Fair Value

12 Months Ended

Dec. 31, 2021

Fair Value Disclosures [Abstract]

Fair Value

FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access at the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or 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.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Investment Securities Available for Sale: The fair values of investment securities available for sale are determined by matrix pricing, which is a mathematical technique used to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2). Management obtains the fair values of securities available for sale on a monthly basis from a third party pricing service.

Residential Loans Held for Sale: The Company has elected to account for residential loans held for sale at fair value. The fair value of loans held for sale is determined using either actual quoted prices for the assets (Level 1) whenever possible or quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2). The gain (loss) on loans held for sale is included in residential fee income in the Consolidated Statements of Income.

SBA Loans Held for Investment, at Fair Value: The Company has elected to account for certain SBA loans held for investment at fair value. Fair value is calculated based on the present value of estimated future payments (Level 3). The valuation model uses interest rate, prepayment speed, and default rate assumptions that market participants would use in estimating future payments. Whenever available, the present value is validated against available market data.

Mortgage Banking Derivatives: Mortgage banking derivatives used in the ordinary course of business primarily consist of mandatory forward sales contracts, best efforts forward sales contracts, and interest rate lock commitments. The fair value of mandatory forward sales contracts is measured using quoted market prices (Level 1), or in some cases when quoted market prices are not available, the pricing is derived from market observable inputs that can generally be verified and do not typically involve significant judgment by the Company (Level 2). Interest rate lock commitments involve pricing derived from market observable inputs that are adjusted based on pull-through rates. Pull-through rates are an unobservable input which are the Company’s estimate of the percentage of interest rate lock commitments expected to result in closed loans (Level 3). The fair value of best efforts forward sales contracts is measured using market observable inputs that are adjusted using unobservable inputs including duration, spread, and pull-through rates (Level 3).

Impaired Loans: A loan is considered to be impaired when it is probable the Bank will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. In most cases, the Bank measures fair value based on the value of the collateral securing the loan. Collateral may be in the form of real estate and/or business or personal assets, including but not limited to equipment, inventory, and accounts receivable. The fair value of real estate collateral is determined based on third party appraisals by qualified licensed appraisers as well as internal estimates. The fair value of other business or personal assets is generally based on amounts reported on the financial statements of the customer or customer’s business. Appraised and reported values may be adjusted based on management’s historical knowledge, changes in market conditions from the time of valuation and management’s knowledge of the customer and the customer’s business. Since not all valuation inputs are observable, these nonrecurring fair value determinations are classified as Level 3. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors previously identified.

SBA Loan Servicing Rights: On a quarterly basis, SBA loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount. If the carrying amount exceeds fair value, impairment is recorded so that the servicing asset is carried at fair value. The fair value of SBA servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. There were no SBA loan servicing rights carried at fair value at December 31, 2021 and December 31, 2020.

Assets and liabilities measured at fair value on a recurring basis at December 31, 2021 are summarized below:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Financial assets
Investment securities available for sale	$	—	$	30,893	$	—	$	30,893
Residential loans held for sale	43,837		70,294		—		114,131
SBA loans held for investment, at fair value	—		—		9,614		9,614
Interest rate lock commitments	—		—		1,435		1,435
Mandatory forward sales contracts	88		—		—		88
Best efforts forward sales contracts	—		—		27		27
Financial liabilities
Interest rate lock commitments	$	—	$	—	$	23	$	23
Mandatory forward sales contracts	166		—		—		166

Assets and liabilities measured at fair value on a recurring basis at December 31, 2020 are summarized below:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Financial assets
Residential loans held for sale	$	21,888	$	186,816	$	—	$	208,704
SBA loans held for investment, at fair value	—		—		9,264		9,264
Interest rate lock commitments	—		—		7,565		7,565
Best efforts forward sales contracts	—		—		55		55
Financial liabilities
Interest rate lock commitments	$	—	$	—	$	12	$	12
Mandatory forward sales contracts	4,455		—		—		4,455

There were no transfers between levels for assets and liabilities recorded at fair value on a recurring basis during the reported periods.

Financial Instruments Recorded Using Fair Value Option

The Company has elected the fair value option for residential loans held for sale. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual term of the loan and in accordance with the Company’s policy on loans held for investment. None of these loans are 90 days or more past due or on nonaccrual at December 31, 2021 and December 31, 2020.

The aggregate fair value, contractual balance, and gain at December 31, 2021 and December 31, 2020 for residential loans held for sale were as follows:

	December 31, 2021		December 31, 2020
Aggregate fair value	$	114,131	$	208,704
Contractual balance	110,335		199,974
Gain	$	3,796	$	8,730

The total amount of gains and losses from changes in fair value and interest income included in earnings for the years ended December 31, 2021 and 2020 for residential loans held for sale were as follows:

	Year Ended December 31,
	2021		2020
Interest income	$	3,717	$	2,684
Change in fair value	(4,934)		6,049
Total gain (loss)	$	(1,217)	$	8,733

The Company also elected the fair value option for certain of its non-PPP SBA loans originated and fully funded during the year ended December 31, 2018 as the Company believed that fair value was the best indicator of the resolution of those loans at that time. Depending on market conditions and liquidity needs of the Company, management determines whether it is advantageous to hold or sell SBA loans on a loan-by-loan basis. The portion of these loans guaranteed by the SBA are generally readily marketable in the secondary market and the portion of the loans that are not guaranteed may be sold periodically to other third party financial institutions. Interest income on these loans is recorded based on the contractual term of the loan and in accordance with the Company’s policy on other loans held for investment.

The aggregate fair value, contractual balance, and gain (loss) at December 31, 2021 and December 31, 2020 for SBA loans held for investment, at fair value, were as follows:

	December 31, 2021		December 31, 2020
Aggregate fair value	$	9,614	$	9,264
Contractual balance	9,429		9,263
Gain (loss)	$	185	$	1

The total amount of gains and losses from changes in fair value and interest income included in earnings for the years ended December 31, 2021 and 2020 for SBA loans held for investment, at fair value, were as follows:

	Year Ended December 31,
	2021		2020
Interest income	$	559	$	725
Change in fair value	184		1
Total gain	$	743	$	726

Changes in fair value for SBA loans held for investment, at fair value, were included in SBA fair value gain (loss) on the Consolidated Statements of Income.

The table below presents a reconciliation of SBA loans held for investment, at fair value, which were valued on a recurring basis and used significant unobservable inputs (Level 3) for the years ended December 31, 2021 and 2020:

	Year Ended December 31,
	2021		2020
Balance of SBA loans held for investment at fair value, beginning of period	$	9,264	$	10,341
Principal payments	(1,227)		(741)
Charge-offs	(8)		(97)
SBA repurchase of guaranteed balances	—		(240)
Repurchase of guaranteed balances previously participated	1,401		—
Total gains during the period	184		1
Balance of SBA loans held for investment at fair value, end of period	$	9,614	$	9,264

The Company’s valuation of SBA loans held for investment, at fair value, was supported by an analysis prepared by an independent third party and approved by management. The approach to determine fair value involved several steps: 1) Identifying each loan’s unique characteristics, including balance, payment type, term, coupon, age, and principal and interest payment; 2) Projecting these loan level characteristics for the life of each loan; and 3) Performing discounted cash flow modeling.

The following table provides information about the valuation techniques and unobservable inputs used in the valuation of SBA loans held for investment, at fair value, interest rate lock commitments, best efforts forward sales contracts falling within Level 3 of the fair value hierarchy at December 31, 2021 and December 31, 2020:

	Fair Value		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
December 31, 2021
SBA loans held for	$	9,614	Discounted	Discount Rate	3.22%-6.72% (4.22%)
investment, at fair value			Cash Flow	Conditional Prepayment Rate	10.56%-10.56% (10.56%)
Interest rate lock commitments	1,412		Quoted market prices	Pull-through expectations	24.00%-100.00% (84.40%)
Best efforts forward sales contracts	27		Quoted market prices	Pull-through expectations	24.00%-80.00% (65.79%)
December 31, 2020
SBA loans held for	$	9,264	Discounted	Discount Rate	3.24%-6.74% (4.37%)
investment, at fair value			Cash Flow	Conditional Prepayment Rate	10.53%-10.56% (10.55%)
Interest rate lock commitments	7,553		Quoted market prices	Pull-through expectations	52.50%-100.00% (81.63%)
Best efforts forward sales contracts	55		Quoted market prices	Pull-through expectations	52.50%-80.00% (73.37%)

The significant unobservable inputs impacting the fair value measurement of SBA loans held for investment, at fair value, include discount rates and conditional prepayment rates. Increases in discount rates or prepayment rates would result in a lower fair value measurement. Although the prepayment rate and discount rate are not directly interrelated, they generally move in opposite directions. The discount rates and conditional prepayment rates were weighted by the relative principal balance outstanding of these loans.

The significant unobservable inputs impacting the fair value measurement of interest rate lock commitments and best efforts sales contracts include pull-through rate. An increase in the pull-through rate utilized in the fair value measurement of the interest rate lock commitments and best efforts forward sale contracts will result in positive fair value adjustments (and an increase in the fair value measurement). Conversely, a decrease in the pull-through rate will result in a negative fair value adjustment (and a decrease in the fair value measurement).

Assets measured at fair value on a nonrecurring basis at December 31, 2021 are summarized below:

	Fair Value		Valuation Technique(s)	Significant Unobservable Input(s)	Discount % Range/Amount
Impaired loans	$	1,614	Discount appraisals, estimated net realizable value of collateral	Collateral discounts	10%

Assets measured at fair value on a nonrecurring basis at December 31, 2020 are summarized below:

	Fair Value		Valuation Technique(s)	Significant Unobservable Input(s)	Discount % Range/Amount
Impaired loans	$	1,583	Discount appraisals, estimated net realizable value of collateral	Collateral discounts	20-75%

Fair Value of Financial Instruments

The carrying values and estimated fair values of financial instruments not carried at fair value, at December 31, 2021 and December 31, 2020 are as follows:

		December 31, 2021				December 31, 2020
	Level	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Cash and cash equivalents	1	$	109,727	$	109,727	$	55,379	$	55,379
Time deposits in banks	2	2,381		2,437		2,381		2,521
Investment securities held to maturity	2	2		2		41		39
Restricted equity securities, at cost	2	2,827		2,827		2,362		2,362
Government guaranteed loans held for sale	2	1,460		1,460		—		—
Loans held for investment, at amortized cost	3	560,882		569,394		1,197,896		1,213,967
Accrued interest receivable	3	3,564		3,564		7,300		7,300
SBA loan servicing rights	3	6,407		8,050		8,160		9,709
Mortgage loan servicing rights	3	212		212		—		—
Liabilities:
Noninterest-bearing deposits	2	$	83,638	$	83,638	$	62,650	$	62,650
Interest-bearing transaction accounts	2	163,495		163,495		140,265		140,265
Savings and money market deposits	2	423,864		423,864		286,744		286,744
Time deposits	2	50,688		51,049		69,125		69,743
Subordinated debentures	2	5,985		6,175		5,948		6,516
Notes payable	2	3,299		3,350		3,754		3,754
PPP Liquidity Facility	2	69,654		69,654		881,262		881,262
Accrued interest payable	2	326		326		1,999		1,999