Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.21.2
Fair Value Measurements
9 Months Ended
Sep. 30, 2021
Fair Value Disclosures [Abstract]  
Fair Value Measurements

Note 11 — 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.

Derivatives – The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.

Loans held for sale - Loans held for sale includes the guaranteed portion of SBA 7(a) loans and second draw PPP loans carried at the lower of cost or fair value. Management obtains quotes, bids or pricing indication sheets on all or part of the 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, 2021 and December 31, 2020, the entire balance of loans held for sale was recorded at its cost. We record loans held for sale on a nonrecurring basis with Level 2 inputs.

Nonperforming loans – Nonaccrual loans receivable and loans 90-days past due and still accruing interest are considered nonperforming for reporting purposes and are measured and recorded at fair value on a non-recurring basis. All nonperforming loans with a carrying balance over $250,000 are individually evaluated for the amount of impairment, if any. Nonperforming loans with a carrying balance of $250,000 or less are evaluated collectively. However, from time to time, nonrecurring fair value adjustments to collateral dependent nonperforming 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 3 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.

Other repossessed assets – Fair value of equipment from leasing contracts is based primarily on a third party valuation service, less costs to sell and result in a Level 3 classification of the inputs for determining fair value. Valuations are required at the time the asset is repossessed and may be subsequently updated periodically due to the Company’s short-term possession of the asset prior to sale or as circumstances require and the fair value adjustments are made to the asset based on its value prior to sale.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of September 30, 2021 and December 31, 2020, assets and liabilities measured at fair value on a recurring basis are as follows:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

Significant

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Observable

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices in

 

 

Inputs with No

 

 

 

 

 

 

 

 

 

 

 

Active Markets

 

 

Active Market

 

 

Significant

 

 

 

 

 

 

 

for Identical

 

 

with Identical

 

 

Unobservable

 

 

 

 

 

 

 

Assets

 

 

Characteristics

 

 

Inputs

 

 

Total Fair Value

 

 

 

(in thousands)

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

4,945

 

 

$

 

 

$

 

 

$

4,945

 

U.S. government agency and sponsored agency obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

636,062

 

 

 

 

 

 

636,062

 

Collateralized mortgage obligations

 

 

 

 

 

99,883

 

 

 

 

 

 

99,883

 

Debt securities

 

 

 

 

 

98,436

 

 

 

 

 

 

98,436

 

Total U.S. government agency and sponsored agency obligations

 

 

 

 

 

834,381

 

 

 

 

 

 

834,381

 

Municipal bonds-tax exempt

 

 

 

 

 

67,670

 

 

 

 

 

 

67,670

 

Total securities available for sale

 

$

4,945

 

 

$

902,051

 

 

$

 

 

$

906,996

 

Derivative financial instruments

 

$

 

 

$

800

 

 

$

 

 

$

800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

 

$

769

 

 

$

 

 

$

769

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

10,132

 

 

$

 

 

$

 

 

$

10,132

 

U.S. government agency and sponsored agency obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

519,241

 

 

 

 

 

 

519,241

 

Collateralized mortgage obligations

 

 

 

 

 

133,601

 

 

 

 

 

 

133,601

 

Debt securities

 

 

 

 

 

90,807

 

 

 

 

 

 

90,807

 

Total U.S. government agency and sponsored agency obligations

 

 

 

 

 

743,649

 

 

 

 

 

 

743,649

 

Total securities available for sale

 

$

10,132

 

 

$

743,649

 

 

$

 

 

$

753,781

 

Derivative financial instruments

 

$

 

 

$

1,088

 

 

$

 

 

$

1,088

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

 

$

1,149

 

 

$

 

 

$

1,149

 

 

 

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

As of September 30, 2021 and December 31, 2020, assets and liabilities measured at fair value on a non-recurring basis are as follows:

 

 

 

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

Significant

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Observable

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices in

 

 

Inputs With No

 

 

 

 

 

 

 

 

 

 

 

Active Markets

 

 

Active Market

 

 

Significant

 

 

 

 

 

 

 

for Identical

 

 

With Identical

 

 

Unobservable

 

 

 

Total

 

 

Assets

 

 

Characteristics

 

 

Inputs

 

 

 

(in thousands)

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateral dependent loans (1)

 

$

12,325

 

 

$

 

 

$

 

 

$

12,325

 

Other real estate owned

 

 

675

 

 

 

 

 

 

 

 

 

675

 

Repossessed personal property

 

 

180

 

 

 

 

 

 

 

 

 

180

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateral dependent loans (2)

 

$

63,114

 

 

$

 

 

$

 

 

$

63,114

 

Other real estate owned

 

 

2,360

 

 

 

 

 

 

 

 

 

2,360

 

Repossessed personal property

 

 

857

 

 

 

 

 

 

 

 

 

857

 

 

(1)

Consisted of real estate loans of $12.3 million.

(2)

Consisted of real estate loans of $63.1 million and commercial and industrial loans of $41,000.

 

The following table represents quantitative information about Level 3 fair value assumptions for assets measured at fair value on a non-recurring basis at September 30, 2021 and December 31, 2020:

 

 

 

Fair Value

 

 

Valuation

Techniques

 

Unobservable

Input(s)

 

Range (Weighted

Average)

 

 

 

(in thousands)

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

Collateral dependent loans:

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

2,628

 

 

Market approach

 

Market data comparison

 

(28)% to 23% / (6)%

 

Other

 

 

128

 

 

Market approach

 

Market data comparison

 

(10)% to 5% / (3)%

 

Construction

 

 

7,046

 

 

Market approach

 

Market data comparison

 

(20)% to 10% / (10)%

 

Residential/consumer loans

 

 

2,523

 

 

Market approach

 

Market data comparison

 

(20)% to 8% / (15)%

 

Total real estate loans

 

 

12,325

 

 

 

 

 

 

 

 

Total

 

$

12,325

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned

 

$

675

 

 

Market approach

 

Market data comparison

 

(20)% to (5)% / (12)%

 

 

 

 

 

 

 

 

 

 

 

 

 

Repossessed personal property

 

 

180

 

 

Market approach

 

Market data comparison

 

(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

Collateral dependent loans:

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

6,330

 

 

Market approach

 

Market data comparison

 

(45)% to 35% / 14%

 

Hospitality

 

 

20,612

 

 

Market approach

 

Market data comparison

 

(2)

 

Other

 

 

8,410

 

 

Market approach

 

Market data comparison

 

(55)% to 34% / 15% (1)

 

Construction

 

 

24,854

 

 

Market approach

 

Market data comparison

 

(20)% to 12% / (8)%

 

Residential/consumer loans

 

 

2,867

 

 

Market approach

 

Market data comparison

 

(13)% to 15% / 6% (1)

 

Total real estate loans

 

 

63,073

 

 

 

 

 

 

 

 

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

 

 

Commercial lines of credit

 

 

41

 

 

Market approach

 

Market data comparison

 

(9)% to 15% / 6% (1)

 

Total

 

$

63,114

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned

 

$

2,360

 

 

Market approach

 

Market data comparison

 

(35)% to 15% / (14)%

 

 

 

 

 

 

 

 

 

 

 

 

 

Repossessed personal property

 

 

857

 

 

Market approach

 

Market data comparison

 

(3)

 

 

(1)

Appraisal reports utilize a combination of valuation techniques including a market approach, where prices and other relevant information generated by market transactions involving similar or comparable properties are used to determine the appraised value. Appraisals may include an ‘as is’ and ‘upon completion’ valuation scenarios. Adjustments are routinely made in the appraisal process by third-party appraisers to adjust for differences between the comparable sales and income data. Adjustments also result from the consideration of relevant economic and demographic factors with the potential to affect property values. Also, prospective values are based on the market conditions which exist at the date of inspection combined with informed forecasts based on current trends in supply and demand for the property types under appraisal. Positive adjustments disclosed in this table represent increases to the sales comparison and negative adjustment represent decreases.

(2)

No discount weighted average range available given primary valuation methodology is via discounted cash flow analysis (DCF) for going concern properties.

(3)

The equipment is usually too low in value to use a professional appraisal service. The values are determined internally using a combination of auction values, vendor recommendations and sales comparisons depending on the equipment type. Some highly commoditized equipment, such as commercial trucks have services that provide industry values.

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.

Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825), 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, 2021, 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, 2021

 

 

 

Carrying

 

 

Fair Value

 

 

 

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(in thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

824,347

 

 

$

824,347

 

 

$

 

 

$

 

Securities available for sale

 

 

906,996

 

 

 

4,945

 

 

 

902,051

 

 

 

 

Loans held for sale

 

 

17,881

 

 

 

 

 

 

19,937

 

 

 

 

Loans receivable, net of allowance for credit losses

 

 

4,782,252

 

 

 

 

 

 

 

 

 

4,774,003

 

Accrued interest receivable

 

 

11,943

 

 

 

11,943

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

2,548,591

 

 

 

 

 

 

2,548,591

 

 

 

 

Interest-bearing deposits

 

 

3,180,945

 

 

 

 

 

 

 

 

 

3,180,790

 

Borrowings and subordinated debentures

 

 

352,344

 

 

 

 

 

 

137,991

 

 

 

211,880

 

Accrued interest payable

 

 

1,235

 

 

 

1,235

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

Carrying

 

 

Fair Value

 

 

 

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(in thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

391,849

 

 

$

391,849

 

 

$

 

 

$

 

Securities available for sale

 

 

753,781

 

 

 

10,132

 

 

 

743,649

 

 

 

 

Loans held for sale

 

 

8,568

 

 

 

 

 

 

9,270

 

 

 

 

Loans receivable, net of allowance for credit losses

 

 

4,789,742

 

 

 

 

 

 

 

 

 

4,755,302

 

Accrued interest receivable

 

 

16,363

 

 

 

16,363

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

1,898,766

 

 

 

 

 

 

1,898,766

 

 

 

 

Interest-bearing deposits

 

 

3,376,242

 

 

 

 

 

 

 

 

 

3,380,179

 

Borrowings and subordinated debentures

 

 

268,972

 

 

 

 

 

 

151,714

 

 

 

118,809

 

Accrued interest payable

 

 

4,564

 

 

 

4,564