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Fair Value Measurements and Fair Value of Financial Instruments | 9 Months Ended
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Sep. 30, 2021
Fair Value Disclosures [Abstract] |
Fair Value Measurements and Fair Value of Financial Instruments | Note 6. Fair Value Measurements and Fair Value of Financial Instruments Fair value is the exchange price that would 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. The following sets forth the hierarchy of valuation techniques used to determine fair value: Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2: Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (for example, supported with little or no market activity). An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. Assets and Liabilities Measured at Fair Value on a Recurring Basis The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020: Securities Available-for-Sale and Equity Securities: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 inputs include securities that have quoted prices in active markets for identical assets. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of instruments which would generally be classified within Level 2 of the valuation hierarchy include municipal bonds and certain agency collateralized mortgage obligations. In certain cases where there is limited activity in the market for a particular instrument, assumptions must be made to determine the fair value of the instruments and these are classified as Level 3. When measuring fair value, the valuation techniques available under the market approach, income approach and/or cost approach are used. The Company’s evaluations are based on market data and the Company employs combinations of these approaches for its valuation methods depending on the asset class. Derivatives: The fair value of derivatives is based on valuation models using observable market data as of the measurement date (level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rate, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. 33 Table of Contents
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. Fair Value Measurements and Fair Value of Financial Instruments – (continued) For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used as of September 30, 2021 and December 31, 2020 are as follows:
|  |  |  |  | September 30, 2021
|  |  |  |  | Fair Value Measurements at Reporting Date Using
|  | Total Fair Value |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
(dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |
Recurring fair value measurements: |  |  |  |  |  |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |  |  |  |  |  |
Investment securities: |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |
Federal agency obligations |  | $ | 51,048 |  | $ | - |  | $ | 51,048 |  | $ | -
Residential mortgage pass-through securities |  |  | 256,055 |  |  | - |  |  | 256,055 |  |  | -
Commercial mortgage pass-through securities |  |  | 10,526 |  |  | - |  |  | 10,526 |  |  | -
Obligations of U.S. states and political subdivision |  |  | 130,274 |  |  | - |  |  | 121,638 |  |  | 8,636
Corporate bonds and notes |  |  | 11,089 |  |  | - |  |  | 11,089 |  |  | -
Asset-backed securities |  |  | 2,722 |  |  | - |  |  | 2,722 |  |  | -
Certificates of deposit |  |  | 150 |  |  | - |  |  | 150 |  |  | -
Other securities |  |  | 1,020 |  |  | 1,020 |  |  | - |  |  | -
Total available-for-sale |  | $ | 462,884 |  | $ | 1,020 |  | $ | 453,228 |  | $ | 8,636
Equity securities |  |  | 13,700 |  |  | 11,709 |  |  | 1,991 |  |  | -
Derivatives |  |  | 1,296 |  |  | - |  |  | 1,296 |  |  | -
Total assets |  | $ | 477,880 |  | $ | 12,729 |  | $ | 456,515 |  | $ | 8,636
34 Table of Contents
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. Fair Value Measurements and Fair Value of Financial Instruments – (continued)
|  |  |  |  | December 31, 2020
|  |  |  |  | Fair Value Measurements at Reporting Date Using
|  | Total Fair Value |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
(dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |
Recurring fair value measurements: |  |  |  |  |  |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |  |  |  |  |  |
Investment securities: |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |
Federal agency obligations |  | $ | 38,458 |  | $ | - |  | $ | 38,458 |  | $ | -
Residential mortgage pass-through securities |  |  | 270,884 |  |  | - |  |  | 270,884 |  |  | -
Commercial mortgage pass-through securities |  |  | 6,922 |  |  | - |  |  | 6,922 |  |  | -
Obligations of U.S. states and political subdivision |  |  | 142,808 |  |  | - |  |  | 133,964 |  |  | 8,844
Corporate bonds and notes |  |  | 25,095 |  |  | - |  |  | 25,095 |  |  | -
Asset-backed securities |  |  | 3,480 |  |  | - |  |  | 3,480 |  |  | -
Certificates of deposit |  |  | 151 |  |  | - |  |  | 151 |  |  | -
Other securities |  |  | 157 |  |  | 157 |  |  | - |  |  | -
Total available-for-sale |  |  | 487,955 |  | $ | 157 |  | $ | 478,954 |  | $ | 8,844
Equity securities |  |  | 13,387 |  |  | 13,387 |  |  | - |  |  | -
Total assets |  | $ | 501,342 |  | $ | 13,544 |  | $ | 478,954 |  | $ | 8,844
Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Derivatives |  | $ | (2,119) |  | $ | - |  | $ | (2,119) |  | $ | -
Total liabilities |  | $ | (2,119) |  | $ | - |  | $ | (2,119) |  | $ | -
There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2021 and during the year ended December 31, 2020. Assets Measured at Fair Value on a Nonrecurring Basis The Company may be required periodically to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or impairment write-downs of individual assets. The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a nonrecurring basis as of September 30, 2021 and December 31, 2020. Loans Held-for-Sale: Residential mortgage loans, originated and intended for sale in the secondary market, are carried at the lower of aggregate cost or estimated fair value as determined by outstanding commitments from investors. For these loans originated and intended for sale, gains and losses on loan sales (sale proceeds minus carrying value) are recorded in other income and direct loan origination costs and fees are deferred at origination of the loan and are recognized in other income upon sale of the loan. Management obtains quotes or bids on all or parts of these loans directly from the purchasing financial institutions (Level 2). Other loans held-for-sale are carried at the lower of aggregate cost or estimated fair value. Fair value of these loans is determined based on the terms of the loan, such as interest rate, maturity date, reset term, as well as sales of similar assets (Level 3). 35 Table of Contents
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. Fair Value Measurements and Fair Value of Financial Instruments – (continued) Collateral Dependent Loans: The Company may record adjustments to the carrying value of loans based on fair value measurements, either as specific reserves or as partial charge-offs of the uncollectible portions of these loans. These adjustments also include certain impairment amounts for collateral dependent loans calculated in accordance with GAAP. Impairment amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated impairment amount applicable to that loan does not necessarily represent the fair value of the loan. Real estate collateral is valued using independent appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable by market participants. However, due to the substantial judgment applied and limited volume of activity as compared to other assets, fair value is based on Level 3 inputs. Estimates of fair value used for collateral supporting commercial loans generally are based on assumptions not observable in the marketplace and are also based on Level 3 inputs. For assets measured at fair value on a nonrecurring basis, the fair value measurements as of September 30, 2021 and December 31, 2020 are as follows:
|  |  |  |  | Fair Value Measurements at Reporting Date Using
|  |  |  |  | Quoted |  |  |  |  |  |
|  |  |  |  | Prices |  |  |  |  |  |
|  |  |  |  | in Active |  | Significant |  |  |
|  |  |  | Markets for |  | Other |  | Significant
|  |  |  | Identical |  | Observable |  | Unobservable
Assets measured at fair value on a nonrecurring |  | September 30, |  | Assets |  | Inputs |  | Inputs
basis: |  | 2021 |  | (Level 1) |  | (Level 2) |  | (Level 3)
Collateral dependent loans: |  |  |  |  | (dollars in thousands)
Commercial |  | $ | 12,966 |  | $ | - |  | $ | - |  | $ | 12,966
Commercial real estate |  |  | 16,407 |  |  | - |  |  | - |  |  | 16,407
Residential real estate |  |  | 2,251 |  |  | - |  |  | - |  |  | 2,251
Collateral dependent loans – Collateral dependent loans as of September 30, 2021 that required a valuation allowance were $48.2 million with a related valuation allowance of $16.6 million.
|  |  |  |  | Fair Value Measurements at Reporting Date Using
|  |  |  |  | Quoted |  |  |  |  |  |
|  |  |  |  | Prices |  |  |  |  |
|  |  |  |  | in Active |  | Significant |  |
|  |  |  |  | Markets for |  | Other |  | Significant
|  |  |  |  | Identical |  | Observable |  | Unobservable
Assets measured at fair value on a nonrecurring |  | December 31, |  | Assets |  | Inputs |  | Inputs
basis: |  | 2020 |  | (Level 1) |  | (Level 2) |  | (Level 3)
Impaired loans: |  |  |  |  | (dollars in thousands)
Commercial |  | $ | 10,751 |  | $ | - |  | $ | - |  | $ | 10,751
Commercial real estate |  |  | 1,393 |  |  | - |  |  | - |  |  | 1,393
Impaired loans – Impaired loans as of December 31, 2020 that required a valuation allowance were $26.5 million with a related valuation allowance of $14.3 million 36 Table of Contents
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. Fair Value Measurements and Fair Value of Financial Instruments – (continued) Assets Measured With Significant Unobservable Level 3 Inputs Recurring basis The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2021 and for the year ended December 31, 2020:
|  | Municipal |
|  | Securities |
|  | (dollars in thousands) |
Balance as of December 31, 2020 |  | $ | 8,844 |  |
Principal paydowns |  |  | (208 | ) |
Balance as of September 30, 2021 |  | $ | 8,636 |  |
|  | Municipal |
|  | Securities |
|  | (dollars in thousands) |
Balance as of December 31, 2019 |  | $ | 9,114 |  |
Principal paydowns |  |  | (270) |  |
Balance as of December 31, 2020 |  | $ | 8,844 |  |
The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020. The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy.
September 30, 2021 |  |  |  |  |  |  |  |  |  |
|  |  |  |  | Valuation |  | Unobservable |  |  |
|  | Fair Value |  | Techniques |  | Input |  | Rate
Securities available-for-sale: |  | (dollars in thousands)
Municipal securities |  | $ | 8,636 |  | Discounted cash flows |  | Discount rate |  | 2.9 | %
December 31, 2020 |  |  |  |  |  |  |  |  |  |
|  |  |  |  | Valuation |  | Unobservable |  |  |
|  | Fair Value |  | Techniques |  | Input |  | Rate
Securities available-for-sale: |  | (dollars in thousands)
Municipal securities |  | $ | 8,844 |  | Discounted cash flows |  | Discount rate |  | 2.9 | %
37 Table of Contents
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. Fair Value Measurements and Fair Value of Financial Instruments – (continued) Nonrecurring basis: The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a nonrecurring basis for the periods presented. The tables below provide quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy. September 30, 2021
|  |  |  |  | Valuation |  | Unobservable |  |
(dollars in thousands) |  | Fair Value |  | Techniques |  | Input |  | Range (weighted average)
Collateral dependent: |  |  |  |  |  |  |  |  |
Commercial |  | $ | 780 |  | Appraisals of collateral value |  | Comparable sales |  | 0% - 5% (2%)
Commercial |  | $ | 12,186 |  | Market approach (100) |  | Average transfer price as a price to unpaid principal balance |  | 48 – 53 (49)
Commercial real estate |  | $ | 16,407 |  | Appraisals of collateral value |  | Comparable sales |  | 0% - 25% (8%)
Residential real estate |  | $ | 2,251 |  | Appraisals of collateral value |  | Comparable sales |  | 1% - 15% (6%)
December 31, 2020
|  |  |  |  | Valuation |  | Unobservable |  |
(dollars in thousands) |  | Fair Value |  | Techniques |  | Input |  | Range (weighed average)
Impaired loans: |  |  |  |  |  |  |  |  |
Commercial |  | $ | 10,524 |  | Market approach (100%) |  | Average transfer price as a price to unpaid principal balance |  | 48 - 53 (49)
Commercial |  | $ | 227 |  | Appraisals of collateral value |  | Adjustment for comparable sales |  | 1% to +5% (+2%)
Commercial real estate |  | $ | 1,393 |  | Appraisals of collateral value |  | Adjustment for comparable sales |  | -25% to +20% (-8%)
38 Table of Contents
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. Fair Value Measurements and Fair Value of Financial Instruments – (continued) As of September 30, 2021 the fair value measurements presented are consistent with Topic 820, Fair Value Measurement, in which fair value represents exit price. The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 2021 and December 31, 2020:
|  |  |  |  |  |  |  | Fair Value Measurements
|  |  |  |  |  |  |  | Quoted |  |  |  |  |  |
|  |  |  |  |  |  |  | Prices in |  |  |  |  |  |
|  |  |  |  |  |  |  | Active |  | Significant |  |  |
|  |  |  |  |  |  |  | Markets for |  | Other |  | Significant
|  |  |  |  |  |  |  | Identical |  | Observable |  | Unobservable
|  | Carrying |  | Fair |  | Assets |  | Inputs |  | Inputs
|  | Amount |  | Value |  | (Level 1) |  | (Level 2) |  | (Level 3)
|  | (dollars in thousands)
September 30, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 413,195 |  | $ | 413,195 |  | $ | 413,195 |  | $ | - |  | $ | -
Securities available-for-sale |  |  | 462,884 |  |  | 462,884 |  |  | 1,020 |  |  | 453,228 |  |  | 8,636
Investment in restricted stocks |  |  | 18,106 |  |  | n/a |  |  | n/a |  |  | n/a |  |  | n/a
Equity securities |  |  | 13,700 |  |  | 13,700 |  |  | 11,709 |  |  | 1,991 |  |  | -
Net loans |  |  | 6,498,453 |  |  | 6,567,363 |  |  | - |  |  | - |  |  | 6,567,363
Derivatives |  |  | 1,296 |  |  | 1,296 |  |  | - |  |  | 1,296 |  |  | -
Accrued interest receivable |  |  | 33,610 |  |  | 33,610 |  |  | - |  |  | 1,356 |  |  | 32,254
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Noninterest-bearing deposits |  |  | 1,500,754 |  |  | 1,500,754 |  |  | 1,500,754 |  |  | - |  |  | -
Interest-bearing deposits |  |  | 4,897,584 |  |  | 4,899,141 |  |  | 3,675,673 |  |  | 1,223,468 |  |  | -
Borrowings |  |  | 253,225 |  |  | 255,099 |  |  | - |  |  | 255,099 |  |  | -
Subordinated debentures |  |  | 152,875 |  |  | 164,378 |  |  | - |  |  | 164,378 |  |  | -
Accrued interest payable |  |  | 2,879 |  |  | 2,879 |  |  | - |  |  | 2,879 |  |  | -
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 303,756 |  | $ | 303,756 |  | $ | 303,756 |  | $ | - |  | $ | -
Investment securities available-for-sale |  |  | 487,955 |  |  | 487,955 |  |  | 157 |  |  | 478,954 |  |  | 8,844
Restricted investment in bank stocks |  |  | 25,099 |  |  | n/a |  |  | n/a |  |  | n/a |  |  | n/a
Equity securities |  |  | 13,387 |  |  | 13,387 |  |  | 13,387 |  |  | - |  |  | -
Net loans |  |  | 6,157,081 |  |  | 6,244,037 |  |  | - |  |  | - |  |  | 6,244,037
Accrued interest receivable |  |  | 35,317 |  |  | 35,317 |  |  | - |  |  | 1,764 |  |  | 33,553
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Noninterest-bearing deposits |  |  | 1,339,108 |  |  | 1,339,108 |  |  | 1,339,108 |  |  | - |  |  | -
Interest-bearing deposits |  |  | 4,620,116 |  |  | 4,633,961 |  |  | 3,155,983 |  |  | 1,477,978 |  |  | -
Borrowings |  |  | 425,954 |  |  | 429,671 |  |  | - |  |  | 429,671 |  |  | -
Subordinated debentures |  |  | 202,648 |  |  | 214,113 |  |  | - |  |  | 214,113 |  |  | -
Derivatives |  |  | 2,119 |  |  | 2,119 |  |  | - |  |  | 2,119 |  |  | -
Accrued interest payable |  |  | 3,687 |  |  | 3,687 |  |  | - |  |  | 3,687 |  |  | -
39 Table of Contents
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. Fair Value Measurements and Fair Value of Financial Instruments – (continued) The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, considering the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. The fair value of commitments to originate loans is immaterial and not included in the tables above. Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values. Fair value estimates are based on existing balance sheet financial instruments, without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, there are certain significant assets and liabilities that are not considered financial assets or liabilities, such as deferred taxes, premises and equipment, and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. Management believes that reasonable comparability between financial institutions may not be likely, due to the wide range of permitted valuation techniques and numerous estimates which must be made, given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=123874694&loc=d3e19207-110258 + Details
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