Note 8 - FAIR VALUE

9 Months Ended

Sep. 30, 2024

FAIR VALUE

FAIR VALUE

NOTE 8 – FAIR VALUE

Accounting guidance on fair value measurement uses a hierarchy intended to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy includes three levels and is based upon the valuation techniques used to measure assets and liabilities. The three levels are as follows:

● Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in markets;

● Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and

● Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Assets and liabilities measured at fair value on a recurring basis comprise the following at September 30, 2024 and December 31, 2023:

			Fair Value Measurements at Reporting Date Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(dollars in thousands)
September 30, 2024:
Securities AFS:
U.S. treasuries and govt. sponsored agency securities	$	18,621	$	—	$	18,621	$	—
Residential mortgage-backed and related securities		53,487		—		53,487		—
Municipal securities		171,162		—		171,162		—
Asset-backed securities		10,455		—		10,455		—
Other securities		38,140		—		38,140		—
Securities trading		58,685		—		—		58,685
Derivatives		261,913		—		261,913		—
Total assets measured at fair value	$	612,463	$	—	$	553,778	$	58,685
Derivatives	$	285,769	$	—	$	285,769	$	—
Total liabilities measured at fair value	$	285,769	$	—	$	285,769	$	—
December 31, 2023:
Securities AFS:
U.S. govt. sponsored agency securities	$	14,973	$	—	$	14,973	$	—
Residential mortgage-backed and related securities		59,196		—		59,196		—
Municipal securities		170,987		—		170,987		—
Asset-backed securities		15,423		—		15,423		—
Other securities		39,076		—		39,076		—
Securities trading		22,369		—		—		22,369
Derivatives		187,341		—		187,341		—
Total assets measured at fair value	$	509,365	$	—	$	486,996	$	22,369
Derivatives	$	215,735	$	—	$	215,735	$	—
Total liabilities measured at fair value	$	215,735	$	—	$	215,735	$	—

The securities AFS portfolio consists of securities whereby the Company obtains fair values from an independent pricing service. The fair values are determined by pricing models that consider observable market data, such as interest rate volatilities, SOFR yield curve, credit spreads and prices from market makers and live trading systems (Level 2 inputs).

Trading securities consist of retained beneficial interests from securitizations and are classified as a Level 3 in the fair value hierarchy.  Fair values are estimated using the discounted cash flow method, including discount rates which are deemed to be significant unobservable inputs. As of September 30, 2024, the discount rates ranged from 5.86% to 7.12%.

There were no trading securities as of September 30, 2024. Changes in fair value of trading securities for the three and nine months ended September 30, 2024, respectively, are presented as follows:

	For the			For the
	Three Months Ended			Nine Months Ended
	September 30, 2024			September 30, 2024
	(dollars in thousands)
Balance at the beginning of the period	$	22,362	$	22,369
Trading securities purchased		36,670		36,670
Fair value gain (loss)		(347)		(354)
Balance at the end of the period	$	58,685	$	58,685

Interest rate caps, swaps, swaptions and collars are used for the purpose of hedging interest rate risk on various financial assets and liabilities, further described in Note 4 to the Consolidated Financial Statements. Interest rate swaps are also executed for select commercial customers.  The fair values are determined by pricing models that consider observable market data for derivative instruments with similar structures (Level 2 inputs).

Certain financial assets are measured at fair value on a non-recurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when a loan/lease is collaterally dependent).

Assets measured at fair value on a non-recurring basis comprised the following at September 30, 2024 and December 31, 2023:

			Fair Value Measurements at Reporting Date Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
September 30, 2024:
Loans/leases evaluated individually	$	36,118	$	—	$	—	$	36,118
Loans receivable held for sale in preparation for securitization		165,941		—		—		165,941
OREO		399		—		—		399
Other repossessed assets		610		—		—		610
	$	203,068	$	—	$	—	$	203,068
December 31, 2023:
Loans/leases evaluated individually	$	33,656	$	—	$	—	$	33,656
OREO		1,455		—		—		1,455
	$	35,111	$	—	$	—	$	35,111

Loans/leases evaluated individually are valued at the lower of cost or fair value and are classified as Level 3 in the fair value hierarchy. Fair value is measured based on the value of the collateral securing these loans/leases. Collateral may be comprised of real estate and/or business assets, including equipment, inventory and/or accounts receivable, and is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraised and reported values are discounted based on management's historical knowledge, changes in market conditions from the time of valuation, and/or management's expertise and knowledge of the client and client's business.

Loans receivable held for sale in preparation for securitization are valued at the lower of cost or fair value in the aggregate by type and are classified as Level 3 in the fair value hierarchy.  Fair value is estimated considering the loans have a floating interest rate with a spread that is commensurate with current market pricing, in addition to factoring in a discount for credit risk.

OREO in the table above consists of property acquired through foreclosures and settlement of loans.  Property acquired is carried at the estimated fair value of the property, less disposal costs, and is classified as a Level 3 in the fair value hierarchy.  The estimated fair value of the property acquired is generally determined based on appraisals by qualified licensed appraisers hired by the Company.  Appraised and reported values are discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the property.

Other repossessed assets in the table above consists of equipment acquired through repossession and settlement of loans.  Property acquired is carried at the estimated fair value of the property, less disposal costs, and is classified as a Level 3 in the fair value hierarchy.  The estimated fair value of the property acquired is generally determined based on current average auction prices database used by a national auction company hired by the Company.  

The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis for which the Company has utilized Level 3 inputs to determine fair value:

	Quantitative Information about Level Fair Value Measurements
	Fair Value		Fair Value
	September 30,		December 31,
	2024		2023		Valuation Technique	Unobservable Input	Range
	(dollars in thousands)
Loans/leases evaluated individually	$	36,118	$	33,656	Appraisal of collateral	Appraisal adjustments	-10.00	%	to	-30.00	%
Loans receivable held for sale in preparation for securitization		165,941		—	Market prices for similar loans	Market price adjustments			n/a
OREO		399		1,455	Appraisal of collateral	Appraisal adjustments	0.00	%	to	-35.00	%
Other repossessed assets		610		—	Average auction prices	Market price adjustments			n/a

For the loans/leases evaluated individually and OREO, the Company records carrying value at fair value less disposal or selling costs. The amounts reported in the tables above are fair values before the adjustment for disposal or selling costs.

For loans receivable held for sale in preparation for securitization, the Company records carrying value at fair value factoring in a discount for credit risk.

There have been no changes in valuation techniques used for any assets or liabilities measured at fair value during the three and nine months ended September 30, 2024 and 2023.

The following table presents the carrying values and estimated fair values of financial assets and liabilities carried on the Company's consolidated balance sheets, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis:

	Fair Value	As of September 30, 2024				As of December 31, 2023
	Hierarchy	Carrying		Estimated		Carrying		Estimated
	Level	Value		Fair Value		Value		Fair Value
		(dollars in thousands)
Cash and due from banks	Level 1	$	103,840	$	103,840	$	97,123	$	97,123
Federal funds sold	Level 2		13,200		13,200		35,450		35,450
Interest-bearing deposits at financial institutions	Level 2		145,959		145,959		104,919		104,919
Investment securities:
HTM	Level 2		795,496		791,659		683,504		680,279
AFS	Level 2		291,865		291,865		299,655		299,655
Trading	Level 3		58,685		58,685		22,369		22,369
Loans/leases receivable, net	Level 3		33,443		36,118		31,163		33,656
Loans/leases receivable, net	Level 2		6,709,038		6,483,278		6,425,053		6,125,433
Derivatives	Level 2		261,913		261,913		187,341		187,341
Deposits:
Nonmaturity deposits	Level 2		5,749,506		5,749,506		5,504,323		5,504,323
Time deposits	Level 2		1,235,127		1,235,442		1,009,682		996,746
Short-term borrowings	Level 2		2,750		2,750		1,500		1,500
FHLB advances	Level 2		375,383		377,501		435,000		437,178
Subordinated notes	Level 2		233,383		238,978		233,064		240,235
Junior subordinated debentures	Level 2		48,828		41,114		48,731		40,397
Derivatives	Level 2		285,769		285,769		215,735		215,735