Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.19.3
Fair Value Measurements
9 Months Ended
Sep. 30, 2019
Fair Value Disclosures [Abstract]  
Fair Value Measurements 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.

Loans held for sale - Loans held for sale are all SBA loans and carried at the lower of cost or fair value. Management obtains quotes, bids or pricing indication sheets on all or part of these 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 September 30, 2019 and December 31, 2018, the entire balance of SBA loans held for sale was recorded at its cost. We record SBA loans held for sale on a nonrecurring basis with Level 2 inputs.

Impaired loans - Nonaccrual loans and performing restructured loans are considered impaired for reporting purposes and are measured and recorded at fair value on a non-recurring basis. All impaired loans with a carrying balance over $250,000 are reviewed individually for the amount of impairment, if any. Impaired loans with a carrying balance of $250,000 or less are evaluated for impairment collectively. The Company does not record loans at fair value on a recurring basis. However, from time to time, nonrecurring fair value adjustments to collateral-dependent impaired loans are recorded based on either the current appraised value of the collateral, a Level 2 measurement, or management’s judgment and estimation of value reported on older appraisals that are then adjusted based on recent market trends, 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 2 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.


Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of September 30, 2019 and December 31, 2018, assets and liabilities measured at fair value on a recurring basis are as follows:
 
Level 1
 
Level 2
 
Level 3
 
 
 
Quoted Prices in
Active Markets
for Identical
Assets
 
Significant
Observable
Inputs with No
Active Market
with Identical
Characteristics
 
Significant
Unobservable
Inputs
 
Balance
 
(in thousands)
September 30, 2019
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
40,169

 
$

 
$

 
$
40,169

U.S. government agency and sponsored agency obligations:
 
 
 
 
 
 
 
Mortgage-backed securities

 
399,474

 

 
399,474

Collateralized mortgage obligations

 
164,999

 

 
164,999

Debt securities

 
17,173

 

 
17,173

Total U.S. government agency and sponsored agency obligations

 
581,646

 

 
581,646

Municipal bonds-tax exempt

 

 

 

Total securities available for sale
$
40,169

 
$
581,646

 
$

 
$
621,815

 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
39,830

 
$

 
$

 
$
39,830

U.S. government agency and sponsored agency obligations:
 
 
 
 
 
 
 
Mortgage-backed securities

 
295,034

 

 
295,034

Collateralized mortgage obligations

 
122,292

 

 
122,292

Debt securities

 
7,402

 

 
7,402

Total U.S. government agency and sponsored agency obligations

 
424,728

 

 
424,728

Municipal bonds-tax exempt

 
110,350

 

 
110,350

Total securities available for sale
$
39,830

 
$
535,078

 
$

 
$
574,908



Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

As of September 30, 2019 and December 31, 2018, assets and liabilities measured at fair value on a non-recurring basis are as follows:
 
Level 1
 
Level 2
 
Level 3
 
 
 
Quoted Prices in
Active Markets
for Identical
Assets
 
Significant
Observable
Inputs With No
Active Market
With Identical
Characteristics
 
Significant
Unobservable
Inputs
 
Loss During the
Nine Months Ended
September 30, 2019
 
(in thousands)
September 30, 2019
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Impaired loans (1)
$

 
$

 
$
24,264

 
$
15,948

OREO

 

 
330

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
Assets:
 
 
 
 
 
 
 
Impaired loans (2)
$

 
$
3,253

 
$
1,957

 
$
1,184

OREO

 
663

 

 


(1) 
Consist of real estate loans of $12.7 million and commercial and industrial loans of $11.5 million.
(2) 
Consist of real estate loans of $3.5 million, commercial and industrial loans of $1.7 million.

The fair value of the Level 3 impaired loans at September 30, 2019 were determined utilizing the fair value measurement methodology for assets measured on a non-recurring basis. The impaired loans measured at fair value at September 30, 2019 consisted of one commercial real estate loan with a fair value of $12.7 million and one commercial and industrial loan with a fair value of $11.5 million. The fair value of collateral dependent loans are determined on a non-recurring basis using either the sales comparison approach or the income approach by obtaining third party appraisals.

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.

Effective January 1, 2018, the Company adopted ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825). This standard, 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 have concluded that the carrying amounts approximate fair value, the fair value estimates shown below are based on an exit price notion as of September 30, 2019, as required by ASU 2016-01. The financial instruments for which we have concluded that the carrying amounts approximate fair value include, cash and due from banks, accrued interest receivable and payable, and noninterest-bearing deposits. The fair values of off-balance sheet items are based upon the difference between the current value of similar loans and the price at which the Bank has committed to make the loans.
    
The estimated fair values of financial instruments were as follows:
 
September 30, 2019
 
Carrying
 
Fair Value
 
Amount
 
Level 1
 
Level 2
 
Level 3
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
Cash and due from banks
$
150,678

 
$
150,678

 
$

 
$

Securities available for sale
621,815

 
40,169

 
581,646

 

Loans held for sale
6,598

 

 
7,078

 

Loans and leases receivable, net of allowance for loan and lease losses
4,519,125

 

 

 
4,539,227

Accrued interest receivable
11,723

 
11,723

 

 

Financial liabilities:

 
 
 
 
 
 
Noninterest-bearing deposits
1,388,121

 

 
1,388,121

 

Interest-bearing deposits
3,302,020

 

 

 
3,314,224

Borrowings and subordinated debentures
193,232

 

 
195,860

 


Accrued interest payable
10,076

 
10,076

 

 

 
 
December 31, 2018
 
Carrying
 
Fair Value
 
Amount
 
Level 1
 
Level 2
 
Level 3
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
Cash and due from banks
$
155,376

 
$
155,376

 
$

 
$

Securities available for sale
574,908

 
39,830

 
535,078

 

Loans held for sale
9,390

 

 
9,905

 

Loans and leases receivable, net of allowance for loan and lease losses
4,568,566

 

 

 
4,518,716

Accrued interest receivable
13,331

 
13,331

 

 

Financial liabilities:
 
 
 
 
 
 
 
Noninterest-bearing deposits
1,284,530

 

 
1,284,530

 

Interest-bearing deposits
3,462,705

 

 

 
3,458,523

Borrowings and subordinated debentures
172,808

 

 
98,020

 
54,939

Accrued interest payable
11,379

 
11,379