Fair Value Measurements

9 Months Ended

Sep. 30, 2021

Fair Value Measurements

Fair value is defined by applicable accounting guidance as the price to sell an asset or transfer a liability in an orderly transaction between market participants in the principal market for the given asset or liability at the measurement date based on market conditions at that date. An orderly transaction assumes exposure to the market for a customary period for marketing activities prior to the measurement date and not a forced liquidation or distressed sale. Certain assets and liabilities are recorded in the Company’s financial statements at fair value. Some are recorded on a recurring basis and some on a non-recurring basis.

For some assets and liabilities, observable market transactions and market information might be available. For other assets and liabilities, observable market transactions and market information might not be available. A hierarchy for fair value has been established which categorizes into three levels the inputs to valuation techniques used to measure fair value. The three levels are as follows:

Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) - Fair value is based on unadjusted quoted prices in active markets for identical assets or liabilities.

Significant Other Observable Inputs (Level 2) - Fair value is based on significant other observable inputs which are generally determined based on a single price for each financial instrument provided to us by an applicable third-party pricing service and is based on one or more of the following:

•Quoted prices for similar, but not identical, assets or liabilities in active markets;

•Quoted prices for identical or similar assets or liabilities in inactive markets;

•Inputs other than quoted prices that are observable, such as interest rate and yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates;

•Other inputs derived from or corroborated by observable market inputs.

Significant Unobservable Inputs (Level 3) - Fair value is based upon model-based valuation techniques for which at least one significant assumption is not observable in the market.

Transfers between levels are recognized as of the end of the reporting period. There were no transfers in or out of quoted prices in active markets for identical instruments to significant other observable inputs or significant unobservable inputs during the nine months ended September 30, 2021 and 2020, respectively. Transfers between significant other observable inputs and significant unobservable inputs during the nine months ended September 30, 2021 and 2020 are included in the summary of changes in recurring fair values measured using unobservable inputs.

The underlying methods used by the third-party pricing services are considered in determining the primary inputs used to determine fair values. Management has evaluated the methodologies employed by the third-party pricing services by comparing the price provided by the pricing service with other sources, including brokers' quotes, sales or purchases of similar instruments and discounted cash flows to establish a basis for reliance on the pricing service values. Significant differences between the pricing service provided value and other sources are discussed with the pricing service to understand the basis for their values. Based on all observable inputs, management may adjust prices obtained from third-party pricing services to more appropriately reflect the prices that would be received to sell assets or paid to transfer liabilities in orderly transactions in the current market. No significant adjustments were made to prices provided by third-party pricing services at September 30, 2021 or December 31, 2020.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The fair value of financial assets and liabilities measured on a recurring basis was as follows as of September 30, 2021 (in thousands):


	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Trading securities:
U.S. government securities	$	8,863	$	4,999	$	3,864	$	—
Residential agency mortgage-backed securities	5,469,676		—		5,469,676		—
Municipal securities	35,894		—		35,894		—

Other trading securities	39,607		—		39,607		—
Total trading securities	5,554,040		4,999		5,549,041		—
Available for sale securities:
U.S. Treasury	502		502		—		—
Municipal securities	461,619		—		461,619		—
Residential agency mortgage-backed securities	8,168,025		—		8,168,025		—
Residential non-agency mortgage-backed securities	26,072		—		26,072		—
Commercial agency mortgage-backed securities	4,685,423		—		4,685,423		—
Other debt securities	472		—		—		472
Total available for sale securities	13,342,113		502		13,341,139		472


Fair value option securities – Residential agency mortgage-backed securities	51,019		—		51,019		—

Residential mortgage loans held for sale1	176,813		—		170,338		6,475
Mortgage servicing rights2	133,308		—		—		133,308
Derivative contracts, net of cash collateral3	1,901,136		1,109		1,900,027		—
Liabilities:
Derivative contracts, net of cash collateral3	739,641		233,266		506,375		—

1Residential mortgage loans held for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) consist of residential mortgage loans intended for sale to U.S. government agencies that fail to meet conforming standards and are valued at 95.57% of the unpaid principal balance.

2A reconciliation of the beginning and ending fair value of mortgage servicing rights and disclosures of significant assumptions used to determine fair value are presented in Note 5, Mortgage Banking Activities.

3See Note 3 for detail of fair value of derivative contracts by contract type. Fair values based on quoted prices in active markets for identical instruments (Level 1) are primarily exchange-traded derivative contracts, net of cash margin.

The fair value of financial assets and liabilities measured on a recurring basis was as follows as of December 31, 2020 (in thousands):


	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Trading securities:
U.S. government securities	$	9,183	$	4,999	$	4,184	$	—
Residential agency mortgage-backed securities	4,669,148		—		4,669,148		—
Municipal securities	19,172		—		19,172		—

Other trading securities	10,472		—		10,472		—
Total trading securities	4,707,975		4,999		4,702,976		—
Available for sale securities:
U.S. Treasury	508		508		—		—
Municipal securities	167,979		—		167,979		—
Residential agency mortgage-backed securities	9,340,471		—		9,340,471		—
Residential non-agency mortgage-backed securities	32,770		—		32,770		—
Commercial agency mortgage-backed securities	3,508,465		—		3,508,465		—
Other debt securities	472		—		—		472
Total available for sale securities	13,050,665		508		13,049,685		472



Fair value option securities — Residential agency mortgage-backed securities	114,982		—		114,982		—
Residential mortgage loans held for sale1	252,316		—		245,299		7,017
Mortgage servicing rights2	101,172		—		—		101,172
Derivative contracts, net of cash collateral3	810,688		10,780		799,908		—
Liabilities:
Derivative contracts, net of cash collateral3	405,779		—		405,779		—

Following is a description of the Company's valuation methodologies used for assets and liabilities measured on a recurring basis:

Securities

The fair values of trading, available for sale and fair value option securities are based on quoted prices for identical instruments in active markets, when available. If quoted prices for identical instruments are not available, fair values are based on significant other observable inputs such as quoted prices of comparable instruments or interest rates and credit spreads, yield curves, volatilities, prepayment speeds and loss severities. The Company has elected to carry all residential mortgage-backed securities guaranteed by U.S. government agencies held as economic hedges against changes in the fair value of mortgage servicing rights at fair value with changes in the fair value recognized in earnings.

The fair value of certain available for sale municipal and other debt securities may be based on significant unobservable inputs. These significant unobservable inputs include limited observed trades, projected cash flows, current credit rating of the issuers and, when applicable, the insurers of the debt and observed trades of similar debt. Discount rates are primarily based on references to interest rate spreads on comparable securities of similar duration and credit rating as determined by the nationally-recognized rating agencies adjusted for a lack of trading volume. Significant unobservable inputs are developed by investment securities professionals involved in the active trading of similar securities. A summary of significant inputs used to value these securities follows. A management committee composed of senior members from the Company's Capital Markets, Risk Management and Finance departments assesses the appropriateness of these inputs quarterly.

Derivatives

All derivative instruments are carried on the balance sheet at fair value. Fair values for exchange-traded contracts are based on quoted prices. Fair values for over-the-counter interest rate, commodity and foreign exchange contracts are based on valuations provided either by third-party dealers in the contracts, quotes provided by independent pricing services, or a third-party provided pricing model that uses significant other observable market inputs.

Credit risk is considered in determining the fair value of derivative instruments. Management determines fair value adjustments based on various risk factors including but not limited to current fair value, probability of default and loss given default.

We also consider our own credit risk in determining the fair value of derivative contracts. Changes in our credit rating would affect the fair value of our derivative liabilities. In the event of a credit downgrade, the fair value of our derivative liabilities would increase.

Residential Mortgage Loans Held for Sale

Residential mortgage loans held for sale are carried on the balance sheet at fair value. The Company has elected to carry all residential mortgage loans originated for sale at fair value. Changes in the fair value of these financial instruments are recognized in earnings. The fair values of residential mortgage loans held for sale are based upon quoted market prices of such loans sold in securitization transactions, including related unfunded loan commitments and forward sales contracts. The fair value of mortgage loans that were unable to be sold to U.S. government agencies were determined using quoted prices of loans that are sold in securitization transactions with a liquidity discount applied.

Fair Value of Assets and Liabilities Measured on a Non-Recurring Basis

Assets measured at fair value on a non-recurring basis include collateral for certain nonaccruing loans and real property and other assets acquired to satisfy loans, which are based primarily on comparisons to completed sales of similar assets.

The following represents the carrying value of assets measured at fair value on a non-recurring basis (and related losses) during the period. The carrying value represents only those assets with a balance at September 30, 2021 for which the fair value was adjusted during the nine months ended September 30, 2021:


							Fair Value Adjustments for the
	Carrying Value at September 30, 2021						Three Months Ended Sept. 30, 2021 Recognized in:				Nine Months Ended Sept. 30, 2021 Recognized in:
	Quoted Prices in Active Markets for Identical Instruments		Significant Other Observable Inputs		Significant Unobservable Inputs		Gross charge-offs against allowance for loan losses		Other gains (losses), net		Gross charge-offs against allowance for loan losses		Other gains (losses), net
Nonaccruing loans	$	—	$	63	$	12,538	$	6,929	$	—	$	17,466	$	—
Real estate and other repossessed assets	—		1,706		—		—		—		—		(150)

The following represents the carrying value of assets measured at fair value on a non-recurring basis (and related losses) during the period. The carrying value represents only those assets with a balance at September 30, 2020 for which the fair value was adjusted during the nine months ended September 30, 2020:


							Fair Value Adjustments for the
	Carrying Value at September 30, 2020						Three Months Ended Sept. 30, 2020 Recognized in:				Nine Months Ended Sept. 30, 2020 Recognized in:
	Quoted Prices in Active Markets for Identical Instruments		Significant Other Observable Inputs		Significant Unobservable Inputs		Gross charge-offs against allowance for loan losses		Other gains (losses), net		Gross charge-offs against allowance for loan losses		Other gains (losses), net
Nonaccruing loans	$	—	$	396	$	13,001	$	6,371	$	—	$	28,624	$	—
Real estate and other repossessed assets	—		16,828		2,993		—		4,370		—		4,452

The fair value of collateral-dependent nonaccruing loans secured by real estate and real estate and other repossessed assets and the related fair value adjustments are generally based on unadjusted third-party appraisals. Our appraisal review policies require appraised values to be supported by observed inputs derived principally from or corroborated by observable market data. Appraisals that are not based on observable inputs or that require significant adjustments or fair value measurements that are not based on third-party appraisals are considered to be based on significant unobservable inputs. Non-recurring fair value measurements of collateral-dependent nonaccruing loans and real estate and other repossessed assets based on significant unobservable inputs are generally due to estimates of current fair values between appraisal dates. Significant unobservable inputs include listing prices for the same or comparable assets, uncorroborated expert opinions or management's knowledge of the collateral or industry. Non-recurring fair value measurements of collateral dependent loans secured by mineral rights are generally determined by our internal staff of engineers on projected cash flows under current market conditions and are based on significant unobservable inputs. Projected cash flows are discounted according to risk characteristics of the underlying oil and gas properties. Assets are evaluated to demonstrate with reasonable certainty that crude oil, natural gas and natural gas liquids can be recovered from known oil and gas reservoirs under existing economic and operating conditions at current prices with existing conventional equipment, operating methods and costs. Significant unobservable inputs are developed by asset management and workout professionals and approved by senior Credit Administration executives.

A summary of quantitative information about Non-recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of September 30, 2021 follows (in thousands):

Fair Value

Valuation Technique(s)

Unobservable Input

Range
(Weighted Average)

Nonaccruing loans

12,538

Discounted cash flows

Management knowledge of industry and non-real estate collateral including but not limited to recoverable oil and gas reserves, forward-looking commodity prices, estimated operating costs

1% - 97% (23%)1

1 Represents fair value as a percentage of the unpaid principal balance.

A summary of quantitative information about Non-recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of September 30, 2020 follows (in thousands):

Fair Value

Valuation Technique(s)

Unobservable Input

Range
(Weighted Average)

Nonaccruing loans

13,001

Discounted cash flows

Management knowledge of industry and non-real estate collateral including but not limited to recoverable oil and gas reserves, forward-looking commodity prices, estimated operating costs

—% - 73% (18%)1

Real estate and other repossessed assets

2,993

Discounted cash flows

Management knowledge of industry and non-real estate collateral including but not limited to recoverable oil and gas reserves, forward-looking commodity prices, estimated operating costs

N/A

1 Represents fair value as a percentage of the unpaid principal balance.

Fair Value of Financial Instruments

The following table presents the carrying values and estimated fair values of all financial instruments, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis as of September 30, 2021 (dollars in thousands):


	Carrying Value		Estimated Fair Value		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and due from banks	$	729,285	$	729,285	$	729,285	$	—	$	—
Interest-bearing cash and cash equivalents	1,162,477		1,162,477		1,162,477		—		—
Trading securities:
U.S. government securities	8,863		8,863		4,999		3,864		—
Residential agency mortgage-backed securities	5,469,676		5,469,676		—		5,469,676		—
Municipal securities	35,894		35,894		—		35,894		—

Other trading securities	39,607		39,607		—		39,607		—
Total trading securities	5,554,040		5,554,040		4,999		5,549,041		—
Investment securities:
Municipal securities	207,393		229,149		—		61,682		167,467
Residential agency mortgage-backed securities	7,412		8,084		—		8,084		—
Other debt securities	1,257		1,256		—		1,256		—
Total investment securities	216,062		238,489		—		71,022		167,467
Allowance for credit losses	(470)		—		—		—		—
Investment securities, net of allowance	215,592		238,489		—		71,022		167,467
Available for sale securities:
U.S. Treasury	502		502		502		—		—
Municipal securities	461,619		461,619		—		461,619		—
Residential agency mortgage-backed securities	8,168,025		8,168,025		—		8,168,025		—
Residential non-agency mortgage-backed securities	26,072		26,072		—		26,072		—
Commercial agency mortgage-backed securities	4,685,423		4,685,423		—		4,685,423		—
Other debt securities	472		472		—		—		472
Total available for sale securities	13,342,113		13,342,113		502		13,341,139		472


Fair value option securities – Residential agency mortgage-backed securities	51,019		51,019		—		51,019		—

Residential mortgage loans held for sale	176,813		176,813		—		170,338		6,475
Loans:
Commercial	12,175,140		12,054,326		—		—		12,054,326
Commercial real estate	4,116,892		4,085,030		—		—		4,085,030
Paycheck protection program	536,052		525,990		—		—		525,990
Loans to individuals	3,519,852		3,519,309		—		—		3,519,309
Total loans	20,347,936		20,184,655		—		—		20,184,655
Allowance for loan losses	(276,680)		—		—		—		—
Loans, net of allowance	20,071,256		20,184,655		—		—		20,184,655
Mortgage servicing rights	133,308		133,308		—		—		133,308
Derivative instruments with positive fair value, net of cash collateral	1,901,136		1,901,136		1,109		1,900,027		—
Deposits with no stated maturity	36,743,836		36,743,836		—		—		36,743,836
Time deposits	1,780,715		1,783,165		—		—		1,783,165
Other borrowed funds	880,699		877,709		—		—		877,709
Subordinated debentures	131,220		143,381		—		143,381		—
Derivative instruments with negative fair value, net of cash collateral	739,641		739,641		233,266		506,375		—


	Carrying Value		Estimated Fair Value		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and due from banks	$	798,757	$	798,757	$	798,757	$	—	$	—
Interest-bearing cash and cash equivalents	381,816		381,816		381,816		—		—
Trading securities:
U.S. government securities	9,183		9,183		4,999		4,184		—
Residential agency mortgage-backed securities	4,669,148		4,669,148		—		4,669,148		—
Municipal securities	19,172		19,172		—		19,172		—

Other trading securities	10,472		10,472		—		10,472		—
Total trading securities	4,707,975		4,707,975		4,999		4,702,976		—
Investment securities:
Municipal securities	229,245		255,270		—		69,404		185,866
Residential agency mortgage-backed securities	8,913		9,790		—		9,790		—
Other debt securities	7,373		7,371		—		7,371		—
Total investment securities	245,531		272,431		—		86,565		185,866
Allowance for credit losses	(688)		—		—		—		—
Investment securities, net of allowance	244,843		272,431		—		86,565		185,866
Available for sale securities:
U.S. Treasury	508		508		508		—		—
Municipal securities	167,979		167,979		—		167,979		—
Residential agency mortgage-backed securities	9,340,471		9,340,471		—		9,340,471		—
Residential non-agency mortgage-backed securities	32,770		32,770		—		32,770		—
Commercial agency mortgage-backed securities	3,508,465		3,508,465		—		3,508,465		—
Other debt securities	472		472		—		—		472
Total available for sale securities	13,050,665		13,050,665		508		13,049,685		472



Fair value option securities — Residential agency mortgage-backed securities	114,982		114,982		—		114,982		—
Residential mortgage loans held for sale	252,316		252,316		—		245,299		7,017
Loans:
Commercial	13,077,535		13,003,383		—		—		13,003,383
Commercial real estate	4,698,538		4,649,763		—		—		4,649,763
Paycheck protection program	1,682,310		1,669,461		—		—		1,669,461
Loans to individuals	3,549,137		3,563,199		—		—		3,563,199
Total loans	23,007,520		22,885,806		—		—		22,885,806
Allowance for loan losses	(388,640)		—		—		—		—
Loans, net of allowance	22,618,880		22,885,806		—		—		22,885,806
Mortgage servicing rights	101,172		101,172		—		—		101,172
Derivative instruments with positive fair value, net of cash collateral	810,688		810,688		10,780		799,908		—
Deposits with no stated maturity	34,176,752		34,176,752		—		—		34,176,752
Time deposits	1,967,128		1,976,936		—		—		1,976,936
Other borrowed funds	3,545,356		3,542,489		—		—		3,542,489
Subordinated debentures	276,005		269,544		—		269,544		—
Derivative instruments with negative fair value, net of cash collateral	405,779		405,779		—		405,779		—

Because no market exists for certain of these financial instruments and management does not intend to sell these financial instruments, the fair values shown in the tables above may not represent values at which the respective financial instruments could be sold individually or in the aggregate at the given reporting date.

- 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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