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Fair Value

9 Months Ended

Sep. 30, 2021

FAIR VALUE

Fair value represents the amount expected to be received to sell an asset or paid to transfer a liability in its principal or most advantageous market in an orderly transaction between market participants at the measurement date. In accordance with fair value accounting guidance, the Company measures, records, and reports various types of assets and liabilities at fair value on either a recurring or non-recurring basis in the Consolidated Statements of Financial Condition. Those assets and liabilities are presented below in the sections titled "Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis" and "Assets and Liabilities Required to be Measured at Fair Value on a Non-Recurring Basis."

Other assets and liabilities are not required to be measured at fair value in the Consolidated Statements of Financial Condition, but must be disclosed at fair value. See the "Fair Value Measurements of Other Financial Instruments" section of this note. Any aggregation of the estimated fair values presented in this note does not represent the value of the Company.

Depending on the nature of the asset or liability, the Company uses various valuation methodologies and assumptions to estimate fair value. GAAP provides a three-tiered fair value hierarchy based on the inputs used to measure fair value. The hierarchy is defined as follows:

•Level 1 – Quoted prices in active markets for identical assets or liabilities.

•Level 2 – Observable inputs other than level 1 prices, such as quoted prices for similar instruments, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

•Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. These inputs require significant management judgment or estimation, some of which use model-based techniques and may be internally developed.

Assets and liabilities are assigned to a level within the fair value hierarchy based on the lowest level of significant input used to measure fair value. Assets and liabilities may change levels within the fair value hierarchy due to market conditions or other circumstances. Those transfers are recognized on the date of the event that prompted the transfer. There were no transfers of assets or liabilities required to be measured at fair value on a recurring basis between levels of the fair value hierarchy during the periods presented.

Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis

The following table provides the fair value for assets and liabilities required to be measured at fair value on a recurring basis in the Consolidated Statements of Financial Condition by level in the fair value hierarchy.

Recurring Fair Value Measurements

(Dollar amounts in thousands)


	As of September 30, 2021						As of December 31, 2020
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Assets
Equity securities	$	87,232	$	22,616	$	—	$	52,888	$	18,516	$	—
Securities available-for-sale
U.S. treasury securities	—		—		—		12,051		—		—
U.S. agency securities	—		656,112		—		—		652,474		—
CMOs	—		1,295,544		—		—		1,438,518		—
MBSs	—		856,096		—		—		580,840		—
Municipal securities	—		224,618		—		—		236,015		—

Corporate debt securities	—		180,538		—		—		176,510		—
Total securities available-for-sale	—		3,212,908		—		12,051		3,084,357		—
Mortgage servicing rights ("MSRs")(1)	—		—		6,306		—		—		4,899
Derivative assets(1)	—		91,170		—		—		153,704		—
Liabilities
Derivative liabilities(2)	$	—	$	30,729	$	—	$	—	$	44,581	$	—

(1)Included in other assets in the Consolidated Statements of Financial Condition.

(2)Included in other liabilities in the Consolidated Statements of Financial Condition.

The following sections describe the specific valuation techniques and inputs used to measure financial assets and liabilities at fair value.

Equity Securities

The Company's equity securities consist primarily of community development investments and certain diversified securities held in a grantor trust for participants in the Company's nonqualified deferred compensation plan that are invested in money market and mutual funds, and various preferred equity investments. The fair value of certain community development investments is based on quoted prices in active markets or market prices for similar securities obtained from external pricing services or dealer market participants and is classified in level 2 of the fair value hierarchy. As of September 30, 2021, the fair value of certain community development investments totaling $5.0 million was based on the net asset value per share ("NAV") practical expedient and can be redeemed at any month end with 30 days notice. Because these investments are measured at fair value using the NAV practical expedient, they are not classified in the fair value hierarchy. The fair value of the money market, mutual funds, and preferred equity investments is based on quoted market prices in active exchange markets and is classified in level 1 of the fair value hierarchy.

Securities Available-for-Sale

The Company's securities available-for-sale are primarily fixed income instruments that are not quoted on an exchange but may be traded in active markets. The fair values for these securities are based on quoted prices in active markets or market prices for similar securities obtained from external pricing services or dealer market participants and are classified in level 2 of the fair value hierarchy. The fair value of U.S. treasury securities is based on quoted market prices in active exchange markets and is classified in level 1 of the fair value hierarchy. Quarterly, the Company evaluates the methodologies used by its external pricing services to estimate the fair value of these securities in order to determine whether the valuations represent an exit price in the Company's principal markets.

MSRs

The Company services loans for others totaling $808.6 million and $766.1 million as of September 30, 2021 and December 31, 2020, respectively. These loans are owned by third-parties and are not included in the Consolidated Statements of Financial Condition. The Company determines the fair value of MSRs by estimating the present value of expected future cash flows associated with the mortgage loans being serviced and classifies them in level 3 of the fair value hierarchy. The following table presents the ranges of significant, unobservable inputs used by the Company to determine the fair value of MSRs as of September 30, 2021 and December 31, 2020.

Significant Unobservable Inputs Used in the Valuation of MSRs


	As of
	September 30, 2021				December 31, 2020
Prepayment speed	2.4	%	-	15.4%	5.3	%	-	16.3%
Maturity (months)	14		-	82	13		-	71
Discount rate	9.5	%	-	15.0%	9.5	%	-	12.0%

The impact of changes in these key inputs could result in a significantly higher or lower fair value measurement for MSRs. Significant increases in expected prepayment speeds and discount rates have negative impacts on the valuation. Higher maturity assumptions have a favorable effect on the estimated fair value.

A rollforward of the carrying value of MSRs for the quarters and nine months ended September 30, 2021 and 2020 is presented in the following table.

Carrying Value of MSRs

(Dollar amounts in thousands)


	Quarters Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Beginning balance	$	6,269	$	4,464	$	4,899	$	5,858

New MSRs	267		727		1,834		1,628
Total gains (losses) included in earnings(1):
Changes in valuation inputs and assumptions	137		(432)		603		(2,090)
Other changes in fair value(2)	(367)		(301)		(1,030)		(938)
Ending balance(3)	$	6,306	$	4,458	$	6,306	$	4,458
Contractual servicing fees earned(1)	$	512	$	424	$	1,472	$	1,221

(1)Included in mortgage banking income in the Condensed Consolidated Statements of Income and related to assets held as of September 30, 2021 and 2020.

(2)Primarily represents changes in expected future cash flows due to payoffs and paydowns.

(3)Included in other assets in the Consolidated Statements of Financial Condition.

Derivative Assets and Derivative Liabilities

The Company enters into interest rate swaps and derivative transactions with commercial customers. These derivative transactions are executed in the dealer market, and pricing is based on market quotes obtained from the counterparties. The market quotes were developed using market observable inputs, which primarily include LIBOR. Therefore, derivatives are classified in level 2 of the fair value hierarchy. For its derivative assets and liabilities, the Company also considers non-performance risk, including the likelihood of default by itself and its counterparties, when evaluating whether the market quotes from the counterparty are representative of an exit price.

Assets and Liabilities Required to be Measured at Fair Value on a Non-Recurring Basis

The following table provides the fair value for each class of assets and liabilities required to be measured at fair value on a non-recurring basis in the Consolidated Statements of Financial Condition by level in the fair value hierarchy.

Non-Recurring Fair Value Measurements

(Dollar amounts in thousands)


	As of September 30, 2021						As of December 31, 2020
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Collateral-dependent non-accrual loans(1)	$	—	$	—	$	25,198	$	—	$	—	$	21,246
OREO(2)	—		—		2,000		—		—		—
Loans held-for-sale(3)	—		—		15,725		—		—		44,965
Assets held-for-sale(4)	—		—		3,438		—		—		3,722

(1)Includes non-accrual loans with charge-offs and non-accrual loans with a specific allowance during the periods presented.

(2)Includes OREO with fair value adjustments subsequent to initial transfer that occurred during the periods presented.

(3)Included in other assets in the Consolidated Statements of Financial Condition.

(4)Included in premises, furniture, and equipment in the Consolidated Statements of Financial Condition.

Collateral-Dependent Non-accrual Loans

Certain collateral-dependent non-accrual loans are subject to fair value adjustments to reflect the difference between the carrying value of the loan and the fair value of the underlying collateral. The fair values of collateral-dependent non-accrual loans are primarily determined by current appraised values of the underlying collateral. Based on the age and/or type of collateral, appraisals may be adjusted in the range of 0% to 15%. In certain cases, an internal valuation may be used when the underlying collateral is located in areas where comparable sales data is limited or unavailable. Accordingly, collateral-dependent non-accrual loans are classified in level 3 of the fair value hierarchy.

Collateral-dependent non-accrual loans for which the fair value is greater than the recorded investment are not measured at fair value in the Consolidated Statements of Financial Condition and are not included in this disclosure.

OREO

The fair value of OREO is measured using the current appraised value of the properties. In certain circumstances, a current appraisal may not be available or may not represent an accurate measurement of the property's fair value due to outdated market information or other factors. In these cases, the fair value is determined based on the lower of the (i) most recent appraised value, (ii) broker price opinion, (iii) current listing price, or (iv) signed sales contract, all less estimated costs to sell. Given these valuation methods, OREO is classified in level 3 of the fair value hierarchy.

Loans Held-for-Sale

As of September 30, 2021 and December 31, 2020, loans held-for-sale consists of 1-4 family mortgage loans, which were originated with the intent to sell. These loans were recorded in the held-for-sale category at the contract price and, accordingly, are classified in level 3 of the fair value hierarchy.

Assets Held-for-Sale

Assets held-for-sale as of September 30, 2021 and December 31, 2020 consists of former branches that are no longer in operation and parcels of land previously purchased for expansion. These properties are being actively marketed and were transferred into the held-for-sale category at their fair value as determined by current appraisals. Based on these valuation methods, they are classified in level 3 of the fair value hierarchy.

Financial Instruments Not Required to be Measured at Fair Value

For certain financial instruments that are not required to be measured at fair value in the Consolidated Statements of Financial Condition, the Company must disclose the estimated fair values and the level within the fair value hierarchy as shown in the following table.

Fair Value Measurements of Other Financial Instruments

(Dollar amounts in thousands)


		As of
		September 30, 2021				December 31, 2020
	Fair Value Hierarchy Level	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets
Cash and due from banks	1	$	270,020	$	270,020	$	196,364	$	196,364
Interest-bearing deposits in other banks	2	1,654,917		1,654,917		920,880		920,880
Securities held-to-maturity	2	10,853		10,461		12,071		11,686
FHLB and FRB stock	2	106,090		106,090		117,420		117,420
Loans	3	14,582,491		14,425,048		14,512,215		14,614,029
Investment in BOLI	3	300,387		300,387		301,101		301,101
Accrued interest receivable	3	62,018		62,018		68,390		68,390

Liabilities
Deposits	2	$	17,198,402	$	17,199,593	$	16,012,464	$	16,007,133
Borrowed funds	2	1,274,572		1,274,572		1,546,414		1,546,414
Senior and subordinated debt	2	235,383		283,439		234,768		281,843
Accrued interest payable	2	2,915		2,915		4,826		4,826

Management uses various methodologies and assumptions to determine the estimated fair values of the financial instruments in the table above. The fair value estimates are made at a discrete point in time based on relevant market information and consider management's judgments regarding future expected economic conditions, loss experience, and specific risk characteristics of the financial instruments. Loans include net loans, which consists of loans held-for-investment, acquired loans, and the allowance for loan losses. As of both September 30, 2021 and December 31, 2020, the Company estimated the fair value of lending commitments outstanding to be immaterial.

- 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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