)
Total	$	56,649	$	553,407	$	74,097	$	684,153

For further details on our Level 3 inputs related to MSRs, see Note 5 - Mortgage Servicing Rights.

The following table presents a reconciliation for our Level 3 assets measured at fair value on a recurring basis:


	For the three months ended September 30,				For the nine months ended September 30,
	2023		2022		2023		2022
Balance, beginning of period	$	78,390	$	66,047	$	74,097	$	47,392
Total (losses) gains included in earnings	(44)		4,314		(695)		14,777
Purchases, issuances, sales and settlements:

Issuances	2,690		3,489		7,634		11,681


Balance, end of period	$	81,036	$	73,850	$	81,036	$	73,850

Certain financial assets and financial liabilities are regularly measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. Financial assets measured at fair value on a non-recurring basis during the reported periods include certain collateral dependent loans reported at the fair value of the underlying collateral if repayment is expected solely from the collateral and other real estate owned and foreclosed assets, which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for credit losses, and subsequent to their initial recognition, were remeasured at fair value through a write-down included in other non-interest expense. The following table sets forth our assets and liabilities that were measured at fair value on a non-recurring basis as of:


	Level 3
	September 30, 2023		December 31, 2022
Collateral dependent loans:
Commercial and industrial	$	7,197	$	5,229
Commercial real estate	500		607
Residential real estate	1,230		802

Consumer	—		3

Total collateral dependent loans	$	8,927	$	6,641

Other real estate owned and foreclosed assets, net:

Commercial real estate	$	7,428	$	5,391
Residential real estate	967		967

Total other real estate owned and foreclosed assets, net:	$	8,395	$	6,358

The fair value of the financial assets in the table above utilize the market approach valuation technique, with discount adjustments for differences between comparable sales.

Fair value of financial instruments not carried at fair value:

The carrying amounts and estimated fair values of financial instruments not carried at fair value are as follows as of:


			Estimated Fair Value
	Carrying Value		Total		Level 1		Level 2		Level 3
September 30, 2023
Assets:
Cash and cash equivalents	$	443,887	$	443,887	$	443,887	$	—	$	—
Securities held-to-maturity	37,410		30,792		—		30,792		—
Loans (excluding collateral dependent loans at fair value)	6,170,595		6,036,398		—		—		6,036,398
Restricted equity securities	35,396		35,396		—		35,396		—
Accrued interest receivable	37,218		37,218		—		2,328		34,890

Liabilities:
Deposits (excluding demand deposits)	$	4,288,352	$	4,273,238	$	2,511,783	$	1,761,455	$	—
Securities sold under agreements to repurchase	25,868		25,868		—		25,868		—
FHLB advances	330,000		330,000		—		330,000		—


Subordinated debt, net	75,180		70,934		—		70,934		—
Accrued interest payable	9,862		9,862		—		9,862		—
December 31, 2022
Assets:
Cash and cash equivalents	$	343,526	$	343,526	$	343,526	$	—	$	—
Securities held-to-maturity	38,901		33,218		—		33,218		—
Loans (excluding impaired loans)	5,871,274		5,756,197		—		—		5,756,197
Restricted equity securities	50,215		50,215		—		50,215		—
Accrued interest receivable	28,543		28,543		—		2,049		26,494

Liabilities:
Deposits (excluding demand deposits)	$	3,732,215	$	3,696,438	$	—	$	3,696,438	$	—
Securities sold under agreements to repurchase	36,721		36,721		—		36,721		—
FHLB advances	643,885		643,885		—		643,885		—

Convertible notes payable, net	5,355		5,329		—		5,329		—
Subordinated debt, net	74,880		71,618		—		71,618		—
Accrued interest payable	5,798		5,798		—		5,798		—

- 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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