FAIR VALUE MEASUREMENTS

3 Months Ended

Mar. 31, 2023

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

NOTE 2: FAIR VALUE MEASUREMENTS

Assets Measured at Fair Value on a Recurring Basis

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. Current accounting guidance establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. 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 the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The following tables show the recorded amounts of assets and liabilities measured at fair value on a recurring basis as of:

			Fair Value Measurement Level
(dollars in thousands)	Total		Level 1		Level 2		Level 3
March 31, 2023:
Investment securities available for sale:
Collateralized mortgage obligations	$	8,511	$	—	$	8,511	$	—
Agency mortgage-backed securities		7,157		—		7,157		—
Municipal bonds		47,520		—		47,520		—
SBA securities		16,819		—		16,819		—
Beneficial interests in FHLMC securitization		6,830		—		—		6,830
Corporate bonds		123,243		—		123,243		—
U.S. Treasury		1,244		1,244		—		—
Investment in equity securities		9,758		—		—		9,758
Total assets at fair value on a recurring basis	$	221,082	$	1,244	$	203,250	$	16,588
December 31, 2022:
Investment securities available for sale:
Collateralized mortgage obligations	$	8,615	$	—	$	8,615	$	—
Agency mortgage-backed securities		7,576		—		7,576		—
Municipal bonds		46,790		—		46,790		—
SBA securities		18,955		—		18,955		—
Beneficial interests in FHLMC securitization		7,981		—		—		7,981
Corporate bonds		135,013		—		135,013		—
U.S. Treasury		1,228		1,228		—		—
Investment in equity securities		9,767		—		—		9,767
Total assets at fair value on a recurring basis	$	235,925	$	1,228	$	216,949	$	17,748

The decrease in Level 3 assets from December 31, 2022 was primarily due to $0.3 million in securitization paydowns and $0.8 million in provisions for credit losses in the first three months of 2023.

Assets Measured at Fair Value on a Nonrecurring Basis

From time to time, we may be required to measure other assets at fair value on a nonrecurring basis. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

Loans. Loans measured at fair value on a nonrecurring basis include collateral dependent loans held for investment. The specific reserves for these loans are based on collateral value, net of estimated disposition costs and other identified quantitative inputs. Collateral value is determined based on independent third-party appraisals or internally-developed discounted cash flow analyses. Internal discounted cash flow analyses are also utilized to estimate the fair value of these loans, which considers internally-developed, unobservable inputs such as discount rates, default rates, and loss severity. When the fair value of the collateral is based on an observable market price or a current appraised value, we measure the impaired loan at nonrecurring Level 2. When an appraised value is not available, or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price or a discounted cash flow has been used to determine the fair value, we measure the impaired loan at nonrecurring Level 3. The total collateral dependent impaired Level 3 loans were $37.5 million and $47.2 million at March 31, 2023 and

December 31, 2022, respectively. There were no specific reserves related to these loans at March 31, 2023 and December 31, 2022.

Real Estate Owned. The fair value of real estate owned is based on external appraised values that include adjustments for estimated selling costs and assumptions of market conditions that are not directly observable, resulting in a Level 3 classification.

Mortgage Servicing Rights. When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on a valuation model that calculates the present value of estimated future net servicing income, resulting in a Level 3 classification. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Significant assumptions in the valuation of these Level 3 mortgage servicing rights as of March 31, 2023 included prepayment rates ranging from 20% to 30% and a discount rate of 10%.

Fair Value of Financial Instruments

FASB ASC 825-10, “Disclosures about Fair Value of Financial Instruments” requires disclosure of the fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate such value. The methodologies for estimating the fair value of financial assets and financial liabilities measured at fair value on a recurring and non-recurring basis are discussed above. The estimated fair value amounts have been determined by management using available market information and appropriate valuation methodologies and are based on the exit price notion set forth by ASU 2016-01. In cases where quoted market prices are not available, fair values are based on estimates using present value or other market value techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The aggregate fair value amounts presented below do not represent the underlying value of the Company.

Fair value estimates are made at a discrete point in time based on relevant market information and other information about the financial instruments. Because no active market exists for a significant portion of our financial instruments, fair value estimates are based in large part on judgments we make primarily regarding current economic conditions, risk characteristics of various financial instruments, prepayment rates, and future expected loss experience. These estimates are subjective in nature and invariably involve some inherent uncertainties. Additionally, unexpected changes in events or circumstances can occur that could require us to make changes to our assumptions and which, in turn, could significantly affect and require us to make changes to our previous estimates of fair value.

In addition, the fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of existing and anticipated future customer relationships and the value of assets and liabilities that are not considered financial instruments, such as premises and equipment and other real estate owned.

The following methods and assumptions were used to estimate the fair value of financial instruments:

Cash and Cash Equivalents. The fair value of cash and cash equivalents approximates its carrying value.

Interest-Bearing Deposits with Financial Institutions.  The fair values of interest-bearing deposits maturing within ninety days approximate their carrying values.

Investment Securities Available for Sale. Investment securities available for sale are measured at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair

values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. When a market is illiquid or there is a lack of transparency around the inputs to valuation, the securities are classified as Level 3 and reliance is placed upon external third party models, and management judgment and evaluation for valuation. Level 1 investment securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 investment securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Investment securities classified as Level 3 include beneficial interests in FHLMC securitizations. Significant assumptions in the valuation of these Level 3 securities as of March 31, 2023 and December 31, 2022 included prepayment rates ranging from 35% to 34% and discount rates ranging from 8.92% to 10.0%.

Investment in Equity Securities. The fair value on investment in equity securities is the carrying amount and is  evaluated for impairment on an annual basis.

Investment in Federal Home Loan Bank Stock. The Bank is a member of the Federal Home Loan Bank (the “FHLB”). As a member, we are required to own stock of the FHLB, the amount of which is based primarily on the level of our borrowings from this institution. The fair value of the stock is equal to the carrying amount, is classified as restricted securities and is periodically evaluated for impairment based on our assessment of the ultimate recoverability of our investments in that stock. Any cash or stock dividends paid to us on such stock are reported as income.

Loans Held for Investment. The fair value for loans with variable interest rates is the carrying amount. The fair value of fixed rate loans is derived by calculating the discounted value of future cash flows expected to be received by the various homogeneous categories of loans or by reference to secondary market pricing. All loans have been adjusted to reflect changes in credit risk.

Deposits. The fair value of demand deposits, savings deposits, and money market deposits is defined as the amounts payable on demand. The fair value of fixed maturity certificates of deposit is estimated based on the discounted value of the future cash flows expected to be paid on the deposits.

Borrowings. The fair value of borrowings is the carrying value of overnight FHLB advances and federal funds purchased that approximate fair value because of the short-term maturity of these instruments, resulting in a Level 1 classification. The fair value of term borrowings is derived by calculating the discounted value of future cash flows expected to be paid out by the Company resulting in a Level 3 classification.

The carrying amounts and estimated fair values of financial instruments are as follows as of:

	Carrying		Fair Value Measurement Level
(dollars in thousands)	Value		1		2		3		Total
March 31, 2023:
Assets:
Cash and cash equivalents	$	1,317,129	$	1,317,129	$	—	$	—	$	1,317,129
Securities AFS, net		211,324		1,244		203,250		6,830		211,324
Securities HTM		847,036		—		766,907		—		766,907
Loans, net		10,638,708		—		—		10,302,070		10,302,070
Investment in FHLB stock		58,716		—		58,716		—		58,716
Investment in equity securities		9,758		—		—		9,758		9,758
Liabilities:
Deposits	$	10,051,706	$	7,625,291	$	2,409,187	$	—	$	10,034,478
Borrowings		2,294,600		2,020,000		—		153,121		2,173,121
December 31, 2022:
Assets:
Cash and cash equivalents	$	656,494	$	656,494	$	—	$	—	$	656,494
Securities AFS, net		226,158		1,228		216,949		7,981		226,158
Securities HTM		862,544				773,061				773,061
Loans, net		10,692,462		—		—		10,354,052		10,354,052
Investment in FHLB stock		25,358		—		25,358		—		25,358
Investment in equity securities		9,767		—		—		9,767		9,767
Liabilities:
Deposits	$	10,362,612	$	8,483,770	$	1,865,502	$	—	$	10,349,272
Borrowings		1,369,936		1,176,601		—		153,121		1,329,722