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Fair Value Measurements | 9 Months Ended
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Sep. 30, 2021
Fair Value Disclosures [Abstract] |
Fair Value Measurements | Note 11 — Fair Value Measurements Fair Value Measurements ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy, and expands disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an 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 three-level fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are defined as follows:
| • | Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
| • | Level 2 - Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
| • | Level 3 - Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Fair value is used on a recurring basis for certain assets and liabilities in which fair value is the primary basis of accounting. Additionally, fair value is used on a non-recurring basis to evaluate assets or liabilities for impairment or for disclosure purposes. We record securities available for sale at fair value on a recurring basis. Certain other assets, such as loans held for sale, impaired loans, OREO, and core deposit intangible, are recorded at fair value on a non-recurring basis. Non-recurring fair value measurements typically involve assets that are periodically evaluated for impairment and for which any impairment is recorded in the period in which the re-measurement is performed. The following methods and assumptions were used to estimate the fair value of each class of financial instrument below: Securities available for sale - The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities, or other model-based valuation techniques requiring observable inputs other than quoted prices such as yield curve, prepayment speeds, and default rates. Level 1 securities include U.S. Treasury securities that are traded on an active exchange or by dealers or brokers in active over-the-counter markets. The fair value of these securities is determined by quoted prices on an active exchange or over-the-counter market. Level 2 securities primarily include U.S. government agency and sponsored agency mortgage-backed securities, collateralized mortgage obligations and debt securities as well as municipal bonds in markets that are active. In determining the fair value of the securities categorized as Level 2, we obtain reports from nationally recognized broker-dealers detailing the fair value of each investment security held as of each reporting date. The broker-dealers use prices obtained from nationally recognized pricing services to value our fixed income securities. The fair value of the municipal securities is determined based on pricing data provided by nationally recognized pricing services. We review the prices obtained for reasonableness based on our understanding of the marketplace, and also consider any credit issues related to the bonds. As we have not made any adjustments to the market quotes provided to us and as they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy. Level 3 securities are instruments that are not traded in the market. As such, no observable market data for the instrument is available, which necessitates the use of significant unobservable inputs. Derivatives – The fair values of derivatives are 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 rates, 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. Loans held for sale - Loans held for sale includes the guaranteed portion of SBA 7(a) loans and second draw PPP loans carried at the lower of cost or fair value. Management obtains quotes, bids or pricing indication sheets on all or part of the loans directly from the purchasing financial institutions. Premiums received or to be received on the quotes, bids or pricing indication sheets are indicative of the fact that cost is lower than fair value. At September 30, 2021 and December 31, 2020, the entire balance of loans held for sale was recorded at its cost. We record loans held for sale on a nonrecurring basis with Level 2 inputs. Nonperforming loans – Nonaccrual loans receivable and loans 90-days past due and still accruing interest are considered nonperforming for reporting purposes and are measured and recorded at fair value on a non-recurring basis. All nonperforming loans with a carrying balance over $250,000 are individually evaluated for the amount of impairment, if any. Nonperforming loans with a carrying balance of $250,000 or less are evaluated collectively. However, from time to time, nonrecurring fair value adjustments to collateral dependent nonperforming loans are recorded based on either the current appraised value of the collateral, a Level 2 measurement, or management’s judgment and estimation of value reported on older appraisals that are then adjusted based on recent market trends, a Level 3 measurement. OREO - Fair value of OREO is based primarily on third party appraisals, less costs to sell and result in a Level 3 classification of the inputs for determining fair value. Appraisals are required annually and may be updated more frequently as circumstances require and the fair value adjustments are made to OREO based on the updated appraised value of the property. Other repossessed assets – Fair value of equipment from leasing contracts is based primarily on a third party valuation service, less costs to sell and result in a Level 3 classification of the inputs for determining fair value. Valuations are required at the time the asset is repossessed and may be subsequently updated periodically due to the Company’s short-term possession of the asset prior to sale or as circumstances require and the fair value adjustments are made to the asset based on its value prior to sale. Assets and Liabilities Measured at Fair Value on a Recurring Basis As of September 30, 2021 and December 31, 2020, assets and liabilities measured at fair value on a recurring basis are as follows:
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  |  |  |
|  |  |  |  |  | Significant |  |  |  |  |  |  |  |  |
|  |  |  |  |  | Observable |  |  |  |  |  |  |  |  |
|  | Quoted Prices in |  |  | Inputs with No |  |  |  |  |  |  |  |  |
|  | Active Markets |  |  | Active Market |  |  | Significant |  |  |  |  |
|  | for Identical |  |  | with Identical |  |  | Unobservable |  |  |  |  |
|  | Assets |  |  | Characteristics |  |  | Inputs |  |  | Total Fair Value |
|  | (in thousands) |
September 30, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Securities available for sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities |  | $ | 4,945 |  |  | $ | — |  |  | $ | — |  |  | $ | 4,945 |
U.S. government agency and sponsored agency obligations: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage-backed securities |  |  | — |  |  |  | 636,062 |  |  |  | — |  |  |  | 636,062 |
Collateralized mortgage obligations |  |  | — |  |  |  | 99,883 |  |  |  | — |  |  |  | 99,883 |
Debt securities |  |  | — |  |  |  | 98,436 |  |  |  | — |  |  |  | 98,436 |
Total U.S. government agency and sponsored agency obligations |  |  | — |  |  |  | 834,381 |  |  |  | — |  |  |  | 834,381 |
Municipal bonds-tax exempt |  |  | — |  |  |  | 67,670 |  |  |  | — |  |  |  | 67,670 |
Total securities available for sale |  | $ | 4,945 |  |  | $ | 902,051 |  |  | $ | — |  |  | $ | 906,996 |
Derivative financial instruments |  | $ | — |  |  | $ | 800 |  |  | $ | — |  |  | $ | 800 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivative financial instruments |  | $ | — |  |  | $ | 769 |  |  | $ | — |  |  | $ | 769 |
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Securities available for sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities |  | $ | 10,132 |  |  | $ | — |  |  | $ | — |  |  | $ | 10,132 |
U.S. government agency and sponsored agency obligations: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage-backed securities |  |  | — |  |  |  | 519,241 |  |  |  | — |  |  |  | 519,241 |
Collateralized mortgage obligations |  |  | — |  |  |  | 133,601 |  |  |  | — |  |  |  | 133,601 |
Debt securities |  |  | — |  |  |  | 90,807 |  |  |  | — |  |  |  | 90,807 |
Total U.S. government agency and sponsored agency obligations |  |  | — |  |  |  | 743,649 |  |  |  | — |  |  |  | 743,649 |
Total securities available for sale |  | $ | 10,132 |  |  | $ | 743,649 |  |  | $ | — |  |  | $ | 753,781 |
Derivative financial instruments |  | $ | — |  |  | $ | 1,088 |  |  | $ | — |  |  | $ | 1,088 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivative financial instruments |  | $ | — |  |  | $ | 1,149 |  |  | $ | — |  |  | $ | 1,149 |
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis As of September 30, 2021 and December 31, 2020, assets and liabilities measured at fair value on a non-recurring basis are as follows:
|  |  |  |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
|  |  |  |  |  |  |  |  |  | Significant |  |  |  |  |
|  |  |  |  |  |  |  |  |  | Observable |  |  |  |  |
|  |  |  |  |  | Quoted Prices in |  |  | Inputs With No |  |  |  |  |
|  |  |  |  |  | Active Markets |  |  | Active Market |  |  | Significant |
|  |  |  |  |  | for Identical |  |  | With Identical |  |  | Unobservable |
|  | Total |  |  | Assets |  |  | Characteristics |  |  | Inputs |
|  | (in thousands) |
September 30, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateral dependent loans (1) |  | $ | 12,325 |  |  | $ | — |  |  | $ | — |  |  | $ | 12,325 |
Other real estate owned |  |  | 675 |  |  |  | — |  |  |  | — |  |  |  | 675 |
Repossessed personal property |  |  | 180 |  |  |  | — |  |  |  | — |  |  |  | 180 |
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateral dependent loans (2) |  | $ | 63,114 |  |  | $ | — |  |  | $ | — |  |  | $ | 63,114 |
Other real estate owned |  |  | 2,360 |  |  |  | — |  |  |  | — |  |  |  | 2,360 |
Repossessed personal property |  |  | 857 |  |  |  | — |  |  |  | — |  |  |  | 857 |
(1) | Consisted of real estate loans of $12.3 million.
(2) | Consisted of real estate loans of $63.1 million and commercial and industrial loans of $41,000.
The following table represents quantitative information about Level 3 fair value assumptions for assets measured at fair value on a non-recurring basis at September 30, 2021 and December 31, 2020:
|  | Fair Value |  |  | Valuation Techniques |  | Unobservable Input(s) |  | Range (Weighted Average) |
|  | (in thousands) |
September 30, 2021 |  |  |  |  |  |  |  |  |  |  |
Collateral dependent loans: |  |  |  |  |  |  |  |  |  |  |
Real estate loans: |  |  |  |  |  |  |  |  |  |  |
Commercial property |  |  |  |  |  |  |  |  |  |  |
Retail |  | $ | 2,628 |  |  | Market approach |  | Market data comparison |  | (28)% to 23% / (6)% |
Other |  |  | 128 |  |  | Market approach |  | Market data comparison |  | (10)% to 5% / (3)% |
Construction |  |  | 7,046 |  |  | Market approach |  | Market data comparison |  | (20)% to 10% / (10)% |
Residential/consumer loans |  |  | 2,523 |  |  | Market approach |  | Market data comparison |  | (20)% to 8% / (15)% |
Total real estate loans |  |  | 12,325 |  |  |  |  |  |  |  |
Total |  | $ | 12,325 |  |  |  |  |  |  |  |
Other real estate owned |  | $ | 675 |  |  | Market approach |  | Market data comparison |  | (20)% to (5)% / (12)% |
Repossessed personal property |  |  | 180 |  |  | Market approach |  | Market data comparison |  | (3) |
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |
Collateral dependent loans: |  |  |  |  |  |  |  |  |  |  |
Real estate loans: |  |  |  |  |  |  |  |  |  |  |
Commercial property |  |  |  |  |  |  |  |  |  |  |
Retail |  | $ | 6,330 |  |  | Market approach |  | Market data comparison |  | (45)% to 35% / 14% |
Hospitality |  |  | 20,612 |  |  | Market approach |  | Market data comparison |  | (2) |
Other |  |  | 8,410 |  |  | Market approach |  | Market data comparison |  | (55)% to 34% / 15% (1) |
Construction |  |  | 24,854 |  |  | Market approach |  | Market data comparison |  | (20)% to 12% / (8)% |
Residential/consumer loans |  |  | 2,867 |  |  | Market approach |  | Market data comparison |  | (13)% to 15% / 6% (1) |
Total real estate loans |  |  | 63,073 |  |  |  |  |  |  |  |
Commercial and industrial loans: |  |  |  |  |  |  |  |  |  |  |
Commercial lines of credit |  |  | 41 |  |  | Market approach |  | Market data comparison |  | (9)% to 15% / 6% (1) |
Total |  | $ | 63,114 |  |  |  |  |  |  |  |
Other real estate owned |  | $ | 2,360 |  |  | Market approach |  | Market data comparison |  | (35)% to 15% / (14)% |
Repossessed personal property |  |  | 857 |  |  | Market approach |  | Market data comparison |  | (3) |
(1) | Appraisal reports utilize a combination of valuation techniques including a market approach, where prices and other relevant information generated by market transactions involving similar or comparable properties are used to determine the appraised value. Appraisals may include an ‘as is’ and ‘upon completion’ valuation scenarios. Adjustments are routinely made in the appraisal process by third-party appraisers to adjust for differences between the comparable sales and income data. Adjustments also result from the consideration of relevant economic and demographic factors with the potential to affect property values. Also, prospective values are based on the market conditions which exist at the date of inspection combined with informed forecasts based on current trends in supply and demand for the property types under appraisal. Positive adjustments disclosed in this table represent increases to the sales comparison and negative adjustment represent decreases.
(2) | No discount weighted average range available given primary valuation methodology is via discounted cash flow analysis (DCF) for going concern properties.
(3) | The equipment is usually too low in value to use a professional appraisal service. The values are determined internally using a combination of auction values, vendor recommendations and sales comparisons depending on the equipment type. Some highly commoditized equipment, such as commercial trucks have services that provide industry values.
ASC 825, Financial Instruments, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured on a recurring basis or non-recurring basis are discussed above. The estimated fair value of financial instruments has been determined by using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data in order to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825), among other provisions, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. Other than certain financial instruments for which we have concluded that the carrying amounts approximate fair value, the fair value estimates shown below are based on an exit price notion as of September 30, 2021, as required by ASU 2016-01. The financial instruments for which we have concluded that the carrying amounts approximate fair value include, cash and due from banks, accrued interest receivable and payable, and noninterest-bearing deposits. The fair values of off-balance sheet items are based upon the difference between the current value of similar loans and the price at which the Bank has committed to make the loans. The estimated fair values of financial instruments were as follows:
|  | September 30, 2021 |
|  | Carrying |  |  | Fair Value |
|  | Amount |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
|  | (in thousands) |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 824,347 |  |  | $ | 824,347 |  |  | $ | — |  |  | $ | — |
Securities available for sale |  |  | 906,996 |  |  |  | 4,945 |  |  |  | 902,051 |  |  |  | — |
Loans held for sale |  |  | 17,881 |  |  |  | — |  |  |  | 19,937 |  |  |  | — |
Loans receivable, net of allowance for credit losses |  |  | 4,782,252 |  |  |  | — |  |  |  | — |  |  |  | 4,774,003 |
Accrued interest receivable |  |  | 11,943 |  |  |  | 11,943 |  |  |  | — |  |  |  | — |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Noninterest-bearing deposits |  |  | 2,548,591 |  |  |  | — |  |  |  | 2,548,591 |  |  |  | — |
Interest-bearing deposits |  |  | 3,180,945 |  |  |  | — |  |  |  | — |  |  |  | 3,180,790 |
Borrowings and subordinated debentures |  |  | 352,344 |  |  |  | — |  |  |  | 137,991 |  |  |  | 211,880 |
Accrued interest payable |  |  | 1,235 |  |  |  | 1,235 |  |  |  | — |  |  |  | — |
|  | December 31, 2020 |
|  | Carrying |  |  | Fair Value |
|  | Amount |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
|  | (in thousands) |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 391,849 |  |  | $ | 391,849 |  |  | $ | — |  |  | $ | — |
Securities available for sale |  |  | 753,781 |  |  |  | 10,132 |  |  |  | 743,649 |  |  |  | — |
Loans held for sale |  |  | 8,568 |  |  |  | — |  |  |  | 9,270 |  |  |  | — |
Loans receivable, net of allowance for credit losses |  |  | 4,789,742 |  |  |  | — |  |  |  | — |  |  |  | 4,755,302 |
Accrued interest receivable |  |  | 16,363 |  |  |  | 16,363 |  |  |  | — |  |  |  | — |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Noninterest-bearing deposits |  |  | 1,898,766 |  |  |  | — |  |  |  | 1,898,766 |  |  |  | — |
Interest-bearing deposits |  |  | 3,376,242 |  |  |  | — |  |  |  | — |  |  |  | 3,380,179 |
Borrowings and subordinated debentures |  |  | 268,972 |  |  |  | — |  |  |  | 151,714 |  |  |  | 118,809 |
Accrued interest payable |  |  | 4,564 |  |  |  | 4,564 |  |  |  | — |  |  |  | — |

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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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