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 as of 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; or 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.

Available-for-sale securities: The fair values for available-for-sale investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based

on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

Equity Securities: Fair value of equity securities represents the market value of mutual funds based on quoted market prices (Level 1) and the value of stock held in other companies, which is based on recent market transactions or quoted rates that are not actively traded (Level 2).

Equity Warrants: Fair value of equity warrants of private companies are priced using a Black-Scholes option pricing model to estimate the fair value by using strike prices, option expiration dates, risk-free interest rates, and option volatility assumptions (Level 3).

Guarantee Asset and Liability: The guarantee asset represents the fair value of the consideration received in exchange for the credit enhancement fee. The guarantee liability represents a financial guarantee to cover the second layer of any losses on loans sold to FHLB under the MPF 125 loan sales agreement. The guarantee liability value on day one is equivalent to the guarantee asset fair value, which is the consideration for the credit enhancement fee paid over the life of the loans. The liability is then carried at amortized cost. Significant inputs in the valuation analysis for the asset are Level 3, due to the nature of this asset and the lack of market quotes. The fair value of the guarantee asset is determined using a discounted cash flow model, for which significant unobservable inputs include assumed future prepayment rates (“CPR”) and market discount rate (Level 3). An increase in prepayment rates or discount rate would generally reduce the estimated fair value of the guarantee asset.

Mortgage Related Derivatives: Mortgage related derivatives include our IRLC, FSC, and the forward commitments on our loans held for sale pipeline. The fair value estimate of our IRLC is based on valuation models using market data from secondary market loan sales and direct contacts with third party investors as of the measurement date and pull through assumptions (Level 3). The FSC fair value estimate reflects the potential pair off fee associated with mandatory trades and is estimated by using a market differential and pair off penalty assessed by the investor (Level 3). The fair value estimate of the forward commitments is based on market prices of similar securities to the underlying MBS (Level 2).

Loans Held for Investment: The fair value of loans held for investment are typically determined based on discounted cash flow analysis using market-based interest rate spreads. Discounted cash flow analysis are adjusted, as appropriate, to reflect current market conditions and borrower specific credit risk. Due to the nature of the valuation inputs, loans held for investment are classified within Level 3 of the valuation hierarchy.


December 31, 2022	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Reported Balance
Mortgage loans held for sale	$	—	$	8,839	$	—	$	8,839
Loans held for sale	$	1,965	$	—	$	—	$	1,965
Loans held at fair value	$	—	$	—	$	23,321	$	23,321
Forward commitments and FSC	$	—	$	46	$	—	$	46
Equity securities	$	627	$	122	$	—	$	749
Guarantee asset	$	—	$	—	$	143	$	143
IRLC, net	$	—	$	—	$	229	$	229
Equity warrants	$	—	$	—	$	825	$	825


December 31, 2021	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Reported Balance
Investment securities available-for-sale:
U.S. Treasury debt	$	247	$	—	$	—	$	247
U.S. Government Agency	—		3,522		—		3,522
Corporate bonds	—		6,212		2,113		8,325
GNMA mortgage-backed securities - residential	—		26,650		—		26,650
FNMA mortgage-backed securities - residential	—		14,443		—		14,443
Government CMO and MBS	—		878		—		878
Corporate CMO and MBS	—		1,497		—		1,497
Total securities available-for-sale	$	247	$	53,202	$	2,113	$	55,562
Mortgage loans held for sale	$	—	$	30,620	$	—	$	30,620
Forward commitments and FSC	$	—	$	(65)	$	(9)	$	(74)
Equity securities	$	709	$	489	$	—	$	1,198
Guarantee asset	$	—	$	—	$	237	$	237
IRLC, net	$	—	$	—	$	1,473	$	1,473
Equity warrants	$	—	$	—	$	160	$	160

There were no transfers between levels during the year ended December 31, 2022 or 2021. On April 1, 2022, the Company elected to transfer all securities classified as available-for-sale to held-to-maturity and are now carried at amortized cost. See Note 3 - Investment Securities for more information.

As of December 31, 2021, U.S. Treasury debt was reported at fair value utilizing Level 1 inputs. Three Corporate bonds were reported at fair value utilizing Level 3 inputs. The remaining portfolio of securities were reported at fair value with Level 2 inputs provided by a pricing service. The majority of the securities had credit support provided by the Federal Home Loan Mortgage Corporation, GNMA, and FNMA. Factors used to value the securities by the pricing service include: benchmark yields, reported trades, interest spreads, prepayments, and other market research. In addition, ratings and collateral quality were considered.

As of December 31, 2022, equity securities, equity warrants, IRLC, and guarantee assets have been recorded at fair value within the Other assets line item in the Consolidated Balance Sheets. All changes are recorded in Non-interest income in the Consolidated Statements of Income.

The Company has elected to account for certain purchased whole loans held for investment under the fair value option in order to align the accounting presentation with the Company's viewpoint of the economics of the loans. Interest income on loans held for investment accounted for under the fair value option is recognized within Interest and dividend income in the accompanying Consolidated Statements of Income. Not electing fair value generally results in a larger discount being recorded on the date of the loan purchase. The discount is subsequently accreted into interest income over the underlying loan's remaining term using the effective interest method. Additionally, management has elected the fair value option for mortgage loans originated and held for sale and loans held for sale.

As of December 31, 2022, the Company reclassified $2.0 million of loans held for investment to loans held for sale. The transfer occurred at the point in time the Company decided to sell the loan and received a commitment from third party investors to purchase the loan.

There were no loans accounted for under the fair value option that were 90 days or more past due and still accruing interest as of December 31, 2022 or December 31, 2021. As of December 31, 2022, there were 145 loans, totaling $0.1 million, accounted for under the fair value option that were on nonaccrual. As of December 31, 2021, there were no loans accounted for under the fair value option that were on nonaccrual.

The following provides more information about the fair value carrying amount and unpaid principal outstanding of loans accounted for under the fair value option as of the dates noted (dollars in thousands):


	December 31, 2022
	Total Loans						Non Accruals						90 Days or More Past Due
	Fair Value Carrying Amount		Unpaid Principal Balance		Difference		Fair Value Carrying Amount		Unpaid Principal Balance		Difference		Fair Value Carrying Amount		Unpaid Principal Balance		Difference
Mortgage loans held for sale	$	8,839	$	8,750	$	89	$	—	$	—	$	—	$	—	$	—	$	—
Loans held for sale	1,965		1,984		(19)		—		—		$	—	—		—		—
Loans held for investment	23,321		23,415		(94)		139		140		(1)		139		140		(1)
	$	34,125	$	34,149	$	(24)	$	139	$	140	$	(1)	$	139	$	140	$	(1)


	December 31, 2021
	Total Loans						Non Accruals						90 Days or More Past Due
	Fair Value Carrying Amount		Unpaid Principal Balance		Difference		Fair Value Carrying Amount		Unpaid Principal Balance		Difference		Fair Value Carrying Amount		Unpaid Principal Balance		Difference
Mortgage loans held for sale	$	30,620	$	29,857	$	763	$	—	$	—	$	—	$	—	$	—	$	—
Loans held for investment	—		—		—		—		—		—		—		—		—
	$	30,620	$	29,857	$	763	$	—	$	—	$	—	$	—	$	—	$	—


	Year Ended
	December 31,
Mortgage loans held for sale		2022		2021
Balance at beginning of period			$	30,620	$	161,843
Loans originated				439,682		1,425,713
Loans acquired				—		840
Fair value changes				(673)		(4,712)
Sales				(460,514)		(1,548,405)
Settlements				(276)		(4,659)
Balance at end of period			$	8,839	$	30,620


	Year Ended
	December 31,
Loans held for sale		2022		2021
Balance at beginning of period			$	—	$	—
Loans transferred from held for investment				1,985		—

Fair value changes				(20)		—


Balance at end of period			$	1,965	$	—


	Year Ended
	December 31,
Loans held for investment		2022	2021
Balance at beginning of period			—		$	—

Loans acquired			35,616			—
Fair value changes			(94)			—

Settlements			(12,201)			—
Balance at end of period			$	23,321	$	—

Other Real Estate Owned ("OREO"): Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. They are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than on an annual basis. Appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between comparable sales and income data available. Such adjustments can be significant and typically result in Level 3 classifications of the inputs for determining fair value. OREO is evaluated annually for additional impairment and adjusted accordingly.

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments can be significant and typically result in Level 3 classifications of the inputs for determining fair value. Impaired loans are evaluated monthly for additional impairment and adjusted accordingly.

Appraisals for both collateral-dependent impaired loans and OREO are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, the Company reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.


December 31, 2021	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Reported Balance



Impaired loans(1):
Commercial and Industrial	$	—	$	—	$	439	$	439

During the year ended December 31, 2022, the Company recorded $0.4 million of OREO as a result of obtaining physical possession of foreclosed property as partial consideration for amounts owed on an impaired loan. The Company sold the property during the year ended December 31, 2022, resulting in an immaterial gain. As of December 31, 2022 and December 31, 2021, the Company did not own any OREO properties.

As of December 31, 2021, total impaired loans measured for impairment using the fair value of the collateral dependent loans had carrying values of $2.2 million with valuation allowances of $1.8 million and were classified as Level 3.

Impaired loans accounted for no specific reserves as of December 31, 2022 and $1.8 million as of December 31, 2021. The Company did not have any charge offs during the year ended December 31, 2022 from the specific reserve. The Company charged off an immaterial amount during the year ended December 31, 2021 from the specific reserve.


Year Ended December 31, 2022	Corporate Bonds		Loans Held at Fair Value		FSC		Guarantee Asset		IRLC		Equity Warrants
Beginning balance	$	2,113	$	—	$	(9)	$	237	$	1,473	$	160
Acquisitions	4,000		35,616		9		—		3,213		344
Originations	—		—		—		1		(5,048)		—
Gains (losses) in net income, net	—		(94)		—		(75)		591		321
Unrealized gains, net	102		—		—		—		—		—
Transfer to held-to-maturity	(6,215)		—		—		—		—		—
Settlements	—		(12,201)		—		(20)		—		—
Ending balance	$	—	$	23,321	$	—	$	143	$	229	$	825


Year Ended December 31, 2021	Corporate Bonds		Loans Held at Fair Value		FSC		Guarantee Asset		IRLC		Equity Warrants
Beginning balance	$	—	$	—	$	(89)	$	232	$	9,841	$	—
Acquisitions	2,113		—		(182)		—		19,526		160
Originations	—		—		—		2		(25,804)		—

Gains (losses) in net income, net	—		—		262		32		(2,090)		—
Other settlements	—		—		—		(29)		—		—
Ending balance	$	2,113	$	—	$	(9)	$	237	$	1,473	$	160

Quantitative Information about Level 3 Fair Value Measurements as of December 31, 2022

Fair Value

Valuation
Technique

Significant
Unobservable Input

Range
(Weighted Average)

Recurring fair value

Loans held for investment at fair value

23,321

Discounted cash flow

Discount rate

4% to 18% (8)%

Guarantee asset

143

Discounted cash flow

Discount rate
Prepayment rate

5% (5%)

4% (4)%

IRLC, net

229

Best execution model

Pull through

73% to 100% (91)%

Equity Warrants

825

Black-Scholes option pricing model

Volatility
Risk-free interest rate
Remaining life

31.2% to 44.7% (34.8)%

4.04% to 4.14% (4.05)%

0 to 4 years

Quantitative Information about Level 3 Fair Value Measurements as of December 31, 2021

Fair Value

Valuation
Technique

Significant
Unobservable Input

Range
(Weighted Average)

Recurring fair value

Corporate Bonds

2,113

Discounted cash flow

Discount rate

7% (7)%

FSC

(9)

Internal pricing model

Market Differential

(14) bps to

(2) bps

((6) bps)

Guarantee asset

237

Discounted cash flow

Discount rate
Prepayment rate

3% (3%)

18% (18%)

IRLC, net

1,473

Best execution model

Pull through

71% to 100% (88)%

Equity warrants

160

Black-Scholes option pricing model

Volatility
Risk-free interest rate
Remaining life

24% to 37% (32)%

0.30% to 1.10% (0.97)%

0 to 4 years

Nonrecurring fair value

Impaired loans(1):

Commercial and Industrial

439

Sales comparison, Market approach - guideline transaction method

Management discount for asset/property type

17% - 45% (39%)


	Carrying Amount		Fair Value Measurements Using:
December 31, 2022			Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	196,512	$	196,512	$	—	$	—
Held-to-maturity securities	81,056		234		67,433		7,051
Loans, net	2,452,230		—		—		2,379,406
Accrued interest receivable	10,445		5		362		10,078
Liabilities:
Deposits	2,405,229		2,181,139		—		228,868
Borrowings:
FHLB borrowings – fixed rate	141,498		—		141,867		—
Federal Reserve borrowings – fixed rate	5,388		—		5,388		—
Subordinated notes – fixed-to-floating rate	52,132		—		—		60,384
Accrued interest payable	1,125		—		587		538


	Carrying Amount		Fair Value Measurements Using:
December 31, 2021			Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	386,983	$	386,983	$	—	$	—
Loans, net	1,935,405		—		—		1,919,625
Accrued interest receivable	7,151		2		203		6,946
Liabilities:
Deposits	2,205,703		2,035,212		—		172,240
Borrowings:
FHLB borrowings – fixed rate	15,000		—		14,990		—
Federal Reserve borrowings – fixed rate	23,629		—		23,629		—
Subordinated notes – fixed-to-floating rate	39,031		—		—		40,325
Accrued interest payable	355		9		77		269

The fair value estimates presented and discussed above are based on pertinent information available to management as of the dates specified. The estimated fair value amounts are based on the exit price notion set forth by ASU 2016-01. Although management is not aware of any factors that would significantly affect the estimated fair values, such amounts have not been comprehensively revalued for purposes of these consolidated financial statements since the balance sheet dates. Therefore, current estimates of fair value may differ significantly from the amounts presented herein.

Cash and Cash Equivalents and Restricted Cash: The carrying amounts of cash and cash equivalents and restricted cash approximate fair values as maturities are less than 90 days and balances are generally in accounts bearing current market interest rates.

Held-to-maturity securities: The fair values for held-to-maturity investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities is not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

Loans, net: The fair values for all fixed-rate and variable-rate performing loans were estimated using the income approach and by discounting the projected cash flows of such loans. Principal and interest cash flows were projected based on the contractual terms of the loans, including maturity, contractual amortization and adjustments for prepayments and expected losses, where appropriate. A discount rate was developed based on the relative risk of the cash flows, considering the loan type, maturity and a required return on capital.

Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amounts payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting dates. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Fixed-to-Floating Rate Borrowings: Borrowings with fixed-to-floating rates are valued using inputs such as discounted cash flows and current interest rates for similar instruments and assume the Company will redeem the instrument prior to the first interest rate reset date.