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Fair Value | 9 Months Ended
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Sep. 30, 2021
Fair Value Disclosures [Abstract] |
Fair Value | Note 11 – Fair Value The fair value of a financial instrument is the current amount that would be exchanged between willing parties in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. The Company records fair value adjustments to certain assets and liabilities and determines fair value disclosures utilizing a definition of fair value of assets and liabilities that states that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Additional considerations are involved to determine the fair value of financial assets in markets that are not active. The Company uses a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy based on these two types of inputs are as follows:
Level 1 – |  | Valuation is based on quoted prices in active markets for identical assets and liabilities.
Level 2 – |  | Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
Level 3 – |  | Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.
The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements: Securities Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. 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 flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. The carrying value of restricted FRB and FHLB stock approximates fair value based upon the redemption provisions of each entity and is therefore excluded from the following table. Rabbi trust assets As a result of the Bay Banks Merger, the Company acquired and assumed a rabbi trust and deferred compensation plan. The assets held by the rabbi trust are invested at the direction of the individual participants and are generally invested in marketable investment securities, such as common stocks and mutual funds or short-term investments (e.g., cash) (Level 1). Rabbi trust assets and the associated deferred compensation plan liability are included in other assets and other liabilities, respectively, in the consolidated balance sheets. Derivative financial instruments Derivative instruments used to hedge residential mortgage loans held for sale and the related interest rate lock commitments include forward commitments to sell mortgage loans and are reported at fair value utilizing Level 2 inputs. The fair values of derivative financial instruments are based on derivative market data inputs as of the valuation date and the underlying value of mortgage loans for rate lock commitments. Cash flow hedges (interest rate swaps) hedge against the risk of variability in cash flows attributable to changes in the 3-month LIBOR index rate component of forecasted 3-month fixed rate funding advances from the FHLB. These cash flow hedges are recorded at fair value utilizing Level 2 inputs. The following tables present the balances of financial assets measured at fair value on a recurring basis as of the dates stated.
|  | September 30, 2021 |
(Dollars in thousands) |  | Total |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Securities available for sale |  |  |  |  |  |  |  |  |  |  |  |
State and municipals |  | $ | 41,852 |  |  | $ | — |  |  | $ | 41,852 |  |  | $ | — |
U.S. Treasury and agencies |  |  | 48,548 |  |  |  | — |  |  |  | 48,548 |  |  |  | — |
Mortgage backed securities |  |  | 238,923 |  |  |  | — |  |  |  | 238,923 |  |  |  | — |
Corporate bonds |  |  | 30,775 |  |  |  | — |  |  |  | 30,775 |  |  |  | — |
Total securities available for sale |  | $ | 360,098 |  |  | $ | — |  |  | $ | 360,098 |  |  | $ | — |
Other assets |  |  |  |  |  |  |  |  |  |  |  |
Rabbi trust assets |  | $ | 963 |  |  | $ | 963 |  |  | $ | — |  |  | $ | — |
Mortgage derivative asset |  |  | 3,456 |  |  |  | — |  |  |  | 3,456 |  |  |  | — |
Interest rate swap asset |  |  | 5,838 |  |  |  | — |  |  |  | 5,838 |  |  |  | — |
Other liabilities |  |  |  |  |  |  |  |  |  |  |  |
Mortgage derivative liability |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Interest rate swap liability |  |  | 1,239 |  |  |  | — |  |  |  | 1,239 |  |  |  | — |
|  | December 31, 2020 |
(Dollars in thousands) |  | Total |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Securities available for sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
State and municipals |  | $ | 14,259 |  |  | $ | — |  |  | $ | 14,259 |  |  | $ | — |
U.S. Treasury and agencies |  |  | 2,409 |  |  |  | — |  |  |  | 2,409 |  |  |  | — |
Mortgage backed securities |  |  | 72,635 |  |  |  | — |  |  |  | 72,635 |  |  |  | — |
Corporate bonds |  |  | 20,172 |  |  |  | — |  |  |  | 20,172 |  |  |  | — |
Total securities available for sale |  | $ | 109,475 |  |  | $ | — |  |  | $ | 109,475 |  |  | $ | — |
Other assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage derivative asset |  | $ | 5,293 |  |  | $ | — |  |  | $ | 5,293 |  |  | $ | — |
Interest rate swap asset |  |  | 1,716 |  |  |  | — |  |  |  | 1,716 |  |  |  | — |
Other liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage derivative liability |  | $ | 1,569 |  |  | $ | — |  |  | $ | 1,569 |  |  | $ | — |
Interest rate swap liability |  |  | 2,735 |  |  |  | — |  |  |  | 2,735 |  |  |  | — |
Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets. The following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements. Mortgage Servicing Rights The Company records MSR assets initially at fair value and subsequently accounts for them under the amortization method and performs an impairment assessment each reporting period. The amortization method requires that the MSR assets be recorded at the lower of cost or fair value. The following tables present the change in MSR assets using Level 3 inputs as of and for the periods stated.
(Dollars in thousands) |  | MSR Assets |
Balance, December 31, 2020 |  | $ | 7,084 |
Acquired in Bay Banks Merger |  |  | 997 |
Additions |  |  | 9,252 |
Write-offs |  |  | (616 | )
Amortization |  |  | (1,741 | )
Impairments |  |  | — |
Fair value adjustments |  |  | 3,567 |
Balance, September 30, 2021 - fair value |  | $ | 18,543 |
Balance, September 30, 2021 - amortized cost |  | $ | 14,976 |
(Dollars in thousands) |  | MSR Assets |
Balance, December 31, 2019 |  | $ | — |
Additions |  |  | 7,539 |
Write-offs |  |  | (61 | )
Amortization |  |  | (391 | )
Impairments |  |  | (3 | )
Fair value adjustments |  |  | 207 |
Balance, December 31, 2020 - fair value |  | $ | 7,291 |
Balance, December 31, 2020 - amortized cost |  | $ | 7,084 |
A third-party model is used to determine the fair value of the Company’s MSR assets. The model establishes pools of performing loans, calculates projected future cash flows for each pool, and applies a discount rate to each pool. As of September 30, 2021 and December 31, 2020, the Company was servicing approximately $1.75 billion and $846.5 million of loans, respectively. Loans are segregated into homogenous pools based on loan term, interest rates, and other similar characteristics. Cash flows are then estimated based on net servicing fee income and utilizing assumed servicing costs and prepayment speeds. The weighted average net servicing fee income of the portfolio was 28.1 basis points as of September 30, 2021. Estimated base annual servicing costs were $65.00 to $80.00 per loan depending on the guarantor. Prepayment speeds in the model are based on empirically derived data for mortgage pool factors and differences between a mortgage pool’s weighted average coupon and its current mortgage rate. The weighted average prepayment speed assumption used in the fair value model was 12.16% as of September 30, 2021. A base discount rate of 9.0% to 12.0% (9.30% weighted average discount rate) was then applied to each pool’s projected future cash flows as of September 30, 2021. The discount rate is intended to represent the estimated market yield for the highest quality grade of comparable servicing. MSR assets are classified as Level 3. Impaired Loans Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. The measurement of loss associated with impaired loans can be based on either the discounted cash flows of the loan or the fair value of the collateral, if any, less estimated costs to sell, if the loan is collateral dependent. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. Any given loan may have multiple types of collateral; however, the majority of the Company’s loan collateral is real estate. The value of real estate collateral is generally determined utilizing a market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data (Level 2). If the collateral value is significantly adjusted due to differences in the comparable properties or is discounted because of lack of marketability, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant or the net book value based on the borrower’s financial statements if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statements or aging reports (Level 3). Fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of income. Loans Held for Sale Mortgage loans originated or purchased and intended for sale in the secondary market are carried at estimated market value in the aggregate. The agreed upon sales price is considered fair value as all of these loans are under agreements to sell to investors at the time of origination. This amount is generally the loan’s principal amount. Changes in fair value are recognized in the gain on sale of mortgages on the consolidated statements of income. Other Real Estate Owned Certain assets such as OREO are measured at fair value less estimated costs to sell. Valuation of OREO is generally determined using current appraisals from independent appraisers, a Level 2 input. If current appraisals cannot be obtained prior to reporting dates, or if declines in value are identified after a recent appraisal is received, appraisal values are discounted, resulting in Level 3 estimates. If the Company markets the property with a real estate agent or broker, estimated selling costs reduce the listing price, resulting in a valuation based on Level 3 inputs. The following tables summarize assets that were measured at fair value on a nonrecurring basis as of the dates stated.
|  | September 30, 2021 |
(Dollars in thousands) |  | Total |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Impaired loans, net |  | $ | 8,233 |  |  | $ | — |  |  | $ | — |  |  | $ | 8,233 |
Loans held for sale |  |  | 144,111 |  |  |  | — |  |  |  | 144,111 |  |  |  | — |
OREO |  |  | 227 |  |  |  | — |  |  |  | — |  |  |  | 227 |
|  | December 31, 2020 |
(Dollars in thousands) |  | Total |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Impaired loans, net |  | $ | 2,187 |  |  | $ | — |  |  | $ | — |  |  | $ | 2,187 |
Loans held for sale |  |  | 148,209 |  |  |  | — |  |  |  | 148,209 |  |  |  | — |
The following tables present quantitative information about Level 3 fair value measurements as of the dates stated.
|  | Balance as of |  |  | Valuation |  | Unobservable |  | Weighted |
(Dollars in thousands) |  | September 30, 2021 |  |  | Technique |  | Input |  | Average |
Impaired loans, net |  | $ | 8,233 |  |  | Discounted appraised value |  | Selling costs |  |  | 7 | %
OREO |  |  | 227 |  |  | Discounted appraised value |  | Selling costs |  |  | 7 | %
|  | Balance as of |  |  | Valuation |  | Unobservable |  | Weighted |
(Dollars in thousands) |  | December 31, 2020 |  |  | Technique |  | Input |  | Average |
Impaired loans, net |  | $ | 2,097 |  |  | Discounted appraised value |  | Selling costs |  |  | 10 | %
|  |  | 90 |  |  | Discounted cash flows |  | Discount rate |  |  | 6 | %
Fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value is based upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership in an entity, or contracts that convey or impose on an entity that contractual right or obligation to either receive or deliver cash for another financial instrument. The information used to determine fair value is highly subjective and judgmental in nature and, therefore, the results may not be precise. Subjective factors include, among other things, estimates of cash flows, risk characteristics, credit quality, and interest rates, all of which are subject to change. Since the fair value is estimated as of the balance sheet date, the amounts that will actually be realized or paid upon settlement or maturity on these various instruments could be significantly different. The carrying values of cash and due from banks and federal funds sold are of such short duration that carrying value reasonably approximates fair value (Level 1). The carrying values of accrued interest receivable and accrued interest payable are of such short duration that carrying value reasonably approximates fair value (Level 2). The carrying value of restricted equity investments approximates fair value based on the redemption provisions of the issuer (Level 2). The fair value of the Company’s loan portfolio includes a credit risk assumption in the determination of the fair value of its loans. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the following categories: variable rate loans, impaired loans, and all other loans. The results are then adjusted to account for credit risk as described above. The fair value of the Company’s loan portfolio also considers illiquidity risk through the use of a discounted cash flow model to compensate for based on certain assumptions included within the discounted cash flow model, primarily the use of discount rates that better capture inherent credit risk over the lifetime of a loan. This consideration of both credit risk and illiquidity risk provides an estimated exit price for the Company’s loan portfolio. Loans held for investment are reported as Level 3. There is no credit risk associated with PPP loans as they are fully guaranteed by the U.S. government. Further, the Company believes the PPP loans will be forgiven within 1.5 years for PPP 1 loans and between one and three years for PPP 2 loans, depending on the loan’s balance, and any fair value adjustment for potential interest rate change was considered inconsequential as of September 30, 2021. As a result, the carrying value of PPP loans reasonably approximates fair value (Level 3). The carrying value of cash surrender value of life insurance reasonably approximates fair value. The Company records these policies at their cash surrender value, which is estimated using information by insurance carriers (Level 2). The carrying value of noninterest-bearing deposits approximates fair value (Level 1). The carrying values of interest-bearing demand, money market, and savings deposits approximates fair value based on their current pricing and are reported as Level 2. The fair value of certificates of deposits were valued using a discounted cash flow calculation that includes a market rate analysis of the current rates offered by market participants for certificates of deposits that mature in the same period. Time deposits are reported as Level 3. The fair value of the FHLB borrowings is estimated by discounting the future cash flows using current interest rates offered for similar advances (Level 2). The fair value of FRB borrowings was approximated as its carrying value as there is no comparable debt to PPPLF advances (Level 2). The fair value of the Company’s subordinated notes was estimated by utilizing recent issuance rates for subordinated debt offerings of similar issuer size (Level 3). The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change, and these changes may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. Borrowers with fixed rate obligations, however, are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk. The following tables present the estimated fair values, related carrying amounts, and valuation level of the financial instruments as of the dates stated.
|  | Carrying Value as of |  |  | Fair Value as of |  |  | Fair Value Measurements as of September 30, 2021 |
(Dollars in thousands) |  | September 30, 2021 |  |  | September 30, 2021 |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Financial Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 53,077 |  |  | $ | 53,077 |  |  | $ | 53,077 |  |  | $ | — |  |  | $ | — |
Federal funds sold |  |  | 144,376 |  |  |  | 144,376 |  |  |  | 144,376 |  |  |  | — |  |  |  | — |
Securities available for sale |  |  | 360,098 |  |  |  | 360,098 |  |  |  | — |  |  |  | 360,098 |  |  |  | — |
Restricted equity and other investments |  |  | 19,343 |  |  |  | 19,343 |  |  |  | — |  |  |  | 19,343 |  |  |  | — |
PPP loans receivable, net |  |  | 46,648 |  |  |  | 46,648 |  |  |  | — |  |  |  | — |  |  |  | 46,648 |
Loans held for investment, net |  |  | 1,739,839 |  |  |  | 1,732,771 |  |  |  | — |  |  |  | — |  |  |  | 1,732,771 |
Accrued interest receivable |  |  | 9,900 |  |  |  | 9,900 |  |  |  | — |  |  |  | 9,900 |  |  |  | — |
Bank owned life insurance |  |  | 46,278 |  |  |  | 46,278 |  |  |  | — |  |  |  | 46,278 |  |  |  | — |
Financial Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Noninterest-bearing demand deposits |  | $ | 684,859 |  |  | $ | 684,859 |  |  | $ | 684,859 |  |  | $ | — |  |  | $ | — |
Interest-bearing demand and money market deposits |  |  | 828,477 |  |  |  | 828,477 |  |  |  | — |  |  |  | 828,477 |  |  |  | — |
Savings deposits |  |  | 144,904 |  |  |  | 144,904 |  |  |  | — |  |  |  | 144,904 |  |  |  | — |
Time deposits |  |  | 541,964 |  |  |  | 547,140 |  |  |  | — |  |  |  | — |  |  |  | 547,140 |
FHLB borrowings |  |  | 125,115 |  |  |  | 124,900 |  |  |  | — |  |  |  | 124,900 |  |  |  | — |
FRB borrowings |  |  | 33,857 |  |  |  | 33,857 |  |  |  | — |  |  |  | 33,857 |  |  |  | — |
Subordinated notes, net |  |  | 40,503 |  |  |  | 42,048 |  |  |  | — |  |  |  | — |  |  |  | 42,048 |
|  | Carrying Value as of |  |  | Fair Value as of |  |  | Fair Value Measurements as of December 31, 2020 |
(Dollars in thousands) |  | December 31, 2020 |  |  | December 31, 2020 |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Financial Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 117,945 |  |  | $ | 117,945 |  |  | $ | 117,945 |  |  | $ | — |  |  | $ | — |
Federal funds sold |  |  | 775 |  |  |  | 775 |  |  |  | 775 |  |  |  | — |  |  |  | — |
Securities available for sale |  |  | 109,475 |  |  |  | 109,475 |  |  |  | — |  |  |  | 109,475 |  |  |  | — |
Restricted equity investments |  |  | 11,173 |  |  |  | 11,173 |  |  |  | — |  |  |  | 11,173 |  |  |  | — |
PPP loans receivable, net |  |  | 288,533 |  |  |  | 288,533 |  |  |  | — |  |  |  | — |  |  |  | 288,533 |
Loans held for investment, net |  |  | 719,056 |  |  |  | 720,396 |  |  |  | — |  |  |  | — |  |  |  | 720,396 |
Accrued interest receivable |  |  | 5,428 |  |  |  | 5,428 |  |  |  | — |  |  |  | 5,428 |  |  |  | — |
Bank owned life insurance |  |  | 15,724 |  |  |  | 15,724 |  |  |  | — |  |  |  | 15,724 |  |  |  | — |
Financial Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Noninterest-bearing demand deposits |  | $ | 333,051 |  |  | $ | 333,051 |  |  | $ | 333,051 |  |  | $ | — |  |  | $ | — |
Interest-bearing demand and money market deposits |  |  | 282,263 |  |  |  | 282,263 |  |  |  | — |  |  |  | 282,263 |  |  |  |
Savings deposits |  |  | 78,352 |  |  |  | 78,352 |  |  |  | — |  |  |  | 78,352 |  |  |  | — |
Time deposits |  |  | 251,443 |  |  |  | 257,647 |  |  |  | — |  |  |  | — |  |  |  | 257,647 |
FHLB borrowings |  |  | 115,000 |  |  |  | 114,983 |  |  |  | — |  |  |  | 114,983 |  |  |  | — |
FRB borrowings |  |  | 281,650 |  |  |  | 281,650 |  |  |  | — |  |  |  | 281,650 |  |  |  | — |
Subordinated notes, net |  |  | 24,506 |  |  |  | 25,830 |  |  |  | — |  |  |  | — |  |  |  | 25,830 |

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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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