| FAIR VALUE MEASUREMENTS |
13. FAIR VALUE MEASUREMENTS
The Company follows ASC 820, Fair Value Measurement to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. ASC 820 clarifies that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants.
ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy under ASC 820 based on these two types of inputs are as follows:
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Level 1 |
Valuation is based on quoted prices in active markets for identical assets and liabilities. |
Level 2 |
Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the markets. |
Level 3 |
Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market. These unobservable inputs reflect the Company’s assumptions about what market participants would use and information that is reasonably available under the circumstances without undue cost and effort.
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Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements. Refer to Note 1 “Summary of Significant Accounting Policies” in this Form 10-K for additional information on the valuation techniques used by the Company.
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AFS Securities: AFS securities are recorded at fair value on a recurring basis.
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The Company’s investment portfolio is primarily valued using fair value measurements that are considered to be Level 2. The Company has contracted with a third-party portfolio accounting service vendor for valuation of its securities portfolio. No material differences were identified during the valuation for the years ended December 31, 2023 and 2022.
The carrying value of restricted FRB and FHLB stock approximates fair value based on the redemption provisions of each entity and is therefore excluded from the table below.
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Loans Held for Sale: Residential loans originated for sale in the open market are carried at fair value. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). Gains and losses on the sale of loans are recorded in current period earnings as a component of “Mortgage banking income” on the Company’s Consolidated Statements of Income.
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| ● |
Derivative Instruments: As discussed in Note 1 “Summary of Significant Accounting Policies” in this Form 10-K, the Company records derivative instruments at fair value on a recurring basis. The Company utilizes derivative instruments as part of the management of interest rate risk to modify the re-pricing characteristics of certain portions of the Company’s interest-bearing assets and liabilities, as well as to manage the Company’s exposure to credit risk related to borrower’s performance under interest rate derivatives. The Company has contracted with a third-party vendor to provide valuations for derivatives using standard valuation techniques and therefore classifies such valuations as Level 2. Third-party valuations are validated by the Company using the Bloomberg Valuation Service’s derivative pricing functions. The Company determines the fair value of rate lock commitments, delivery contracts, and forward sales contracts of MBS by measuring the change in the value of the underlying asset, while taking into consideration the probability that the rate lock commitments will close or be funded. No significant differences were identified during the valuation as of December 31, 2023 and December 31, 2022. The Company has considered counterparty credit risk in the valuation of its derivative assets and has considered its own credit risk in the valuation of its derivative liabilities.
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The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of December 31, (dollars in thousands):
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|
|
|
|
|
|
|
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2023 Fair Value Measurements using |
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|
|
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Significant |
|
|
|
|
|
|
|
|
Quoted Prices in |
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Other |
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Significant |
|
|
|
|
|
Active Markets for |
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Observable |
|
Unobservable |
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|
|
|
|
Identical Assets |
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Inputs |
|
Inputs |
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|
|
|
|
Level 1 |
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Level 2 |
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Level 3 |
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Balance |
ASSETS |
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|
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AFS securities: |
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|
|
|
|
|
|
|
|
|
|
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U.S. government and agency securities |
|
$ |
61,311 |
|
$ |
2,045 |
|
$ |
— |
|
$ |
63,356 |
Obligations of states and political subdivisions |
|
|
— |
|
|
475,447 |
|
|
— |
|
|
475,447 |
Corporate and other bonds(1) |
|
|
— |
|
|
241,889 |
|
|
— |
|
|
241,889 |
MBS |
|
|
— |
|
|
1,448,817 |
|
|
— |
|
|
1,448,817 |
Other securities |
|
|
— |
|
|
1,752 |
|
|
— |
|
|
1,752 |
LHFS |
|
|
— |
|
|
6,710 |
|
|
— |
|
|
6,710 |
Financial Derivatives(2) |
|
|
— |
|
|
93,027 |
|
|
— |
|
|
93,027 |
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|
|
|
|
|
|
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|
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LIABILITIES |
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|
|
|
|
|
|
|
|
|
|
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Financial Derivatives(2) |
|
$ |
— |
|
$ |
206,561 |
|
$ |
— |
|
$ |
206,561 |
(1) Other bonds include asset-backed securities.
(2) Includes hedged and non-hedged derivatives.
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|
|
|
|
|
|
|
|
|
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2022 Fair Value Measurements using |
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|
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Significant |
|
|
|
|
|
|
|
|
Quoted Prices in |
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Other |
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Significant |
|
|
|
|
|
Active Markets for |
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Observable |
|
Unobservable |
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|
|
|
|
Identical Assets |
|
Inputs |
|
Inputs |
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|
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Balance |
ASSETS |
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|
|
|
|
|
|
|
|
|
|
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AFS securities: |
|
|
|
|
|
|
|
|
|
|
|
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U.S. government and agency securities |
|
$ |
56,606 |
|
$ |
5,337 |
|
$ |
— |
|
$ |
61,943 |
Obligations of states and political subdivisions |
|
|
— |
|
|
807,435 |
|
|
— |
|
|
807,435 |
Corporate and other bonds(1) |
|
|
— |
|
|
226,380 |
|
|
— |
|
|
226,380 |
MBS |
|
|
— |
|
|
1,644,394 |
|
|
— |
|
|
1,644,394 |
Other securities |
|
|
— |
|
|
1,664 |
|
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— |
|
|
1,664 |
LHFS |
|
|
— |
|
|
3,936 |
|
|
— |
|
|
3,936 |
Financial Derivatives(2) |
|
|
— |
|
|
80,310 |
|
|
— |
|
|
80,310 |
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|
|
|
|
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LIABILITIES |
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|
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Financial Derivatives(2) |
|
$ |
— |
|
$ |
236,000 |
|
$ |
— |
|
$ |
236,000 |
(1) Other bonds include asset-backed securities.
(2) Includes hedged and non-hedged derivatives.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets after they are evaluated for impairment. The primary assets accounted for at fair value on a nonrecurring basis are related to foreclosed properties, former bank premises, and collateral-dependent loans that are individually assessed. When the asset is secured by real estate, the Company measures the fair value utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data. Management may discount the value from the appraisal in determining the fair value if, based on its understanding of the market conditions, the collateral had been impaired below the appraised value (Level 3). The nonrecurring valuation adjustments for these assets did not have a significant impact on the Company’s consolidated financial statements.
Fair Value of Financial Instruments
ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments for interim periods and excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. Refer to Note 1 “Summary of Significant Accounting Policies” in this Form 10-K for additional information on the valuation techniques used by the Company to measure the fair value.
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Cash and Cash Equivalents: The carrying amount is a reasonable estimate of fair value.
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| ● |
HTM Securities: The Company’s investment portfolio is primarily valued using fair value measurements that are considered to be Level 2; however, there are a few investments that are considered to be Level 3. The Company has contracted with a third-party portfolio accounting service vendor for valuation of its securities portfolio. No material differences were identified during the valuation for the years ended December 31, 2023 and 2022.
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| ● |
Loans and Leases: The fair value of loans and leases were estimated using an exit price, representing the amount that would be expected to be received if the Company sold the loans and leases. The fair value of performing loans and leases were estimated through use of discounted cash flows. Credit loss assumptions were based on market probability of default/loss given default for loan and lease cohorts. The discount rate was based primarily on recent market origination rates. Fair value of loans and leases individually assessed and their respective levels within the fair value hierarchy are described in the previous section related to fair value measurements of assets that are measured on a nonrecurring basis.
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| ● |
Accrued Interest: The carrying amounts of accrued interest approximate fair value.
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| ● |
Bank Owned Life Insurance: The carrying value of BOLI approximates fair value. The Company records these policies at their cash surrender value, which is estimated using information provided by insurance carriers.
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| ● |
Deposits: The fair value of demand deposits, savings accounts, brokered deposits, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposits were valued using a discounted cash flow calculation that includes a market rate analysis of the current rates offered by market participants for certificates of deposits that mature in the same period.
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| ● |
Borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements and any other short-term borrowings approximate their fair values. The fair values of the Company’s long-term borrowings, including trust preferred securities are estimated using discounted cash flow analyses, based on the current incremental borrowing rates for similar types of borrowing arrangements.
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The carrying values and estimated fair values of the Company’s financial instruments as of December 31, are as follows (dollars in thousands):
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|
|
|
|
|
|
|
|
|
|
2023 Fair Value Measurements using |
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|
|
|
|
Quoted Prices |
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Significant |
|
|
|
|
|
|
|
|
|
|
|
in Active |
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Other |
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Significant |
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|
|
|
|
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Markets for |
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Observable |
|
Unobservable |
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Total Fair |
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Identical Assets |
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Inputs |
|
Inputs |
|
Value |
|
|
Carrying |
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Value |
|
Level 1 |
|
Level 2 |
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Level 3 |
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Balance |
ASSETS |
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|
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Cash and cash equivalents |
|
$ |
378,131 |
|
$ |
378,131 |
|
$ |
— |
|
$ |
— |
|
$ |
378,131 |
AFS securities |
|
|
2,231,261 |
|
|
61,311 |
|
|
2,169,950 |
|
|
— |
|
|
2,231,261 |
HTM securities |
|
|
837,378 |
|
|
— |
|
|
806,834 |
|
|
1,240 |
|
|
808,074 |
Restricted stock |
|
|
115,472 |
|
|
— |
|
|
115,472 |
|
|
— |
|
|
115,472 |
LHFS |
|
|
6,710 |
|
|
— |
|
|
6,710 |
|
|
— |
|
|
6,710 |
LHFI, net of deferred fees and costs |
|
|
15,635,043 |
|
|
— |
|
|
— |
|
|
15,148,256 |
|
|
15,148,256 |
Financial Derivatives(1) |
|
|
93,027 |
|
|
— |
|
|
93,027 |
|
|
— |
|
|
93,027 |
Accrued interest receivable |
|
|
91,370 |
|
|
— |
|
|
91,370 |
|
|
— |
|
|
91,370 |
BOLI |
|
|
452,565 |
|
|
— |
|
|
452,565 |
|
|
— |
|
|
452,565 |
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LIABILITIES |
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Deposits |
|
$ |
16,818,129 |
|
$ |
— |
|
$ |
16,799,791 |
|
$ |
— |
|
$ |
16,799,791 |
Borrowings |
|
|
1,311,858 |
|
|
— |
|
|
1,154,694 |
|
|
— |
|
|
1,154,694 |
Accrued interest payable |
|
|
20,528 |
|
|
— |
|
|
20,528 |
|
|
— |
|
|
20,528 |
Financial Derivatives(1) |
|
|
206,561 |
|
|
— |
|
|
206,561 |
|
|
— |
|
|
206,561 |
(1) Includes hedged and non-hedged derivatives.
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
2022 Fair Value Measurements using |
|
|
|
|
|
Quoted Prices |
|
Significant |
|
|
|
|
|
|
|
|
|
|
|
in Active |
|
Other |
|
Significant |
|
|
|
|
|
|
|
|
Markets for |
|
Observable |
|
Unobservable |
|
Total Fair |
|
|
|
|
|
Identical Assets |
|
Inputs |
|
Inputs |
|
Value |
|
|
Carrying |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Balance |
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
319,948 |
|
$ |
319,948 |
|
$ |
— |
|
$ |
— |
|
$ |
319,948 |
AFS securities |
|
|
2,741,816 |
|
|
56,606 |
|
|
2,685,210 |
|
|
— |
|
|
2,741,816 |
HTM securities |
|
|
847,732 |
|
|
— |
|
|
798,778 |
|
|
3,109 |
|
|
801,887 |
Restricted stock |
|
|
120,213 |
|
|
— |
|
|
120,213 |
|
|
— |
|
|
120,213 |
LHFS |
|
|
3,936 |
|
|
— |
|
|
3,936 |
|
|
— |
|
|
3,936 |
LHFI, net of deferred fees and costs |
|
|
14,449,142 |
|
|
— |
|
|
— |
|
|
13,974,926 |
|
|
13,974,926 |
Financial Derivatives(1) |
|
|
80,310 |
|
|
— |
|
|
80,310 |
|
|
— |
|
|
80,310 |
Accrued interest receivable |
|
|
81,953 |
|
|
— |
|
|
81,953 |
|
|
— |
|
|
81,953 |
BOLI |
|
|
440,656 |
|
|
— |
|
|
440,656 |
|
|
— |
|
|
440,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
15,931,677 |
|
$ |
— |
|
$ |
15,927,361 |
|
$ |
— |
|
$ |
15,927,361 |
Borrowings |
|
|
1,708,700 |
|
|
— |
|
|
1,645,095 |
|
|
— |
|
|
1,645,095 |
Accrued interest payable |
|
|
5,268 |
|
|
— |
|
|
5,268 |
|
|
— |
|
|
5,268 |
Financial Derivatives(1) |
|
|
236,000 |
|
|
— |
|
|
236,000 |
|
|
— |
|
|
236,000 |
(1) Includes hedged and non-hedged derivatives.
The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. Borrowers with fixed rate obligations, however, are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.
|