Fair Value Measurements

9 Months Ended

Sep. 30, 2021

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 $317.3 million and $345.5 million as of September 30, 2021 and December 31, 2020, 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 2021 and 2020, there were no transfers between the three levels.

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 held at fair value are comprised of commercial real estate loans and SBA loans which had been originated for sale or securitization in the secondary market, and which are now being held on the balance sheet. Commercial real estate loans and SBA loans 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, on a pooled basis.

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 was measured at fair value at each balance sheet date. The fair value was initially established by the sales price and the investment was 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 reflected changes in estimated fair value. Interest paid to the bank on the notes was credited to principal. In the third quarter of 2021, The Bancorp and the other investor dissolved the entity, as the remaining balance did not warrant ongoing administrative and accounting expenses. As a result of the dissolution, the investment in unconsolidated entity, which had a June 30, 2021 balance of $25.0 million, was reclassified as follows. Approximately $22.9 million of loans were reclassified to commercial loans, at fair value and $2.1 million was reclassified to other real estate owned, as those assets continue to be reported at fair value.

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, senior debt 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 in other assets or other liabilities, 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, 2021
					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	$	1,054,223	$	1,054,223	$	—	$	984,961	$	69,262
Federal Home Loan Bank and Atlantic Central Bankers Bank stock		1,663		1,663		—		—		1,663
Commercial loans, at fair value		1,550,025		1,550,025		—		—		1,550,025
Loans, net of deferred loan fees and costs		3,136,662		3,129,602		—		—		3,129,602
Assets held-for-sale from discontinued operations		87,904		87,904		—		—		87,904
Interest rate swaps, liability		895		895		—		895		—
Demand and interest checking		4,734,352		4,734,352		—		4,734,352		—
Savings and money market		378,160		378,160		—		378,160		—
Senior debt		98,590		101,433		—		101,433		—
Subordinated debentures		13,401		8,663		—		—		8,663
Securities sold under agreements to repurchase		42		42		42		—		—
Short-term borrowings		300,000		300,000		300,000		—		—

	December 31, 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	$	1,206,164	$	1,206,164	$	—	$	1,027,213	$	178,951
Federal Home Loan Bank and Atlantic Central Bankers Bank stock		1,368		1,368		—		—		1,368
Commercial loans, at fair value		1,810,812		1,810,812		—		—		1,810,812
Loans, net of deferred loan fees and costs		2,652,323		2,650,613		—		—		2,650,613
Investment in unconsolidated entity		31,294		31,294		—		—		31,294
Assets held-for-sale from discontinued operations		113,650		113,650		—		—		113,650
Interest rate swaps, liability		2,223		2,223		—		2,223		—
Demand and interest checking		5,205,010		5,205,010		—		5,205,010		—
Savings and money market		257,050		257,050		—		257,050		—
Senior debt		98,314		104,111		—		104,111		—
Subordinated debentures		13,401		9,102		—		—		9,102
Securities sold under agreements to repurchase		42		42		42		—		—

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, 2021	(Level 1)		(Level 2)		(Level 3)
Investment securities, available-for-sale
U.S. Government agency securities	$	39,120	$	—	$	39,120	$	—
Asset-backed securities		368,913		—		368,913		—
Obligations of states and political subdivisions		52,797		—		52,797		—
Residential mortgage-backed securities		199,270		—		199,270		—
Collateralized mortgage obligation securities		76,342		—		76,342		—
Commercial mortgage-backed securities		311,276		—		248,519		62,757
Corporate debt securities		6,505		—		—		6,505
Total investment securities, available-for-sale		1,054,223		—		984,961		69,262
Commercial loans, at fair value		1,550,025		—		—		1,550,025
Assets held-for-sale from discontinued operations		87,904		—		—		87,904
Interest rate swaps, liability		895		—		895		—
	$	2,691,257	$	—	$	984,066	$	1,707,191

			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, 2020	(Level 1)		(Level 2)		(Level 3)
Investment securities, available-for-sale
U.S. Government agency securities	$	47,197	$	—	$	47,197	$	—
Asset-backed securities		238,361		—		238,361		—
Obligations of states and political subdivisions		56,354		—		56,354		—
Residential mortgage-backed securities		266,583		—		266,583		—
Collateralized mortgage obligation securities		148,530		—		148,530		—
Commercial mortgage-backed securities		367,280		—		270,188		97,092
Corporate debt securities		81,859		—		—		81,859
Total investment securities, available-for-sale		1,206,164		—		1,027,213		178,951
Commercial loans, at fair value		1,810,812		—		—		1,810,812
Investment in unconsolidated entity		31,294		—		—		31,294
Assets held-for-sale from discontinued operations		113,650		—		—		113,650
Interest rate swaps, liability		2,223		—		2,223		—
	$	3,159,697	$	—	$	1,024,990	$	2,134,707

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.

The Company’s Level 3 asset activity for the categories shown 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, 2021		December 31, 2020		September 30, 2021		December 31, 2020
Beginning balance	$	178,951	$	117,333	$	1,810,812	$	1,180,546
Transfers from investment in unconsolidated entity		—		—		22,926		—
Reclass of held-to-maturity securities to available-for-sale		—		85,151		—		—
Total (losses) or gains (realized/unrealized)
Included in earnings		(676)		—		5,315		(1,883)
Included in other comprehensive loss		(1,096)		(2,121)		—		—
Purchases, issuances, sales and settlements
Issuances		—		—		62,151		721,590
Settlements		(107,917)		(21,412)		(351,179)		(89,441)
Ending balance	$	69,262	$	178,951	$	1,550,025	$	1,810,812
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.	$	(879)	$	—	$	(1,953)	$	(3,567)

The Company’s Level 3 asset activity for the categories shown 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, 2021		December 31, 2020		September 30, 2021		December 31, 2020
Beginning balance	$	31,294	$	39,154	$	113,650	$	140,657
Transfers to commercial loans, at fair value		(22,926)		—		—		—
Transfers to other real estate owned		(2,145)		—		—		—
Total (losses) or gains (realized/unrealized)
Included in earnings		—		(45)		1,115		(3,326)
Purchases, issuances, sales, settlements and charge-offs
Issuances		—		—		3,715		4,942
Sales		—		—		(2,020)		(1,482)
Settlements		(6,223)		(7,815)		(28,556)		(26,846)
Charge-offs		—		—		—		(295)
Ending balance	$	—	$	31,294	$	87,904	$	113,650
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)	$	498	$	(2,664)

The Company’s other real estate owned activity is summarized below (in thousands) as of the dates indicated:

	September 30, 2021		December 31, 2020
Beginning balance	$	—	$	—
Transfers from investment in unconsolidated entity		2,145		—
Ending balance	$	2,145	$	—

	Level 3 instruments only
						Weighted
	Fair value at				Range at	average at
	September 30, 2021		Valuation techniques	Unobservable inputs	September 30, 2021	September 30, 2021
Commercial mortgage backed investment
securities (a)	$	62,757	Discounted cash flow	Discount rate	3.11%-7.71%	4.00%
Insurance liquidating trust preferred security (b)		6,505	Discounted cash flow	Discount rate	7.00%	7.00%
Federal Home Loan Bank and Atlantic
Central Bankers Bank stock		1,663	Cost	N/A	N/A	N/A
Loans, net of deferred loan fees and costs (c)		3,129,602	Discounted cash flow	Discount rate	1.00% - 7.00%	3.60%
Commercial - SBA (d)		214,301	Traders' pricing	Offered quotes	$100 - $106	$103.5
Non-SBA CRE - fixed (e)		85,075	Discounted cash flow	Discount rate	5.72%-7.44%	5.85%
Non-SBA CRE - floating (f)		1,250,649	Discounted cash flow	Discount rate	3.96%-8.2%	4.86%
Commercial loans, at fair value		1,550,025
Assets held-for-sale from discontinued operations (g)		87,904	Discounted cash flow	Discount rate	3.37%-6.58%	4.69%
Subordinated debentures (h)		8,663	Discounted cash flow	Discount rate	7.00%	7.00%
Other real estate owned		2,145	Appraised value	N/A	N/A	N/A

		Level 3 instruments only
						Weighted
	Fair value at				Range at	average at
	December 31, 2020		Valuation techniques	Unobservable inputs	December 31, 2020	December 31, 2020
Commercial mortgage backed investment
securities	$	97,092	Discounted cash flow	Discount rate	3.68%-8.30%	4.62%
Insurance liquidating trust preferred security		6,765	Discounted cash flow	Discount rate	6.61%	6.61%
Corporate debt securities		75,094	Traders' pricing	Price indications	$100.13	$100.13
Federal Home Loan Bank and Atlantic
Central Bankers Bank stock		1,368	Cost	N/A	N/A	N/A
Loans, net of deferred loan fees and costs		2,650,613	Discounted cash flow	Discount rate	1.00% - 6.36%	2.82%
Commercial - SBA		243,562	Traders' pricing	Offered quotes	$100.00 - $117.80	$105.60
Non-SBA CRE - fixed		87,288	Discounted cash flow	Discount rate	5.16%-7.32%	6.03%
Non-SBA CRE - floating		1,479,962	Discounted cash flow	Discount rate	3.96% -9.70%	4.91%
Commercial loans, at fair value		1,810,812
Investment in unconsolidated entity		31,294	Discounted cash flow	Discount rate	3.93%	3.93%
				Default rate	1.00%	1.00%
Assets held-for-sale from discontinued operations		113,650	Discounted cash flow	Discount rate,	2.55%-6.83%	4.15%
				Credit analysis
Subordinated debentures		9,102	Discounted cash flow	Discount rate	6.61%	6.61%

The valuations for each of the instruments above, as of the balance sheet date, are subject to judgments, assumptions and uncertainties, changes in which could have a significant impact on such valuations. 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 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, 2021 table.

a)Commercial mortgage backed investment securities, consisting of Bank sponsored 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 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)Loans, net of deferred loan 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, 2021, the balance included $71.3 million of Paycheck Protection Program loans, which bear interest at 1%, but also earn fees.

d)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.

e)Non-SBA CRE-fixed are fixed rate non-SBA commercial real estate mortgages. Discount rates used in applying discounted cash flow analysis are based upon loan terms, the current origination rates for similar loans and the quality of the credit.

f)Non-SBA CRE-floating are floating rate non-SBA 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 of these loans are fair valued by a third-party, based upon discounting at market rates for similar loans.

g)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.

h)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, 2021		(Level 1)		(Level 2)		(Level 3)
Collateral dependent loans (1)	$	5,068	$	—	$	—	$	5,068
Other real estate owned		2,145		—		—		2,145
Intangible assets		2,547		—		—		2,547
	$	9,760	$	—	$	—	$	9,760

			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, 2020		(Level 1)		(Level 2)		(Level 3)
Collateral dependent loans (1)	$	9,578	$	—	$	—	$	9,578
Intangible assets		2,845		—		—		2,845
	$	12,423	$	—	$	—	$	12,423

(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, 2021, 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 $5.1 million. To arrive at that fair value, related loan principal of $6.9 million was reduced by specific reserves of $1.8 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, 2021 were 9 troubled debt restructured loans with a balance of $1.4 million, which had specific reserves of $626,000. 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.