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Fair Value Measurements | 6 Months Ended
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Jun. 30, 2022
Fair Value Disclosures [Abstract] |
Fair Value Measurements | Fair Value Measurements The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 820, "Fair Value Measurements and Disclosures," establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: Level 1 Quoted prices in active exchange markets for identical assets or liabilities; also includes certain U.S. Treasury and other U.S. Government and agency securities actively traded in over-the-counter markets. Level 2 Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. Government and agency securities, corporate debt securities, derivative instruments, and residential mortgage loans held for sale. Level 3 Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for single dealer nonbinding quotes not corroborated by observable market data. This category generally includes certain private equity investments, retained interests from securitizations, and certain collateralized debt obligations. Assets and Liabilities Recorded at Fair Value on a Recurring Basis The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021.
|  |  |  | Significant |  | Significant |  |
|  |  |  | Other |  | Other |  |
|  |  |  | Observable |  | Unobservable |  |
|  | Quoted Prices |  | Inputs |  | Inputs |  | Total
(dollars in thousands) |  | (Level 1) |  | (Level 2) |  | (Level 3) |  | (Fair Value)
June 30, 2022 |  |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |  |
Investment securities available-for-sale: |  |  |  |  |  |  |  |
U.S treasury bonds |  | $ | — |  |  | $ | 47,081 |  |  | $ | — |  |  | $ | 47,081 |
U. S. agency securities |  | — |  |  | 698,057 |  |  | — |  |  | 698,057 |
Residential mortgage-backed securities |  | — |  |  | 885,689 |  |  | — |  |  | 885,689 |
Commercial mortgage-backed securities |  | — |  |  | 109,549 |  |  | — |  |  | 109,549 |
Municipal bonds |  | — |  |  | 12,932 |  |  | — |  |  | 12,932 |
Corporate bonds |  | — |  |  | 1,946 |  |  | — |  |  | 1,946 |
Loans held for sale |  | — |  |  | 13,814 |  |  | — |  |  | 13,814 |
Interest rate caps |  | — |  |  | 18,589 |  |  | — |  |  | 18,589 |
Mortgage banking derivatives |  | — |  |  | — |  |  | 254 |  |  | 254 |
Total assets measured at fair value on a recurring basis as of June 30, 2022 |  | $ | — |  |  | $ | 1,787,657 |  |  | $ | 254 |  |  | $ | 1,787,911 |
Liabilities: |  |  |  |  |  |  |  |
Credit risk participation agreements |  | $ | — |  |  | $ | 11 |  |  | $ | — |  |  | $ | 11 |
Interest rate caps |  | — |  |  | 17,662 |  |  | — |  |  | 17,662 |
Mortgage banking derivatives |  | — |  |  | — |  |  | 20 |  |  | 20 |
Total liabilities measured at fair value on a recurring basis as of June 30, 2022 |  | $ | — |  |  | $ | 17,673 |  |  | $ | 20 |  |  | $ | 17,693 |
December 31, 2021 |  |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |  |
Investment securities available-for-sale: |  |  |  |  |  |  |  |
U.S. treasury bonds |  | $ | — |  |  | $ | 49,458 |  |  | $ | — |  |  | $ | 49,458 |
U. S. agency securities |  | — |  |  | 622,387 |  |  | — |  |  | 622,387 |
Mortgage-backed securities |  | — |  |  | 1,677,673 |  |  | — |  |  | 1,677,673 |
Municipal bonds |  | — |  |  | 145,431 |  |  | — |  |  | 145,431 |
Corporate bonds |  | — |  |  | 116,459 |  |  | 12,000 |  |  | 128,459 |
Loans held for sale |  | — |  |  | 47,218 |  |  | — |  |  | 47,218 |
Interest rate caps |  | — |  |  | 5,197 |  |  | — |  |  | 5,197 |
Mortgage banking derivatives |  | — |  |  | — |  |  | 636 |  |  | 636 |
Total assets measured at fair value on a recurring basis as of December 31, 2021 |  | $ | — |  |  | $ | 2,663,823 |  |  | $ | 12,636 |  |  | $ | 2,676,459 |
Liabilities: |  |  |  |  |  |  |  |
Credit risk participation agreements |  | $ | — |  |  | $ | 47 |  |  | $ | — |  |  | $ | 47 |
Interest rate caps |  | — |  |  | 5,147 |  |  | — |  |  | 5,147 |
Total liabilities measured at fair value on a recurring basis as of December 31, 2021 |  | $ | — |  |  | $ | 5,194 |  |  | $ | — |  |  | $ | 5,194 |
Investment securities available-for-sale: Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange. Level 2 securities include U.S. treasury bonds, U.S. agency debt securities, mortgage-backed securities issued by Government Sponsored Entities and municipal bonds. Securities classified as Level 3 include securities in less liquid markets, the carrying amounts approximate the fair value. Loans held for sale: The Company has elected to carry loans held for sale at fair value. This election reduces certain timing differences in the Consolidated Statement of Income and better aligns with the management of the portfolio from a business perspective. Fair value is derived from secondary market quotations for similar instruments. Gains and losses on sales of residential mortgage loans are recorded as a component of noninterest income in the Consolidated Statements of Income. Gains and losses on sales of multifamily FHA securities are recorded as a component of noninterest income in the Consolidated Statements of Income. As such, the Company classifies loans subjected to fair value adjustments as Level 2 valuation. The following tables summarize the difference between the aggregate fair value and the aggregate unpaid principal balance for loans held for sale measured at fair value as of June 30, 2022 and December 31, 2021.
|  |  |  | Aggregate Unpaid |  |
(dollars in thousands) |  | Fair Value |  | Principal Balance |  | Difference
June 30, 2022 |  |  |  |  |  |
Loans held for sale |  | $ | 13,814 |  |  | $ | 13,828 |  |  | $ | (14) |
December 31, 2021 |  |  |  |  |  |
Loans held for sale |  | $ | 47,218 |  |  | $ | 46,623 |  |  | $ | 595 |
There were no residential mortgage loans held for sale that were 90 or more days past due or on nonaccrual status as of June 30, 2022 or December 31, 2021. Credit risk participation agreements: The Company enters into credit risk participation agreements ("RPAs") with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower's performance related to interest rate derivative contracts. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers' credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities. Accordingly, RPAs fall within Level 2. Interest rate caps: The Company entered into an interest rate cap agreement ("cap") with an institutional counterparty, under which the Company will receive cash if and when market rates exceed the cap's strike rate. The fair value of the cap is calculated by determining the total expected asset or liability exposure of the derivatives. Total expected exposure incorporates both the current and potential future exposure of the derivative, derived from using observable inputs, such as yield curves and voltilities. Accordingly, the cap falls within Level 2. Mortgage banking derivatives for loans settled on a mandatory basis: The Company relied on a third-party pricing service to value its mortgage banking derivative financial assets and liabilities, which the Company classifies as a Level 3 valuation. The external valuation model to estimate the fair value of its interest rate lock commitments to originate residential mortgage loans held for sale includes grouping the interest rate lock commitments by interest rate and terms, applying an estimated pull-through rate based on historical experience, and then multiplying by quoted investor prices determined to be reasonably applicable to the loan commitment groups based on interest rate, terms, and rate lock expiration dates of the loan commitment groups. The Company also relies on an external valuation model to estimate the fair value of its forward commitments to sell residential mortgage loans (i.e. an estimate of what the Company would receive or pay to terminate the forward delivery contract based on market prices for similar financial instruments), which includes matching specific terms and maturities of the forward commitments against applicable investor pricing. Mortgage banking derivative for loans settled best efforts basis: The significant unobservable input (Level 3) used in the fair value measurement of the Company's interest rate lock commitments is the pull through ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. An increase in the pull through ratio (i.e. higher percentage of loans are estimated to close) will increase the gain or loss. The pull through ratio is largely dependent on the loan processing stage that a loan is currently in. The pull through rate is computed by the Company's secondary marketing consultant using historical data and the ratio is periodically reviewed by the Company for reasonableness. The following is a reconciliation of activity for assets measured at fair value based on Significant Other Unobservable Inputs (Level 3):
|  | Investment |  |  |  |
|  | Securities |  | Mortgage Banking |  |
(dollars in thousands) |  | Available-for-Sale |  | Derivatives |  | Total
Assets: |  |  |  |  |  |
Beginning balance at January 1, 2022 |  | $ | 12,000 |  |  | $ | 636 |  |  | $ | 12,636 |
Unrealized loss included in earnings |  | — |  |  | (382) |  |  | (382) |
Reclassified to investment securities held-to-maturity |  | (12,000) |  |  | — |  |  | (12,000) |
Ending balance at June 30, 2022 |  | $ | — |  |  | $ | 254 |  |  | $ | 254 |
Liabilities: |  |  |  |  |  |
Beginning balance at January 1, 2022 |  |  |  | $ | — |  |  | $ | — |
Unrealized loss included in earnings |  |  |  | (20) |  |  | (20) |
Ending balance at June 30, 2022 |  |  |  | $ | (20) |  |  | $ | (20) |
|  | Investment |  |  |  |
|  | Securities |  | Mortgage Banking |  |
(dollars in thousands) |  | Available-for-Sale |  | Derivatives |  | Total
Assets: |  |  |  |  |  |
Beginning balance at January 1, 2021 |  | $ | 1,500 |  |  | $ | 5,213 |  |  | $ | 6,713 |
Realized loss included in earnings |  | — |  |  | (4,577) |  |  | (4,577) |
Reclass Level 2 to Level 3 |  | 12,000 |  |  | — |  |  | 12,000 |
Principal redemption |  | (1,500) |  |  | — |  |  | (1,500) |
Ending balance at December 31, 2021 |  | $ | 12,000 |  |  | $ | 636 |  |  | $ | 12,636 |
For Level 3 assets measured at fair value on a recurring or nonrecurring basis as of June 30, 2022 and December 31, 2021, the significant unobservable inputs used in the fair value measurements were as follows:
|  |  |  | June 30, 2022 |  | December 31, 2021
(dollars in thousands) |  | Valuation Technique |  | Description |  | Range |  | Weighted Average (1) |  | Fair Value |  | Weighted Average (1) |  | Fair Value
Mortgage banking derivatives |  | Pricing Model |  | Pull Through Rate |  | 69.6% - 75.5% |  | 74.97 | % |  | $ | 254 |  |  | 86.40 | % |  | $ | 636 |
(1) Unobservable inputs for mortgage banking derivatives were weighted by loan amount. Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis The Company measures certain assets at fair value on a nonrecurring basis and the following is a general description of the methods used to value such assets. At June 30, 2022, substantially all of the Company's individually evaluated loans were evaluated based upon the fair value of the collateral. In accordance with ASC Topic 820, individually evaluated loans where an allowance is established based on the fair value of collateral, i.e. those that are collateral dependent, require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3. Other real estate owned: Other real estate owned is initially recorded at fair value less estimated selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management's estimation of the value of the collateral, which the Company classifies as a Level 3 valuation. Assets measured at fair value on a nonrecurring basis are included in the table below:
|  |  |  | Significant |  | Significant |  |
|  |  |  | Other |  | Other |  |
|  |  |  | Observable |  | Unobservable |  |
|  | Quoted Prices |  | Inputs |  | Inputs |  | Total
(dollars in thousands) |  | (Level 1) |  | (Level 2) |  | (Level 3) |  | (Fair Value)
June 30, 2022 |  |  |  |  |  |  |  |
Collateral dependent loans |  |  |  |  |  |  |  |
Commercial |  | $ | — |  |  | $ | — |  |  | $ | 7,700 |  |  | $ | 7,700 |
Income producing - commercial real estate |  | — |  |  | — |  |  | 7,844 |  |  | 7,844 |
Owner occupied - commercial real estate |  | — |  |  | — |  |  | 27 |  |  | 27 |
Real estate mortgage - residential |  | — |  |  | — |  |  | 2,941 |  |  | 2,941 |
Home equity |  | — |  |  | — |  |  | 308 |  |  | 308 |
Other real estate owned |  | — |  |  | — |  |  | 1,487 |  |  | 1,487 |
Total assets measured at fair value on a nonrecurring basis as of June 30, 2022 |  | $ | — |  |  | $ | — |  |  | $ | 20,307 |  |  | $ | 20,307 |
December 31, 2021 |  |  |  |  |  |  |  |
Collateral dependent loans |  |  |  |  |  |  |  |
Commercial |  | $ | — |  |  | $ | — |  |  | $ | 8,121 |  |  | $ | 8,121 |
PPP loans |  | — |  |  | — |  |  | 1,365 |  |  | 1,365 |
Income producing - commercial real estate |  | — |  |  | — |  |  | 17,415 |  |  | 17,415 |
Owner occupied - commercial real estate |  | — |  |  | — |  |  | 42 |  |  | 42 |
Real estate mortgage - residential |  | — |  |  | — |  |  | 1,779 |  |  | 1,779 |
Construction - commercial and residential |  | — |  |  | — |  |  | 3,093 |  |  | 3,093 |
Home equity |  | — |  |  | — |  |  | 366 |  |  | 366 |
Other real estate owned |  | — |  |  | — |  |  | 1,635 |  |  | 1,635 |
Total assets measured at fair value on a nonrecurring basis as of December 31, 2021 |  | $ | — |  |  | $ | — |  |  | $ | 33,816 |  |  | $ | 33,816 |
Fair Value of Financial Instruments The Company discloses fair value information about financial instruments for which it is practicable to estimate the value, whether or not such financial instruments are recognized on the balance sheet. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by quoted market price, if one exists. Quoted market prices, if available, are shown as estimates of fair value. Because no quoted market prices exist for a portion of the Company's financial instruments, the fair value of such instruments has been derived based on management's assumptions with respect to future economic conditions, the amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimates. Accordingly, the net realizable value could be materially different from the estimates presented below. In addition, the estimates are only indicative of individual financial instrument values and should not be considered an indication of the fair value of the Company taken as a whole. The estimated fair value of the Company's financial instruments at June 30, 2022 and December 31, 2021 are as follows:
|  |  |  |  |  | Fair Value Measurements
|  |  |  |  |  | Quoted Prices (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
|  | Carrying |  |  |  |  |
(dollars in thousands) |  | Value |  | Fair Value |  |  |
June 30, 2022 |  |  |  |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 13,132 |  |  | $ | 13,132 |  |  | $ | 13,132 |  |  | $ | — |  |  | $ | — |
Federal funds sold |  | $ | 42,697 |  |  | $ | 42,697 |  |  | $ | — |  |  | $ | 42,697 |  |  | $ | — |
Interest bearing deposits with other banks |  | $ | 369,337 |  |  | $ | 369,337 |  |  | $ | — |  |  | $ | 369,337 |  |  | $ | — |
Investment securities available-for-sale |  | $ | 1,755,254 |  |  | $ | 1,755,254 |  |  | $ | — |  |  | $ | 1,755,254 |  |  | $ | — |
Investment securities held-to-maturity |  | $ | 1,143,632 |  |  | $ | 1,084,706 |  |  | $ | — |  |  | $ | 1,084,706 |  |  | $ | — |
Federal Reserve and Federal Home Loan Bank stock |  | $ | 33,990 |  |  | $ | 33,990 |  |  | $ | — |  |  | $ | 33,990 |  |  | $ | — |
Loans held for sale |  | $ | 13,814 |  |  | $ | 13,814 |  |  | $ | — |  |  | $ | 13,814 |  |  | $ | — |
Loans |  | $ | 7,082,021 |  |  | $ | 6,972,568 |  |  | $ | — |  |  | $ | — |  |  | $ | 6,972,568 |
Annuity investment |  | $ | 13,907 |  |  | $ | 13,907 |  |  | $ | — |  |  | $ | 13,907 |  |  | $ | — |
Mortgage banking derivatives |  | $ | 254 |  |  | $ | 254 |  |  | $ | — |  |  | $ | — |  |  | $ | 254 |
Interest rate caps |  | $ | 18,589 |  |  | $ | 18,589 |  |  | $ | — |  |  | $ | 18,589 |  |  | $ | — |
Liabilities |  |  |  |  |  |  |  |  |  |
Noninterest bearing deposits |  | $ | 2,831,934 |  |  | $ | 2,831,934 |  |  | $ | — |  |  | $ | 2,831,934 |  |  | $ | — |
Interest bearing deposits |  | $ | 5,726,611 |  |  | $ | 5,726,611 |  |  | $ | — |  |  | $ | 5,726,611 |  |  | $ | — |
Time deposits |  | $ | 613,073 |  |  | $ | 610,373 |  |  | $ | — |  |  | $ | 610,373 |  |  | $ | — |
Customer repurchase agreements |  | $ | 26,539 |  |  | $ | 26,539 |  |  | $ | — |  |  | $ | 26,539 |  |  | $ | — |
Borrowings |  | $ | 349,732 |  |  | $ | 350,557 |  |  | $ | — |  |  | $ | 350,557 |  |  | $ | — |
Mortgage banking derivatives |  | $ | 20 |  |  | $ | 20 |  |  | $ | — |  |  | $ | — |  |  | $ | 20 |
Credit risk participation agreement |  | $ | 11 |  |  | $ | 11 |  |  | $ | — |  |  | $ | 11 |  |  | $ | — |
Interest rate caps |  | $ | 17,662 |  |  | $ | 17,662 |  |  | $ | — |  |  | $ | 17,662 |  |  | $ | — |
December 31, 2021 |  |  |  |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 12,886 |  |  | $ | 12,886 |  |  | $ | 12,886 |  |  | $ | — |  |  | $ | — |
Federal funds sold |  | $ | 20,391 |  |  | $ | 20,391 |  |  | $ | — |  |  | $ | 20,391 |  |  | $ | — |
Interest bearing deposits with other banks |  | $ | 1,680,945 |  |  | $ | 1,680,945 |  |  | $ | — |  |  | $ | 1,680,945 |  |  | $ | — |
Investment securities |  | $ | 2,623,408 |  |  | $ | 2,623,408 |  |  | $ | — |  |  | $ | 2,611,408 |  |  | $ | 12,000 |
Federal Reserve and Federal Home Loan Bank stock |  | $ | 34,153 |  |  | $ | 34,153 |  |  | $ | — |  |  | $ | 34,153 |  |  | $ | — |
Loans held for sale |  | $ | 47,218 |  |  | $ | 47,218 |  |  | $ | — |  |  | $ | 47,218 |  |  | $ | — |
Loans |  | $ | 7,065,598 |  |  | $ | 6,930,929 |  |  | $ | — |  |  | $ | — |  |  | $ | 6,930,929 |
Mortgage banking derivative |  | $ | 636 |  |  | $ | 636 |  |  | $ | — |  |  | $ | — |  |  | $ | 636 |
Interest rate caps |  | $ | 5,197 |  |  | $ | 5,197 |  |  | $ | — |  |  | $ | 5,197 |  |  | $ | — |
Liabilities |  |  |  |  |  |  |  |  |  |
Noninterest bearing deposits |  | $ | 3,277,956 |  |  | $ | 3,277,956 |  |  | $ | — |  |  | $ | 3,277,956 |  |  | $ | — |
Interest bearing deposits |  | $ | 5,974,502 |  |  | $ | 5,974,502 |  |  | $ | — |  |  | $ | 5,974,502 |  |  | $ | — |
Time deposits |  | $ | 729,082 |  |  | $ | 736,001 |  |  | $ | — |  |  | $ | 736,001 |  |  | $ | — |
Customer repurchase agreements |  | $ | 23,918 |  |  | $ | 23,918 |  |  | $ | — |  |  | $ | 23,918 |  |  | $ | — |
Borrowings |  | $ | 369,670 |  |  | $ | 374,326 |  |  | $ | — |  |  | $ | 374,326 |  |  | $ | — |
Credit risk participation agreements |  | $ | 47 |  |  | $ | 47 |  |  | $ | — |  |  | $ | 47 |  |  | $ | — |
Interest rate caps |  | $ | 5,147 |  |  | $ | 5,147 |  |  | $ | — |  |  | $ | 5,147 |  |  | $ | — |

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- Definition The entire disclosure of the fair value measurement of assets and liabilities, which includes financial instruments measured at fair value that are classified in shareholders' equity, which may be measured on a recurring or nonrecurring basis. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI https://asc.fasb.org/topic&trid=2155941 + Details
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