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Fair Value of Financial Instruments
3 Months Ended
Mar. 31, 2024
Fair Value Disclosures [Abstract]  
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 Assets20242023
Balance at beginning of period$2,874 $2,210 
New equity warrant assets370 153 
Changes in fair value, net5,661 (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, 2024TotalLevel 1Level 2Level 3
Investment securities available-for-sale
US government agencies$14,741 $— $14,741 $— 
Mortgage-backed securities1,102,876 — 1,102,876 — 
Municipal bonds (1)
3,005 — 2,920 85 
Loans held for investment379,222 — — 379,222 
Servicing assets (2)
48,962 — — 48,962 
Mutual fund1,324 — 1,324 — 
Equity warrant assets8,700 — — 8,700 
Total assets at fair value$1,558,830 $— $1,121,861 $436,969 
December 31, 2023TotalLevel 1Level 2Level 3
Investment securities available-for-sale
US government agencies$17,529 $— $17,529 $— 
Mortgage-backed securities1,105,592 — 1,105,592 — 
Municipal bonds (1)
3,039 — 2,954 85 
Loans held for investment388,036 — — 388,036 
Servicing assets (2)
48,186 — — 48,186 
Mutual fund1,645 — 1,645 — 
Equity warrant assets2,874 — — 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 $(1,449)
The following table presents the net gains (losses) from changes in fair value.
Three Months Ended March 31,
Gains (Losses) on Loans Accounted for under the Fair Value Option20242023
Loans held for investment$(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 investment20242023
Balance at beginning of period$388,036 $494,458 
Repurchases8,565 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, 2024TotalLevel 1Level 2Level 3
Collateral-dependent loans$5,425 $— $— $5,425 
Foreclosed assets2,080 — — 2,080 
Total assets at fair value$7,505 $— $— $7,505 
December 31, 2023TotalLevel 1Level 2Level 3
Collateral-dependent loans$4,503 $— $— $4,503 
Foreclosed assets6,481 — — 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 ValueValuation TechniqueSignificant Unobservable InputsRange
Weighted Average (1)
Recurring fair value
Municipal bond$85 Discounted expected cash flowsDiscount rate7.0 %N/A
Prepayment speed5.0 %N/A
Loans held for investment$379,222 Discounted expected cash flowsLoss 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 flowsDiscount rate14.5 %14.5 %
Prepayment speed
12.0% - 18.2%
15.7 %
Equity warrant assets$8,700 Black-Scholes option pricing modelVolatility
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 ValueValuation Technique
Significant Unobservable Inputs
Range
Weighted Average (1)
Recurring fair value
Municipal bond$85 Discounted expected cash flowsDiscount rate7.0 %N/A
Prepayment speed5.0 %N/A
Loans held for investment
$388,036 Discounted expected cash flowsLoss 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 flowsDiscount rate14.5 %14.5 %
Prepayment speed
11.8% - 17.8%
15.3 %
Equity warrant assets$2,874 Black-Scholes option pricing modelVolatility
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 banks250 250 — — 250 
Loans held for sale310,749 — — 329,849 329,849 
Loans and leases held for investment, net of allowance for credit losses on loans and leases8,394,298 — — 8,884,123 8,884,123 
Financial liabilities
Deposits10,383,361 — 10,140,423 — 10,140,423 
Borrowings120,242 — — 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 banks250 250 — — 250 
Loans held for sale387,037 — — 402,096 402,096 
Loans and leases held for investment, net of allowance for credit losses on loans and leases8,119,971 — — 8,600,046 8,600,046 
Financial liabilities
Deposits10,275,019 — 10,080,182 — 10,080,182 
Borrowings23,354 — — 22,844 22,844