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Fair Value | 9 Months Ended
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Sep. 30, 2022
Fair Value Disclosures [Abstract] |
Fair Value | Note 10 – 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. Mortgage servicing rights 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, 2022 and December 31, 2021, the Company was servicing approximately $2.17 billion and $1.91 billion 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 28.4 basis points as of September 30, 2022. Estimated base annual servicing costs were $65.00 to $80.00 p er 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 7.99% as of September 30, 2022. A base discount rate of 9% to 11% (9.32% weighted average discount rate) was then applied to each pool’s projected future cash flows as of September 30, 2022. 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. As previously noted, the Company changed its accounting method for MSR assets from the amortization method to the fair value measurement method effective January 1, 2022. This was a prospective change in accounting method; therefore, the carrying value of the MSR assets in periods prior to January 1, 2022 were stated at amortized cost. Rabbi trust assets The Company's rabbi trust is associated with a 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. The Company has interest rate swap assets and liabilities associated with certain customer commercial loans. The interest rate swap asset with the customer is offset with an equal swap agreement with a highly-rated third-party financial institution (i.e., "back-to-back"). Both the interest rate swap assets and liabilities are free-standing derivatives and 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, 2022 |
(Dollars in thousands) |  | Total |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Securities available for sale |  |  |  |  |  |  |  |  |  |  |  |
State and municipals |  | $ | 51,032 |  |  | $ | — |  |  | $ | 51,032 |  |  | $ | — |
U.S. Treasury and agencies |  |  | 60,085 |  |  |  | — |  |  |  | 60,085 |  |  |  | — |
Mortgage backed securities |  |  | 207,820 |  |  |  | — |  |  |  | 200,203 |  |  |  | 7,617 |
Corporate bonds |  |  | 40,579 |  |  |  | 1,500 |  |  |  | 31,034 |  |  |  | 8,045 |
Total securities available for sale |  | $ | 359,516 |  |  | $ | 1,500 |  |  | $ | 342,354 |  |  | $ | 15,662 |
Other assets |  |  |  |  |  |  |  |  |  |  |  |
MSR assets |  | $ | 29,861 |  |  | $ | — |  |  | $ | — |  |  | $ | 29,861 |
Rabbi trust assets |  |  | 765 |  |  |  | 765 |  |  |  | — |  |  |  | — |
Mortgage derivative asset |  |  | 1,045 |  |  |  | — |  |  |  | 1,045 |  |  |  | — |
Interest rate swap asset |  |  | 102 |  |  |  | — |  |  |  | 102 |  |  |  | — |
Other liabilities |  |  |  |  |  |  |  |  |  |  |  |
Mortgage derivative liability |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Interest rate swap liability |  |  | 102 |  |  |  | — |  |  |  | 102 |  |  |  | — |
|  | December 31, 2021 |
(Dollars in thousands) |  | Total |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Securities available for sale |  |  |  |  |  |  |  |  |  |  |  |
State and municipals |  | $ | 51,113 |  |  | $ | — |  |  | $ | 51,113 |  |  | $ | — |
U.S. Treasury and agencies |  |  | 64,066 |  |  |  | — |  |  |  | 64,066 |  |  |  | — |
Mortgage backed securities |  |  | 219,110 |  |  |  | — |  |  |  | 211,194 |  |  |  | 7,916 |
Corporate bonds |  |  | 39,243 |  |  |  | 3,000 |  |  |  | 25,179 |  |  |  | 11,064 |
Total securities available for sale |  | $ | 373,532 |  |  | $ | 3,000 |  |  | $ | 351,552 |  |  | $ | 18,980 |
Other assets |  |  |  |  |  |  |  |  |  |  |  |
Rabbi trust assets |  | $ | 994 |  |  | $ | 994 |  |  | $ | — |  |  | $ | — |
Mortgage derivative asset |  |  | 1,876 |  |  |  | — |  |  |  | 1,876 |  |  |  | — |
Interest rate swap asset |  |  | 199 |  |  |  | — |  |  |  | 199 |  |  |  | — |
Other liabilities |  |  |  |  |  |  |  |  |  |  |  |
Mortgage derivative liability |  | $ | 75 |  |  | $ | — |  |  | $ | 75 |  |  | $ | — |
Interest rate swap liability |  |  | 199 |  |  |  | — |  |  |  | 199 |  |  |  | — |
The following table presents the change in financial assets valued using Level 3 inputs for the period stated.
(Dollars in thousands) |  | MSR Assets |  |  | Corporate Bonds |  |  | Mortgage backed securities |
Balance as of December 31, 2021 |  | $ | 16,469 |  |  | $ | 11,064 |  |  | $ | 7,916 |
Change in accounting method |  |  | 4,484 |  |  |  | — |  |  |  | — |
Transfers from Level 2 to Level 3 |  |  | — |  |  |  | — |  |  |  | — |
Transfers from Level 3 to Level 2 |  |  | — |  |  |  | (5,684 | ) |  |  | — |
Additions |  |  | 5,412 |  |  |  | 3,000 |  |  |  | — |
Sales or paydowns |  |  | — |  |  |  | — |  |  |  | (280 | )
Fair value adjustments |  |  | 3,496 |  |  |  | (335 | ) |  |  | (19 | )
Balance as of September 30, 2022 |  | $ | 29,861 |  |  | $ | 8,045 |  |  | $ | 7,617 |
As of September 30, 2022, 14 c orporate bonds totaling $8.0 million and six mortgage backed securities totaling $7.6 million were reported at their respective purchase prices and as Level 3 assets in the fair value hierarchy, as there were no observable market prices for similar investments. 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 the write-down 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. Impaired Loans Impaired loans with specific reserves are carried at fair value. Fair value is based on the discounted cash flows of the loan or the fair value of the collateral 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. A 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 outside of the Company using observable market data (Level 2). However, if the collateral value is significantly adjusted due to differences in the comparable properties or is discounted by the Company 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 on the applicable borrower’s financial statements if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of operations. Loans Held for Sale Mortgage loans originated or purchased and intended for sale in the secondary market (i.e., loans held for sale) are carried at estimated market value in the aggregate. Changes in fair value are recognized in residential mortgage banking income, net on the consolidated statements of operations (Level 2). Certain consumer loans originated by the Bank and sourced by fintech partners are classified on the Company's consolidated balance sheets as held for sale. After origination, these loans are sold directly to the applicable fintech partner or another investor at par, generally up to 10 days from origination. Due to relatively short time between origination and sale, these loans are held at cost, which approximates fair value (Level 2). Other Real Estate Owned ("OREO") 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 (Level 2). 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, 2022 |
(Dollars in thousands) |  | Total |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Impaired loans, net |  | $ | 3,142 |  |  | $ | — |  |  | $ | — |  |  | $ | 3,142 |
Loans held for sale |  |  | 25,800 |  |  |  | — |  |  |  | 25,800 |  |  |  | — |
OREO |  |  | 195 |  |  |  | — |  |  |  | — |  |  |  | 195 |
|  | December 31, 2021 |
(Dollars in thousands) |  | Total |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Impaired loans, net |  | $ | 8,344 |  |  | $ | — |  |  | $ | — |  |  | $ | 8,344 |
Loans held for sale |  |  | 121,943 |  |  |  | — |  |  |  | 121,943 |  |  |  | — |
OREO |  |  | 157 |  |  |  | — |  |  |  | — |  |  |  | 157 |
The following tables present quantitative information about Level 3 fair value measurements as of the dates stated.
(Dollars in thousands) |  | Balance as of September 30, 2022 |  |  | Unobservable Input |  | Range |
Impaired loans, net |  |  |  |  |  |  |  |
Discounted appraised value technique |  | $ | 661 |  |  | Selling Costs |  | 0% - 7% |
Discounted cash flows technique |  |  | 2,481 |  |  | Discount Rate |  | 4% - 11% |
OREO |  |  |  |  |  |  |  |
Discounted appraised value technique |  |  | 195 |  |  | Selling Costs |  |  | 7 | %
(Dollars in thousands) |  | Balance as of December 31, 2021 |  |  | Unobservable Input |  | Range |
Impaired loans, net |  |  |  |  |  |  |  |
Discounted appraised value technique |  | $ | 8,108 |  |  | Selling Costs |  |  | 7 | %
Discounted cash flows technique |  |  | 236 |  |  | Discount Rate |  | 4% - 7% |
OREO |  |  |  |  |  |  |  |
Discounted appraised value technique |  |  | 157 |  |  | Selling Costs |  |  | 7 | %
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 following tables present the estimated fair values, related carrying amounts, and valuation level of the financial instruments as of the dates stated.
|  | September 30, 2022 |
|  |  |  |  |  |  |  | Fair Value Measurements |
(Dollars in thousands) |  | Carrying Value |  |  | Fair Value |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Financial Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 98,305 |  |  | $ | 98,305 |  |  | $ | 98,305 |  |  | $ | — |  |  | $ | — |
Federal funds sold |  |  | 10,581 |  |  |  | 10,581 |  |  |  | 10,581 |  |  |  | — |  |  |  | — |
Securities available for sale |  |  | 359,516 |  |  |  | 359,516 |  |  |  | 1,500 |  |  |  | 342,354 |  |  |  | 15,662 |
Restricted equity investments |  |  | 13,639 |  |  |  | 13,639 |  |  |  | — |  |  |  | 13,639 |  |  |  | — |
Other equity investments |  |  | 23,570 |  |  |  | 23,570 |  |  |  | — |  |  |  | 23,570 |  |  |  | — |
PPP loans receivable, net |  |  | 13,148 |  |  |  | 13,148 |  |  |  | — |  |  |  | — |  |  |  | 13,148 |
Loans held for investment, net |  |  | 2,137,808 |  |  |  | 2,093,433 |  |  |  | — |  |  |  | — |  |  |  | 2,093,433 |
Accrued interest receivable |  |  | 9,577 |  |  |  | 9,577 |  |  |  | — |  |  |  | 9,577 |  |  |  | — |
Bank owned life insurance |  |  | 47,095 |  |  |  | 47,095 |  |  |  | — |  |  |  | 47,095 |  |  |  | — |
MSR assets |  |  | 29,861 |  |  |  | 29,861 |  |  |  | — |  |  |  | — |  |  |  | 29,861 |
Financial Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Noninterest-bearing deposits |  | $ | 787,514 |  |  | $ | 787,514 |  |  | $ | 787,514 |  |  | $ | — |  |  | $ | — |
Interest-bearing demand and money market deposits |  |  | 1,097,585 |  |  |  | 1,097,585 |  |  |  | — |  |  |  | 1,097,585 |  |  |  | — |
Savings deposits |  |  | 152,225 |  |  |  | 152,225 |  |  |  | — |  |  |  | 152,225 |  |  |  | — |
Time deposits |  |  | 372,162 |  |  |  | 370,898 |  |  |  | — |  |  |  | — |  |  |  | 370,898 |
FHLB borrowings |  |  | 150,100 |  |  |  | 150,100 |  |  |  | — |  |  |  | 150,100 |  |  |  | — |
FRB borrowings |  |  | 55 |  |  |  | 55 |  |  |  | — |  |  |  | 55 |  |  |  | — |
Subordinated notes, net |  |  | 39,937 |  |  |  | 37,608 |  |  |  | — |  |  |  | — |  |  |  | 37,608 |
|  | December 31, 2021 |
|  |  |  |  |  |  |  | Fair Value Measurements |
(Dollars in thousands) |  | Carrying Value |  |  | Fair Value |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Financial Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 130,548 |  |  | $ | 130,548 |  |  | $ | 130,548 |  |  | $ | — |  |  | $ | — |
Federal funds sold |  |  | 43,903 |  |  |  | 43,903 |  |  |  | 43,903 |  |  |  | — |  |  |  | — |
Securities available for sale |  |  | 373,532 |  |  |  | 373,532 |  |  |  | 3,000 |  |  |  | 351,552 |  |  |  | 18,980 |
Restricted equity investments |  |  | 8,334 |  |  |  | 8,334 |  |  |  | — |  |  |  | 8,334 |  |  |  | — |
Other equity investments |  |  | 14,184 |  |  |  | 14,184 |  |  |  | — |  |  |  | 14,184 |  |  |  | — |
PPP loans receivable, net |  |  | 30,406 |  |  |  | 30,406 |  |  |  | — |  |  |  | — |  |  |  | 30,406 |
Loans held for investment, net |  |  | 1,765,051 |  |  |  | 1,766,820 |  |  |  | — |  |  |  | — |  |  |  | 1,766,820 |
Accrued interest receivable |  |  | 9,573 |  |  |  | 9,573 |  |  |  | — |  |  |  | 9,573 |  |  |  | — |
Bank owned life insurance |  |  | 46,545 |  |  |  | 46,545 |  |  |  | — |  |  |  | 46,545 |  |  |  | — |
Financial Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Noninterest-bearing deposits |  | $ | 685,801 |  |  | $ | 685,801 |  |  | $ | 685,801 |  |  | $ | — |  |  | $ | — |
Interest-bearing demand and money market deposits |  |  | 962,092 |  |  |  | 962,092 |  |  |  | — |  |  |  | 962,092 |  |  |  | — |
Savings deposits |  |  | 150,376 |  |  |  | 150,376 |  |  |  | — |  |  |  | 150,376 |  |  |  | — |
Time deposits |  |  | 499,502 |  |  |  | 503,968 |  |  |  | — |  |  |  | — |  |  |  | 503,968 |
FHLB borrowings |  |  | 10,111 |  |  |  | 9,943 |  |  |  | — |  |  |  | 9,943 |  |  |  | — |
FRB borrowings |  |  | 17,901 |  |  |  | 17,901 |  |  |  | — |  |  |  | 17,901 |  |  |  | — |
Subordinated notes, net |  |  | 39,986 |  |  |  | 41,388 |  |  |  | — |  |  |  | — |  |  |  | 41,388 |

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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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