Fair Value Measurements

12 Months Ended

Dec. 31, 2023

Note Q—Fair Value of Financial Instruments

ASC 825, Financial Instruments, requires disclosure of the estimated fair value of an entity’s assets and liabilities considered to be financial instruments. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered to be financial instruments. However, many such instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Also, it is the Company’s general practice and intent to hold its financial instruments to maturity whether or not categorized as “available-for-sale” and not to engage in trading or sales activities although it sold loans in 2019 and prior years, and may do so in the future. For fair value disclosure purposes, the Company utilized the fair value measurement criteria of ASC 820, Fair Value Measurements and Disclosures (“ASC 820”).

ASC 820 establishes a common definition for fair value to be applied to assets and liabilities. It clarifies 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 at the measurement date. It also establishes a framework for measuring fair value and expands disclosures concerning fair value measurements. ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Level 1 valuation is based on quoted market prices for identical assets or liabilities to which the Company has access at the measurement date. Level 2 valuation is based on other observable inputs for the asset or liability, either directly or indirectly. This includes quoted prices for similar assets in active or inactive markets, inputs other than quoted prices that are observable for the asset or liability such as yield curves, volatilities, prepayment speeds, credit risks, default rates, or inputs that are derived principally from, or corroborated through, observable market data by market-corroborated reports. Level 3 valuation is based on “unobservable inputs” that are the best information available in the circumstances. Assets classified as level 3 are only classified as such, when the observable inputs discussed above are not available, often as a result of thinly traded markets. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. There were no transfers between levels in 2023 and 2022. Transfers between levels in prior years, resulted only from the availability or non-availability of third-party pricing for commercial real estate securities from the Company’s securitizations, see “Note E—Loans”. For fair value disclosure purposes, the Company utilized certain value measurement criteria required under the ASC 820, as discussed below.

Estimated fair values have been determined by the Company using the best available data and an estimation methodology it believes to be suitable for each category of financial instruments. Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Also, there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values.

Cash and cash equivalents, which are comprised of cash and due from banks and the Company’s balance at the Federal Reserve, had recorded values of $1.04 billion and $888.2 million at December 31, 2023 and 2022, respectively, which approximated fair values.

Investment securities have estimated fair values based on quoted market prices or other observable inputs, if available. If observable inputs are not available, fair values are determined using unobservable (Level 3) inputs that are based on the best information available in the circumstances. For these investment securities, fair values are based on the present value of expected cash flows from principal and interest to maturity, or yield to call as appropriate, at the measurement date.

Commercial loans, at fair value are comprised of commercial real estate bridge loans and SBA loans which had been previously originated for sale or securitization in the secondary market, and which are now being held on the balance sheet. Commercial real estate bridge loans and SBA loans are valued using a discounted cash flow analysis based upon pricing for similar loans where market indications of the sales price of such loans are not available. SBA loans are valued on a pooled basis and commercial real estate bridge loans are valued individually.

Loans, net have an estimated fair value using the present value of future cash flows. The discount rate used in these calculations is the estimated current market rate adjusted for borrower-specific credit risk. The carrying value of accrued interest approximates fair value.

For OREO, market value is based upon appraisals of the underlying collateral by third-party appraisers, reduced by 7% to 10% for estimated selling costs

Federal Reserve, FHLB, and ACBB stock, are held as required by those respective institutions and are carried at cost. Each of these institutions require their members to hold stock as a condition of membership. While a fixed stock amount is required by each of these institutions, the FHLB stock requirement periodically increases or decreases with varying levels of borrowing activity.

Assets held-for-sale from discontinued operations were recorded at the lower of cost basis or market value. For loans, market value was determined using the discounted cash flow approach which converts expected cash flows from the loan portfolio by unit of measurement to a present value estimate. Unit of measurement was determined by loan type and for significant loans on an individual loan basis. Loan fair values are based on “unobservable inputs” that are based on available information. Level 3 fair values are based on the present value of cash flows by unit of measurement. In the first quarter of 2022, discontinued loans were reclassified to loans held for investment, as efforts to sell the loans had concluded. Accordingly, these loans will be accounted for as such, and included in related tables. Discontinued OREO which constituted the remainder of discontinued assets was reclassified to the OREO caption on the consolidated balance sheet.

Deposits (comprised of interest and non-interest-bearing checking accounts, savings, and certain types of money market accounts) are equal to the amount payable on demand at the reporting date (generally, their carrying amounts). The fair values of securities sold under agreements to repurchase and short-term borrowings are equal to their carrying amounts as they are overnight borrowings. There were no short-term borrowings outstanding at December 31, 2023 or 2022.

Time deposits, when outstanding, senior debt and subordinated debentures have a fair value estimated using a discounted cash flow calculation that applies current interest rates to discount expected cash flows. There were no time deposits outstanding at December 31, 2023 and $330.0 million at December 31, 2022.

Long-term borrowings resulted from sold loans which did not qualify for true sale accounting. They are presented in the principal amount of such loans.

Interest rate swaps are either assets or liabilities and have a fair value which is estimated using models that use readily observable market inputs and a market standard methodology applied to the contractual terms of the derivatives, including the period to maturity and the applicable interest rate index.

The fair value of commitments to extend credit is estimated based on the amount of unamortized deferred loan commitment fees. The fair value of letters of credit is based on the amount of unearned fees plus the estimated cost to terminate the letters of credit. Fair values of unrecognized financial instruments, including commitments to extend credit, and the fair value of letters of credit are considered immaterial. Fair value information for specific balance sheet categories is as follows.


	December 31, 2023
					Quoted prices		Significant
					in active		other		Significant
					markets for		observable		unobservable
	Carrying		Estimated		identical assets		inputs		inputs
	amount		fair value		(Level 1)		(Level 2)		(Level 3)
		(in thousands)
Investment securities, available-for-sale	$	747,534	$	747,534	$	—	$	735,463	$	12,071
Federal Reserve, FHLB and ACBB stock		15,591		15,591		—		—		15,591
Commercial loans, at fair value		332,766		332,766		—		—		332,766
Loans, net of deferred loan fees and costs		5,361,139		5,329,436		—		—		5,329,436
Interest rate swaps, asset		285		285		—		285		—
Demand and interest checking		6,630,251		6,630,251		—		6,630,251		—
Savings and money market		50,659		50,659		—		50,659		—
Senior debt		95,859		96,539		—		96,539		—
Subordinated debentures		13,401		11,470		—		—		11,470
Securities sold under agreements to repurchase		42		42		42		—		—


	December 31, 2022
					Quoted prices		Significant
					in active		other		Significant
					markets for		observable		unobservable
	Carrying		Estimated		identical assets		inputs		inputs
	amount		fair value		(Level 1)		(Level 2)		(Level 3)
		(in thousands)
Investment securities, available-for-sale	$	766,016	$	766,016	$	—	$	745,993	$	20,023
Federal Reserve, FHLB and ACBB stock		12,629		12,629		—		—		12,629
Commercial loans, at fair value		589,143		589,143		—		—		589,143
Loans, net of deferred loan fees and costs		5,486,853		5,462,948		—		—		5,462,948
Interest rate swaps, asset		408		408		—		408		—
Demand and interest checking		6,559,617		6,559,617		—		6,559,617		—
Savings and money market		140,496		140,496		—		140,496		—
Senior debt		99,050		93,871		—		93,871		—
Time deposits		330,000		330,000				330,000		—
Subordinated debentures		13,401		10,067		—		—		10,067
Securities sold under agreements to repurchase		42		42		42		—		—

Other assets and liabilities measured at fair value on a recurring basis, segregated by fair value hierarchy, are summarized below (in thousands):


			Fair Value Measurements at Reporting Date Using
			Quoted prices in active		Significant other		Significant
			markets for identical		observable		unobservable
	Fair value		assets		inputs		inputs
	December 31, 2023		(Level 1)		(Level 2)		(Level 3)

Investment securities, available-for-sale
U.S. Government agency securities	$	33,886	$	—	$	33,886	$	—
Asset-backed securities		325,353		—		325,353		—
Obligations of states and political subdivisions		47,237		—		47,237		—
Residential mortgage-backed securities		160,767		—		160,767		—
Collateralized mortgage obligation securities		34,038		—		34,038		—
Commercial mortgage-backed securities		146,253		—		134,182		12,071
Total investment securities, available-for-sale		747,534		—		735,463		12,071
Commercial loans, at fair value		332,766		—		—		332,766
Interest rate swaps, asset		285		—		285		—
	$	1,080,585	$	—	$	735,748	$	344,837


			Fair Value Measurements at Reporting Date Using
			Quoted prices in active		Significant other		Significant
			markets for identical		observable		unobservable
	Fair value		assets		inputs		inputs
	December 31, 2022		(Level 1)		(Level 2)		(Level 3)
	.
Investment securities, available-for-sale
U.S. Government agency securities	$	28,381	$	—	$	28,381	$	—
Asset-backed securities		334,009		—		334,009		—
Obligations of states and political subdivisions		47,510		—		47,510		—
Residential mortgage-backed securities		139,820		—		139,820		—
Collateralized mortgage obligation securities		41,783		—		41,783		—
Commercial mortgage-backed securities		166,813		—		154,490		12,323
Corporate debt securities		7,700		—		—		7,700
Total investment securities, available-for-sale		766,016		—		745,993		20,023
Commercial loans, at fair value		589,143		—		—		589,143
Interest rate swaps, asset		408		—		408		—
	$	1,355,567	$	—	$	746,401	$	609,166

The Company’s Level 3 asset activity for the categories shown for the years 2023 and 2022 is as follows (in thousands):


		Fair Value Measurements Using
		Significant Unobservable Inputs
		(Level 3)

	Available-for-sale				Commercial loans,
	securities				at fair value
	December 31, 2023		December 31, 2022		December 31, 2023		December 31, 2022
Beginning balance	$	20,023	$	19,031	$	589,143	$	1,388,416
Transfers to OREO		—		—		(2,686)		(61,580)
Total net (losses) or gains (realized/unrealized)
Included in earnings		—		—		3,869		12,570
Included in earnings (included in credit loss)		(10,000)		—		—		—
Included in other comprehensive income/(loss)		2,048		992		—		—
Purchases, issuances, sales and settlements
Issuances		—		—		134,256		66,067
Settlements		—		—		(391,816)		(816,330)
Ending balance	$	12,071	$	20,023	$	332,766	$	589,143

Total losses year to date included
in earnings attributable to the change in
unrealized gains or losses relating to assets still
held at the reporting date as shown above.	$	—	$	—	$	(3,085)	$	(3,492)


	Fair Value Measurements Using
	Significant Unobservable Inputs
	(Level 3)

	Assets held-for-sale
	from discontinued operations
	December 31, 2023		December 31, 2022
Beginning balance	$	—	$	3,268
Settlements		—		(3,268)
Ending balance	$	—	$	—

Total losses year to date included
in earnings attributable to the change in
unrealized gains or losses relating to assets still
held at the reporting date as shown above.	$	—	$	—

The Company’s OREO activity is summarized below (in thousands) as of the dates indicated:


	December 31, 2023		December 31, 2022
Beginning balance	$	21,210	$	18,873
Transfer from commercial loans, at fair value		2,686		—
Writedowns		(1,147)		—
Sales		(5,800)		(2,343)
Transfers from commercial loans, at fair value		—		4,680
Ending balance	$	16,949	$	21,210

Information related to fair values of Level 3 balance sheet categories is as follows (dollars in thousands, except range and weighted average data):



	Fair value at				Range at	Weighted average at
Level 3 instruments only	December 31, 2023		Valuation techniques	Unobservable inputs	December 31, 2023	December 31, 2023

Commercial mortgage-backed investment
security⁽¹⁾	$	12,071	Discounted cash flow	Discount rate	14.00%	14.00%
FHLB, ACBB,
and Federal Reserve Bank stock		15,591	Cost	N/A	N/A	N/A
Loans, net of deferred loan fees and costs⁽²⁾		5,329,436	Discounted cash flow	Discount rate	7.40%-13.00%	8.41%

Commercial - SBA⁽³⁾		119,287	Discounted cash flow	Discount rate	7.46%	7.46%
Non-SBA commercial real estate - fixed⁽⁴⁾		162,674	Discounted cash flow and appraisal	Discount rate	8.00%-12.30%	8.76%
Non-SBA commercial real estate - floating⁽⁵⁾		50,805	Discounted cash flow	Discount rate	9.30%-16.50%	14.19%
Commercial loans, at fair value		332,766

Subordinated debentures⁽⁶⁾		11,470	Discounted cash flow	Discount rate	11.00%	11.00%

OREO⁽⁷⁾		16,949	Appraised value	N/A	N/A	N/A


	Fair value at				Range at	Weighted average at
Level 3 instruments only	December 31, 2022		Valuation techniques	Unobservable inputs	December 31, 2022	December 31, 2022

Commercial mortgage-backed investment
securities	$	12,323	Discounted cash flow	Discount rate	12.71%	12.71%
Insurance liquidating trust preferred security		7,700	Discounted cash flow	Discount rate	11.50%	11.50%
FHLB, ACBB,
and Federal Reserve Bank stock		12,629	Cost	N/A	N/A	N/A
Loans, net of deferred loan fees and costs		5,462,948	Discounted cash flow	Discount rate	5.65%-11.00%	6.86%

Commercial - SBA		146,717	Discounted cash flow	Discount rate	5.57%-6.25%	6.17%
Non-SBA commercial real estate - fixed		28,695	Discounted cash flow and appraisal	Discount rate	8.36%-11.65%	10.31%
Non-SBA commercial real estate - floating		413,731	Discounted cash flow	Discount rate	7.07%-17.20%	7.90%
Commercial loans, at fair value		589,143

Subordinated debentures		10,067	Discounted cash flow	Discount rate	11.50%	11.50%

OREO		21,210	Appraised value	N/A	N/A	N/A

The valuations for each of the instruments above, as of the balance sheet date, are sensitive to judgments, assumptions and uncertainties, changes in which could have a significant impact on such valuations. All weighted averages at December 31, 2023 were calculated using the discount rate for each individual security or loan weighted by its par value, except for SBA loans. For SBA loans, traders’ pricing indications based on loan seasoning were weighted. For commercial loans recorded at fair value, changes in fair value are reflected in the income statement. Changes in the fair value of securities which are unrelated to credit are recorded through equity. Changes in the value of subordinated debentures are a disclosure item, without impact on the financial statements. Changes in the fair value of loans recorded at amortized cost which are unrelated to credit are also a disclosure item, without impact on the financial statements. The notes below refer to the December 31, 2023 table.

⁽¹⁾Commercial mortgage-backed investment security, consisting of the CRE-2 security, is valued using discounted cash flow analysis. The discount rate and prepayment rate applied are based upon market observations and actual experience for comparable securities and implicitly assume market averages for defaults and loss severities. The CRE-2 security has significant credit enhancement, or protection from other tranches in the issue, which limits the valuation exposure to credit losses. Nonetheless, increases in expected default rates or loss severities on the loans underlying the issue could reduce its value. In market environments in which investors demand greater yield compensation for credit risk, the discount rate applied would ordinarily be higher and the valuation lower. Changes in prepayments and loss experience could also change the interest earned on this holding in future periods and impact its fair value. As a single security, the weighted average rate shown is the actual rate applied to the CRE-2 security. For additional information related to this security see “Note 6—Loans”.

⁽²⁾Loans, net of deferred loan fees and costs are valued using discounted cash flow analysis. Discount rates are based upon available information for estimated current origination rates for each loan type. Origination rates may fluctuate based upon changes in the risk free (Treasury) rate and credit experience for each loan type.

⁽³⁾Commercial – SBA Loans are comprised of the government guaranteed portion of SBA-insured loans. Their valuation is based upon the yield derived from dealer pricing indications for guaranteed pools, adjusted for seasoning and prepayments. A limited number of broker/dealers originate the pooled securities for which the loans are purchased and as a result, prices can fluctuate based on such limited market demand, although the government guarantee has resulted in consistent historical demand. Valuations are impacted by prepayment assumptions resulting from both voluntary payoffs and defaults. As of December 31, 2023 all remaining SBA loans carried at fair value have in excess of 36 months of seasoning. As such, a single discount rate and prepayment assumption, based upon pool pricing, was applied to this calculation.

⁽⁴⁾Non-SBA commercial real estate – fixed are fixed rate non-SBA commercial real estate mortgages. These loans are fair valued by a third party, based upon discounting at market rates for similar loans. Discount rates used in applying discounted cash flow analysis utilize input based upon loan terms, the general level of interest rates and the quality of the credit. Deterioration in loan performance or other credit weaknesses could result in fair value ranges which would be dependent upon potential buyers’ tolerance for such weaknesses and are difficult to estimate.

⁽⁵⁾Non-SBA commercial real estate – floating are floating rate non-SBA loans, the majority of which are secured by multi-family properties (apartment buildings). These are bridge loans designed to provide owners time and funding for property improvements and are generally valued using discounted cash flow analysis. The discount rate for the vast majority of these loans was based upon current origination rates for similar loans. Deterioration in loan performance or other credit weaknesses could result in fair value ranges which would be dependent upon potential buyers’ tolerance for such weaknesses and are difficult to estimate. At December 31, 2023, these loans were fair valued by a third party, based upon discounting at market rates for similar loans.

⁽⁶⁾Subordinated debentures are comprised of the 2038 Debentures, which are valued using discounted cash flow analysis. The discount rate is based on the market rate for comparable relatively illiquid instruments. Changes in those market rates, or the credit of the Company could result in changes in the valuation.

⁽⁷⁾For OREO, fair value is based upon appraisals of the underlying collateral by third party appraisers, reduced by 7% to 10% for estimated selling costs. Such appraisals reflect estimates of amounts realizable upon property sales based on the sale of comparable properties and other factors. Actual sales prices may vary based upon the identification of potential purchasers, changing conditions in local real estate markets and the level of interest rates required to finance purchases.

Assets measured at fair value on a nonrecurring basis, segregated by fair value hierarchy, at December 31, 2022 and 2021 are summarized below (in thousands):


			Fair Value Measurements at Reporting Date Using
			Quoted prices in active		Significant other		Significant
			markets for identical		observable		unobservable
	Fair value		assets		inputs		inputs⁽¹⁾
Description	December 31, 2023		(Level 1)		(Level 2)		(Level 3)

Collateral dependent loans⁽¹⁾	$	8,944	$	—	$	—	$	8,944
OREO		16,949		—		—		16,949
Intangible assets		1,651		—		—		1,651
	$	27,544	$	—	$	—	$	27,544


			Fair Value Measurements at Reporting Date Using
			Quoted prices in active		Significant other		Significant
			markets for identical		observable		unobservable
	Fair value		assets		inputs		inputs⁽¹⁾
Description	December 31, 2022		(Level 1)		(Level 2)		(Level 3)


Collateral dependent loans⁽¹⁾	$	12,205	$	—	$	—	$	12,205
OREO		21,210		—		—		21,210
Intangible assets		2,049		—		—		2,049
	$	35,464	$	—	$	—	$	35,464

⁽¹⁾The method of valuation approach for the loans evaluated for an ACL on an individual loan basis and also for OREO was the market approach based upon appraisals of the underlying collateral by external appraisers, reduced by 7% to 10% for estimated selling costs. Intangible assets are valued based upon internal analyses.

At December 31, 2023, principal on collateral dependent loans and troubled debt restructurings, which is accounted for on the basis of the value of underlying collateral, is shown in the above table at an estimated fair value of $8.9 million. To arrive at that fair value, related loan principal of $11.8 million was reduced by specific allowances of $2.9 million within the ACL, as of that date, representing the deficiency between principal and estimated collateral values, which were reduced by estimated costs to sell. When the deficiency is deemed uncollectible, it is charged off by reducing the specific allowance and decreasing principal. Included in the loans individually evaluated for an ACL at December 31, 2023, were troubled debt restructured loans with a balance of $1.6 million which had specific allowances of $591,000. At December 31, 2022, principal on loans individually evaluated for an ACL, and troubled debt restructurings that is accounted for on the basis of the value of underlying collateral, is shown in the above table at an estimated fair value of $12.2 million. To arrive at that fair value, related loan principal of $14.3 million was reduced by specific allowances of $2.1 million within the ACL, as of that date, representing the deficiency between principal and estimated collateral values, which were reduced by estimated costs to sell. Included in the loans individually evaluated for an ACL at December 31, 2022, were troubled debt restructured loans with a balance of $5.3 million which had specific allowances of $637,000. Under the new accounting guidance effective January 1, 2023, which broadened the reporting of loan restructurings to include all modifications, there were $13.1 million of loans classified as modified as of December 31, 2023 with specific allowances of $127,000. Valuation techniques consistent with the market and/or cost approach were used to measure fair value and primarily included observable inputs for the individual loans being evaluated such as recent sales of similar collateral or observable market data for operational or carrying costs. In cases where such inputs were unobservable, the loan balance is reflected within the Level 3 hierarchy.

- 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.

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