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Fair Value Measurements | 3 Months Ended
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Mar. 31, 2023
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 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 March 31, 2023 and December 31, 2022, 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, or management’s judgment and estimation of value reported on older appraisals that are then adjusted based on recent market trends, and result in 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. Servicing assets - On a quarterly basis, the Company utilizes a third party service to evaluate servicing assets related to loans sold to unaffiliated parties with servicing retained, and result in a Level 3 classification. Servicing assets are assessed for impairment or increased obligation based on fair value at each reporting date. Other repossessed assets – Fair value of equipment from equipment financing agreements 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 March 31, 2023 and December 31, 2022, 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) |
March 31, 2023 |  |  |  |  |  |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Securities available for sale: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities |  | $ | 54,926 |  |  | $ | — |  |  | $ | — |  |  | $ | 54,926 |
U.S. government agency and sponsored agency obligations: |  |  |  |  |  |  |  |  |  |  |  |
Mortgage-backed securities - residential |  |  | — |  |  |  | 464,105 |  |  |  | — |  |  |  | 464,105 |
Mortgage-backed securities - commercial |  |  | — |  |  |  | 50,866 |  |  |  | — |  |  |  | 50,866 |
Collateralized mortgage obligations |  |  | — |  |  |  | 100,546 |  |  |  | — |  |  |  | 100,546 |
Debt securities |  |  | — |  |  |  | 140,368 |  |  |  | — |  |  |  | 140,368 |
Total U.S. government agency and sponsored agency obligations |  |  | — |  |  |  | 755,885 |  |  |  | — |  |  |  | 755,885 |
Municipal bonds-tax exempt |  |  | — |  |  |  | 67,890 |  |  |  | — |  |  |  | 67,890 |
Total securities available for sale |  | $ | 54,926 |  |  | $ | 823,775 |  |  | $ | — |  |  | $ | 878,701 |
Derivative financial instruments |  | $ | — |  |  | $ | 5,621 |  |  | $ | — |  |  | $ | 5,621 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Derivative financial instruments |  | $ | — |  |  | $ | 5,617 |  |  | $ | — |  |  | $ | 5,617 |
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Securities available for sale: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities |  | $ | 48,026 |  |  | $ | — |  |  | $ | — |  |  | $ | 48,026 |
U.S. government agency and sponsored agency obligations: |  |  |  |  |  |  |  |  |  |  |  |
Mortgage-backed securities - residential |  |  | — |  |  |  | 465,152 |  |  |  | — |  |  |  | 465,152 |
Mortgage-backed securities - commercial |  |  | — |  |  |  | 51,292 |  |  |  | — |  |  |  | 51,292 |
Collateralized mortgage obligations |  |  | — |  |  |  | 85,485 |  |  |  | — |  |  |  | 85,485 |
Debt securities |  |  | — |  |  |  | 138,499 |  |  |  | — |  |  |  | 138,499 |
Total U.S. government agency and sponsored agency obligations |  |  | — |  |  |  | 740,428 |  |  |  | — |  |  |  | 740,428 |
Municipal bonds-tax exempt |  |  | — |  |  |  | 65,384 |  |  |  | — |  |  |  | 65,384 |
Total securities available for sale |  | $ | 48,026 |  |  | $ | 805,812 |  |  | $ | — |  |  | $ | 853,838 |
Derivative financial instruments |  | $ | — |  |  | $ | 7,507 |  |  | $ | — |  |  | $ | 7,507 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Derivative financial instruments |  | $ | — |  |  | $ | 7,375 |  |  | $ | — |  |  | $ | 7,375 |
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis As of March 31, 2023 and December 31, 2022, 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) |
March 31, 2023 |  |  |  |  |  |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Collateral dependent loans (1) |  | $ | 10,191 |  |  | $ | — |  |  | $ | — |  |  | $ | 10,191 |
Other real estate owned |  |  | 117 |  |  |  | — |  |  |  | — |  |  |  | 117 |
Repossessed personal property |  |  | 629 |  |  |  | — |  |  |  | — |  |  |  | 629 |
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Collateral dependent loans (2) |  | $ | 2,694 |  |  | $ | — |  |  | $ | — |  |  | $ | 2,694 |
Other real estate owned |  |  | 117 |  |  |  | — |  |  |  | — |  |  |  | 117 |
Repossessed personal property |  |  | 467 |  |  |  | — |  |  |  | — |  |  |  | 467 |
Servicing assets |  |  | 7,176 |  |  |  | — |  |  |  | — |  |  |  | 7,176 |
(1) Consisted of real estate loans of $2.6 million and commercial and industrial loans of $7.6 million, which were secured by real estate and business assets. (2) Consisted of real estate loans of $2.7 million. The following table represents quantitative information about Level 3 fair value assumptions for assets measured at fair value on a non-recurring basis at March 31, 2023 and December 31, 2022:
|  | Fair Value |  |  | Valuation Techniques |  | Unobservable Input(s) |  | Range (Weighted Average) |
|  | (in thousands) |
March 31, 2023 |  |  |  |  |  |  |  |  |  |
Collateral dependent loans: |  |  |  |  |  |  |  |  |  |
Real estate loans: |  |  |  |  |  |  |  |  |  |
Commercial property |  |  |  |  |  |  |  |  |  |
Retail |  | $ | 1,883 |  |  | Market approach |  | Adjustments to market data |  | 5% to 25% / 16% | (1)
Other |  |  | 259 |  |  | Market approach |  | Adjustments to market data |  | (35)% to (10)% / (24)% | (1)
Residential |  |  | 487 |  |  | Market approach |  | Adjustments to market data |  | (13)% to 5% / (2)% | (1)
Total real estate loans |  |  | 2,629 |  |  |  |  |  |  |  |
Commercial and industrial loans |  |  | 7,562 |  |  | Market approach |  | Adjustments to market data |  | 10% to 15% / 11% | (1)
Total |  | $ | 10,191 |  |  |  |  |  |  |  |
Other real estate owned |  | $ | 117 |  |  | Market approach |  | Adjustments to market data |  | (10)% to 5% / (2)% | (1)
Repossessed personal property |  |  | 629 |  |  | Market approach |  | Adjustments to market data |  |  | (2)
December 31, 2022 |  |  |  |  |  |  |  |  |  |
Collateral dependent loans: |  |  |  |  |  |  |  |  |  |
Real estate loans: |  |  |  |  |  |  |  |  |  |
Commercial property |  |  |  |  |  |  |  |  |  |
Retail |  | $ | 1,930 |  |  | Market approach |  | Adjustments to market data |  | 5% to 25% / 16% | (1)
Other |  |  | 256 |  |  | Market approach |  | Adjustments to market data |  | (42)% to 3% / (24)% | (1)
Residential |  |  | 508 |  |  | Market approach |  | Adjustments to market data |  | (15)% to 3% / (1)% | (1)
Total real estate loans |  |  | 2,694 |  |  |  |  |  |  |  |
Total |  | $ | 2,694 |  |  |  |  |  |  |  |
Other real estate owned |  | $ | 117 |  |  | Market approach |  | Adjustments to market data |  | (20)% to 20% / (2)% | (1)
Repossessed personal property |  |  | 467 |  |  | Market approach |  | Adjustments to market data |  |  | (2)
Servicing assets |  |  | 7,176 |  |  | Market approach |  | Prepayment rate Discount rate |  | 11% to 17% / 16% 22% to 25% / 22% | (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 adjustments represent decreases. (2) The equipment is usually too small 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. (3) Fair value is based on a valuation model using the present value of estimated future cash flows, prepayment speeds, default rates, and discount rates. Servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into income over the period of the estimated future net servicing income of the underlying loans. 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 had concluded that the carrying amounts approximate fair value, the fair value estimates shown below were based on an exit price notion as of March 31, 2023, as required by ASU 2016-01. The financial instruments for which we had concluded that the carrying amounts approximate fair value include, cash and due from banks, accrued interest receivable and payable, and noninterest-bearing deposits. The estimated fair values of financial instruments were as follows:
|  | March 31, 2023 |
|  | Carrying |  |  | Fair Value |
|  | Amount |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
|  | (in thousands) |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 386,201 |  |  | $ | 386,201 |  |  | $ | — |  |  | $ | — |
Securities available for sale |  |  | 878,701 |  |  |  | 54,926 |  |  |  | 823,775 |  |  |  | — |
Loans held for sale |  |  | 3,652 |  |  |  | — |  |  |  | 3,653 |  |  |  | — |
Loans receivable, net of allowance for credit losses |  |  | 5,908,209 |  |  |  | — |  |  |  | — |  |  |  | 5,753,059 |
Accrued interest receivable |  |  | 19,004 |  |  |  | 19,004 |  |  |  | — |  |  |  | — |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Noninterest-bearing deposits |  |  | 2,334,083 |  |  |  | — |  |  |  | 2,334,083 |  |  |  | — |
Interest-bearing deposits |  |  | 3,866,955 |  |  |  | — |  |  |  | — |  |  |  | 3,870,056 |
Borrowings and subordinated debentures |  |  | 479,558 |  |  |  | — |  |  |  | 346,689 |  |  |  | 131,791 |
Accrued interest payable |  |  | 20,512 |  |  |  | 20,512 |  |  |  | — |  |  |  | — |
|  | December 31, 2022 |
|  | Carrying |  |  | Fair Value |
|  | Amount |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
|  | (in thousands) |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 352,421 |  |  | $ | 352,421 |  |  | $ | — |  |  | $ | — |
Securities available for sale |  |  | 853,838 |  |  |  | 48,026 |  |  |  | 805,812 |  |  |  | — |
Loans held for sale |  |  | 8,043 |  |  |  | — |  |  |  | 8,423 |  |  |  | — |
Loans receivable, net of allowance for credit losses |  |  | 5,895,610 |  |  |  | — |  |  |  | — |  |  |  | 5,808,190 |
Accrued interest receivable |  |  | 18,537 |  |  |  | 18,537 |  |  |  | — |  |  |  | — |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Noninterest-bearing deposits |  |  | 2,539,602 |  |  |  | — |  |  |  | 2,539,602 |  |  |  | — |
Interest-bearing deposits |  |  | 3,628,470 |  |  |  | — |  |  |  | — |  |  |  | 3,623,827 |
Borrowings and subordinated debentures |  |  | 479,409 |  |  |  | — |  |  |  | 345,867 |  |  |  | 126,828 |
Accrued interest payable |  |  | 7,792 |  |  |  | 7,792 |  |  |  | — |  |  |  | — |
The methods and assumptions used to estimate the fair value of each class of financial instruments for which it was practicable to estimate that value are explained below: Cash and due from banks – The carrying amounts of cash and due from banks approximate fair value due to the short-term nature of these instruments (Level 1). Securities – The fair value of securities, consisting of securities available for sale, is generally obtained from market bids for similar or identical securities, from independent securities brokers or dealers, or from other model-based valuation techniques described above (Level 1 and 2). Loans held for sale – Loans held for sale, representing the guaranteed portion of SBA loans, are carried at the lower of aggregate cost or fair market value, as determined based upon quotes, bids or sales contract prices (Level 2). Loans receivable, net of allowance for credit losses – The fair value of loans receivable is estimated based on the discounted cash flow approach. To estimate the fair value of the loans, certain loan characteristics such as account types, remaining terms, annual interest rates or coupons, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan-to-value ratios, loss exposures, and remaining balances are considered. Additionally, the Company’s prior charge-off rates and loss ratios as well as various other assumptions relating to credit, interest, and prepayment risks are used as part of valuing the loan portfolio. Subsequently, the loans were individually evaluated by sorting and pooling them based on loan types, credit risk grades, and payment types. Consistent with the requirements of ASU 2016-01 which was adopted by the Company on January 1, 2018, the fair value of the Company's loans receivable is considered to be an exit price notion as of March 31, 2023 (Level 3). The fair value of collateral dependent loans is estimated based on the net realizable fair value of the collateral or the observable market price of the most recent sale or quoted price from loans held for sale. The Company does not record loans at fair value on a recurring basis. Nonrecurring fair value adjustments to collateral dependent loans are recorded based on the current appraised value of the collateral (Level 3). Accrued interest receivable – The carrying amount of accrued interest receivable approximates its fair value (Level 1). Noninterest-bearing deposits – The fair value of noninterest-bearing deposits is the amount payable on demand at the reporting date (Level 2). Interest-bearing deposits – The fair value of interest-bearing deposits, such as savings accounts, money market checking, and certificates of deposit, is estimated based on discounted cash flows. The cash flows for non-maturity deposits, including savings accounts and money market checking, are estimated based on their historical decaying experiences. The discount rate used for fair valuation is based on interest rates currently being offered by the Bank on comparable deposits as to amount and term (Level 3). Borrowings and subordinated debentures – Borrowings consist of FHLB advances, subordinated debentures and other borrowings. Discounted cash flows based on current market rates for borrowings with similar remaining maturities are used to estimate the fair value of borrowings (Level 2 and 3). Accrued interest payable – The carrying amount of accrued interest payable approximates its fair value (Level 1).

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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 https://asc.fasb.org/extlink&oid=126976982&loc=d3e19207-110258 + Details
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