Fair Value Measurements

9 Months Ended

Sep. 30, 2020

Fair Value Measurements [Abstract]

Fair Value Measurements

Note 8. Fair Value Measurements

ASC 825, “Financial Instruments”, requires disclosure of the estimated fair value of an entity’s assets and liabilities considered to be financial instruments. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered to be financial instruments. However, many such instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Accordingly, estimated fair values are determined by the Company using the best available data and an estimation methodology it believes to be suitable for each category of financial instruments. Also, it is the Company’s general practice and intent to hold its financial instruments to maturity whether or not categorized as “available-for-sale” and not to engage in trading or sales activities although it has sold loans in the past and may do so in the future. For fair value disclosure purposes, the Company utilized certain value measurement criteria required under ASC 820, “Fair Value Measurements and Disclosures”, as discussed below.

Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Also, there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values.

Cash and cash equivalents, which are comprised of cash and due from banks, the Company’s balance at the Federal Reserve Bank and securities purchased under agreements to resell, had recorded values of $301.0 million and $944.5 million as of September 30, 2020 and December 31, 2019, respectively, which approximated fair values.

The estimated fair values of investment securities are based on quoted market prices, if available, or estimated using a methodology based on management’s inputs. Level 3 investment security fair values are based on the present valuing of cash flows, which discounts expected cash flows from principal and interest using yield to maturity, or yield to call as appropriate, at the measurement date. In the third quarter of 2020, there were no transfers between the three levels. In the third quarter of 2019, there were $100.7 million of transfers from level two to level three. The securities were transferred due to the difficulty in obtaining reliable pricing service information related to significant observable inputs. The securities transferred were those which were acquired in the commercial real estate securitizations.

FHLB and Atlantic Central Bankers Bank stock is held as required by those respective institutions and is carried at cost. Federal law requires a member institution of the FHLB to hold stock according to predetermined formulas. Atlantic Central Bankers Bank requires its correspondent banking institutions to hold stock as a condition of membership.

Commercial loans, at fair value are valued using a discounted cash flow analysis based upon pricing for similar loans where market indications of the sales price of such loans are not available.

The net loan portfolio is valued using the present value of discounted cash flow where market prices were not available. The discount rate used in these calculations is the estimated current market rate adjusted for credit risk. Accrued interest receivable has a carrying value that approximates fair value.

On December 30, 2014, the Bank entered into an agreement for, and closed on, the sale of a portion of its discontinued commercial loan portfolio.  The purchaser of the loan portfolio was a newly formed entity, 2014-1 LLC (Walnut Street).  The price paid to the Bank for the loan portfolio which had a face value of approximately $267.6 million, was approximately $209.6 million, of which approximately $193.6 million was in the form of two notes issued by Walnut Street to the Bank; a senior note in the principal amount of approximately $178.2 million bearing interest at 1.5% per year and maturing in December 2024 and a subordinate note in the principal amount of approximately $15.4 million, bearing interest at 10.0% per year and maturing in December 2024.  The balance of these notes comprises the balance of the investment in unconsolidated entity on the consolidated balance sheets, which is measured at fair value at each balance sheet date.  The fair value was initially established by the sales price and the investment is marked quarterly to fair value, as determined using a discounted cash flow analysis. The change in value of investment in unconsolidated entity in the consolidated statements of operations reflects changes in estimated fair value. Interest paid to the bank on the notes is credited to principal.

Assets held-for-sale from discontinued operations are recorded at the lower of cost basis or market value. For loans, market value was determined using the discounted cash flow approach which converts expected cash flows from the loan portfolio by unit of measurement to a present value estimate. Unit of measurement was determined by loan type and for significant loans on an individual loan basis. Loan fair values are based on “unobservable inputs” that are based on available information. Level 3 fair values are based on the present value of cash flows by unit of measurement. For commercial loans other than SBA loans, a market adjusted rate to discount expected cash flows from outstanding principal and interest to expected maturity at the measurement date was utilized. For SBA loans, market indications for similar loans were utilized on a pooled basis. For other real estate owned, market value is based upon appraisals of the underlying collateral by third-party appraisers, reduced by 7% to 10% for estimated selling costs.

The estimated fair values of demand deposits (comprised of interest and non-interest bearing checking accounts, savings accounts, and certain types of money market accounts) are equal to the amount payable on demand at the reporting date (generally, their carrying amounts). The fair values of securities sold under agreements to repurchase and short-term borrowings are equal to their carrying amounts as they are short-term borrowings.

Time deposits, when outstanding, and subordinated debentures have a fair value estimated using a discounted cash flow calculation that applies current interest rates to discount expected cash flows. The carrying amount of accrued interest payable approximates its fair value. Long term borrowings resulted from sold loans which did not qualify for true sale accounting. They are presented in the amount of the principal of such loans.

The fair values of interest rate swaps, recorded as part of other assets, are determined using models that use readily observable market inputs and a market standard methodology applied to the contractual terms of the derivatives, including the period to maturity and interest rate indices.

The fair value of commitments to extend credit is estimated based on the amount of unamortized deferred loan commitment fees. The fair value of letters of credit is based on the amount of unearned fees plus the estimated cost to terminate the letters of credit. Fair values of unrecognized financial instruments, including commitments to extend credit, and the fair value of letters of credit are considered immaterial.

The following tables provide information regarding carrying amounts and estimated fair values (in thousands) as of the dates indicated:

	September 30, 2020
			Quoted prices in	Significant other	Significant
			active markets for	observable	unobservable
	Carrying	Estimated	identical assets	inputs	inputs
	amount	fair value	(Level 1)	(Level 2)	(Level 3)
Investment securities, available-for-sale	$            1,264,903	$            1,264,903	$                            -	$               1,080,555	$                184,348
Federal Home Loan Bank and Atlantic Central Bankers Bank stock	1,368	1,368	-	-	1,368
Commercial loans, at fair value	1,849,947	1,849,947	-	-	1,849,947
Loans, net of deferred loan fees and costs	2,488,760	2,486,275	-	-	2,486,275
Investment in unconsolidated entity	31,783	31,783	-	-	31,783
Assets held-for-sale from discontinued operations	122,253	122,253	-	-	122,253
Interest rate swaps, liability	2,465	2,465	-	2,465	-
Demand and interest checking	4,882,834	4,882,834	-	4,882,834	-
Savings and money market	505,928	505,928	-	505,928	-
Senior debt	98,222	101,910	-	101,910	-
Subordinated debentures	13,401	8,235	-	-	8,235
Securities sold under agreements to repurchase	42	42	42	-	-

	December 31, 2019
			Quoted prices in	Significant other	Significant
			active markets for	observable	unobservable
	Carrying	Estimated	identical assets	inputs	inputs
	amount	fair value	(Level 1)	(Level 2)	(Level 3)
Investment securities, available-for-sale	$            1,320,692	$            1,320,692	$                            -	$               1,203,359	$                117,333
Investment securities, held-to-maturity	84,387	83,002	-	75,850	7,152
Federal Home Loan Bank and Atlantic Central Bankers Bank stock	5,342	5,342	-	-	5,342
Commercial loans, at fair value	1,180,546	1,180,546	-	-	1,180,546
Loans, net of deferred loan fees and costs	1,824,245	1,826,154	-	-	1,826,154
Investment in unconsolidated entity	39,154	39,154	-	-	39,154
Assets held-for-sale from discontinued operations	140,657	140,657	-	-	140,657
Interest rate swaps, liability	232	232	-	232	-
Demand and interest checking	4,402,740	4,402,740	-	4,402,740	-
Savings and money market	174,290	174,290	-	174,290	-
Time deposits	475,000	475,000	-	-	475,000
Senior debt	-	-	-	-	-
Subordinated debentures	13,401	9,736	-	-	9,736
Securities sold under agreements to repurchase	82	82	82	-	-

The assets and liabilities measured at fair value on a recurring basis, segregated by fair value hierarchy, are summarized below (in thousands) as of the dates indicated:

		Fair Value Measurements at Reporting Date Using
		Quoted prices in	Significant other	Significant
		active markets for	observable	unobservable
	Fair value	identical assets	inputs	inputs
	September 30, 2020	(Level 1)	(Level 2)	(Level 3)
Investment securities, available-for-sale
U.S. Government agency securities	$                           48,377	$                                       -	$                             48,377	$                                       -
Asset-backed securities	238,179	-	238,179	-
Obligations of states and political subdivisions	58,458	-	58,458	-
Residential mortgage-backed securities	285,701	-	285,701	-
Collateralized mortgage obligation securities	169,213	-	169,213	-
Commercial mortgage-backed securities	383,281	-	280,627	102,654
Corporate debt securities	81,694	-	-	81,694
Total investment securities available-for-sale	1,264,903	-	1,080,555	184,348
Commercial loans, at fair value	1,849,947	-	-	1,849,947
Investment in unconsolidated entity	31,783	-	-	31,783
Assets held-for-sale from discontinued operations	122,253	-	-	122,253
Interest rate swaps, liability	2,465	-	2,465	-
	$                      3,266,421	$                                       -	$                        1,078,090	$                        2,188,331

		Fair Value Measurements at Reporting Date Using
		Quoted prices in	Significant other	Significant
		active markets for	observable	unobservable
	Fair value	identical assets	inputs	inputs
	December 31, 2019	(Level 1)	(Level 2)	(Level 3)
Investment securities, available-for-sale
U.S. Government agency securities	$                           52,910	$                                       -	$                             52,910	$                                       -
Asset-backed securities	244,349	-	244,349	-
Obligations of states and political subdivisions	65,568	-	65,568	-
Residential mortgage-backed securities	336,596	-	336,596	-
Collateralized mortgage obligation securities	222,727	-	222,727	-
Commercial mortgage-backed securities	398,542	-	281,209	117,333
Total investment securities available-for-sale	1,320,692	-	1,203,359	117,333
Commercial loans, at fair value	1,180,546	-	-	1,180,546
Investment in unconsolidated entity	39,154	-	-	39,154
Assets held-for-sale from discontinued operations	140,657	-	-	140,657
Interest rate swaps, liability	232	-	232	-
	$                      2,680,817	$                                       -	$                        1,203,127	$                        1,477,690

In addition, ASC 820 establishes a common definition for fair value to be applied to assets and liabilities. It clarifies 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 at the measurement date. It also establishes a framework for measuring fair value and expands disclosures concerning fair value measurements. ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Level 1 valuation is based on quoted market prices for identical assets or liabilities to which the Company has access at the measurement date. Level 2 valuation is based on other observable inputs for the asset or liability, either directly or indirectly. This includes quoted prices for similar assets in active or inactive markets, inputs other than quoted prices that are observable for the asset or liability such as yield curves, volatilities, prepayment speeds, credit risks, default rates, or inputs that are derived principally from, or corroborated through, observable market data by market-corroborated reports. Level 3 valuation is based on “unobservable inputs” which the Company believes is the best information available in the circumstances. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

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The Company’s Level 3 asset activity for the categories shown for year to date are summarized below (in thousands):

	Fair Value Measurements Using
	Significant Unobservable Inputs
	(Level 3)
	Available-for-sale		Commercial loans
	securities		at fair value
	September 30, 2020	December 31, 2019	September 30, 2020	December 31, 2019
Beginning balance	$                         117,333	$                              24,390	$                         1,180,546	$                            688,471
Transfers into level 3	-	100,664	-	-
Transfers out of level 3	-	-	-	-
Reclass of held-to-maturity securities to available-for-sale	85,151	-	-	-
Total gains or (losses) (realized/unrealized)
Included in earnings	-	-	(3,180)	25,986
Included in other comprehensive income	2,215	688	-	-
Purchases, issuances, sales and settlements
Purchases	-	-	-	-
Issuances	-	-	683,696	1,795,376
Sales	-	-	-	(1,329,287)
Settlements	(20,351)	(8,409)	(11,115)	-
Ending balance	$                         184,348	$                            117,333	$                         1,849,947	$                         1,180,546
Total gains or (losses) year to date included
in earnings attributable to the change in
unrealized gains or losses relating to assets still
held at the reporting date as shown above.	$                                    -	$                                        -	$                              (3,054)	$                                   963

The Company’s Level 3 asset activity for the categories shown for year to date are summarized below (in thousands):

	Fair Value Measurements Using
	Significant Unobservable Inputs
	(Level 3)
	Investment in			Assets held-for-sale
	unconsolidated entity			from discontinued operations
		September 30, 2020	December 31, 2019	September 30, 2020	December 31, 2019
Beginning balance		$                           39,154	$                              59,273	$                            140,657	$                            197,831
Transfers into level 3		-	-	-	-
Transfers out of level 3		-	-	-	-
Total gains or (losses) (realized/unrealized)
Included in earnings		(45)	-	(2,332)	(487)
Included in other comprehensive income		-	-	-	-
Purchases, issuances, sales, settlements and charge-offs
Purchases		-	-	-	-
Issuances		-	-	2,046	2,125
Sales		-	-	(1,252)	(7,136)
Settlements		(7,326)	(20,119)	(16,571)	(49,021)
Charge-offs		-	-	(295)	(2,655)
Ending balance		$                           31,783	$                              39,154	$                            122,253	$                            140,657
Total losses year to date included
in earnings attributable to the change in
unrealized gains or losses relating to assets still
held at the reporting date as shown above.		$                               (45)	$                                        -	$                              (1,899)	$                                 (487)

	Level 3 instruments only
					Weighted
	Fair value at			Range at	average at
	September 30, 2020	Valuation techniques	Unobservable inputs	September 30, 2020	September 30, 2020
Commercial mortgage backed investment	$             102,654	Discounted cash flow	Discount rate	4.19% - 8.29%	4.72%
securities available-for-sale (a)
Insurance liquidating trust preferred security,	6,156	Discounted cash flow	Discount rate	7.47%	7.47%
available-for-sale (b)
Corporate debt securities (c)	75,538	Traders' pricing	Price indications	$100.55 - $101.00	$100.90
Federal Home Loan Bank and Atlantic	1,368	Cost	N/A	N/A	N/A
Central Bankers Bank stock
Loans, net of deferred loan fees and costs (d)	2,486,275	Discounted cash flow	Discount rate	1.00% - 7.00%	2.63%
Commercial - SBA (e)	250,958	Traders' pricing	Offered quotes	$100.00 - $117.5	$105.60
Commercial - fixed (f)	84,901	Discounted cash flow	Discount rate	5.01% - 7.30%	5.90%
Commercial - floating (g)	1,514,088	Discounted cash flow	Discount rate	3.00% - 7.80%	4.81%
Commercial loans, at fair value	1,849,947
Investment in unconsolidated entity (h)	31,783	Discounted cash flow	Discount rate	3.93%	3.93%
			Default rate	1.00%	1.00%
Assets held-for-sale from discontinued operations (i)	122,253	Discounted cash flow	Discount rate,	2.73% - 7.58%	4.19%
			Credit analysis
Subordinated debentures (j)	8,235	Discounted cash flow	Discount rate	7.47%	7.47%

	Level 3 instruments only
	Fair value at			Range at
	December 31, 2019	Valuation techniques	Unobservable inputs	December 31, 2019
Commercial mortgage backed investment	$             117,333	Discounted cash flow	Discount rate	4.05% - 8.18%
securities available-for-sale
Insurance liquidating trust preferred security,	7,152	Discounted cash flow	Discount rate	8.01%
available-for-sale
Federal Home Loan Bank and Atlantic	5,342	Cost	N/A	N/A
Central Bankers Bank stock
Loans, net of deferred loan fees and costs	1,826,154	Discounted cash flow	Discount rate	3.11% - 6.93%
Commercial - SBA	220,358	Traders' pricing	Offered quotes	$101.6 - $107.9
Commercial - fixed	88,986	Discounted cash flow	Discount rate	4.33% - 7.13%
Commercial - floating	871,202	Discounted cash flow	Discount rate	4.51% - 6.81%
Commercial loans, at fair value	1,180,546
Investment in unconsolidated entity	39,154	Discounted cash flow	Discount rate	5.84%
			Default rate	1.00%
Assets held-for-sale from discontinued operations	140,657	Discounted cash flow	Discount rate,	3.49% -7.58%
			Credit analysis
Subordinated debentures	9,736	Discounted cash flow	Discount rate	8.01%

The valuations for each of the instruments above, as of the balance sheet date, is subject to judgments, assumptions and uncertainties, changes in which could have a significant impact on such valuations. All weighted averages were calculated by using the discount rate for each individual security or loan weighted by its market value, except for SBA loans. For SBA loans, traders’ pricing indications for pools determined by date of loan origination were weighted. For commercial loans recorded at fair value, investment in unconsolidated entity and assets held-for-sale from discontinued operations, changes in fair value are reflected in the income statement. Changes in fair value of securities which are unrelated to credit are recorded through equity. Changes in the fair value of loans recorded at amortized cost which are unrelated to credit are a disclosure item, without impact on the financial statements. The notes below refer to the September 30, 2020 table.

a)Commercial mortgage backed investment securities, consisting of Bank issued CRE securities, are valued using discounted cash flow analyses. The discount rates applied are based upon market observations for comparable securities and implicitly assume market averages for prepayments, defaults, and loss severities. Each of the securities has some credit enhancement, or

protection from other tranches in the issue, which limit their valuation exposure to credit losses. Nonetheless, increases in expected default rates or loss severities on the loans underlying the issue could reduce their value. In market environments in which investors demand greater yield compensation for credit risk, the discount rate applied would ordinarily be higher and the valuation lower. Changes in prepayments and loss experience could also change the interest earned on these holdings in future periods and impact fair values.

b)Insurance liquidating trust preferred is a single debenture which is valued using discounted cash flow analysis. The discount rate used is based on the market rate on comparable relatively illiquid instruments and credit analysis. A change in the liquidating trust’s ability to repay the note, or an increase in interest rates, particularly for privately placed debentures, would affect the discount rate and thus the valuation. As a single security, the weighted average rate shown is the actual rate applied to the security.

c)Corporate debt securities consist of three AAA rated privately placed debt structures backed by investment grade corporate debt each with over 50% credit enhancement. Each of these securities has a coupon of 3 Month LIBOR + 3.00%. Price indications are obtained from a broker/dealer with significant experience in trading and evaluating these securities. Changes in either investor yield requirements for relatively illiquid securities, or credit risk could affect the price indications.

d)Loans, net of deferred fees and costs are valued using discounted cash flow analysis. Discount rates are based upon available information for estimated current origination rates for each loan type. Origination rates may fluctuate based upon changes in the risk free (Treasury) rate and credit experience for each loan type. At September 30, 2020, the balance included $207.9 million of Paycheck Protection Program loans, which bear interest at 1%, but also earn fees.

e)Commercial-SBL (SBA Loans) are comprised of the government guaranteed portion of SBA insured loans. Their valuation is based upon dealer pricing indications. A limited number of broker/dealers originate the pooled securities for which the loans are purchased and as a result, prices can fluctuate based on such limited market demand, although the government guarantee has resulted in consistent historical demand. Valuations are also impacted by prepayment assumptions resulting from both voluntary payoffs and defaults.

f)Commercial-fixed are fixed rate commercial mortgages originated for sale. Discount rates used in applying discounted cash flow analysis are determined by an independent valuation consultant based upon loan terms, the general level of interest rates and the quality of the credit.

g)Commercial-floating are floating rate loans, the vast majority of which are secured by multi-family properties. These are bridge loans designed to provide owners time and funding for property improvements and are generally valued internally using discounted cash flow analysis. The discount rate for the vast majority of these loans, which are multi-family, was based upon current origination rates for similar loans. Certain non multi family loans are fair valued by a third party, based upon discounting at market rates for similar loans.

h)Investment in unconsolidated entity is in non-accrual status, and changes in its value, determined by discounted cash flows, are recorded in the income statement under “Change in value of investment in unconsolidated entity”. A constant default rate of 1%, net of recoveries, on cash flowing loans was utilized. Changes in market interest rates, credit quality or payment experience could result in a change in the current valuation.

i)Assets held-for-sale from discontinued operations are valued using discounted cash flow by an independent valuation consultant using loan performance, other credit characteristics and market interest rate comparisons. Changes in those factors could change the valuation.

j)Subordinated debentures are comprised of two subordinated notes issued by the Company, maturing in 2038 with a floating rate of 3-month LIBOR plus 3.25%. These notes are valued using discounted cash flow analysis. The discount rate is based on the market rate for comparable relatively illiquid instruments. Changes in those market rates, or the credit of the Company could result in changes in the valuation.

Assets measured at fair value on a nonrecurring basis, segregated by fair value hierarchy, during the periods shown are summarized below (in thousands):

		Fair Value Measurements at Reporting Date Using
		Quoted prices in active	Significant other	Significant
		markets for identical	observable	unobservable
	Fair value	assets	inputs	inputs (1)
Description	September 30, 2020	(Level 1)	(Level 2)	(Level 3)
Collateral dependent loans (1)	$                             9,922	$                                       -	$                                       -	$                               9,922

		Fair Value Measurements at Reporting Date Using
		Quoted prices in active	Significant other	Significant
		markets for identical	observable	unobservable
	Fair value	assets	inputs	inputs (1)
Description	December 31, 2019	(Level 1)	(Level 2)	(Level 3)
Collateral dependent loans (1)	$                             3,651	$                                       -	$                                       -	$                               3,651
Intangible assets	2,315	-	-	2,315
	$                             5,966	$                                       -	$                                       -	$                               5,966

(1)The method of valuation approach for the collateral dependent loans was the market value approach based upon appraisals of the underlying collateral by external appraisers, reduced by 7% to 10% for estimated selling costs. Intangible assets are valued based upon internal analyses.

At September 30, 2020, principal on collateral dependent loans and troubled debt restructurings, which is accounted for on the basis of the value of underlying collateral, is shown at estimated fair value of $9.9 million. To arrive at that fair value, related loan principal of $12.8 million was reduced by specific reserves of $2.9 million within the allowance for credit losses as of that date, representing the deficiency between principal and estimated collateral values, which were reduced by estimated costs to sell. When the deficiency is deemed uncollectible, it is charged off by reducing the specific reserve and decreasing principal. Included in the collateral dependent loans at September 30, 2020 were 11 troubled debt restructured loans with a balance of $1.7 million, which had specific reserves of $479,000. Valuation techniques consistent with the market and/or cost approach were used to measure fair value and primarily included observable inputs for the individual collateral dependent loans being evaluated such as recent sales of similar assets or observable market data for operational or carrying costs. In cases where such inputs were unobservable, the loan balance is reflected within the Level 3 hierarchy. There was no other real estate owned in continuing operations at either September 30, 2020 or December 31, 2019.