FAIR VALUE DISCLOSURES

6 Months Ended

Jun. 30, 2024

FAIR VALUE DISCLOSURES [Abstract]

FAIR VALUE DISCLOSURES

12.  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:

● 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.

● 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.

● 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 as of the dates indicated below (dollars in thousands):

	Level 1		Level 2			Level 3		Total
June 30, 2024
Assets (liabilities) measured at fair value on a recurring basis:
Securities available for sale:
State and municipal	$	—	$	176,032		$	—	$	176,032
Residential mortgage-backed securities		—		278,466			—		278,466
Commercial mortgage-backed securities		—		40,705			—		40,705
Commercial collateralized mortgage obligations		—		69,118			—		69,118
Asset-backed and other amortizing securities		—		15,705			—		15,705
Other securities		—		11,005			—		11,005
Loans held for sale (mandatory)		—		12,252			—		12,252
Mortgage servicing rights		—		—			26,426		26,426
Asset derivatives		—		18,228			—		18,228
Liability derivatives		—		(116	)		—		(116	)
Assets measured at fair value on a non-recurring basis:
Loans held for investment		—		—			19,648		19,648
December 31, 2023
Assets (liabilities) measured at fair value on a recurring basis:
Securities available for sale:
State and municipal	$	—	$	180,575		$	—	$	180,575
Residential mortgage-backed securities		—		300,704			—		300,704
Commercial mortgage-backed securities		—		41,748			—		41,748
Commercial collateralized mortgage obligations		—		71,930			—		71,930
Asset-backed and other amortizing securities		—		17,040			—		17,040
Other securities		—		10,765			—		10,765
Loans held for sale (mandatory)		—		6,615			—		6,615
Mortgage servicing rights		—		—			26,569		26,569
Asset derivatives		—		17,230			—		17,230
Liability derivatives		—		(432	)		—		(432	)
Assets measured at fair value on a non-recurring basis:
Loans held for investment		—		—			1,482		1,482

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.

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 speeds, default rates, and discount rates, which are significant unobservable inputs. Mortgage servicing rights are the only Level 3 asset measured at fair value on a recurring basis, see Note 5 for the Level 3 change activity for the three and six months ended June 30, 2024 and 2023.

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

Loans held for investment – Includes certain collateral-dependent loans which are reported at fair value, for which a specific allocation of the allowance for credit losses is based off 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.

Fair Values of Assets Recorded on a Recurring Basis for which the Fair Value Option has been Elected

Loans held for sale (mandatory) – Loans held for sale originated for mandatory delivery are reported at fair value on a recurring basis due to the Company’s election to adopt fair value accounting treatment for these assets. This election allows for a more effective offset of the changes in fair values of the assets and the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting under ASC Topic 815, Derivatives and Hedging. For assets for which the fair value option has been elected, the earned current contractual interest payment is recognized in interest income, loan origination costs and fees on fair value option loans are recognized in earnings as incurred and not deferred. At June 30, 2024, and December 31, 2023, there were no gains or losses recorded attributable to changes in instrument-specific credit risk. Fair value is determined using quoted prices for similar assets, adjusted for specific attributes of that loan. At June 30, 2024 and December 31, 2023 the aggregate fair value of loans held for sale for mandatory delivery was $12.3 million and $6.6 million, respectively. The aggregate unpaid principal balance as of the same dates was $12.0 million and $6.4 million, respectively, representing differences between fair value and unpaid principal balance of $287 thousand and $190 thousand, respectively. The Company had no loans held for sale for mandatory delivery designated as nonaccrual or 90 days or more past due at each of June 30, 2024 and December 31, 2023.

The total fair value option impact on noninterest income for loans held for sale for mandatory delivery is included in Net gain on sales of loans in the consolidated statements of comprehensive income (loss). For the three months ended June 30, 2024 and 2023 the net (gain) loss amount totaled $32 thousand and $9 thousand, respectively. For the six months ended June 30, 2024 and 2023 the net (gain) loss amount totaled $(340) thousand and $(252) thousand, respectively.

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
June 30, 2024
Non-recurring:
Loans held for investment	$	19,648	Third party appraisals or inspections	Collateral discounts and selling costs		20	%
Recurring:
Mortgage servicing rights		26,426	Discounted cash flows	Constant prepayment rate		7.32	%
				Discount rate		10.16	%
December 31, 2023
Non-recurring:
Loans held for investment	$	1,482	Third party appraisals or inspections	Collateral discounts and selling costs		20%-100	%
Recurring:
Mortgage servicing rights		26,569	Discounted cash flows	Constant prepayment rate		7.46	%
				Discount rate		10.66	%

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

	Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value
June 30, 2024
Financial assets:
Cash and cash equivalents	$	298,006	$	298,006	$	—	$	—	$	298,006
Loans held for investment, net		3,051,100		—		—		2,933,460		2,933,460
Loans held for sale (best efforts)		4,333		—		4,408		—		4,408
Accrued interest receivable		19,481		—		19,481		—		19,481
Financial liabilities:
Deposits	$	3,624,513	$	—	$	3,624,285	$	—	$	3,624,285
Accrued interest payable		52,695		—		52,695		—		52,695
Junior subordinated deferrable interest debentures		46,393		—		33,530		—		33,530
Subordinated debt		63,868		—		57,558		—		57,558

	Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value
December 31, 2023
Financial assets:
Cash and cash equivalents	$	330,158	$	330,158	$	—	$	—	$	330,158
Loans held for investment, net		2,971,797		—		—		2,848,536		2,848,536
Loans held for sale (best efforts)		7,884		—		7,977		—		7,977
Accrued interest receivable		20,881		—		20,881		—		20,881
Financial liabilities:
Deposits	$	3,626,153	$	—	$	3,625,321	$	—	$	3,625,321
Accrued interest payable		5,057		—		5,057		—		5,057
Junior subordinated deferrable interest debentures		46,393		—		33,098		—		33,098
Subordinated debt		63,775		—		57,497		—		57,497