Fair Value Measurements

9 Months Ended

Sep. 30, 2022

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Investment securities available for sale and marketable equity securities: Fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Servicing rights: MSR and CSR are measured at fair value on a recurring basis. These assets are classified as Level 3 as quoted prices are not available. In order to determine the fair value of MSR and CSR, the present value of net expected future cash flows is estimated. Assumptions used include market discount rates, anticipated prepayment speeds, escrow calculations, delinquency rates, and ancillary fee income net of servicing costs.

Derivative instruments: The fair value of the interest rate lock commitments are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions based on historical information, where appropriate. The pull-through rate assumptions are considered Level 3 valuation inputs and are significant to the interest rate lock commitment valuation; as such, the interest rate lock commitment derivatives are classified as Level 3. Interest rate contracts are valued in a model, which uses as its basis a discounted cash flow technique incorporating credit valuation adjustments to reflect nonperformance risk in the measurement of fair value. Although the Company has determined that the

majority of inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2022, the Company has assessed the significance of the impact of these adjustments on the overall valuation of its interest rate positions and has determined that they are not significant to the overall valuation of its interest rate derivatives. As a result, the Company has classified its interest rate derivative valuations in Level 2 of the fair value hierarchy.

Commitments to extend credit and standby letters of credit: The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counterparties at the reporting date.

Assets Subject to Nonrecurring Adjustment to Fair Value

The Company is also required to measure certain assets such as equity method investments, goodwill, intangible assets, impaired loans, and Other Real Estate Owned ("OREO") at fair value on a nonrecurring basis in accordance with GAAP. Any nonrecurring adjustments to fair value usually result from the write-down of individual assets.

The Company uses either in-house evaluations or external appraisals to estimate the fair value of OREO and impaired loans as of each reporting date. In-house appraisals are considered Level 3 inputs and external appraisals are considered Level 2 inputs. The Company’s determination of which method to use is based upon several factors. The Company takes into account compliance with legal and regulatory guidelines, the amount of the loan, the size of the assets, the location and type of property to be valued and how critical the timing of completion of the analysis is to the assessment of value. Those factors are balanced with the level of internal expertise, internal experience and market information available, versus external expertise available such as qualified appraisers, brokers, auctioneers and equipment specialists.

Limitations

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 Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s 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 and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Estimated fair values as of the periods indicated are as follows:


	September 30, 2022		December 31, 2021
(In Thousands)	Carrying Amount	Fair Value	Carrying Amount	Fair Value
Financial assets:
Level 1 inputs:
Cash, due from banks and deposits in other banks	$406,921	$406,921	$645,827	$645,827
Investment securities available for sale	361,802	361,802	141,531	141,531
Marketable equity securities	11,149	11,149	8,420	8,420

Level 2 inputs:
Investment securities available for sale	290,119	290,119	285,153	285,153
Investment in Federal Home Loan Bank stock	3,820	3,820	3,107	3,107
Loans held for sale	49,356	49,356	73,650	73,650
Accrued interest receivable	8,495	8,495	6,846	6,846
Interest rate swaps	14,856	14,856	6,030	6,030
Retail interest rate contracts	593	593	166	166

Level 3 inputs:
Investment securities held to maturity	36,750	31,694	20,000	19,164
Loans	1,407,266	1,313,253	1,413,886	1,396,486
Purchased receivables, net	4,785	4,785	6,987	6,987
Interest rate lock commitments	354	354	1,387	1,387
Mortgage servicing rights	17,709	17,709	13,724	13,724
Commercial servicing rights	1,067	1,067	1,084	1,084

Financial liabilities:
Level 2 inputs:
Deposits	$2,439,335	$2,435,738	$2,421,631	$2,422,215

Borrowings	14,199	11,883	14,508	14,727
Accrued interest payable	135	135	31	31
Interest rate swaps	13,374	13,374	6,985	6,985


Level 3 inputs:

Junior subordinated debentures	10,310	10,047	10,310	9,727

The following table sets forth the balances as of the periods indicated of assets and liabilities measured at fair value on a recurring basis:


(In Thousands)	Total	Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
September 30, 2022
Assets:
Available for sale securities
U.S. Treasury and government sponsored entities	$564,072	$331,861	$232,211	$—
Municipal securities	796	—	796	—

Corporate bonds	29,941	29,941	—	—
Collateralized loan obligations	57,112	—	57,112	—
Total available for sale securities	$651,921	$361,802	$290,119	$—
Marketable equity securities	$11,149	$11,149	$—	$—
Total marketable equity securities	$11,149	$11,149	$—	$—
Interest rate swaps	$14,856	$—	$14,856	$—
Interest rate lock commitments	354	—	—	354
Mortgage servicing rights	17,709	—	—	17,709
Commercial servicing rights	1,067	—	—	1,067
Retail interest rate contracts	593	—	—	593
Total other assets	$34,579	$—	$14,856	$19,723
Liabilities:
Interest rate swaps	$13,374	$—	$13,374	$—

Total other liabilities	$13,374	$—	$13,374	$—
December 31, 2021
Assets:
Available for sale securities
U.S. Treasury and government sponsored entities	$341,480	$115,686	$225,794	$—
Municipal securities	840	—	840	—

Corporate bonds	32,946	25,845	7,101	—
Collateralized loan obligations	51,418	—	51,418	—
Total available for sale securities	$426,684	$141,531	$285,153	$—
Marketable equity securities	$8,420	$8,420	$—	$—
Total marketable securities	$8,420	$8,420	$—	$—
Interest rate swaps	$6,030	$—	$6,030	$—
Interest rate lock commitments	1,387	—	—	1,387
Mortgage servicing rights	13,724	—	—	13,724
Commercial servicing rights	1,084	—	—	1,084
Retail interest rate contracts	166	—	166	—
Total other assets	$22,391	$—	$6,196	$16,195
Liabilities:
Interest rate swaps	$6,985	$—	$6,985	$—

Total other liabilities	$6,985	$—	$6,985	$—

The following tables provide a reconciliation of the assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three and nine-month periods ended September 30, 2022 and 2021:


(In Thousands)	Beginning balance	Change included in earnings	Purchases and issuances	Sales and settlements	Ending balance	Net change in unrealized gains (losses) relating to items held at end of period
Three Months Ended September 30, 2022
Interest rate lock commitments	$2,567	($370)	$2,976	($4,819)	$354	$354
Mortgage servicing rights	16,301	145	1,263	—	17,709	—
Commercial servicing rights	1,069	(75)	73	—	1,067	—
Total	$19,937	($300)	$4,312	($4,819)	$19,130	$354
Three Months Ended September 30, 2021
Interest rate lock commitments	$3,044	($867)	$7,428	($6,357)	$3,248	$3,248
Mortgage servicing rights	12,835	(1,458)	1,703	—	13,080	—
Commercial servicing rights	1,292	(58)	44	—	1,278	—
Total	$17,171	($2,383)	$9,175	($6,357)	$17,606	$3,248


(In Thousands)	Beginning balance	Change included in earnings	Purchases and issuances	Sales and settlements	Ending balance	Net change in unrealized gains (losses) relating to items held at end of period
Nine Months Ended September 30, 2022
Interest rate lock commitments	$1,387	($1,399)	$11,189	($10,823)	$354	$354
Mortgage servicing rights	13,724	607	3,378	—	17,709	—
Commercial servicing rights	1,084	(123)	106	—	1,067	—
Total	$16,195	($915)	$14,673	($10,823)	$19,130	$354
Nine Months Ended September 30, 2021
Interest rate lock commitments	$4,034	($2,881)	$23,879	($21,784)	$3,248	$3,248
Mortgage servicing rights	11,218	(3,034)	4,896	—	13,080	—
Commercial servicing rights	1,310	(134)	102	—	1,278	—
Total	$16,562	($6,049)	$28,877	($21,784)	$17,606	$3,248

There were no changes in unrealized gains and losses for the three and nine-month periods ending September 30, 2022 and 2021 included in other comprehensive income for recurring Level 3 fair value measurements.

As of and for the periods ending September 30, 2022 and December 31, 2021, no impairment or valuation adjustment was recognized for assets recognized at fair value on a nonrecurring basis. For loans individually measured for credit losses, the Company classifies fair value measurements using observable inputs, such as external appraisals, as Level 2 valuations in the fair value hierarchy, and unobservable inputs, such as in-house evaluations, as Level 3 valuations in the fair value hierarchy.

The following table presents the (gains) losses resulting from nonrecurring fair value adjustments for the three and nine-month periods ended September 30, 2022 and 2021:


	Three Months Ended September 30,		Nine Months Ended September 30,
(In Thousands)	2022	2021	2022	2021
Loans individually measured for credit losses	$—	($122)	$—	$650


Total loss from nonrecurring measurements	$—	($122)	$—	$650

Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3)

The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring and nonrecurring basis at September 30, 2022 and December 31, 2021:


Financial Instrument	Valuation Technique	Unobservable Input	Weighted Average Rate Range
September 30, 2022



Interest rate lock commitment	External pricing model	Pull through rate	96.1	%
Mortgage servicing rights	Discounted cash flow	Constant prepayment rate	7.23% - 8.68%
		Discount rate	10.00	%
Commercial servicing rights	Discounted cash flow	Constant prepayment rate	12.30% - 16.57%
		Discount rate	9.94	%
December 31, 2021



Interest rate lock commitment	External pricing model	Pull through rate	93.27	%
Mortgage servicing rights	Discounted cash flow	Constant prepayment rate	9.25% - 14.21%
		Discount rate	8.00%
Commercial servicing rights	Discounted cash flow	Constant prepayment rate	12.30% - 16.57%
		Discount rate	9.94	%

- 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.

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