Fair Value of Financial Instruments |
Fair Value of Financial Instruments Fair Value Hierarchy There are three levels of inputs in the fair value hierarchy that may be used to measure fair value. Financial instruments are considered Level 1 when valuation can be based on quoted prices in active markets for identical assets or liabilities. Level 2 financial instruments are valued using quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or models using inputs that are observable or can be corroborated by observable market data of substantially the full term of the assets or liabilities. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation. Recurring Fair Value The table below provides a rollforward of the Level 3 equity warrant asset fair values: | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, | | | Equity Warrant Assets | | 2024 | | 2023 | | | | | Balance at beginning of period | | $ | 2,874 | | | $ | 2,210 | | | | | | New equity warrant assets | | 370 | | | 153 | | | | | | Changes in fair value, net | | 5,661 | | | (176) | | | | | | Settlements | | (205) | | | — | | | | | | Balance at end of period | | $ | 8,700 | | | $ | 2,187 | | | | | |
The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis. | | | | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2024 | | Total | | Level 1 | | Level 2 | | Level 3 | Investment securities available-for-sale | | | | | | | | | US government agencies | | $ | 14,741 | | | $ | — | | | $ | 14,741 | | | $ | — | | Mortgage-backed securities | | 1,102,876 | | | — | | | 1,102,876 | | | — | | Municipal bonds (1) | | 3,005 | | | — | | | 2,920 | | | 85 | | | | | | | | | | | Loans held for investment | | 379,222 | | | — | | | — | | | 379,222 | | Servicing assets (2) | | 48,962 | | | — | | | — | | | 48,962 | | Mutual fund | | 1,324 | | | — | | | 1,324 | | | — | | Equity warrant assets | | 8,700 | | | — | | | — | | | 8,700 | | Total assets at fair value | | $ | 1,558,830 | | | $ | — | | | $ | 1,121,861 | | | $ | 436,969 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2023 | | Total | | Level 1 | | Level 2 | | Level 3 | Investment securities available-for-sale | | | | | | | | | US government agencies | | $ | 17,529 | | | $ | — | | | $ | 17,529 | | | $ | — | | Mortgage-backed securities | | 1,105,592 | | | — | | | 1,105,592 | | | — | | Municipal bonds (1) | | 3,039 | | | — | | | 2,954 | | | 85 | | | | | | | | | | | | | | | | | | | | Loans held for investment | | 388,036 | | | — | | | — | | | 388,036 | | Servicing assets (2) | | 48,186 | | | — | | | — | | | 48,186 | | Mutual fund | | 1,645 | | | — | | | 1,645 | | | — | | Equity warrant assets | | 2,874 | | | — | | | — | | | 2,874 | | Total assets at fair value | | $ | 1,566,901 | | | $ | — | | | $ | 1,127,720 | | | $ | 439,181 | |
| | | | | | (1) | During the three months ended March 31, 2024 there was no level 3 fair value adjustment gain or loss. During the three months ended March 31, 2023, the Company recorded a level 3 fair value adjustment loss of $10 thousand. | (2) | See Note 7 for a rollforward of recurring Level 3 fair values for servicing assets. |
For additional information on the valuation techniques and significant inputs for Level 2 and Level 3 assets and liabilities that are measured at fair value on a recurring basis, see Note 10. Fair Value of Financial Instruments in the Company’s 2023 Form 10-K. Additionally, see Note 1. Basis of Presentation of the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements for information related to changes in valuation techniques for the Company's loan servicing assets and loans accounted for under the fair value option. Fair Value Option Until the first quarter of 2021, the Company had historically elected to account for retained participating interests of all government guaranteed loans 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 is recognized in the same manner on loans reported at fair value as on non-fair value loans, except in regard to origination fees and costs which are recognized immediately upon fair value election. Not electing fair value generally results in a larger discount being recorded on the date of the sale. This discount is subsequently accreted into interest income over the underlying loan’s remaining term using the effective interest method. Management made this change of election in alignment with its ongoing effort to reduce volatility and drive more predictable revenue. In accordance with GAAP, any loans for which fair value was previously elected continue to be measured as such. There were no loans accounted for under the fair value option that were 90 days or more past due and still accruing interest at March 31, 2024 or December 31, 2023. The unpaid principal balance of unguaranteed exposure for nonaccruals was $10.2 million and $9.1 million at March 31, 2024 and December 31, 2023, respectively. The following tables provide more information about the fair value carrying amount and the unpaid principal outstanding of loans accounted for under the fair value option at March 31, 2024 and December 31, 2023. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2024 | | Total Loans | | Nonaccruals | | 90 Days or More Past Due | | Fair Value Carrying Amount | | Unpaid Principal Balance | | Difference | | Fair Value Carrying Amount | | Unpaid Principal Balance | | Difference | | Fair Value Carrying Amount | | Unpaid Principal Balance | | Difference | Fair Value Option Elections | | | | | | | | | | | | | | | | | | Loans held for investment | $ | 379,222 | | | $ | 397,990 | | | $ | (18,768) | | | $ | 55,562 | | | $ | 58,280 | | | $ | (2,718) | | | $ | 43,502 | | | $ | 45,252 | | | $ | (1,750) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2023 | | Total Loans | | Nonaccruals | | 90 Days or More Past Due | | Fair Value Carrying Amount | | Unpaid Principal Balance | | Difference | | Fair Value Carrying Amount | | Unpaid Principal Balance | | Difference | | Fair Value Carrying Amount | | Unpaid Principal Balance | | Difference | Fair Value Option Elections | | | | | | | | | | | | | | | | | | Loans held for investment | $ | 388,036 | | | $ | 407,544 | | | $ | (19,508) | | | $ | 48,474 | | | $ | 50,749 | | | $ | (2,275) | | | $ | 36,490 | | | $ | 37,939 | | | $ | (1,449) | |
The following table presents the net gains (losses) from changes in fair value. | | | | | | | | | | | | | | | | | Three Months Ended March 31, | | | Gains (Losses) on Loans Accounted for under the Fair Value Option | 2024 | | 2023 | | | | | | | | | | | | | Loans held for investment | $ | (219) | | | $ | (4,529) | | | | | | | | | | | | | |
Losses related to borrower-specific credit risk were $0 and $3.2 million for the three months ended March 31, 2024 and 2023, respectively. The following tables summarize the activity pertaining to loans accounted for under the fair value option: | | | | | | | | | | | | | | | | | Three Months Ended March 31, | | | Loans held for investment | 2024 | | 2023 | | | | | Balance at beginning of period | $ | 388,036 | | | $ | 494,458 | | | | | | Repurchases | 8,565 | | | 11,834 | | | | | | Fair value changes | (219) | | | (4,529) | | | | | | | | | | | | | | Settlements | (17,160) | | | (34,813) | | | | | | Balance at end of period | $ | 379,222 | | | $ | 466,950 | | | | | |
Non-Recurring Fair Value The tables below present the recorded amount of assets measured at fair value on a non-recurring basis. The Company has no liabilities recorded at fair value on a non-recurring basis. | | | | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2024 | | Total | | Level 1 | | Level 2 | | Level 3 | Collateral-dependent loans | | $ | 5,425 | | | $ | — | | | $ | — | | | $ | 5,425 | | Foreclosed assets | | 2,080 | | | — | | | — | | | 2,080 | | Total assets at fair value | | $ | 7,505 | | | $ | — | | | $ | — | | | $ | 7,505 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2023 | | Total | | Level 1 | | Level 2 | | Level 3 | Collateral-dependent loans | | $ | 4,503 | | | $ | — | | | $ | — | | | $ | 4,503 | | Foreclosed assets | | 6,481 | | | — | | | — | | | 6,481 | | Total assets at fair value | | $ | 10,984 | | | $ | — | | | $ | — | | | $ | 10,984 | |
For additional information on the valuation techniques and significant inputs for Level 2 and Level 3 assets that are measured at fair value on a non-recurring basis, see Note 10. Fair Value of Financial Instruments in the Company’s 2023 Form 10-K. Level 3 Analysis For Level 3 assets measured at fair value on a recurring or non-recurring basis as of March 31, 2024 and December 31, 2023, the significant unobservable inputs used in the fair value measurements were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2024 | | | | | | | | | | | Level 3 Assets with Significant Unobservable Inputs | | Fair Value | | Valuation Technique | | Significant Unobservable Inputs | | Range | | Weighted Average (1) | Recurring fair value | | | | | | | | | | | Municipal bond | | $ | 85 | | | Discounted expected cash flows | | Discount rate | | 7.0 | % | | N/A | | | | Prepayment speed | | 5.0 | % | | N/A | | | | | | | | | | | | | | | | | | | | Loans held for investment | | $ | 379,222 | | | Discounted expected cash flows | | Loss rate | | 0.0 % - 7.1 % | | 1.1 | % | | | | Discount rate | | 7.3 % - 18.0 % | | 10.0 | % | | | | Prepayment speed | | 14.3 % - 30.6 % | | 16.5 | % | | | | | | | | | | Servicing assets | | $ | 48,962 | | | Discounted expected cash flows | | Discount rate | | 14.5 | % | | 14.5 | % | | | | Prepayment speed | | 12.0% - 18.2% | | 15.7 | % | Equity warrant assets | | $ | 8,700 | | | Black-Scholes option pricing model | | Volatility | | 26.5 % - 90.0 % | | 30.1 | % | | | | Risk-free interest rate | | 4.2 % | | 4.2 | % | | | | Marketability discount | | 5.0 % - 25.0 % | | 15.1 | % | | | | Remaining life | | 3.6 - 10 years | | 5.4 years | Non-recurring fair value | | | | | | | | | | | Collateral-dependent loans | | $ | 5,425 | | | Discounted appraisals | | Appraisal adjustments (2) | | 10.0 % - 97.3 % | | 41.9 | % | Foreclosed assets | | $ | 2,080 | | | Discounted appraisals | | Appraisal adjustments (2) | | 10.0 % | | 10.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2023 | | | | | | | | | | | Level 3 Assets with Significant Unobservable Inputs | | Fair Value | | Valuation Technique | | Significant Unobservable Inputs | | Range | | Weighted Average (1) | Recurring fair value | | | | | | | | | | | Municipal bond | | $ | 85 | | | Discounted expected cash flows | | Discount rate | | 7.0 | % | | N/A | | | | Prepayment speed | | 5.0 | % | | N/A | Loans held for investment | | $ | 388,036 | | | Discounted expected cash flows | | Loss rate | | 0.0 % - 7.4 % | | 1.2 | % | | | | Discount rate | | 6.7 % - 18.0 % | | 9.6 | % | | | | Prepayment speed | | 14.0% - 30.3% | | 16.0 | % | | | | | | | | | | Servicing assets | | $ | 48,186 | | | Discounted expected cash flows | | Discount rate | | 14.5 | % | | 14.5 | % | | | | Prepayment speed | | 11.8% - 17.8% | | 15.3 | % | Equity warrant assets | | $ | 2,874 | | | Black-Scholes option pricing model | | Volatility | | 26.9 % - 90.0 % | | 35.8 | % | | | | Risk-free interest rate | | 3.8 % - 3.9 % | | 3.9 | % | | | | Marketability discount | | 20.0% - 25.0% | | 22.7 | % | | | | Remaining life | | 3.9 - 10 years | | 7.6 years | Non-recurring fair value | | | | | | | | | | | Collateral-dependent loans | | $ | 4,503 | | | Discounted appraisals | | Appraisal adjustments (2) | | 10.0 % - 70.0 % | | 38.7 | % | Foreclosed assets | | $ | 6,481 | | | Discounted appraisals | | Appraisal adjustments (2) | | 10.0% - 17.4% | | 10.4 | % |
| | | | | | (1) | Weighted averages are determined by the relative fair value of the instruments or the relative contribution to the instruments fair value. | (2) | Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and other qualitative adjustments. |
Estimated Fair Value of Other Financial Instruments GAAP also requires disclosure of the fair value of financial instruments carried at book value on the Unaudited Condensed Consolidated Balance Sheets. The carrying amounts and estimated fair values of the Company’s financial instruments not measured at fair value on a recurring or non-recurring basis are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2024 | | Carrying Amount | | Quoted Price In Active Markets for Identical Assets/Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Fair Value | Financial assets | | | | | | | | | | | Cash and due from banks | | $ | 597,394 | | | $ | 597,394 | | | $ | — | | | $ | — | | | $ | 597,394 | | | | | | | | | | | | | Certificates of deposit with other banks | | 250 | | | 250 | | | — | | | — | | | 250 | | Loans held for sale | | 310,749 | | | — | | | — | | | 329,849 | | | 329,849 | | Loans and leases held for investment, net of allowance for credit losses on loans and leases | | 8,394,298 | | | — | | | — | | | 8,884,123 | | | 8,884,123 | | Financial liabilities | | | | | | | | | | | Deposits | | 10,383,361 | | | — | | | 10,140,423 | | | — | | | 10,140,423 | | Borrowings | | 120,242 | | | — | | | — | | | 128,153 | | | 128,153 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2023 | | Carrying Amount | | Quoted Price In Active Markets for Identical Assets/Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Fair Value | Financial assets | | | | | | | | | | | Cash and due from banks | | $ | 582,540 | | | $ | 582,540 | | | $ | — | | | $ | — | | | $ | 582,540 | | | | | | | | | | | | | Certificates of deposit with other banks | | 250 | | | 250 | | | — | | | — | | | 250 | | Loans held for sale | | 387,037 | | | — | | | — | | | 402,096 | | | 402,096 | | Loans and leases held for investment, net of allowance for credit losses on loans and leases | | 8,119,971 | | | — | | | — | | | 8,600,046 | | | 8,600,046 | | Financial liabilities | | | | | | | | | | | Deposits | | 10,275,019 | | | — | | | 10,080,182 | | | — | | | 10,080,182 | | Borrowings | | 23,354 | | | — | | | — | | | 22,844 | | | 22,844 | |
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