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Fair Value
 9 Months Ended
Sep. 30, 2021
Fair Value Disclosures [Abstract]  
Fair Value FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (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. There are three levels of inputs that may be used to measure fair values:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access at 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.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Investment Securities Available for Sale: The fair values of investment securities available for sale are determined by matrix pricing, which is a mathematical technique used 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 (Level 2). Management obtains the fair values of securities available for sale on a monthly basis from a third party pricing service.
Residential Loans Held for Sale: The Company has elected to account for residential loans held for sale at fair value. The fair value of loans held for sale is determined using either actual quoted prices for the assets (Level 1) whenever possible or quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2). The gain (loss) on loans held for sale is included in mortgage banking income in the Consolidated Statements of Income.
SBA Loans Held for Investment, at Fair Value: The Company has elected to account for certain SBA loans held for investment at fair value. Fair value is calculated based on the present value of estimated future payments (Level 3). The valuation model uses interest rate, prepayment speed, and default rate assumptions that market participants would use in estimating future payments. Whenever available, the present value is validated against available market data.
Mortgage Banking Derivatives: Mortgage banking derivatives used in the ordinary course of business primarily consist of mandatory forward sales contracts, best efforts forward sales contracts, and interest rate lock commitments. The fair value of mandatory forward sales contracts is measured using quoted market prices (Level 1), or in some cases when quoted market prices are not available, the pricing is derived from market observable inputs that can generally be verified and do not typically involve significant judgment by the Company (Level 2). Interest rate lock commitments involve pricing derived from market observable inputs that are adjusted based on pull-through rates. Pull-through rates, which typically range between 80-85%, are an unobservable input which are the Company’s estimate of the percentage of interest rate lock
commitments expected to result in closed loans (Level 3). The fair value of best efforts forward sales contracts is measured using market observable inputs that are adjusted using unobservable inputs including duration, spread, and pull-through rates (Level 3).
Impaired Loans: A loan is considered to be impaired when it is probable the Bank will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. In most cases, the Bank measures fair value based on the value of the collateral securing the loan. Collateral may be in the form of real estate and/or business or personal assets, including but not limited to equipment, inventory, and accounts receivable. The fair value of real estate collateral is determined based on third party appraisals by qualified licensed appraisers as well as internal estimates. The fair value of other business or personal assets is generally based on amounts reported on the financial statements of the customer or customer’s business. Appraised and reported values may be adjusted based on management’s historical knowledge, changes in market conditions from the time of valuation and management’s knowledge of the customer and the customer’s business. Since not all valuation inputs are observable, these nonrecurring fair value determinations are classified as Level 3. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors previously identified.
SBA Loan Servicing Rights: On a quarterly basis, SBA loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount. If the carrying amount exceeds fair value, impairment is recorded so that the servicing asset is carried at fair value. The fair value of SBA servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. There were no SBA loan servicing rights carried at fair value at September 30, 2021 and December 31, 2020.
Assets and liabilities measured at fair value on a recurring basis at September 30, 2021 are summarized below:
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Financial assets
Investment securities available for sale
$— $32,535 $— $32,535 
Residential loans held for sale
28,798 62,445 — 91,243 
SBA loans held for investment, at fair value
— — 9,805 9,805 
Interest rate lock commitments
— — 1,579 1,579 
Mandatory forward sales contracts
1,004 — — 1,004 
Best efforts forward sales contracts
— — 30 30 
Financial liabilities
Interest rate lock commitments
$— $— $335 $335 
Mandatory forward sales contracts
44 — — 44 
Assets and liabilities measured at fair value on a recurring basis at December 31, 2020 are summarized below:
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Financial assets
Residential loans held for sale
$21,888 $186,816 $— $208,704 
SBA loans held for investment, at fair value
— — 9,264 9,264 
Interest rate lock commitments
— — 7,565 7,565 
Best efforts forward sales contracts
— — 55 55 
Financial liabilities
Interest rate lock commitments
$— $— $12 $12 
Mandatory forward sales contracts
4,455 — — 4,455 
There were no transfers between levels for assets and liabilities recorded at fair value on a recurring basis during the reported periods.
Financial Instruments Recorded Using Fair Value Option
The Company has elected the fair value option for residential loans held for sale. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual term of the loan and in accordance with the Company’s policy on loans held for investment. None of these loans are 90 days or more past due or on nonaccrual at September 30, 2021 and December 31, 2020.
The aggregate fair value, contractual balance, and gain at September 30, 2021 and December 31, 2020 for residential loans held for sale were as follows:
September 30, 2021December 31, 2020
Aggregate fair value
$91,243 $208,704 
Contractual balance
88,682 199,975 
Gain
$2,561 $8,729 
The total amount of gains and losses from changes in fair value and interest income included in earnings for the nine months ended September 30, 2021 and 2020 for residential loans held for sale were as follows:
Nine Months Ended September 30,
20212020
Interest income$2,770 $1,904 
Change in fair value(6,168)3,190 
Total gain (loss)$(3,398)$5,094 
The Company also elected the fair value option for certain of its non-PPP SBA loans originated and fully funded during the year ended December 31, 2018 as the Company believed that fair value was the best indicator of the resolution of those loans at that time. Depending on market conditions and liquidity needs of the Company, management determines whether it is advantageous to hold or sell SBA loans on a loan-by-loan basis. The portion of these loans guaranteed by the SBA are generally readily marketable in the secondary market and the portion of the loans that are not guaranteed may be sold periodically to other third party financial institutions. Interest income on these loans is recorded based on the contractual term of the loan and in accordance with the Company’s policy on other loans held for investment.
The aggregate fair value, contractual balance, and gain (loss) at September 30, 2021 and December 31, 2020 for SBA loans held for investment, at fair value, were as follows:
September 30, 2021December 31, 2020
Aggregate fair value
$9,805 $9,264 
Contractual balance
9,657 9,266 
Gain (loss)$148 $(2)
The total amount of gains and losses from changes in fair value and interest income included in earnings for the nine months ended September 30, 2021 and 2020 for SBA loans held for investment, at fair value, were as follows:
Nine Months Ended September 30,
20212020
Interest income$462 $465 
Change in fair value151 49 
Total gain
$613 $514 
Changes in fair value for SBA loans held for investment, at fair value, were included in SBA fair value gain (loss) on the Consolidated Statements of Income.
The table below presents a reconciliation of SBA loans held for investment, at fair value, which were valued on a recurring basis and used significant unobservable inputs (Level 3) for the nine months ended September 30, 2021 and 2020:
 Nine Months Ended September 30,
20212020
Balance of SBA loans held for investment at fair value, beginning of period
$9,264 $10,341 
Principal payments
(1,003)(771)
Charge-offs
(8)(65)
Repurchase of guaranteed balances previously participated
1,401 — 
Total gains during the period
151 49 
Balance of SBA loans held for investment at fair value, end of period
$9,805 $9,554 
The Company’s valuation of SBA loans held for investment, at fair value, was supported by an analysis prepared by an independent third party and approved by management. The approach to determine fair value involved several steps: 1) Identifying each loan’s unique characteristics, including balance, payment type, term, coupon, age, and principal and interest payment; 2) Projecting these loan level characteristics for the life of each loan; and 3) Performing discounted cash flow modeling.
The following table provides information about the valuation techniques and unobservable inputs used in the valuation of SBA loans held for investment, at fair value, falling within Level 3 of the fair value hierarchy at September 30, 2021 and December 31, 2020:
 Fair ValueValuation
Technique		Unobservable InputsRange (Weighted Average)
September 30, 2021
SBA loans held for investment, at fair value
$9,805 Discounted cash flowDiscount Rate
3.14%-6.63% (4.13%)
Conditional Prepayment Rate
10.56%-10.56% (10.56%)
December 31, 2020
SBA loans held for investment, at fair value
$9,264 Discounted cash flowDiscount Rate
3.24%-6.74% (4.37%)
Conditional Prepayment Rate
10.53%-10.56% (10.55%)
The significant unobservable inputs impacting the fair value measurement of SBA loans held for investment, at fair value, include discount rates and conditional prepayment rates. Increases in discount rates or prepayment rates would result in a lower fair value measurement. Although the prepayment rate and discount rate are not directly interrelated, they generally move in opposite directions. The discount rates and conditional prepayment rates were weighted by the relative principal balance outstanding of these loans.
Assets measured at fair value on a nonrecurring basis at September 30, 2021 are summarized below:
 Fair ValueValuation Technique(s)Significant
Unobservable
Input(s)		Discount % Range/Amount
Impaired loans
$1,396 Discount appraisals, estimated net realizable value of collateralCollateral discounts10%
Assets measured at fair value on a nonrecurring basis at December 31, 2020 are summarized below:
Fair ValueValuation Technique(s)Significant
Unobservable
Input(s)		Discount % Range/Amount
Impaired loans
$1,583 Discount appraisals, estimated net realizable value of collateralCollateral discounts
20-75%
Fair Value of Financial Instruments
The carrying values and estimated fair values of financial instruments not carried at fair value, at September 30, 2021 and December 31, 2020 are as follows:
September 30, 2021December 31, 2020
LevelCarrying ValueFair ValueCarrying ValueFair Value
Assets:
Cash and cash equivalents
1$107,097 $107,097 $55,379 $55,379 
Time deposits in banks
22,381 2,492 2,381 2,521 
Investment securities held to maturity
23 2 41 39 
Restricted equity securities, at cost
22,827 2,827 2,362 2,362 
Loans held for investment, at amortized cost
3629,873 638,060 1,197,896 1,213,967 
Accrued interest receivable
34,292 4,292 7,300 7,300 
SBA loan servicing rights
35,933 7,615 8,160 9,709 
Mortgage loan servicing rights
3222 222 — — 
Liabilities:
Noninterest-bearing deposits
2$87,625 $87,625 $62,650 $62,650 
Interest-bearing transaction accounts
2157,304 157,304 140,265 140,265 
Savings and money market deposits
2377,452 377,452 286,744 286,744 
Time deposits
252,653 53,033 69,125 69,743 
Subordinated debentures
25,983 6,623 5,948 6,516 
Notes payable
23,413 3,413 3,754 3,754 
PPP Liquidity Facility
3144,601 144,601 881,262 881,262 
Accrued interest payable
3562 562 1,999 1,999