FAIR VALUE MEASUREMENTS

3 Months Ended

Mar. 31, 2021

The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged (using an exit price notion) in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value of financial instruments

Fair value estimates are based on financial instruments both on and off the balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial

instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a significant

effect on fair value estimates and have not been considered in many of the estimates. The methods and assumptions used to

estimate the fair value of certain financial instruments are described below:

Cash and Due from Banks. The carrying amounts of cash and short-term instruments approximate fair values

because of the liquidity of these instruments.

Interest Bearing Deposits at Other Banks. The carrying amount is assumed to be the fair value given the short-term

nature of these deposits.

Loans. The fair value of loans, which is based on an exit price notion, is generally determined using an income based approach based on discounted cash flow analysis. This approach utilizes the contractual maturity of the loans and

market indications of interest rates, prepayment speeds, defaults and credit risk in determining fair value. For impaired loans,

an asset-based approach is applied to determine the estimated fair values of the underlying collateral. This approach utilizes

the estimated net sales proceeds to determine the fair value of the loans when deemed appropriate. The implied sales

proceeds value provides a better indication of value than using an income-based approach as these loans are not performing

or exhibit strong signs indicative of non-performance.

Securities. The fair values of securities available-for-sale and held-to-maturity are determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.

Equity Securities and Other Bank Stock. The fair value of equity securities is based on quoted prices in active markets for identical assets to determine the fair value. If quoted prices are not available to determine fair value, the Company estimates the fair values by using independent pricing models, quoted prices of securities with similar characteristics, or discounted cash flows.

Restricted Stock Investments. Investments in FHLB and Federal Reserve stocks are recorded at cost and measured for impairment. Ownership of FHLB and Federal Reserve stocks are restricted to member banks and the securities do not have a readily determinable market value. Purchases and sales of these securities are at par value with the issuer. The fair value of investments in FHLB and Federal Reserve stock and other bank stock is equal to the carrying amount.

Servicing Asset. The fair value of servicing assets is based, in part, by third-party valuations that project estimated

future cash inflows that include servicing fees and outflows that include market rates for costs of servicing.

Deposits. The fair values disclosed for demand deposits, including interest and non-interest demand accounts,

savings, and certain types of money market accounts are, by definition based on carrying value. Fair value for fixed-rate

certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates currently being offered

on certificates to a schedule of aggregate expected monthly maturities on time deposits. Early withdrawal of fixed-rate

certificates of deposit is not expected to be significant.

Federal Home Loan Bank Borrowings. The fair values of the Company’s overnight borrowings from Federal Home Loan Bank approximates their carrying value as the advances were recently borrowed at market rate. The fair value of fixed-rated term borrowings is estimated using a discounted cash flow through the remaining maturity dates based on the current borrowing rates for similar types of borrowing arrangements.

Paycheck Protection Program Liquidity Facility. The fair value of the PPPLF is estimated using a discounted cash flow based on the remaining contractual term and current borrowing rates for similar terms.

Senior Secured Notes. The fair value of the senior secured notes approximates carrying value as the note was recently borrowed at a variable market rate.

Accrued Interest Receivable and Payable. The fair value of accrued interest receivable and payable approximates their carrying amounts.

Off-Balance Sheet Financial Instruments. The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements. The fair value of these financial instruments is not material.

The following table provides the fair value hierarchy level and estimated fair value of significant financial instruments at the periods indicated:


		March 31, 2021				December 31, 2020
	Fair Value Hierarchy	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial Assets:		(dollars in thousands)
Cash and cash equivalents	Level 1	$	309,446	$	309,446	$	236,381	$	236,381
Securities available-for-sale	Level 2	37,376		37,376		42,027		42,027


Securities held-to-maturity	Level 2	1,348		1,417		1,358		1,470
Equity securities	Level 1	2,774		2,774		2,798		2,798
Loans held for sale	Level 2	12,669		13,687		9,932		10,618
Loan held for investment, net	Level 3	2,009,328		2,051,100		1,861,610		1,904,785
Restricted stock investments, at cost	Level 2	12,999		12,999		12,999		12,999
Servicing asset	Level 3	2,778		3,738		2,860		3,434
Accrued interest receivable	Level 2	9,364		9,364		9,569		9,569

Financial Liabilities:
Deposits	Level 2	$	1,895,550	$	1,895,794	$	1,634,158	$	1,634,170
Borrowings	Level 2	95,000		95,102		145,000		145,357
PPP Liquidity Facility	Level 2	209,998		210,152		204,719		204,820
Senior secured notes	Level 2	—		—		2,000		2,000
Accrued interest payable	Level 2	548		548		534		534

Recurring fair value measurements

The following table provides the hierarchy and fair value for each major category of assets and liabilities measured at fair value on a recurring basis at the periods indicated:


	Recurring Fair Value Measurements
	Level 1		Level 2		Level 3		Total
March 31, 2021:	(dollars in thousands)
Securities available-for-sale:
U.S. Government and agency securities	$	—	$	2,628	$	—	$	2,628
Mortgage-backed securities	—		4,897		—		4,897
Collateralized mortgage obligations	—		22,399		—		22,399
SBA Pools	—		7,452		—		7,452
Securities available-for-sale	$	—	$	37,376	$	—	$	37,376

Equity securities:
Mutual fund investment	$	2,774	$	—	$	—	$	2,774

December 31, 2020:
Securities available-for-sale:
U.S. Government and agency securities	$	—	$	2,705	$	—	$	2,705
Mortgage-backed securities	—		5,653		—		5,653
Collateralized mortgage obligations	—		25,778		—		25,778
SBA Pools	—		7,891		—		7,891
Securities available-for-sale	$	—	$	42,027	$	—	$	42,027

Equity securities:
Mutual fund investment	$	2,798	$	—	$	—	$	2,798

Nonrecurring fair value measurements

These fair value measurements typically result from the application of specific accounting pronouncements under GAAP. The fair value measurements are considered nonrecurring fair value measurements under FASB ASC 820-10.

The following table provides the hierarchy and fair value for each major category of assets and liabilities measured at fair value on a nonrecurring basis at the periods indicated:


	Nonrecurring Fair Value Measurements
	Level 1		Level 2		Level 3		Total
March 31, 2021:	(dollars in thousands)
Impaired loans	$	—	$	—	$	1,158	$	1,158


December 31, 2020:
Impaired loans	$	—	$	—	$	2,300	$	2,300

The majority of the impaired loans are considered collateral-dependent loans or are supported by a SBA guaranty. The collateral-dependent impaired loans were written down to the fair value of their underlying collateral less costs to sell of $1.2 million and $2.3 million at March 31, 2021 and December 31, 2020, by establishing specific reserves or by recording charge-offs when the carrying value exceeded the fair value of the underlying collateral of impaired loans. The Company generally utilized selling costs of 10% of appraised values for nonrecurring fair value measurements related to collateral-dependent impaired loans during the three months ended March 31, 2021 and 2020. The fair value adjustments (which include charge-offs, net of recoveries and changes in specific reserves) resulted in gains of $472 thousand and $62 thousand for the three months ended March 31, 2021 and 2020.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details

First Choice Bancorp 10-Q