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FAIR VALUE
3 Months Ended
Mar. 31, 2023
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 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; or 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.
Recurring Fair Value
Equity Securities: Fair value of equity securities represents the market value of mutual funds based on quoted market prices (Level 1) and the value of stock held in other companies, which is based on recent market transactions or quoted rates that are not actively traded (Level 2).
Equity Warrants: Fair value of equity warrants of private companies are priced using a Black-Scholes option pricing model to estimate the asset fair value by using strike prices, option expiration dates, risk-free interest rates, and option volatility assumptions (Level 3).
Guarantee Asset and Liability: The guarantee asset represents the fair value of the consideration received in exchange for the credit enhancement fee. The guarantee liability represents a financial guarantee to cover the second layer of any losses on loans sold to FHLB under the MPF 125 loan sales agreement. The guarantee liability value on day one is equivalent to the guarantee asset fair value, which is the consideration for the credit enhancement fee paid over the life of the loans. The liability is then carried at amortized cost. Significant inputs in the valuation analysis for the asset are Level 3, due to the nature of this asset and the lack of market quotes. The fair value of the guarantee asset is determined using a discounted cash flow model, for which significant unobservable inputs include assumed future prepayment rates ("CPR") and market discount rate (Level 3). An increase in prepayment rates or discount rate would generally reduce the estimated fair value of the guarantee asset.
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.
Mortgage Related Derivatives: Mortgage related derivatives include our IRLC, FSC, and the forward commitments on our loans held for sale pipeline. The fair value estimate of our IRLC is based on valuation models using market data from secondary market loan sales and direct contacts with third party investors as of the measurement date and pull through assumptions (Level 3). The FSC fair value estimate reflects the potential pair off fee associated with mandatory trades and is estimated by using a market differential and pair off penalty assessed by the investor (Level 3). The fair value estimate of the forward commitments is based on market prices of similar securities to the underlying MBS (Level 2).
Loans Held at Fair Value: The fair value of loans held for investment are typically determined based on discounted cash flow analysis using market-based interest rate spreads. Discounted cash flow analysis are adjusted, as appropriate, to reflect current market conditions and borrower specific credit risk. Due to the nature of the valuation inputs, loans held for investment are classified within Level 3 of the valuation hierarchy.
Mortgage Loans Held for Sale: The fair value of mortgage loans held for sale is estimated based upon quotes from third party investors for similar assets resulting in a Level 2 classification.
Loans Held for Sale: The fair value of loans held for sale is determined using actual quoted commitments from third party investors resulting in Level 1 classification.
The following presents assets and liabilities measured on a recurring basis as of the dates noted (dollars in thousands):
March 31, 2023Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Reported
Balance
Financial Assets
Mortgage loans held for sale$— $9,873 $— $9,873 
Loans held at fair value$— $— $20,807 $20,807 
Equity securities$637 $122 $— $759 
Guarantee asset$— $— $235 $235 
IRLC, net$— $— $723 $723 
Equity warrants$— $— $825 $825 
Swap derivative asset$— $204 $— $204 
Financial Liabilities
Forward commitments and FSC$— $(138)$— $(138)
Swap derivative liabilities$— $(508)$— $(508)
December 31, 2022Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Reported
Balance
Financial Assets
Mortgage loans held for sale$— $8,839 $— $8,839 
Loans held for sale$1,965 $— $— $1,965 
Loans held at fair value$— $— $23,321 $23,321 
Forward commitments and FSC$— $46 $— $46 
Equity securities$627 $122 $— $749 
Guarantee asset$— $— $143 $143 
IRLC, net$— $— $229 $229 
Equity warrants$— $— $825 $825 
There were no transfers between levels during the three months ended March 31, 2023 or year ended December 31, 2022. On April 1, 2022, the Company elected to transfer all securities classified as available-for-sale to held-to-maturity and are now carried at amortized cost. See Note 2 – Investment Securities for more information.
As of March 31, 2023, equity securities, equity warrants, IRLC, and guarantee assets have been recorded at fair value within the Other assets line item in the Condensed Consolidated Balance Sheets. All changes are recorded in the Other line item in the Condensed Consolidated Statements of Income.
Fair Value Option
The Company has elected to account for certain purchased whole loans held for investment under the fair value option in order to align the accounting presentation with the Company’s viewpoint of the economics of the loans. Interest income on loans held for investment accounted for under the fair value option is recognized within Interest and dividend income in the accompanying Condensed Consolidated Statements of Income. Not electing fair value generally results in a larger discount being recorded on the date of the loan purchase. The discount is subsequently accreted into interest income over the underlying loan’s remaining term using the effective interest method. Additionally, management has elected the fair value option for mortgage loans originated and held for sale.
As of December 31, 2022, the Company reclassified $2.0 million of loans held for investment to loans held for sale. The transfer occurred at the point in time the company decided to sell the loan and received a commitment from third party investors to purchase the loan. During the three months ended March 31, 2023, the Company reclassified $39.2 million of loans held for investment to loans held for sale and received a commitment from third party investors to purchase the loans. As of March 31, 2023, the total of $40.9 million loans held for sale had been sold.
There were no loans accounted for under the fair value option that were 90 days or more past due and still accruing interest as of March 31, 2023 or December 31, 2022. As of March 31, 2023, there were 141 loans, totaling $0.1 million, accounted for under the fair value option that were on nonaccrual. As of December 31, 2022, there were 145 loans totaling $0.1 million, accounted for under the fair value option that were on nonaccrual. During the three months ended March 31, 2023, the Company recorded net charge-offs of $0.4 million on loans accounted for under the fair value option. During the three months ended March 31, 2022, the Company recorded no charge-offs on loans accounted for under the fair value option.
The following provides more information about the fair value carrying amount and unpaid principal outstanding of loans accounted for under the fair value option as of the dates noted (dollars in thousands):
March 31, 2023
Total LoansNon Accruals90 Days or More Past Due
Fair Value Carrying
Amount
Unpaid Principal
Balance
DifferenceFair Value Carrying
Amount
Unpaid Principal
Balance
DifferenceFair Value Carrying
Amount
Unpaid Principal
Balance
Difference
Mortgage loans held for sale$9,873 $9,715 $158 $— $— $— $— $— $— 
Loans held for investment20,807 21,052 (245)117 121 (4)117 121 (4)
$30,680 $30,767 $(87)$117 $121 $(4)$117 $121 $(4)
December 31, 2022
Total LoansNon Accruals90 Days or More Past Due
Fair Value Carrying
Amount
Unpaid Principal
Balance
DifferenceFair Value Carrying
Amount
Unpaid Principal
Balance
DifferenceFair Value Carrying
Amount
Unpaid Principal
Balance
Difference
Mortgage loans held for sale$8,839 $8,750 $89 $— $— $— $— $— $— 
Loans held for sale1,965 1,984 (19)— — — — — — 
Loans held for investment23,321 23,415 (94)139 140 (1)139 140 (1)
$34,125 $34,149 $(24)$139 $140 $(1)$139 $140 $(1)
The following presents the changes in fair value of loans accounted for under the fair value option as of the dates noted (dollars in thousands):
Three Months Ended
March 31,
20232022
Mortgage loans held for sale$68 $667 
Loans held for sale(20)— 
Loans held for investment(150)— 
$(102)$667 
The following summarizes the activity pertaining to loans accounted for under the fair value option as of the dates noted (dollars in thousands):
Three Months Ended
March 31,
Mortgage loans held for sale20232022
Balance at beginning of period$8,839 $30,620 
Loans originated54,073 191,081 
Fair value changes68 667 
Sales(53,102)(188,666)
Settlements(5)(39)
Balance at end of period$9,873 $33,663 
Three Months Ended
March 31,
Loans held for sale20232022
Balance at beginning of period$1,965 $— 
Loans transferred from held for investment39,221 — 
Fair value changes(20)— 
Sales(40,761)— 
Settlements(405)— 
Balance at end of period$— $— 
Three Months Ended
March 31,
Loans held for investment20232022
Balance at beginning of period$23,321 $— 
Loans acquired1,162 6,380 
Fair value changes(150)— 
Net charge-offs(392)— 
Settlements(3,134)— 
Balance at end of period$20,807 $6,380 
Nonrecurring Fair Value
Other Real Estate Owned (“OREO”): Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. They are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than on an annual basis. Appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between comparable sales and income data available. Such adjustments can be significant and typically result in Level 3 classifications of the inputs for determining fair value. OREO is evaluated annually for additional impairment and adjusted accordingly.
Collateral Dependent Loans: The fair value of collateral dependent loans individually analyzed and not included in the pooled loan analysis under the ACL is generally based on recent appraisals and the value of any credit enhancements associated with the loan. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments can be significant and typically result in Level 3 classifications of the inputs for determining fair value. Collateral dependent loans are evaluated monthly and adjusted accordingly if needed.
Appraisals for both collateral-dependent loans and OREO are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, the Company reviews the assumptions and approaches utilized
in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.
The following presents assets measured on a nonrecurring basis as of the dates noted (dollars in thousands):
March 31, 2023Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Reported
Balance
Collateral dependent loans:
Commercial and Industrial$— $— $188 $188 
The sales comparison approach was utilized for estimating the fair value of non-recurring assets. There were no assets measured on a nonrecurring basis for the year ended December 31, 2022.
During the year ended December 31, 2022, the Company recorded $0.4 million of OREO as a result of obtaining physical possession of a foreclosed property as partial consideration for amounts owed on a collateral dependent loan. The Company sold the property during the year ended December 31, 2022, resulting in an immaterial gain. As of March 31, 2023 and December 31, 2022, the Company did not own any OREO properties.
As of March 31, 2023, total collateral dependent loans measured using fair value had carrying values of $0.4 million and were classified as Level 3. Collateral dependent loans accounted for $0.2 million of specific reserves as of March 31, 2023 and no specific reserves as of December 31, 2022. The Company recorded no charge offs from the specific reserve during the three months ended March 31, 2023. The Company recorded no charge offs from the specific reserve during the year ended December 31, 2022. During the year ended December 31, 2022, the Company recorded $0.3 million of charge offs.
Level 3 Analysis
The following presents a reconciliation for Level 3 instruments measured at fair value on a recurring basis as of the dates noted (dollars in thousands):
Three Months Ended March 31, 2023
Corporate Bonds(1)
Loans Held at Fair
Value
FSCGuarantee AssetIRLCEquity Warrants
Beginning balance$— $23,321 $— $143 $229 $825 
Acquisitions— 1,162 — — 886 — 
Originations— — — (1,486)— 
Gains/(losses) in net income, net— (150)— 87 1,094 — 
Settlements— (3,526)— — — — 
Ending balance$— $20,807 $— $235 $723 $825 
(1) All securities were transferred from available-for-sale to held-to-maturity effective April 1, 2022 and are no longer measured at fair value on a recurring basis.
Three Months Ended March 31, 2022Corporate Bonds Loans Held at Fair
Value
FSC Guarantee Asset IRLC Equity Warrants
Beginning balance$2,113 $— $(9)$237 $1,473 $160 
Acquisitions4,000 6,380 — 1,614 242 
Originations— — — — (1,354)— 
Losses in net income, net— — — (31)(743)— 
Unrealized gain/(losses), net102 — — — — — 
Ending balance$6,215 $6,380 $— $206 $990 $402 

The following presents quantitative information about Level 3 assets measured on a recurring and nonrecurring basis as of the dates noted (dollars in thousands):
Quantitative Information about Level 3 Fair Value Measurements as of March 31, 2023
Fair ValueValuation
Technique
Significant
Unobservable Input
Range
(Weighted Average)
Recurring fair value
Loans held for investment at fair value$20,807 Discounted cash flowDiscount rate
4% to 9% (5%)
Guarantee asset235 Discounted cash flowDiscount rate
Prepayment rate
5% (5%)
3% (3%)
IRLC, net723 Best execution modelPull through
60% to 100% (89%)
Equity warrants825 Black-Scholes option pricing modelVolatility
Risk-free interest rate
Remaining life
32.7% to 44.7% (35.0%)
3.88% (3.88%)
0 to 3 years
Nonrecurring fair value
Collateral dependent loans:
Commercial and Industrial188 Sales comparison,
Market approach -
guideline transaction
method
Loss given default
35% to 61% (50%)
Quantitative Information about Level 3 Fair Value Measurements as of December 31, 2022
Fair ValueValuation
Technique
Significant
Unobservable Input
Range
(Weighted Average)
Recurring fair value
Loans held for investment at fair value$23,321 Discounted cash flowDiscount rate
4% to 18%
(8)%
Guarantee asset143 Discounted cash flowDiscount rate
Prepayment rate
5% (5%)
4% (4%)
IRLC, net229 Best execution modelPull through
73% to 100%
(91%)
Equity warrants825 Black-Scholes option pricing modelVolatility
Risk-free interest rate
Remaining life
32.7% to 44.7% (34.8%)
4.04% to 4.14% (4.05%)
0 to 4 years
Estimated Fair Value of Other Financial Instruments
The following presents carrying amounts and estimated fair values for financial instruments not carried at fair value as of the dates noted (dollars in thousands):
Carrying
Amount
Fair Value Measurements Using:
March 31, 2023Level 1Level 2Level 3
Assets:
Cash and cash equivalents$295,067 $295,067 $— $— 
Held-to-maturity securities, net of ACL79,565 238 65,747 7,585 
Loans2,448,231 — — 2,343,600 
Accrued interest receivable10,976 10,976 — — 
Liabilities:    
Deposits2,391,927 2,037,360 — 370,521 
Borrowings:    
FHLB borrowings – fixed rate256,780 — 256,788 — 
Federal Reserve borrowings – fixed rate4,605 — 4,605 — 
Subordinated notes – fixed-to-floating rate52,167 — — 56,437 
Accrued interest payable1,786 1,786 — — 
Carrying
Amount
Fair Value Measurements Using:
December 31, 2022Level 1Level 2Level 3
Assets:
Cash and cash equivalents$196,512 $196,512 $— $— 
Held-to-maturity securities81,056 234 67,433 7,051 
Loans2,446,092 — — 2,356,085 
Accrued interest receivable10,445 10,445 — — 
Liabilities:
Deposits2,405,229 2,181,139 — 228,868 
Borrowings:
FHLB borrowings – fixed rate141,498 — 141,867 — 
Federal Reserve borrowings – fixed rate5,388 — 5,388 — 
Subordinated notes – fixed-to-floating rate52,132 — — 60,384 
Accrued interest payable1,125 1,125 — — 
The fair value estimates presented and discussed above are based on pertinent information available to management as of the dates specified. The estimated fair value amounts are based on the exit price notion set forth by ASU 2016-01. Although management is not aware of any factors that would significantly affect the estimated fair values, such amounts have not been comprehensively revalued for purposes of these condensed consolidated financial statements since the balance sheet dates. Therefore, current estimates of fair value may differ significantly from the amounts presented herein.
The methods and assumptions, not previously presented, used to estimate fair values are described as follows.
Cash and Cash Equivalents and Restricted Cash: The carrying amounts of cash and cash equivalents and restricted cash approximate fair values as maturities are less than 90 days and balances are generally in accounts bearing current market interest rates.
Held-to-maturity securities: The fair values for held-to-maturity investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities is not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).
Loans: The fair values for all fixed-rate and variable-rate performing loans were estimated using the income approach and by discounting the projected cash flows of such loans. Principal and interest cash flows were projected based on the contractual terms of the loans, including maturity, contractual amortization, and adjustments for prepayments and expected losses, where appropriate. A discount rate was developed based on the relative risk of the cash flows, considering the loan type, maturity, and a required return on capital.
Accrued Interest Receivable and Payable: The carrying amounts of accrued interest approximate fair value due to their short-term nature.
Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amounts payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting dates. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Fixed Rate Borrowings: Borrowings with fixed rates are valued using inputs such as discounted cash flows and current interest rates for similar instruments.
Fixed-to-Floating Rate Borrowings: Borrowings with fixed-to-floating rates are valued using inputs such as discounted cash flows and current interest rates for similar instruments and assume the Company will redeem the instrument prior to the first interest rate reset date.