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Fair Value Measurement

3 Months Ended

Mar. 31, 2023

The following table presents estimated fair values of the Company's financial instruments as of March 31, 2023 and December 31, 2022, whether or not recognized or recorded at fair value in the Condensed Consolidated Balance Sheets:


		March 31, 2023				December 31, 2022
(in thousands)	Level	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets:
Cash and cash equivalents	1	$	3,635,185	$	3,635,185	$	1,294,643	$	1,294,643
Equity and other investment securities	1,2	76,532		76,532		72,959		72,959
Investment securities available for sale	1,2	9,249,600		9,249,600		3,196,166		3,196,166
Investment securities held to maturity	3	2,432		3,175		2,476		3,197
Loans held for sale	2	49,338		49,338		71,647		71,647
Loans and leases, net	2,3	36,673,816		36,049,025		25,854,846		24,399,370
Restricted equity securities	1	246,525		246,525		47,144		47,144
Residential mortgage servicing rights	3	178,800		178,800		185,017		185,017
Bank owned life insurance	1	641,922		641,922		331,759		331,759
Derivatives	2,3	39,446		39,446		15,444		15,444
Financial liabilities:
Demand, money market, and savings deposits	1	$	37,266,777	$	37,266,777	$	24,355,381	$	24,355,381
Time deposits	2	4,319,570		4,271,184		2,710,231		2,667,535
Securities sold under agreements to repurchase	2	271,047		271,047		308,769		308,769
Borrowings	2	5,950,000		5,949,865		906,175		905,591
Junior subordinated debentures, at fair value	3	297,721		297,721		323,639		323,639
Junior and other subordinated debentures, at amortized cost	3	108,066		88,823		87,813		80,922
Derivatives	2,3	261,845		261,845		271,205		271,205

Fair Value of Assets and Liabilities Measured on a Recurring Basis

The following tables present information about the Company's assets and liabilities measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022:


(in thousands)	March 31, 2023
Description	Total		Level 1		Level 2		Level 3
Financial assets:
Equity and other investment securities

Investments in mutual funds and other securities	$	63,469	$	45,010	$	18,459	$	—
Equity securities held in rabbi trusts	13,063		13,063		—		—

Investment securities available for sale
U.S. Treasury and agencies	1,502,362		401,300		1,101,062		—
Obligations of states and political subdivisions	1,086,185		—		1,086,185		—
Mortgage-backed securities and collateralized mortgage obligations	6,661,053		—		6,661,053		—

Loans held for sale, at fair value	49,338		—		49,338		—
Loans and leases, at fair value	294,012		—		294,012		—
Residential mortgage servicing rights, at fair value	178,800		—		—		178,800
Derivatives
Interest rate lock commitments	176		—		—		176
Interest rate futures	4,584		—		4,584		—
Interest rate forward sales commitments	161		—		161		—
Interest rate swaps	34,205		—		34,205		—
Foreign currency derivatives	320		—		320		—
Total assets measured at fair value	$	9,887,728	$	459,373	$	9,249,379	$	178,976
Financial liabilities:
Junior subordinated debentures, at fair value	$	297,721	$	—	$	—	$	297,721
Derivatives
Interest rate lock commitments	39		—		—		39

Interest rate forward sales commitments	422		—		422		—
Interest rate swaps	261,144		—		261,144		—
Foreign currency derivatives	240		—		240		—
Total liabilities measured at fair value	$	559,566	$	—	$	261,806	$	297,760


(in thousands)	December 31, 2022
Description	Total		Level 1		Level 2		Level 3
Financial assets:
Equity and other investment securities

Investments in mutual funds and other securities	$	61,593	$	44,256	$	17,337	$	—
Equity securities held in rabbi trusts	11,366		11,366		—		—

Investment securities available for sale
U.S. Treasury and agencies	936,174		225,853		710,321		—
Obligations of states and political subdivisions	269,800		—		269,800		—
Mortgage-backed securities and collateralized mortgage obligations	1,990,192		—		1,990,192		—

Loans held for sale, at fair value	71,647		—		71,647		—
Loans and leases, at fair value	285,581		—		285,581		—
Residential mortgage servicing rights, at fair value	185,017		—		—		185,017
Derivatives
Interest rate lock commitments	50		—		—		50

Interest rate forward sales commitments	512		—		512		—
Interest rate swaps	14,657		—		14,657		—
Foreign currency derivatives	225		—		225		—
Total assets measured at fair value	$	3,826,814	$	281,475	$	3,360,272	$	185,067
Financial liabilities:
Junior subordinated debentures, at fair value	$	323,639	$	—	$	—	$	323,639
Derivatives
Interest rate lock commitments	18		—		—		18
Interest rate futures	392		—		392		—
Interest rate forward sales commitments	601		—		601		—
Interest rate swaps	270,009		—		270,009		—
Foreign currency derivatives	185		—		185		—
Total liabilities measured at fair value	$	594,844	$	—	$	271,187	$	323,657

The following methods were used to estimate the fair value of each class of financial instrument that is carried at fair value in the tables above:

Securities— Fair values for investment securities are based on quoted market prices when available or through the use of alternative approaches, such as matrix or model pricing, or broker indicative bids, when market quotes are not readily accessible or available. Management periodically reviews the pricing information received from the third-party pricing service and compares it to a secondary pricing service, evaluating significant price variances between services to determine an appropriate estimate of fair value to report.

Loans Held for Sale— Fair value for residential mortgage loans originated as held for sale is determined based on quoted secondary market prices for similar loans, including the implicit fair value of embedded servicing rights.

Loans and leases— Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type, including commercial, real estate and consumer loans. Each loan category is further segregated by fixed and adjustable rate loans. The fair value of loans is calculated by discounting expected cash flows at rates at which similar loans are currently being made. These amounts are discounted further by embedded probable losses expected to be realized in the portfolio. For loans originated as held for sale and transferred into loans held for investment, the fair value is determined based on quoted secondary market prices for similar loans. As of March 31, 2023, there were $294.0 million in mortgage loans recorded at fair value as they were previously transferred from held for sale to loans held for investment.

Residential Mortgage Servicing Rights— The fair value of MSR is estimated using a DCF model. Assumptions used include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income net of servicing costs. This model is periodically validated by an independent model validation group. The model assumptions and the MSR fair value estimates are also compared to observable trades of similar portfolios as well as to MSR broker valuations and industry surveys, as available. Management believes the significant inputs utilized are indicative of those that would be used by market participants.

Junior Subordinated Debentures— The fair value of junior subordinated debentures is estimated using an income approach valuation technique. The significant unobservable input utilized in the estimation of fair value of these instruments is the credit risk adjusted spread. The credit risk adjusted spread represents the nonperformance risk of the liability, contemplating the inherent risk of the obligation. The Company periodically utilizes a valuation firm to determine or validate the reasonableness of inputs and factors that are used to determine the fair value. The ending carrying (fair) value of the junior subordinated debentures measured at fair value represents the estimated amount that would be paid to transfer these liabilities in an orderly transaction amongst market participants. Due to credit concerns in the capital markets and inactivity in the trust preferred markets that have limited the observability of market spreads, the Company has classified this as a Level 3 fair value measurement.

Derivative Instruments— The fair value of the interest rate lock commitments, interest rate futures, and forward sales commitments 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. The fair value of the interest rate swaps is determined using a DCF technique incorporating credit valuation adjustments to reflect nonperformance risk in the measurement of fair value. Although the Bank has determined that the majority of the inputs used to value its interest rate swap derivatives fall within Level 2 of the fair value hierarchy, the CVA associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2023, the Bank has assessed the significance of the impact of the CVA on the overall valuation of its interest rate swap positions and has determined that the CVA are not significant to the overall valuation of its interest rate swap derivatives. As a result, the Bank has classified its interest rate swap and futures derivative valuations in Level 2 of the fair value hierarchy.

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 March 31, 2023:


Financial Instrument	Fair Value (in thousands)		Valuation Technique	Unobservable Input	Range of Inputs	Weighted Average
Assets:
Residential mortgage servicing rights	$	178,800	Discounted cash flow
				Constant prepayment rate	5.92% - 44.13%	6.53%
				Discount rate	9.50% - 15.98%	10.06%
Interest rate lock commitments, net	$	137	Internal pricing model
				Pull-through rate	12.00% - 100.00%	85.15%
Liabilities:
Junior subordinated debentures	$	297,721	Discounted cash flow
				Credit spread	2.53% - 6.91%	4.05%

Generally, increases in the constant prepayment rate or the discount rate utilized in the fair value measurement of the residential mortgage servicing rights will result in a decrease in fair value. Conversely, decreases in the constant prepayment rate or the discount rate will result in an increase in fair value.

An increase in the pull-through rate utilized in the fair value measurement of the interest rate lock commitment derivative will result in an increase in the fair value measurement. Conversely, a decrease in the pull-through rate will result in a decrease in the fair value measurement.

Management believes that the credit risk adjusted spread utilized in the fair value measurement of the junior subordinated debentures carried at fair value is indicative of the nonperformance risk premium a willing market participant would require under current market conditions, which is an inactive market. Generally, an increase in the credit spread will result in a decrease in the estimated fair value. Conversely, a decrease in the credit spread will result in an increase in the estimated fair value.

The following table provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three months ended March 31, 2023 and 2022:















	Three Months Ended						Three Months Ended
	March 31, 2023						March 31, 2022
(in thousands)	Residential mortgage servicing rights		Interest rate lock commitments, net		Junior subordinated debentures, at fair value		Residential mortgage servicing rights		Interest rate lock commitments, net		Junior subordinated debentures, at fair value
Beginning balance	$	185,017	$	32	$	(323,639)	$	123,615	$	4,641	$	(293,081)

Change included in earnings	(7,818)		(32)		(6,679)		34,802		(4,270)		(2,456)
Change in fair values included in comprehensive income/loss	—		—		25,812		—		—		(12,703)
Purchases and issuances	1,601		338		—		7,390		4,651		—
Sales and settlements	—		(201)		6,785		—		(5,875)		2,521
Ending balance	$	178,800	$	137	$	(297,721)	$	165,807	$	(853)	$	(305,719)
Change in unrealized gains or losses for the period included in earnings for assets held at end of period	$	(2,937)	$	137	$	(6,679)	$	40,149	$	(853)	$	(2,456)
Change in unrealized gains or losses for the period included in other comprehensive income for assets held at end of period	$	—	$	—	$	25,812	$	—	$	—	$	(12,703)

Changes in residential mortgage servicing rights carried at fair value are recorded in residential mortgage banking revenue within non-interest income. Gains (losses) on interest rate lock commitments carried at fair value are recorded in residential mortgage banking revenue within non-interest income. The contractual interest expense on the junior subordinated debentures is recorded on an accrual basis as interest on junior subordinated debentures within interest expense. Settlements related to the junior subordinated debentures represent the payment of accrued interest that is embedded in the fair value of these liabilities.

The change in fair value of junior subordinated debentures is attributable to the change in the instrument specific credit risk; accordingly, unrealized gains on fair value of junior subordinated debentures of $25.8 million for the three months ended March 31, 2023 was recorded net of tax as other comprehensive gains of $19.1 million. Comparatively, an unrealized loss of $12.7 million was recorded net of tax as other comprehensive losses of $9.4 million for the three months ended March 31, 2022. The gain recorded for the three months ended March 31, 2023 was due primarily to an increase in the discount rate primarily due to an increase in the credit spread.

Fair Value of Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

From time to time, certain assets are measured at fair value on a nonrecurring basis. These adjustments to fair value generally result from the application of lower-of-cost-or-market accounting or write-downs of individual assets due to impairment, typically on collateral dependent loans. The following table presents information about the Company's assets and liabilities measured at fair value on a nonrecurring basis for which a nonrecurring change in fair value has been recorded during the reporting period. There were no assets or liabilities measured at fair value on a nonrecurring basis as of March 31, 2023, as the loans and leases charged-off either were not collateral dependent or had a net realizable value of zero. The amounts disclosed below represent the fair values at the time the nonrecurring fair value measurements were made, and not necessarily the fair value as of the dates reported upon.


	December 31, 2022
(in thousands)	Total		Level 1		Level 2		Level 3



Loans and leases	$	3,216	$	—	$	—	$	3,216

Total assets measured at fair value on a nonrecurring basis	$	3,216	$	—	$	—	$	3,216

The following table presents the losses resulting from nonrecurring fair value adjustments for the three months ended March 31, 2023 and 2022:


	Three Months Ended
(in thousands)		March 31, 2023		March 31, 2022



Loans and leases		$	18,734	$	7,791

Total losses from nonrecurring measurements		$	18,734	$	7,791

The following provides a description of the valuation technique and inputs for the Company's assets and liabilities classified as Level 3 and measured at fair value on a nonrecurring basis, excluding goodwill. Unobservable inputs and qualitative information about the unobservable inputs are not presented as the fair value is determined by third-party information for loans and leases.

The loans and leases amounts above represent collateral-dependent loans and leases that have been adjusted to fair value. When a loan or non-homogeneous lease is identified as collateral dependent, the Bank measures the impairment using the current fair value of the collateral, less selling costs. Depending on the characteristics of a loan or lease, the fair value of collateral is generally estimated by obtaining external appraisals, but in some cases, the value of the collateral may be estimated as having little to no value. When a homogeneous lease or equipment finance agreement becomes 181 days past due, it is determined that the collateral has little to no value. If it is determined that the value of the collateral dependent loan or lease is less than its recorded investment, the Bank recognizes this impairment and adjusts the carrying value of the loan or lease to fair value, less costs to sell, through the allowance for credit losses. The loss represents charge-offs on collateral-dependent loans and leases for fair value adjustments based on the fair value of collateral.

Refer to Note 1 - Summary of Significant Accounting Policies and Note 2 - Business Combination for further information about the methods used to determine the fair values of significant assets and liabilities pertaining to the Merger.

Fair Value Option

The following table presents the difference between the aggregate fair value and the aggregate unpaid principal balance of loans held for sale and loans held for investment accounted for under the fair value option as of March 31, 2023 and December 31, 2022:


	March 31, 2023						December 31, 2022
(in thousands)	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
Loans held for sale	$	49,338	$	47,829	$	1,509	$	71,647	$	70,219	$	1,428
Loans	$	294,012	$	332,412	$	(38,400)	$	285,581	$	333,469	$	(47,888)

Residential mortgage loans held for sale 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 as a component of residential mortgage banking revenue. For the three months ended March 31, 2023, the Company recorded a net increase in fair value of $81,000. For the three months ended March 31, 2022, the Company recorded a net decrease in fair value of $11.1 million.

Certain residential mortgage loans were initially originated for sale and measured at fair value; after origination, the loans were transferred to loans held for investment. Gains and losses from changes in fair value for these loans are reported in earnings as a component of other income. For the three months ended March 31, 2023, the Company recorded a net increase in fair value of $9.5 million, as compared to a net decrease in fair value of $21.0 million for the three months ended March 31, 2022.

The Company selected the fair value measurement option for certain junior subordinated debentures. The remaining junior subordinated debentures were acquired through previous business combinations and were measured at fair value at the time of acquisition and subsequently measured at amortized cost.

- 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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