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Fair Value
9 Months Ended
Sep. 30, 2021
Fair Value Disclosures [Abstract]  
Fair Value

Note 11 – Fair Value

The fair value of a financial instrument is the current amount that would be exchanged between willing parties in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances,

there are no quoted market prices for the various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.

Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The Company records fair value adjustments to certain assets and liabilities and determines fair value disclosures utilizing a definition of fair value of assets and liabilities that states 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. Additional considerations are involved to determine the fair value of financial assets in markets that are not active.

The Company uses a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy based on these two types of inputs are as follows:

 

Level 1 –

 

Valuation is based on quoted prices in active markets for identical assets and liabilities.

Level 2 –

 

Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

Level 3 –

 

Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

 

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

Securities

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. The carrying value of restricted FRB and FHLB stock approximates fair value based upon the redemption provisions of each entity and is therefore excluded from the following table.

Rabbi trust assets

As a result of the Bay Banks Merger, the Company acquired and assumed a rabbi trust and deferred compensation plan. The assets held by the rabbi trust are invested at the direction of the individual participants and are generally invested in marketable investment securities, such as common stocks and mutual funds or short-term investments (e.g., cash) (Level 1). Rabbi trust assets and the associated deferred compensation plan liability are included in other assets and other liabilities, respectively, in the consolidated balance sheets.

Derivative financial instruments

Derivative instruments used to hedge residential mortgage loans held for sale and the related interest rate lock commitments include forward commitments to sell mortgage loans and are reported at fair value utilizing Level 2 inputs. The fair values of derivative financial instruments are based on derivative market data inputs as of the valuation date and the underlying value of mortgage loans for rate lock commitments.

Cash flow hedges (interest rate swaps) hedge against the risk of variability in cash flows attributable to changes in the 3-month LIBOR index rate component of forecasted 3-month fixed rate funding advances from the FHLB. These cash flow hedges are recorded at fair value utilizing Level 2 inputs.

The following tables present the balances of financial assets measured at fair value on a recurring basis as of the dates stated.

 

 

September 30, 2021

 

(Dollars in thousands)

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

State and municipals

 

$

41,852

 

 

$

 

 

$

41,852

 

 

$

 

U.S. Treasury and agencies

 

 

48,548

 

 

 

 

 

 

48,548

 

 

 

 

Mortgage backed securities

 

 

238,923

 

 

 

 

 

 

238,923

 

 

 

 

Corporate bonds

 

 

30,775

 

 

 

 

 

 

30,775

 

 

 

 

Total securities available for sale

 

$

360,098

 

 

$

 

 

$

360,098

 

 

$

 

Other assets

 

 

 

 

 

 

 

 

 

 

 

 

Rabbi trust assets

 

$

963

 

 

$

963

 

 

$

 

 

$

 

Mortgage derivative asset

 

 

3,456

 

 

 

 

 

 

3,456

 

 

 

 

Interest rate swap asset

 

 

5,838

 

 

 

 

 

 

5,838

 

 

 

 

Other liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage derivative liability

 

$

 

 

$

 

 

$

 

 

$

 

Interest rate swap liability

 

 

1,239

 

 

 

 

 

 

1,239

 

 

 

 

 

 

 

December 31, 2020

 

(Dollars in thousands)

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipals

 

$

14,259

 

 

$

 

 

$

14,259

 

 

$

 

U.S. Treasury and agencies

 

 

2,409

 

 

 

 

 

 

2,409

 

 

 

 

Mortgage backed securities

 

 

72,635

 

 

 

 

 

 

72,635

 

 

 

 

Corporate bonds

 

 

20,172

 

 

 

 

 

 

20,172

 

 

 

 

          Total securities available for sale

 

$

109,475

 

 

$

 

 

$

109,475

 

 

$

 

Other assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage derivative asset

 

$

5,293

 

 

$

 

 

$

5,293

 

 

$

 

Interest rate swap asset

 

 

1,716

 

 

 

 

 

 

1,716

 

 

 

 

Other liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage derivative liability

 

$

1,569

 

 

$

 

 

$

1,569

 

 

$

 

Interest rate swap liability

 

 

2,735

 

 

 

 

 

 

2,735

 

 

 

 

 

Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements.

Mortgage Servicing Rights

The Company records MSR assets initially at fair value and subsequently accounts for them under the amortization method and performs an impairment assessment each reporting period. The amortization method requires that the MSR assets be recorded at the lower of cost or fair value.

The following tables present the change in MSR assets using Level 3 inputs as of and for the periods stated.

 

(Dollars in thousands)

 

MSR Assets

 

Balance, December 31, 2020

 

$

7,084

 

Acquired in Bay Banks Merger

 

 

997

 

Additions

 

 

9,252

 

Write-offs

 

 

(616

)

Amortization

 

 

(1,741

)

Impairments

 

 

 

Fair value adjustments

 

 

3,567

 

Balance, September 30, 2021 - fair value

 

$

18,543

 

Balance, September 30, 2021 - amortized cost

 

$

14,976

 

 

(Dollars in thousands)

 

MSR Assets

 

Balance, December 31, 2019

 

$

 

Additions

 

 

7,539

 

Write-offs

 

 

(61

)

Amortization

 

 

(391

)

Impairments

 

 

(3

)

Fair value adjustments

 

 

207

 

Balance, December 31, 2020 - fair value

 

$

7,291

 

Balance, December 31, 2020 - amortized cost

 

$

7,084

 

 

A third-party model is used to determine the fair value of the Company’s MSR assets. The model establishes pools of performing loans, calculates projected future cash flows for each pool, and applies a discount rate to each pool. As of September 30, 2021 and December 31, 2020, the Company was servicing approximately $1.75 billion and $846.5 million of loans, respectively. Loans are segregated into homogenous pools based on loan term, interest rates, and other similar characteristics. Cash flows are then estimated based on net servicing fee income and utilizing assumed servicing costs and prepayment speeds. The weighted average net servicing fee income of the portfolio was 28.1 basis points as of September 30, 2021. Estimated base annual servicing costs were $65.00 to $80.00 per loan depending on the guarantor. Prepayment speeds in the model are based on empirically derived data for mortgage pool factors and differences between a mortgage pool’s weighted average coupon and its current mortgage rate. The weighted average prepayment speed assumption used in the fair value model was 12.16% as of September 30, 2021. A base discount rate of 9.0% to 12.0% (9.30% weighted average discount rate) was then applied to each pool’s projected future cash flows as of September 30, 2021. The discount rate is intended to represent the estimated market yield for the highest quality grade of comparable servicing. MSR assets are classified as Level 3.

Impaired Loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. The measurement of loss associated with impaired loans can be based on either the discounted cash flows of the loan or the fair value of the collateral, if any, less estimated costs to sell, if the loan is collateral dependent. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. Any given loan may have multiple types of collateral; however, the majority of the Company’s loan collateral is real estate. The value of real estate collateral is generally determined utilizing a market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data (Level 2). If the collateral value is significantly adjusted due to differences in the comparable properties or is discounted because of lack of marketability, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant or the net book value based on the borrower’s financial statements if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statements or aging reports (Level 3). Fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of income.

Loans Held for Sale

Mortgage loans originated or purchased and intended for sale in the secondary market are carried at estimated market value in the aggregate. The agreed upon sales price is considered fair value as all of these loans are under agreements to sell to investors at the time of origination. This amount is generally the loan’s principal amount. Changes in fair value are recognized in the gain on sale of mortgages on the consolidated statements of income.

Other Real Estate Owned

Certain assets such as OREO are measured at fair value less estimated costs to sell. Valuation of OREO is generally determined using current appraisals from independent appraisers, a Level 2 input. If current appraisals cannot be obtained prior to reporting dates, or if declines in value are identified after a recent appraisal is received, appraisal values are discounted, resulting in Level 3 estimates. If the Company markets the property with a real estate agent or broker, estimated selling costs reduce the listing price, resulting in a valuation based on Level 3 inputs.

The following tables summarize assets that were measured at fair value on a nonrecurring basis as of the dates stated.

 

 

September 30, 2021

 

(Dollars in thousands)

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Impaired loans, net

 

$

8,233

 

 

$

 

 

$

 

 

$

8,233

 

Loans held for sale

 

 

144,111

 

 

 

 

 

 

144,111

 

 

 

 

OREO

 

 

227

 

 

 

 

 

 

 

 

 

227

 

 

 

 

 

December 31, 2020

 

(Dollars in thousands)

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Impaired loans, net

 

$

2,187

 

 

$

 

 

$

 

 

$

2,187

 

Loans held for sale

 

 

148,209

 

 

 

 

 

 

148,209

 

 

 

 

 

The following tables present quantitative information about Level 3 fair value measurements as of the dates stated.

 

 

Balance as of

 

 

Valuation

 

Unobservable

 

Weighted

 

(Dollars in thousands)

 

September 30, 2021

 

 

Technique

 

Input

 

Average

 

Impaired loans, net

 

$

8,233

 

 

Discounted appraised value

 

Selling costs

 

 

7

%

OREO

 

 

227

 

 

Discounted appraised value

 

Selling costs

 

 

7

%

 

 

 

Balance as of

 

 

Valuation

 

Unobservable

 

Weighted

 

(Dollars in thousands)

 

December 31, 2020

 

 

Technique

 

Input

 

Average

 

Impaired loans, net

 

$

2,097

 

 

Discounted appraised value

 

Selling costs

 

 

10

%

 

 

 

90

 

 

Discounted cash flows

 

Discount rate

 

 

6

%

 

Fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value is based upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership in an entity, or contracts that convey or impose on an entity that contractual right or obligation to either receive or deliver cash for another financial instrument. The information used to determine fair value is highly subjective and judgmental in nature and, therefore, the results may not be precise. Subjective factors include, among other things, estimates of cash flows, risk characteristics, credit quality, and interest rates, all of which are subject to change. Since the fair value is estimated as of the balance sheet date, the amounts that will actually be realized or paid upon settlement or maturity on these various instruments could be significantly different.

The carrying values of cash and due from banks and federal funds sold are of such short duration that carrying value reasonably approximates fair value (Level 1).

The carrying values of accrued interest receivable and accrued interest payable are of such short duration that carrying value reasonably approximates fair value (Level 2).

The carrying value of restricted equity investments approximates fair value based on the redemption provisions of the issuer (Level 2).

The fair value of the Company’s loan portfolio includes a credit risk assumption in the determination of the fair value of its loans. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the following categories: variable rate loans, impaired loans, and

all other loans. The results are then adjusted to account for credit risk as described above. The fair value of the Company’s loan portfolio also considers illiquidity risk through the use of a discounted cash flow model to compensate for based on certain assumptions included within the discounted cash flow model, primarily the use of discount rates that better capture inherent credit risk over the lifetime of a loan. This consideration of both credit risk and illiquidity risk provides an estimated exit price for the Company’s loan portfolio. Loans held for investment are reported as Level 3.

There is no credit risk associated with PPP loans as they are fully guaranteed by the U.S. government. Further, the Company believes the PPP loans will be forgiven within 1.5 years for PPP 1 loans and between one and three years for PPP 2 loans, depending on the loan’s balance, and any fair value adjustment for potential interest rate change was considered inconsequential as of September 30, 2021. As a result, the carrying value of PPP loans reasonably approximates fair value (Level 3).

The carrying value of cash surrender value of life insurance reasonably approximates fair value. The Company records these policies at their cash surrender value, which is estimated using information by insurance carriers (Level 2).

The carrying value of noninterest-bearing deposits approximates fair value (Level 1). The carrying values of interest-bearing demand, money market, and savings deposits approximates fair value based on their current pricing and are reported as Level 2. The fair value of certificates of deposits were valued using a discounted cash flow calculation that includes a market rate analysis of the current rates offered by market participants for certificates of deposits that mature in the same period. Time deposits are reported as Level 3.

The fair value of the FHLB borrowings is estimated by discounting the future cash flows using current interest rates offered for similar advances (Level 2).

The fair value of FRB borrowings was approximated as its carrying value as there is no comparable debt to PPPLF advances (Level 2).

The fair value of the Company’s subordinated notes was estimated by utilizing recent issuance rates for subordinated debt offerings of similar issuer size (Level 3).

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change, and these changes may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. Borrowers with fixed rate obligations, however, are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

The following tables present the estimated fair values, related carrying amounts, and valuation level of the financial instruments as of the dates stated.

 

 

 

Carrying Value as of

 

 

Fair Value as of

 

 

Fair Value Measurements as of September 30, 2021

 

(Dollars in thousands)

 

September 30, 2021

 

 

September 30, 2021

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

53,077

 

 

$

53,077

 

 

$

53,077

 

 

$

 

 

$

 

Federal funds sold

 

 

144,376

 

 

 

144,376

 

 

 

144,376

 

 

 

 

 

 

 

Securities available for sale

 

 

360,098

 

 

 

360,098

 

 

 

 

 

 

360,098

 

 

 

 

Restricted equity and other investments

 

 

19,343

 

 

 

19,343

 

 

 

 

 

 

19,343

 

 

 

 

PPP loans receivable, net

 

 

46,648

 

 

 

46,648

 

 

 

 

 

 

 

 

 

46,648

 

Loans held for investment, net

 

 

1,739,839

 

 

 

1,732,771

 

 

 

 

 

 

 

 

 

1,732,771

 

Accrued interest receivable

 

 

9,900

 

 

 

9,900

 

 

 

 

 

 

9,900

 

 

 

 

Bank owned life insurance

 

 

46,278

 

 

 

46,278

 

 

 

 

 

 

46,278

 

 

 

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing demand deposits

 

$

684,859

 

 

$

684,859

 

 

$

684,859

 

 

$

 

 

$

 

Interest-bearing demand and money market deposits

 

 

828,477

 

 

 

828,477

 

 

 

 

 

 

828,477

 

 

 

 

Savings deposits

 

 

144,904

 

 

 

144,904

 

 

 

 

 

 

144,904

 

 

 

 

Time deposits

 

 

541,964

 

 

 

547,140

 

 

 

 

 

 

 

 

 

547,140

 

FHLB borrowings

 

 

125,115

 

 

 

124,900

 

 

 

 

 

 

124,900

 

 

 

 

FRB borrowings

 

 

33,857

 

 

 

33,857

 

 

 

 

 

 

33,857

 

 

 

 

Subordinated notes, net

 

 

40,503

 

 

 

42,048

 

 

 

 

 

 

 

 

 

42,048

 

 

 

 

Carrying Value as of

 

 

Fair Value as of

 

 

Fair Value Measurements as of December 31, 2020

 

(Dollars in thousands)

 

December 31, 2020

 

 

December 31, 2020

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

117,945

 

 

$

117,945

 

 

$

117,945

 

 

$

 

 

$

 

Federal funds sold

 

 

775

 

 

 

775

 

 

 

775

 

 

 

 

 

 

 

Securities available for sale

 

 

109,475

 

 

 

109,475

 

 

 

 

 

 

109,475

 

 

 

 

Restricted equity investments

 

 

11,173

 

 

 

11,173

 

 

 

 

 

 

11,173

 

 

 

 

PPP loans receivable, net

 

 

288,533

 

 

 

288,533

 

 

 

 

 

 

 

 

 

288,533

 

Loans held for investment, net

 

 

719,056

 

 

 

720,396

 

 

 

 

 

 

 

 

 

720,396

 

Accrued interest receivable

 

 

5,428

 

 

 

5,428

 

 

 

 

 

 

5,428

 

 

 

 

Bank owned life insurance

 

 

15,724

 

 

 

15,724

 

 

 

 

 

 

15,724

 

 

 

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing demand deposits

 

$

333,051

 

 

$

333,051

 

 

$

333,051

 

 

$

 

 

$

 

Interest-bearing demand and money market deposits

 

 

282,263

 

 

 

282,263

 

 

 

 

 

 

282,263

 

 

 

 

Savings deposits

 

 

78,352

 

 

 

78,352

 

 

 

 

 

 

78,352

 

 

 

 

Time deposits

 

 

251,443

 

 

 

257,647

 

 

 

 

 

 

 

 

 

257,647

 

FHLB borrowings

 

 

115,000

 

 

 

114,983

 

 

 

 

 

 

114,983

 

 

 

 

FRB borrowings

 

 

281,650

 

 

 

281,650

 

 

 

 

 

 

281,650

 

 

 

 

Subordinated notes, net

 

 

24,506

 

 

 

25,830

 

 

 

 

 

 

 

 

 

25,830