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Fair Value of Financial Instruments
 9 Months Ended
Sep. 30, 2024
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments
Note 5 — Fair Value of Financial Instruments
Fair value is the exchange price that is expected to be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Certain assets and liabilities are recorded in the Company’s consolidated financial statements at fair value. Some are recorded on a recurring basis and some on a nonrecurring basis.
The Company utilizes fair value measurement to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The determination of fair values of financial instruments often requires the use of estimates. In cases where quoted market values in an active market are not available, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach to estimate the fair values of its financial instruments. Such valuation techniques are consistently applied.
A hierarchy for fair value has been established, which categorizes the valuation techniques into three levels used to measure fair value. The three levels are as follows:
Level 1 - Fair value is based on unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 - Fair value is based on significant other observable inputs that are generally determined based on a single price for each financial instrument provided to the Company by an unrelated 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 markets that are not active;
•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; and
•Other inputs derived from or corroborated by observable market inputs.
Level 3 - Prices or valuation techniques that require inputs that are both significant and unobservable in the market. These instruments are valued using the best information available, some of which is internally developed, and reflects the Company’s own assumptions about the risk premiums that market participants would generally require and the assumptions they would use. These estimates can be inherently uncertain.
There were no transfers between fair value reporting levels for any period presented.
Fair Values of Assets and Liabilities Recorded on a Recurring Basis
The following tables summarize financial assets and financial liabilities recorded at fair value on a recurring basis at September 30, 2024, and December 31, 2023, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value. There were no changes in the valuation techniques during 2024 or 2023.
September 30, 2024
(Dollars in thousands)Level 1Level 2Level 3Total
State and municipal securities$— $246,707 $42,155 $288,862 
Corporate bonds— 79,268 1,000 80,268 
U.S. treasury securities30,729 — — 30,729 
U.S. government agency securities— 14,658 — 14,658 
Commercial mortgage-backed securities— 100,172 — 100,172 
Residential mortgage-backed securities— 475,169 — 475,169 
Commercial collateralized mortgage obligations— 48,510 — 48,510 
Residential collateralized mortgage obligations— 122,597 — 122,597 
Securities available for sale30,729 1,087,081 43,155 1,160,965 
Securities carried at fair value through income— — 6,533 6,533 
Loans held for sale— 7,631 — 7,631 
Other assets - derivatives— 13,135 — 13,135 
Total recurring fair value measurements - assets$30,729 $1,107,847 $49,688 $1,188,264 
Other liabilities - derivatives$— $(11,993)$— $(11,993)
Total recurring fair value measurements - liabilities$— $(11,993)$— $(11,993)
December 31, 2023
(Dollars in thousands)Level 1Level 2Level 3Total
State and municipal securities$— $232,679 $49,447 $282,126 
Corporate bonds— 82,635 1,000 83,635 
U.S. treasury securities55,480 — — 55,480 
U.S. government agency securities— 24,160 — 24,160 
Commercial mortgage-backed securities— 93,396 — 93,396 
Residential mortgage-backed securities— 506,502 — 506,502 
Commercial collateralized mortgage obligations— 35,183 — 35,183 
Residential collateralized mortgage obligations— 130,144 — 130,144 
Asset-backed securities— 43,005 — 43,005 
Securities available for sale55,480 1,147,704 50,447 1,253,631 
Securities carried at fair value through income— — 6,808 6,808 
Loans held for sale— 16,852 — 16,852 
Mortgage servicing rights— — 15,637 15,637 
Other assets - derivatives— 20,487 — 20,487 
Total recurring fair value measurements - assets$55,480 $1,185,043 $72,892 $1,313,415 
Other liabilities - derivatives$— $(18,300)$— $(18,300)
Total recurring fair value measurements - liabilities$— $(18,300)$— $(18,300)
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2024 and 2023, are summarized as follows:
(Dollars in thousands)MSRsSecurities Available for SaleSecurities at Fair Value Through Income
Balance at January 1, 2024$15,637 $50,447 $6,808 
Gain (loss) recognized in earnings:
Mortgage banking revenue450 — — 
Other noninterest income— — 24 
Loss recognized in AOCI— 511 — 
Purchases, issuances, sales and settlements:
Sales(16,087)— — 
Settlements— (7,803)(299)
Balance at September 30, 2024
$— $43,155 $6,533 
(Dollars in thousands)MSRsSecurities Available for SaleSecurities at Fair Value Through Income
Balance at January 1, 2023$20,824 $55,769 $6,368 
Gain (loss) recognized in earnings:
Mortgage banking revenue(1)
(485)— — 
Other noninterest income— — 689 
Loss recognized in AOCI— (703)— 
Purchases, issuances, sales and settlements:
Originations656 — — 
Sales(1,806)— — 
Settlements— (2,627)(285)
Balance at September 30, 2023
$19,189 $52,439 $6,772 
___________________________
(1)Total mortgage banking revenue includes changes in fair value due to market changes and run-off.
The Company obtains fair value measurements for securities available for sale and securities at fair value through income from an independent pricing service; therefore, quantitative unobservable inputs are unknown.
The following methodologies were used to measure the fair value of financial assets and liabilities valued on a recurring basis:
Securities Available for Sale
Securities classified as available for sale are reported at fair value utilizing Level 1, Level 2 or Level 3 inputs. For Level 1 securities, the Company obtains the fair value measurements for those identical assets from an independent pricing service. For Level 2 securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, market consensus prepayment speeds, credit information and the security's terms and conditions, among other things. In order to ensure the fair values are consistent with ASC 820, Fair Value Measurements and Disclosures, the Company periodically checks the fair value by comparing them to other pricing sources, such as Bloomberg LP. The third-party pricing service is subject to an annual review of internal controls in accordance with the Statement on Standards for Attestation Engagements No. 16, which was made available to the Company. In certain cases where Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. For Level 3 securities, the Company determines the fair value of the instruments based on their callability, putability and prepay optionality. Putable instruments are valued at book value, non-putable instruments are priced mainly using a present value calculation based on the spread to the yield curve.
Mortgage Servicing Rights (“MSRs”)
During December 2023 and January 2024, the Company solicited non-binding indications of interest with respect to the proposed sale of substantially all of the Company’s MSR asset. The Company subsequently sold its MSR asset and recorded a $410,000 gain on the sale during the nine months ended September 30, 2024. There were no MSR assets recognized or recorded during the quarter ended September 30, 2024, and the carrying value of the MSR is zero at September 30, 2024. At December 31, 2023, the carrying amounts of the MSRs equal fair value, which are determined using a discounted cash flow valuation model. The significant assumptions used to value MSRs were as follows:
December 31, 2023
Range
Weighted Average(1)
Prepayment speeds
7.49% - 8.50%
8.10 %
Discount rates
10.25% - 12.75%
10.31 %
__________________________
(1)The weighted average was calculated with reference to the principal balance of the underlying mortgages.
There have been significant market-driven fluctuations in the assumptions listed above. Typically, loans with higher average coupon rates have a greater likelihood of prepayment during comparatively low interest rate environments, while loans with lower average coupon rates have a lower likelihood of prepayment. Estimating these assumptions within ranges that market participants would use in determining the fair value of MSRs requires significant management judgment.
Derivatives
Fair values for interest rate swap agreements and interest rate lock commitments are based upon the amounts that would be required to settle the contracts. Fair values for risk participations and loan sale commitments are based on the fair values of the underlying mortgage loans or securities and the probability of such commitments being exercised. Significant management judgment and estimation is required in determining these fair value measurements.
Fair Values of Assets Recorded on a Recurring Basis for which the Fair Value Option has been Elected
Certain assets are measured at fair value on a recurring basis due to the Company’s election to adopt fair value accounting treatment for those assets. This election allows for a more effective offset of the changes in fair values of the assets and the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting under ASC Topic 815, Derivatives and Hedging. For assets for which the fair value has been elected, the earned current contractual interest payment is recognized in interest income. At September 30, 2024, and December 31, 2023, there were no gains or losses recorded attributable to changes in instrument-specific credit risk. The following tables summarize the difference between the fair value and the unpaid principal balance for financial instruments for which the fair value option has been elected:
September 30, 2024
(Dollars in thousands)Aggregate Fair ValuePrincipal Balance/Amortized Cost Difference
Loans held for sale(1)
$7,631 $7,394 $237 
Securities carried at fair value through income6,533 6,515 18 
Total$14,164 $13,909 $255 
____________________________
(1)There were no loans held for sale that were designated as nonaccrual or 90 days or more past due at September 30, 2024.
December 31, 2023
(Dollars in thousands)Aggregate Fair ValuePrincipal Balance/Amortized CostDifference
Loans held for sale(1)
$16,852 $16,475 $377 
Securities carried at fair value through income6,808 6,815 (7)
Total$23,660 $23,290 $370 
____________________________
(1)There were no of loans held for sale that were designated as nonaccrual or 90 days or more past due at December 31, 2023.
Changes in the fair value of assets for which the Company elected the fair value option are classified in the consolidated statements of income line items reflected in the following table:
(Dollars in thousands)Three Months Ended September 30,Nine Months Ended September 30,
Changes in fair value included in noninterest income:2024202320242023
Mortgage banking revenue (loans held for sale)(1)
$(273)$(22)$(139)$(214)
Other income:
Securities carried at fair value through income35 666 25 689 
Total fair value option impact on noninterest income$(238)$644 $(114)$475 
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(1)The fair value option impact on noninterest income is offset by the derivative gain/loss recognized in noninterest income. Please see Note 6 — Mortgage Banking for more detail.
The following methodologies were used to measure the fair value of financial assets valued on a recurring basis for which the fair value option was elected:
Securities at Fair Value through Income
Securities carried at fair value through income are valued using a discounted cash flow with a credit spread applied to each instrument based on the creditworthiness of each issuer. Credit spreads ranged from 83 to 227 basis points at both September 30, 2024, and December 31, 2023. The Company believes the fair value approximates an exit price.
Loans Held for Sale
Fair values for loans held for sale are established using anticipated sale prices for loans allocated to a sale commitment, and those unallocated to a commitment are valued based on the interest rate and term for similar loans allocated. The Company believes the fair value approximates an exit price.
Fair Value of Assets Recorded on a Nonrecurring Basis
Non-marketable equity securities held in other financial institutions
The majority of the Company’s non-marketable equity securities held in other financial institutions are within Level 2 of the fair value hierarchy and qualify for the practical expedient allowed for equity securities without a readily determinable fair values, such that the Company has elected to carry these securities at cost adjusted for any observable transactions during the period, less any impairment. Non-marketable equity securities held in other financial institutions totaled $67.1 million and $55.2 million at September 30, 2024 and December 31, 2023, respectively, and are shown on the face of the consolidated balance sheets. To date, no impairment has been recorded on the Company's investments in equity securities that do not have readily determinable fair values. During the nine months ended September 30, 2024, the Company observed a price change in multiple orderly transactions for identical equity securities in one of the Company’s equity securities and adjusted the Company’s basis upwards by $5.2 million.
Individually Evaluated Loans with Credit Losses
Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured to determine if any credit loss exists. Allowable methods for determining the amount of credit loss include estimating the fair value using the fair value of the collateral for collateral-dependent loans and a discounted cash flow methodology for other evaluated loans that are not collateral dependent. If the loan is identified as collateral-dependent, the fair value method of measuring the amount of credit loss is utilized. Evaluating the fair value of the collateral for collateral-dependent loans requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. If the loan is not collateral-dependent, the discounted cash flow method is utilized, which involves assumptions and judgments as to credit risk, prepayment risk, liquidity risk, default rates, loss severity, payment speeds, collateral values and discount rate. Loans that have experienced a credit loss with specific allocated losses are within Level 3 of the fair value hierarchy when the credit loss is determined using the fair value method. The fair value of collateral-dependent loans that have specific allocated reserves was approximately $3.9 million and $3.8 million at September 30, 2024, and December 31, 2023, respectively.
Non-Financial Assets
Foreclosed assets held for sale are the only non-financial assets valued on a nonrecurring basis that are initially recorded by the Company at fair value, less estimated costs to sell. At foreclosure, if the fair value, less estimated costs to sell, of the real estate acquired is less than the Company’s recorded investment in the related loan, a write-down is recognized through a charge to the ALCL. Additionally, valuations are periodically performed by management, and any subsequent reduction in value is recognized by a charge to income. The carrying value and fair value of foreclosed assets held for sale was estimated using Level 3 inputs based on observable market data and was $6.0 million and $3.9 million at September 30, 2024, and December 31, 2023, respectively. At September 30, 2024, and December 31, 2023, the Company had $669,000 and zero, respectively, principal amounts of residential mortgage loans in the process of foreclosure.
Fair Values of Financial Instruments Not Recorded at Fair Value
The carrying value and estimated fair values of financial instruments not recorded at fair value are as follows:
(Dollars in thousands)September 30, 2024December 31, 2023
Financial assets:
Level 1 inputs:
Carrying
Value		Estimated
Fair Value		Carrying
Value		Estimated
Fair Value
Cash and cash equivalents$321,191 $321,191 $280,441 $280,441 
Level 2 inputs:
Non-marketable equity securities held in other financial institutions
67,068 67,068 55,190 55,190 
Accrued interest and loan fees receivable42,925 42,925 41,688 41,688 
Level 3 inputs:
Securities held to maturity11,096 10,701 11,615 10,848 
LHFI, net7,860,801 7,547,324 7,564,076 7,177,720 
Financial liabilities:
Level 2 inputs:
Deposits8,486,568 8,481,684 8,251,125 8,240,520 
FHLB advances, repurchase agreements and other borrowings30,446 30,359 83,598 83,187 
Subordinated indebtedness159,861 159,277 194,279 186,251 
Accrued interest payable15,510 15,510 12,272 12,272