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Fair Value Accounting and Measurement

9 Months Ended

Sep. 30, 2022

The Fair Value Measurements and Disclosures topic of the FASB ASC defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value. We hold fixed and variable rate interest-bearing securities, investments in marketable equity securities and certain other financial instruments, which are carried at fair value. Fair value is determined based upon quoted prices when available or through the use of alternative approaches, such as matrix or model pricing, when market quotes are not readily accessible or available.

The valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our own market assumptions. These two types of inputs create the following fair value hierarchy:

Level 1 – Quoted prices for identical instruments in active markets that are accessible at the measurement date.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.

Fair values are determined as follows:

Debt securities at fair value are priced using a combination of market activity, industry recognized information sources, yield curves, discounted cash flow models and other factors. These fair value calculations are considered a Level 2 input method under the provisions of the Fair Value Measurements and Disclosures topic of the FASB ASC for all debt securities.

Loans held for sale include the fair value of residential mortgage loans originated as held for sale determined based on quoted secondary market prices for similar loans, including the implicit fair value of embedded servicing rights. The change in fair value of loans held for sale is primarily driven by changes in interest rates subsequent to loan funding and changes in the fair value of the related servicing asset, resulting in revaluation adjustments to the recorded fair value.

The fair values of the interest rate lock commitments and interest rate forward loan sales contracts are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions based on historical information, where appropriate. The pull-through rate assumptions are considered Level 3 valuation inputs and are significant to the interest rate lock commitment valuation; as such, the interest rate lock commitment derivatives are classified as Level 3.

Interest rate contracts and the interest rate collar are valued in models, which use as their basis, readily observable market parameters and are classified within Level 2 of the valuation hierarchy.

The following tables set forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis at the dates presented by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:


	Fair Value		Fair Value Measurements at Reporting Date Using
			Level 1		Level 2		Level 3

September 30, 2022	(in thousands)
Assets
Debt securities available for sale:
U.S. government agency and government-sponsored enterprise mortgage-back securities and collateralized mortgage obligations	$	2,852,867	$	—	$	2,852,867	$	—
Other asset-backed securities	334,008		—		334,008		—
State and municipal securities	826,834		—		826,834		—
U.S. government agency and government-sponsored enterprise securities	222,951		—		222,951		—
U.S. government securities	166,306		166,306		—		—
Non-agency collateralized mortgage obligations	297,855		—		297,855		—
Total debt securities available for sale	$	4,700,821	$	166,306	$	4,534,515	$	—
Loans held for sale	$	1,251	$	—	$	1,251	$	—
Other assets:

Interest rate forward loan sales contracts	$	119	$	—	$	119	$	—
Interest rate contracts	$	43,574	$	—	$	43,574	$	—

Liabilities
Other liabilities:

Interest rate contracts	$	43,574	$	—	$	43,574	$	—
Interest rate lock commitments	$	62	$	—	$	—	$	62


	Fair Value		Fair Value Measurements at Reporting Date Using
			Level 1		Level 2		Level 3

December 31, 2021	(in thousands)
Assets
Debt securities available for sale:
U.S. government agency and government-sponsored enterprise mortgage-back securities and collateralized mortgage obligations	$	3,745,601	$	—	$	3,745,601	$	—
Other asset-backed securities	463,063		—		463,063		—
State and municipal securities	997,291		—		997,291		—
U.S. government agency and government-sponsored enterprise securities	252,576		—		252,576		—
U.S. government securities	157,536		157,536		—		—
Non-agency collateralized mortgage	294,932		—		294,932		—
Total debt securities available for sale	$	5,910,999	$	157,536	$	5,753,463	$	—
Loans held for sale	$	9,570	$	—	$	9,570	$	—
Other assets:
Interest rate lock commitments	$	356	$	—	$	—	$	356
Interest rate contracts	$	24,257	$	—	$	24,257	$	—

Liabilities
Other liabilities:
Interest rate forward loan sales contracts	$	27	$	—	$	27	$	—
Interest rate contracts	$	24,257	$	—	$	24,257	$	—

Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3)

The following table provides a description of the valuation technique, significant unobservable inputs and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring basis at the dates presented:

Fair Value at September 30, 2022

Valuation Technique

Unobservable Input

Range (Weighted Average)

(dollars in thousands)

Interest rate lock commitments

(62)

Internal pricing model

Pull-through rate

80.84% - 100.00%

(95.19%)

Fair Value at September 30, 2021

Valuation Technique

Unobservable Input

Range (Weighted Average)

(dollars in thousands)

Interest rate lock commitments

482

Internal pricing model

Pull-through rate

77.76% - 100.00%

(90.62%)

An increase in the pull-through rate utilized in the fair value measurement of the interest rate lock commitment derivative will result in positive fair value adjustments (and an increase in the fair value measurement). Conversely, a decrease in the pull-through rate will result in a negative fair value adjustment (and a decrease in the fair value measurement).

The following table includes a rollforward of interest rate lock commitments which utilize Level 3 inputs to determine the fair value on a recurring basis.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(in thousands)
Balance at the beginning of the period	$	90	$	585	$	356	$	1,096
Change included in earnings	(13)		1,864		133		5,708
Settlements	(139)		(1,967)		(551)		(6,322)
Balance at the end of the period	$	(62)	$	482	$	(62)	$	482

Nonrecurring Measurements

Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as collateral dependent loans. The following valuation techniques and inputs were used to estimate the fair value of collateral dependent loans.

Collateral dependent loans - A collateral dependent loan is a loan in which repayment is expected to be provided solely by the underlying collateral. The fair market value of the collateral is determined by either the discounted expected future cash flows from the operation of the collateral or the appraised value of the collateral, less costs to sell. The collateral dependent loan valuations are performed in conjunction with the allowance for credit losses process on a quarterly basis.

The Company had no assets measured using fair value estimates on a nonrecurring basis during the current quarterly period. For the nine months ended September 30, 2022, the Company recorded a loss of $1.5 million on the nonrecurring measurement of collateral dependent loans.

The following table sets forth information related to the Company’s assets that were measured using fair value estimates on a nonrecurring basis during the prior year quarterly period:










	Fair Value at		Fair Value Measurements at Reporting Date Using						Gains (Losses) During the Three Months Ended September 30, 2021		Gains (Losses) During the Nine Months Ended September 30, 2021
	September 30, 2021		Level 1		Level 2		Level 3

	(in thousands)
Collateral dependent loans	$	1,845	$	—	$	—	$	1,845	$	(958)	$	(958)

The gains (losses) on collateral dependent loans disclosed above represent the amount of the allowance or provision recapture for credit losses and/or charge-offs during the period applicable to loans held at period-end. The amount of the allowance is included in the ACL.

Quantitative information about Level 3 fair value measurements

The range and weighted average of the significant unobservable inputs used to fair value our Level 3 nonrecurring assets, along with the valuation techniques used, are shown in the following table:

Fair Value at September 30, 2021

Valuation Technique

Unobservable Input

Range (Weighted Average) (1)

(dollars in thousands)

Collateral dependent loans (2)

1,845

Fair Market Value of Collateral

Adjustment to Stated Value

0.00% - 97.46% (71.44%)

__________

(1) Discount applied to appraised value or stated value (in the case of accounts receivable and fixed assets).

(2) Collateral consists of accounts receivable and fixed assets.

The following tables summarize carrying amounts and estimated fair values of selected financial instruments by level within the fair value hierarchy at the dates presented:


	September 30, 2022
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3

	(in thousands)
Assets
Cash and due from banks	$	263,551	$	263,551	$	263,551	$	—	$	—
Interest-earning deposits with banks	54,124		54,124		54,124		—		—
Debt securities available for sale	4,700,821		4,700,821		166,306		4,534,515		—
Debt securities held to maturity	2,079,285		1,747,282		—		1,747,282		—
FHLB stock	10,560		10,560		—		10,560		—
Loans held for sale	1,251		1,251		—		1,251		—
Loans	11,537,390		11,353,412		—		—		11,353,412
Interest rate contracts	43,574		43,574		—		43,574		—

Interest rate forward loan sales contracts	119		119		—		119		—
Liabilities
Time deposits	$	371,230	$	360,340	$	—	$	360,340	$	—
FHLB advances	14,322		14,290		—		14,290		—
Repurchase agreements	48,733		48,733		—		48,733		—
Subordinated debentures	10,000		10,013		—		10,013		—
Junior subordinated debentures	10,310		9,984		—		9,984		—

Interest rate contracts	43,574		43,574		—		43,574		—
Interest rate lock commitments	62		62		—		—		62


	December 31, 2021
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3

	(in thousands)
Assets
Cash and due from banks	$	153,414	$	153,414	$	153,414	$	—	$	—
Interest-earning deposits with banks	671,300		671,300		671,300		—		—
Debt securities available for sale	5,910,999		5,910,999		157,536		5,753,463		—
Debt securities held to maturity	2,148,327		2,122,606		—		2,122,606		—
FHLB stock	10,280		10,280		—		10,280		—
Loans held for sale	9,774		9,774		—		9,774		—
Loans	10,486,359		10,679,349		—		—		10,679,349
Interest rate contracts	24,257		24,257		—		24,257		—
Interest rate lock commitments	356		356		—		—		356
Liabilities
Time deposits	$	445,957	$	430,682	$	—	$	430,682	$	—
FHLB advances	7,359		8,752		—		8,752		—
Repurchase agreements	86,013		86,013		—		86,013		—
Subordinated debentures	10,000		10,125		—		10,125		—
Junior subordinated debentures	10,310		9,927		—		9,927		—
Interest rate contracts	24,257		24,257		—		24,257		—
Interest rate forward loan sales contracts	27		27		—		27		—

The following table presents the difference between the aggregate fair value and the aggregate unpaid principal balance of loans held for sale sold under the mandatory delivery method and accounted for under the fair value option as of the dates presented:


September 30, 2022						December 31, 2021
Fair Value		Aggregate Unpaid Principal Balance		Fair Value Less Aggregate Unpaid Principal Balance		Fair Value		Aggregate Unpaid Principal Balance		Fair Value Less Aggregate Unpaid Principal Balance

(in thousands)
$	1,251	$	1,299	$	(48)	$	9,570	$	9,401	$	169

Residential mortgage loans held for sale that are sold under the mandatory delivery method and accounted for under the fair value option are measured initially at fair value with subsequent changes in fair value recognized in earnings. Gains and losses from such changes in fair value are reported in loan revenue. For the three months ended September 30, 2022, the Company recorded a net decrease in fair value of $47 thousand representing the change in fair value reflected in earnings. For the nine months ended September 30, 2022, the Company recorded a net decrease in fair value of $217 thousand, while the Company recorded net decreases in fair value of $161 thousand and $306 thousand, respectively, for the three and nine months ended September 30, 2021. At September 30, 2022 and December 31, 2021, there were no residential mortgage loans held for sale for which the fair value option was elected that were 90 days or more past due, in nonaccrual status or both.

- 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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