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.

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 asset 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.

Derivatives: Derivatives include our swap derivatives, which are compromised of cash flow hedges and derivatives not designated as hedges. The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.

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 at Fair Value: 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 analyses 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.

The following presents assets and liabilities measured on a recurring basis as of the dates noted (dollars in thousands):


March 31, 2024	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Reported Balance
Financial Assets
Mortgage loans held for sale	$	—	$	10,470	$	—	$	10,470
Loans held at fair value	$	—	$	—	$	11,922	$	11,922

Equity securities	$	629	$	122	$	—	$	751
Guarantee asset	$	—	$	—	$	199	$	199
IRLC, net	$	—	$	—	$	813	$	813
Equity warrants	$	—	$	—	$	795	$	795
Swap derivative assets	$	—	$	1,199	$	—	$	1,199
Financial Liabilities
Forward commitments and FSC	$	—	$	23	$	—	$	23
Swap derivative liabilities	$	—	$	664	$	—	$	664


December 31, 2023	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Reported Balance
Financial Assets
Mortgage loans held for sale	$	—	$	7,254	$	—	$	7,254
Loans held at fair value	$	—	$	—	$	13,726	$	13,726

Equity securities	$	636	$	122	$	—	$	758
Guarantee asset	$	—	$	—	$	189	$	189
IRLC, net	$	—	$	—	$	345	$	345
Equity warrants	$	—	$	—	$	795	$	795
Swap derivative asset	$	—	$	763	$	—	$	763
Financial Liabilities
Forward commitments and FSC	$	—	$	351	$	—	$	351
Swap derivative liabilities	$	—	$	740	$	—	$	740

As of March 31, 2024, equity securities, equity warrants, IRLC, and guarantee assets have been recorded at fair value within the Other assets line item in the Condensed Consolidated Balance Sheets. All changes are recorded in Non-interest income in the Condensed 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 Condensed 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.

During the three months ended March 31, 2024, the Company reclassified $2.7 million of loans held for investment to loans held for sale. The transfers occurred at the point in time the Company decided to sell the loan and received a commitment from a third party to purchase the loan. As of March 31, 2024, a total of $2.7 million reclassified loans held for investment had been sold. During the year ended December 31, 2023, the Company reclassified $39.2 million of loans held for investment to loans held for sale. The transfers occurred at the point in time the Company decided to sell the loans and received a commitment from third party investors to purchase the loans. As of December 31, 2023, a total of $40.8 million reclassified loans held for sale were sold. As of March 31, 2024 and December 31, 2023, there were no loans reclassified from held for investment to held for sale.

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 March 31, 2024 or December 31, 2023. As of March 31, 2024, there were two loans, totaling $0.2 million, accounted for under the fair value option that were on non-accrual. As of December 31, 2023, there were 98 loans totaling $0.2 million, accounted for under the fair value option that were on non-accrual. During the three months ended March 31, 2024 and 2023, the Company recorded net charge-offs of $0.4 million on loans accounted for under the fair value option to Net gain/(loss) on loans accounted for under the fair value option on the condensed consolidated statements of income.


	March 31, 2024
	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	$	10,470	$	10,243	$	227	$	—	$	—	$	—	$	—	$	—	$	—

Loans held for investment	11,922		12,276		(354)		178		182		(4)		178		182		(4)
	$	22,392	$	22,519	$	(127)	$	178	$	182	$	(4)	$	178	$	182	$	(4)


	December 31, 2023
	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	$	7,254	$	7,106	$	148	$	—	$	—	$	—	$	—	$	—	$	—

Loans held for investment	13,726		14,129		(403)		210		220		(10)		210		220		(10)
	$	20,980	$	21,235	$	(255)	$	210	$	220	$	(10)	$	210	$	220	$	(10)


	Three Months Ended March 31,
Loans held for sale		2024		2023
Balance at beginning of period		$	—	$	1,965
Loans transferred from held for investment		2,729		39,221
Fair value changes		—		(20)
Sales		(2,729)		(40,761)
Settlements		—		(405)
Balance at end of period		$	—	$	—


	Three Months Ended March 31,
Loans held for investment, fair value option		2024		2023
Balance at beginning of period		$	13,726	$	23,321
Loans acquired		—		1,162
Fair value changes		50		(150)
Net charge-offs		(352)		(392)
Settlements		(1,502)		(3,134)
Balance at end of period		$	11,922	$	20,807

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.

Collateral Dependent Loans: The fair value of collateral dependent loans individually analyzed and not included in the pooled loan analysis under the ACL is generally based on recent appraisals and the value of any credit enhancements associated with the loan. 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. Collateral dependent loans are evaluated monthly and adjusted accordingly if needed.

Appraisals for both collateral-dependent 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.


March 31, 2024	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Reported Balance
Collateral dependent loans:
Consumer and Other	$	—	$	—	$	3,798	$	3,798
1-4 Family Residential	—		—		2,438		2,438
Commercial and Industrial	—		—		23,353		23,353
Owner Occupied CRE	—		—		3,980		3,980
Total	$	—	$	—	$	33,569	$	33,569


December 31, 2023	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Reported Balance
Collateral dependent loans:
Consumer and Other	$	—	$	—	$	7,500	$	7,500
1-4 Family Residential	—		—		2,438		2,438
Commercial and Industrial	—		—		25,738		25,738
Owner Occupied CRE	—		—		3,980		3,980
Total	$	—	$	—	$	39,656	$	39,656

As of March 31, 2024 and December 31, 2023, total collateral dependent loans measured using fair value had carrying values of $33.6 million and $39.7 million, respectively and were classified as Level 3. Collateral dependent loans accounted for $6.1 million and $3.8 million of the allowance on non-performing loans as of March 31, 2024 and December 31, 2023, respectively. The Company recorded an immaterial amount of charge-offs during the three months ended March 31, 2024 and $8.8 million of charge-offs during the year ended December 31, 2023.


Three Months Ended March 31, 2024	Loans Held at Fair Value		Guarantee Asset		IRLC		Equity Warrants
Beginning balance	$	13,726	$	189	$	345	$	795
Acquisitions	—		—		813		—
Originations	—		13		(819)		—

Gains/(losses) in net income, net	50		5		474		—
Net charge-offs	(352)		—		—		—
Settlements	(1,502)		(8)		—		—
Ending balance	$	11,922	$	199	$	813	$	795


Three Months Ended March 31, 2023	Loans Held at Fair Value		Guarantee Asset		IRLC		Equity Warrants
Beginning balance	$	23,321	$	143	$	229	$	825
Acquisitions	1,162		—		886		—
Originations	—		5		(1,486)		—
Gains/(losses) in net income, net	(150)		92		1,094		—
Net charge-offs	(392)		—		—		—
Settlements	(3,134)		(5)		—		—
Ending balance	$	20,807	$	235	$	723	$	825

Quantitative Information about Level 3 Fair Value Measurements as of March 31, 2024

(dollars in thousands)

Fair Value

Valuation
Technique

Significant
Unobservable Input

Range
(Weighted Average)

Recurring fair value

Loans held for investment at fair value

11,922

Discounted cash flow

Discount rate

8% to 8% (8%)

Guarantee asset

199

Discounted cash flow

Discount rate
Prepayment rate

5% (5%)

IRLC, net

813

Best execution model

Pull through

56% to 100% (87%)

Equity warrants

795

Black-Scholes option pricing model

Volatility
Risk-free interest rate
Remaining life

23.0% to 59.6% (30.4%)

4.70% (4.70%)

0 to 1.75 years

Nonrecurring fair value

Collateral dependent loans:

Consumer and Other

3,798

Sales Comparison-Market Value Approach

Market Rate Adjustments

50%

(7%)

1-4 Family Residential

2,438

Sales Comparison-Market Value Approach

Market Rate Adjustments

7% to 50%

(6%)

Commercial and Industrial

23,207

Sales Comparison-Market Value Approach

Market Rate Adjustments

7% to 50%

(6%)

Commercial and Industrial

146

Sales comparison, Market approach - guideline transaction method

Loss given default

8% to 62%

(42%)

Owner Occupied CRE

3,980

Sales Comparison-Market Value Approach

Market Rate Adjustments

50%

(7%)

Quantitative Information about Level 3 Fair Value Measurements as of December 31, 2023

(dollars in thousands)

Fair Value

Valuation
Technique

Significant
Unobservable Input

Range
(Weighted Average)

Recurring fair value

Loans held for investment at fair value

13,726

Discounted cash flow

Discount rate

7% to 8% (8%)

Guarantee asset

189

Discounted cash flow

Discount rate
Prepayment rate

5% (5%)

IRLC, net

345

Best execution model

Pull through

48% to 100% (86%)

Equity warrants

795

Black-Scholes option pricing model

Volatility
Risk-free interest rate
Remaining life

20.1% to 23.0% (22.4%)

4.62% to 4.62% (4.62%)

2.00 to 2.03 years

Nonrecurring fair value

Collateral dependent loans:

Consumer and Other

7,500

Sales Comparison-Market Value Approach

Market rate adjustments

46% (8%)

1-4 Family Residential

2,438

Sales Comparison-Market Value Approach

Market rate adjustments

46% (8%)

Commercial and Industrial

24,791

Sales Comparison-Market Value Approach

Market rate adjustments

46% (8%)

Commercial and Industrial

148

Sales comparison,
Market approach –
guideline transaction
method

Loss given default

14% to 62% (20%)

Commercial and Industrial

799

Sales Comparison-Market Value Approach

Market rate adjustments

21% (11%)

Owner Occupied CRE

3,980

Sales Comparison-Market Value Approach

Market rate adjustments

46% (8%)


	Carrying Amount		Fair Value Measurements Using:
March 31, 2024			Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	257,889	$	257,889	$	—	$	—
Held-to-maturity securities, net of ACL	72,303		245		56,332		8,331
Loans, net(1)	2,438,972		—		—		2,340,551
Accrued interest receivable	11,919		11,919		—		—
Liabilities:
Term deposits(2)	442,834		362,564		—		80,249
Non-term deposits	2,089,136		2,089,136		—		—
Borrowings:
FHLB borrowings – fixed rate	56,314		—		56,340		—

Federal Reserve borrowings – fixed rate	13,170		3,171		9,940		—
Subordinated notes – fixed-to-floating rate	52,397		—		—		47,441
Accrued interest payable	2,415		2,415		—		—


	Carrying Amount		Fair Value Measurements Using:
December 31, 2023			Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	254,442	$	254,442	$	—	$	—
Held-to-maturity securities, net of ACL	74,102		242		58,231		8,144
Loans, net(1)	2,493,258		—		—		2,395,468
Accrued interest receivable	11,428		11,428		—		—
Liabilities:
Term deposits(2)	496,452		414,613		—		82,564
Non-term deposits	2,032,587		2,032,587		—		—
Borrowings:
FHLB borrowings – fixed rate	41,175		—		41,372		—
FHLB borrowings – floating rate	50,000		—		49,986		—
Federal Reserve borrowings – fixed rate	34,536		3,539		30,936		—
Subordinated notes – fixed-to-floating rate	52,340		—		—		48,228
Accrued interest payable	3,793		3,793		—		—

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 condensed consolidated financial statements since the balance sheet dates. Therefore, current estimates of fair value may differ significantly from the amounts presented herein.

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.