FAIR VALUE DISCLOSURES

9 Months Ended

Sep. 30, 2022

14. FAIR VALUE DISCLOSURES

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

Valuation techniques that are consistent with the market approach, the income approach and/or the cost approach are required by GAAP. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset. Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy for valuation inputs gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

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Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

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Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

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Level 3 Inputs - Significant unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

The following table summarizes fair value measurements at the dates indicated (dollars in thousands):

	Level 1		Level 2			Level 3		Total
September 30, 2022
Assets (liabilities) measured at fair value on a recurring basis:
Securities available for sale:
State and municipal	$	—	$	220,153		$	—	$	220,153
Mortgage-backed securities		—		373,972			—		373,972
Collateralized mortgage obligations		—		85,810			—		85,810
Asset-backed and other amortizing securities		—		20,100			—		20,100
Other securities		—		11,377			—		11,377
Loans held for sale (mandatory)		—		17,213			—		17,213
Mortgage servicing rights		—		—			28,424		28,424
Asset derivatives		—		23,830			—		23,830
Liability derivatives		—		(1,189	)		—		(1,189	)

Assets measured at fair value on a non-recurring basis:
Impaired loans		—		—			4,102		4,102

December 31, 2021
Assets (liabilities) measured at fair value on a recurring basis:
Securities available for sale:
State and municipal	$	—	$	275,672		$	—	$	275,672
Mortgage-backed securities		—		303,089			—		303,089
Collateralized mortgage obligations		—		106,320			—		106,320
Asset-backed and other amortizing securities		—		26,936			—		26,936
Other securities		—		12,487			—		12,487
Loans held for sale (mandatory)		—		47,593			—		47,593
Mortgage servicing rights		—		—			19,700		19,700
Asset derivatives		—		7,328			—		7,328
Liability derivatives		—		(535	)		—		(535	)

Assets measured at fair value on a non-recurring basis:
Impaired loans		—		—			6,427		6,427

Securities – Fair value is calculated based on market prices of similar securities using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded.

Loans held for sale (mandatory) – Loans held for sale originated for mandatory delivery are reported at fair value. Fair value is determined using quoted prices for similar assets, adjusted for specific attributes of that loan.

Mortgage servicing rights – Mortgage servicing rights are reported at fair value using Level 3 inputs. The mortgage servicing rights asset is valued by projecting net servicing cash flows, which are then discounted to estimate the fair value. The fair value of the mortgage servicing rights asset is impacted by a variety of factors, including prepayment and discount rates, which are significant unobservable inputs.

Derivatives – Fair value of derivatives is based on valuation models using observable market data as of the measurement date.

Impaired loans – Impaired loans are reported at the fair value of the underlying collateral, less estimated disposal costs, if repayment is expected solely from the sale of the collateral. Collateral values are estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria.

The following table presents quantitative information about recurring and non-recurring Level 3 fair value measurements at the dates indicated (dollars in thousands):

	Fair Value		Valuation Techniques	Unobservable Inputs	Range of Discounts
September 30, 2022
Non-recurring:
Impaired loans	$	4,102	Third party appraisals or inspections	Collateral discounts and selling costs		20%-100	%
Recurring:
Mortgage servicing rights		28,424	Discounted cash flows	Conditional prepayment rate		7.34	%
				Discount rate		9.14	%

December 31, 2021
Non-recurring:
Impaired loans	$	6,427	Third party appraisals or inspections	Collateral discounts and selling costs		20%-100	%
Recurring:
Mortgage servicing rights		19,700	Discounted cash flows	Conditional prepayment rate		12.35	%
				Discount rate		9.14	%

The estimated fair values, and related carrying amounts, of the Company’s financial instruments that are not previously disclosed in the recurring fair value section are as follows (dollars in thousands):

	Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value

September 30, 2022
Financial assets:
Cash and cash equivalents	$	329,962	$	329,962	$	—	$	—	$	329,962
Loans held for investment, net		2,650,709		—		—		2,623,042		2,623,042
Loans held for sale (best efforts)		9,709		—		10,048		—		10,048
Accrued interest receivable		12,408		—		12,408		—		12,408

Financial liabilities:
Deposits	$	3,460,536	$	—	$	3,459,611	$	—	$	3,459,611
Accrued interest payable		1,747		—		1,747		—		1,747
Junior subordinated deferrable interest debentures		46,393		—		34,598		—		34,598
Subordinated debt securities		75,914		—		71,962		—		71,962

	Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value

December 31, 2021
Financial assets:
Cash and cash equivalents	$	486,821	$	486,821	$	—	$	—	$	486,821
Loans held for investment, net		2,395,479		—		—		2,397,079		2,397,079
Loans held for sale (best efforts)		28,914		—		29,500		—		29,500
Accrued interest receivable		13,900		—		13,900		—		13,900

Financial liabilities:
Deposits	$	3,341,222	$	3,004,091	$	339,797	$	—	$	3,343,888
Accrued interest payable		1,914		—		1,914		—		1,914
Junior subordinated deferrable interest debentures		46,393		—		45,690		—		45,690
Subordinated debt securities		75,775		—		77,939		—		77,939

- 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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