XML 31 R21.htm IDEA: XBRL DOCUMENT

FAIR VALUE OF FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2023

Fair value is defined as the exchange price 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 reflecting assumptions that a market participant would use when pricing an asset or liability. The hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:

•Level 1: Unadjusted quoted prices for identical assets or liabilities traded in active markets.

•Level 2: Significant other observable inputs other than Level 1, including quoted prices for similar assets and liabilities in active markets, quoted prices in less active markets, or other observable inputs that 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.

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Investment securities. The fair value of investment securities available for sale are determined by quoted market prices, if available (Level 1). For investment securities available for sale where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For investment securities available for sale where quoted

prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Securities classified as Level 3 are not actively traded, and as a result, fair value is determined utilizing third-party valuation services through consensus pricing. There were no transfers between Levels 1, 2 or 3 during the period presented for assets measured at fair value on a recurring basis. The fair value of equity securities is determined using quoted prices or market prices for similar securities (Level 2).

Loans held for sale. The fair value of loans held for sale is determined using quoted prices for a similar asset, adjusted for specific attributes of that loan (Level 2).

Derivative instruments. The fair value of derivative instruments are determined based on derivative valuation models using observable market data as of the measurement date (Level 2).

Loan servicing rights. In accordance with GAAP, the Company records impairment charges on loan servicing rights on a non-recurring basis when the carrying value exceeds the estimated fair value. The fair value of our servicing rights is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration expected mortgage loan prepayment rates, discount rates, servicing costs, replacement reserves and other economic factors which are estimated based on current market conditions (Level 3).

Mortgage servicing rights held for sale. Mortgage servicing rights held for sale consist of commercial FHA mortgage servicing rights that management has committed to a plan to sell and has the ability to sell them to a buyer in their present condition. Mortgage servicing rights held for sale are carried at the lower of their carrying value or fair value less estimated costs to sell (Level 2).

Nonperforming loans. Nonperforming loans are measured and recorded at fair value on a non-recurring basis. All of our nonaccrual loans and restructured loans are considered nonperforming and are reviewed individually for the amount of impairment, if any. Most of our loans are collateral dependent and, accordingly, we measure nonperforming loans based on the estimated fair value of such collateral. In cases where the Company has an agreed upon selling price for the collateral, the fair value is set at the selling price (Level 1). The fair value of each loan’s collateral is generally based on estimated market prices from an independently prepared appraisal, which is then adjusted for the cost related to liquidating such collateral (Level 2). When adjustments are made to an appraised value to reflect various factors such as the age of the appraisal or known changes in the market or the collateral, such valuation inputs are considered unobservable (Level 3). The nonperforming loans categorized as Level 3 also include unsecured loans and other secured loans whose fair values are based significantly on unobservable inputs such as the strength of a guarantor, cash flows discounted at the effective loan rate, and management’s judgment.

Other Real Estate Owned. OREO is initially recorded at fair value at the date of foreclosure less estimated costs of disposal, which establishes a new cost basis. After foreclosure, OREO is held for sale and is carried at the lower of cost or fair value less estimated costs of disposal. Fair value for OREO is based on an appraisal performed upon foreclosure. Property is evaluated regularly to ensure the recorded amount is supported by its fair value less estimated costs to dispose. After the initial foreclosure appraisal, fair value is generally determined by an annual appraisal unless known events warrant adjustments to the recorded value.

Assets held for sale. Assets held for sale represent the fair value of the banking facilities that are expected to be sold. The fair value of the assets held for sale was based on estimated market prices from independently prepared current appraisals (Level 2).

Assets and liabilities measured and recorded at fair value, including financial assets for which the Company has elected the fair value option, on a recurring and nonrecurring basis at September 30, 2023 and December 31, 2022, are summarized below:


	September 30, 2023
(dollars in thousands)	Carrying amount		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets and liabilities measured at fair value on a recurring basis:
Assets
Investment securities available for sale:
U.S. Treasury securities	$	1,563	$	1,563	$	—	$	—
U.S. government sponsored entities and U.S. agency securities	89,038		—		89,038		—
Mortgage-backed securities - agency	517,391		—		517,391		—
Mortgage-backed securities - non-agency	72,665		—		72,665		—
State and municipal securities	49,737		—		49,737		—
Collateralized loan obligations	22,385		—		22,385		—
Corporate securities	82,230		—		82,230		—
Equity securities	4,335		4,335		—		—
Loans held for sale	6,089		—		6,089		—
Derivative assets	646		—		646		—

Total	$	846,079	$	5,898	$	840,181	$	—
Liabilities
Derivative liabilities	$	10,825	$	—	$	10,825	$	—

Total	$	10,825	$	—	$	10,825	$	—

Assets measured at fair value on a non-recurring basis:
Loan servicing rights	$	20,933	$	—	$	—	$	20,933

Nonperforming loans	55,981		—		39,485		16,496
Other real estate owned	480		201		279		—
Assets held for sale	182		—		182		—


	December 31, 2022
(dollars in thousands)	Carrying amount		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets and liabilities measured at fair value on a recurring basis:
Assets
Investment securities available for sale:
U.S. Treasury securities	$	81,230	$	81,230	$	—	$	—
U.S. government sponsored entities and U.S. agency securities	37,509		—		37,509		—
Mortgage-backed securities - agency	448,150		—		448,150		—
Mortgage-backed securities - non-agency	20,754		—		20,754		—
State and municipal securities	94,636		—		94,636		—
Corporate securities	85,955		—		85,955		—
Equity securities	8,626		8,626		—		—
Loans held for sale	1,286		—		1,286		—
Derivative assets	481		—		481		—

Total	$	778,627	$	89,856	$	688,771	$	—
Liabilities
Derivative liabilities	$	10,446	$	—	$	10,446	$	—

Total	$	10,446	$	—	$	10,446	$	—

Assets measured at fair value on a non-recurring basis:
Loan servicing rights	$	1,205	$	—	$	—	$	1,205
Mortgage servicing rights held for sale	20,745		—		20,745		—
Nonperforming loans	49,423		5,478		34,406		9,539
Other real estate owned	6,729		—		6,729		—
Assets held for sale	356		—		356		—

There were no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2023 and 2022.

The following table presents losses recognized on assets measured on a nonrecurring basis for the three and nine months ended September 30, 2023 and 2022:


	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	2023		2022		2023		2022
Commercial mortgage servicing rights	$	—	$	—	$	—	$	1,263

Nonperforming loans	10,085		1,423		14,761		6,381
Other real estate owned	—		339		—		743

Total losses on assets measured on a nonrecurring basis	$	10,085	$	1,762	$	14,761	$	8,387

The following tables present quantitative information about significant unobservable inputs used in fair value measurements of Level 3 assets measured on a nonrecurring basis at September 30, 2023 and December 31, 2022:

(dollars in thousands)

Fair value

Valuation
technique

Unobservable
input / assumptions

Range (weighted average)(1)

September 30, 2023

Loan servicing rights:

Commercial FHA servicing rights

30,914

Discounted cash flow

Prepayment speed

4.00% - 100.00% (8.26%)

Discount rate

8.00% - 15.00% (8.19%)

SBA servicing rights

818

Discounted cash flow

Prepayment speed

15.62% - 16.02% (15.87%)

Discount rate

No range (14.25%)

Residential servicing rights

2,488

Discounted cash flow

Prepayment speed

7.20% -26.28% (7.50%)

Discount rate

9.25% - 11.75% (10.38%)

December 31, 2022

Loan servicing rights:

SBA servicing rights

876

Discounted cash flow

Prepayment speed

14.49% - 15.44% (15.00%)

Discount rate

No range (13.00%)

Residential servicing rights

2,770

Discounted cash flow

Prepayment speed

7.56% - 26.28% (7.92%)

Discount rate

9.00% - 11.50% (10.13%)

(1)Unobservable inputs were weighted by the relative fair value of the instruments.

ASC Topic 825, Financial Instruments, requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate such fair values. Additionally, certain financial instruments and all nonfinancial instruments are excluded from the applicable disclosure requirements.

The Company has elected the fair value option for newly originated residential loans held for sale. These loans are intended for sale and are hedged with derivative instruments. We have elected the fair value option

to mitigate accounting mismatches in cases where hedge accounting is complex and to achieve operational simplification.

The following table presents the difference between the aggregate fair value and the aggregate remaining principal balance for loans for which the fair value option has been elected as of September 30, 2023 and December 31, 2022:


	September 30, 2023						December 31, 2022
(dollars in thousands)	Aggregate fair value		Difference		Contractual principal		Aggregate fair value		Difference		Contractual principal

Residential loans held for sale	$	6,089	$	142	$	5,947	$	1,286	$	42	$	1,244

The following table presents the amount of gains (losses) from fair value changes included in income before income taxes for financial assets carried at fair value for the three and nine months ended September 30, 2023 and 2022:


	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	2023		2022		2023		2022

Residential loans held for sale	(37)		(280)		112		(557)
Total loans held for sale	$	(37)	$	(280)	$	112	$	(557)

The carrying values and estimated fair value of certain financial instruments not carried at fair value at September 30, 2023 and December 31, 2022 were as follows:


	September 30, 2023
(dollars in thousands)	Carrying amount		Fair value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Cash and due from banks	$	131,179	$	131,179	$	131,179	$	—	$	—
Federal funds sold	953		953		953		—		—

Loans	6,280,883		6,176,092		—		—		6,176,092
Accrued interest receivable	24,283		24,283		—		24,283		—

Liabilities
Deposits	$	6,405,002	$	6,392,040	$	—	$	6,392,040	$	—
Short-term borrowings	17,998		17,998		—		17,998		—
FHLB and other borrowings	538,000		533,614		—		533,614		—
Subordinated debt	93,475		87,263		—		87,263		—
Trust preferred debentures	50,457		50,717		—		50,717		—


	December 31, 2022
(dollars in thousands)	Carrying amount		Fair value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Cash and due from banks	$	143,035	$	143,035	$	143,035	$	—	$	—
Federal funds sold	7,286		7,286		7,286		—		—

Loans	6,306,467		6,121,026		—		—		6,121,026
Accrued interest receivable	20,313		20,313		—		20,313		—

Liabilities
Deposits	$	6,364,652	$	6,344,534	$	—	$	6,344,534	$	—
Short-term borrowings	42,311		42,311		—		42,311		—
FHLB and other borrowings	460,000		457,998		—		457,998		—
Subordinated debt	99,772		95,301		—		95,301		—
Trust preferred debentures	49,975		54,668		—		54,668		—

The methods utilized to measure fair value of financial instruments at September 30, 2023 and December 31, 2022 represent an approximation of exit price; however, an actual exit price may differ.

- 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.

+ References + Details