Fair value represents 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 reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Bank used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Available-for-sale debt securities: Except for the Bank’s U.S. Treasury securities, its private label mortgage-backed security, and its TRUP investment, the fair value of AFS debt securities is typically determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

The Bank’s U.S. Treasury securities are based on quoted market prices (Level 1 inputs) and considered highly liquid.

The Bank’s private label mortgage-backed security remains illiquid, and as such, the Bank classifies this security as a Level 3 security in accordance with ASC Topic 820, Fair Value Measurement. Based on this determination, the Bank utilized an income valuation model (present value model) approach in determining the fair value of this security.

See in this section of the filing under Footnote 2 “Investment Securities” for additional discussion regarding the Bank’s private label mortgage-backed security.

For its TRUP investment, the Company considered the most recent bid price for the same instrument to approximate market value as of September 30, 2022. The Company’s TRUP investment is considered highly illiquid and also valued using Level 3 inputs, as the most recent bid price for this instrument is not always considered generally observable.

Equity securities with readily determinable fair value: Quoted market prices in an active market are available for the Bank’s Community Reinvestment Act mutual fund investment and fall within Level 1 of the fair value hierarchy.

The fair value of the Company’s Freddie Mac preferred stock is determined by matrix pricing, as described above (Level 2 inputs).

Mortgage loans held for sale, at fair value: The fair value of mortgage loans held for sale is determined using quoted secondary market prices. Mortgage loans held for sale are classified as Level 2 in the fair value hierarchy.

Consumer loans held for sale, at fair value: In December 2019, the Bank began offering RCS installment loans with terms ranging from 12 to 60 months to borrowers in multiple states. Balances originated under this RCS installment loan program are carried as “held for sale” on the Bank’s balance sheet, with the intent to sell within sixteen days following the Bank’s origination of the loans. Loans originated under this RCS installment loan program are carried at fair value under a fair-value option, with the portfolio marked to market monthly. Fair value for these loans is based on contractual sales terms, Level 3 inputs.

Consumer loans held for investment, at fair value: The Bank held an immaterial amount of consumer loans at fair value through a consumer loan program the Company is currently unwinding. The fair value of these loans was based on the discounted cash flows of the underlying loans, Level 3 inputs. Further disclosure of these loans is considered immaterial and thus omitted.

Mortgage Banking derivatives: Mortgage Banking derivatives used in the ordinary course of business primarily consist of mandatory forward sales contracts (“forward contracts”) and interest rate lock loan commitments. The fair value of the Bank’s derivative instruments is primarily measured by obtaining pricing from broker-dealers recognized to be market participants. The pricing is derived from market observable inputs that can generally be verified and do not typically involve significant judgment by the Bank. Forward contracts and rate lock loan commitments are classified as Level 2 in the fair value hierarchy.

Interest rate swap agreements: Interest rate swaps are recorded at fair value on a recurring basis. The Company values its interest rate swaps using a third-party valuation service and classifies such valuations as Level 2. Valuations of these interest rate swaps are also received from the relevant dealer counterparty and validated against the Company’s calculations. The Company has considered counterparty credit risk in the valuation of its interest rate swap assets and has considered its own credit risk in the valuation of its interest rate swap liabilities.

Collateral-dependent loans: Collateral-dependent loans generally reflect partial charge-downs to their respective fair value, which is commonly based on recent real estate appraisals or BPOs. These appraisals or BPOs may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the process by the independent experts to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Collateral-dependent loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate Owned: 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. These assets 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 or BPOs. These appraisals or BPOs may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the process by the independent experts to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Bank has elected the fair value option, are summarized below. Information as of September 30, 2022 is presented net of any applicable ACL.

All transfers between levels are generally recognized at the end of each quarter. There were no transfers into or out of Level 1, 2, or 3 assets during the three months and nine months ended September 30, 2022 and 2021.

The following table presents a reconciliation of the Bank’s private label mortgage-backed security measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

The fair value of the Bank’s single private label mortgage-backed security is supported by analysis prepared by an independent third party. The third party’s approach to determining fair value involved several steps: 1) detailed collateral analysis of the underlying mortgages, including consideration of geographic location, original loan-to-value, and the weighted average FICO score of the borrowers; 2) collateral performance projections for each pool of mortgages underlying the security (probability of default, severity of default, and prepayment probabilities) and 3) discounted cash flow modeling.

The significant unobservable inputs in the fair value measurement of the Bank’s single private label mortgage-backed security are prepayment rates, probability of default, and loss severity in the event of default. Significant fluctuations in any of those inputs in isolation would result in a significantly different fair value measurement.

Quantitative information about recurring Level 3 fair value measurement inputs for the Bank’s single private label mortgage-backed security follows:

The following table presents a reconciliation of the Company’s TRUP measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

The fair value of the Company’s TRUP investment is based on the most recent bid price for this instrument, as provided by a third-party broker.

The Bank has elected the fair value option for mortgage loans held for sale. These loans are intended for sale and the Bank believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loans and in accordance with Bank policy for such instruments. None of these loans were past due 90-days-or-more or on nonaccrual as of September 30, 2022 and December 31, 2021.

The aggregate fair value, contractual balance, and unrealized gain were as follows:

The total amount of gains and losses from changes in fair value included in earnings for the three and nine months ended September 30, 2022 and 2021 for mortgage loans held for sale are presented in the following table:

RCS carries loans originated through its installment loan program at fair value. Interest income is recorded based on the contractual terms of the loan and in accordance with Bank policy for such instruments. None of these loans were past due 90-days-or-more or on nonaccrual as of September 30, 2022 and December 31, 2021.

The significant unobservable inputs in the fair value measurement of the Bank’s short-term installment loans are the net contractual premiums and level of loans sold at a discount price. Significant fluctuations in any of those inputs in isolation would result in a significantly lower/higher fair value measurement.

The following table presents quantitative information about recurring Level 3 fair value measurement inputs for installment loans:

The aggregate fair value, contractual balance, and unrealized gain on consumer loans held for sale, at fair value, were as follows:

The total amount of net gains from changes in fair value included in earnings for consumer loans held for sale, at fair value, are presented in the following table:

Assets measured at fair value on a non-recurring basis are summarized below:

*	The difference between the carrying value and the fair value of collateral-dependent loans measured at fair value is reconciled in a subsequent table of this Footnote.


	Fair Value Measurements at
	December 31, 2021 Using:
	Quoted Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable		Total
	Assets		Inputs		Inputs		Fair
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Value

Collateral-dependent loans:
Residential real estate:
Owner occupied	$	—	$	—	$	1,626	$	1,626
Commercial real estate		—		—		2,841		2,841
Home equity		—		—		378		378
Total collateral-dependent loans*	$	—	$	—	$	4,845	$	4,845

Other real estate owned:
Residential real estate	$	—	$	—	$	1,792	$	1,792
Total other real estate owned	$	—	$	—	$	1,792	$	1,792

*	The difference between the carrying value and the fair value of collateral-dependent loans measured at fair value is reconciled in a subsequent table of this Footnote.

The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis:


					Range
	Fair		Valuation	Unobservable	(Weighted
September 30, 2022 (dollars in thousands)	Value		Technique	Inputs	Average)

Collateral-dependent loans - residential real estate owner occupied	$	1,314	Sales comparison approach	Adjustments determined for differences between comparable sales	0% - 41% (11%)

Collateral-dependent loans - commercial real estate	$	944	Sales comparison approach	Adjustments determined for differences between comparable sales	16% (16%)

Other real estate owned - commercial real estate	$	1,634	Sales comparison approach	Adjustments determined for differences between comparable sales	39% (39%)


					Range
	Fair		Valuation	Unobservable	(Weighted
December 31, 2021 (dollars in thousands)	Value		Technique	Inputs	Average)

Collateral-dependent loans - residential real estate owner occupied	$	1,626	Sales comparison approach	Adjustments determined for differences between comparable sales	0% - 51% (10%)

Collateral-dependent loans - commercial real estate	$	2,841	Sales comparison approach	Adjustments determined for differences between comparable sales	12% - 13% (12%)

Collateral-dependent loans - home equity	$	378	Sales comparison approach	Adjustments determined for differences between comparable sales	2%-4% (3%)

Other real estate owned - commercial real estate	$	1,792	Sales comparison approach	Adjustments determined for differences between comparable sales	33% (33%)

Collateral-Dependent Loans

Collateral-dependent loans are generally measured for loss using the fair value for reasonable disposition of the underlying collateral. The Bank’s practice is to obtain new or updated appraisals or BPOs on the loans subject to the initial review and then to evaluate the need for an update to this value on an as-necessary or possibly annual basis thereafter (depending on the market conditions impacting the value of the collateral). The Bank may discount the valuation amount as necessary for selling costs and past due real estate taxes. If a new or updated appraisal or BPO is not available at the time of a loan’s loss review, the Bank may apply a discount to the existing value of an old valuation to reflect the property’s current estimated value if it is believed to have deteriorated in either: (i) the physical or economic aspects of the subject property or (ii) material changes in market conditions. The review generally results in a partial charge-off of the loan if fair value, less selling costs, are below the loan’s carrying value. Collateral-dependent loans are valued within Level 3 of the fair value hierarchy.

Collateral-dependent loans are as follows:


(in thousands)	September 30, 2022		December 31, 2021

Carrying amount of loans measured at fair value	$	1,815	$	4,928
Estimated selling costs considered in carrying amount		479		842
Valuation allowance		(36)		(925)
Total fair value	$	2,258	$	4,845


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2022		2021		2022		2021

Provision on collateral-dependent loans	$	(7)	$	345	$	(11)	$	393

Other Real Estate Owned

Details of other real estate owned carrying value and write downs follows:



(in thousands)	September 30, 2022		December 31, 2021

Other real estate owned carried at fair value	$	1,634	$	1,792
Other real estate owned carried at cost		—		—
Total carrying value of other real estate owned	$	1,634	$	1,792


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2022		2021		2022		2021

Other real estate owned write-downs during the period	$	53	$	53	$	158	$	158

The carrying amounts and estimated exit price fair values of all financial instruments follow:


			Fair Value Measurements at
			September 30, 2022:
									Total
	Carrying								Fair
(in thousands)	Value		Level 1		Level 2		Level 3		Value

Assets:
Cash and cash equivalents	$	754,393	$	754,393	$	—	$	—	$	754,393
Available-for-sale debt securities		629,947		203,013		420,740		6,194		629,947
Held-to-maturity debt securities		32,628		—		32,621		—		32,621
Equity securities with readily determinable fair values		175		—		175		—		175
Mortgage loans held for sale, at fair value		2,912		—		2,912		—		2,912
Consumer loans held for sale, at fair value		8,796		—		—		8,796		8,796
Consumer loans held for sale, at the lower of cost or fair value		12,679		—		—		12,679		12,679
Loans, net		4,224,531		—		—		4,048,246		4,048,246
Federal Home Loan Bank stock		8,568		—		—		—		NA
Accrued interest receivable		11,102		—		11,102		—		11,102
Mortgage servicing rights		9,177		—		17,592		—		17,592
Mandatory forward contracts		639		—		639		—		639
Interest rate swap agreements		7,121		—		7,121		—		7,121

Liabilities:
Noninterest-bearing deposits	$	2,014,123	$	—	$	2,014,123	$	—	$	2,014,123
Transaction deposits		2,540,961		—		2,540,961		—		2,540,961
Time deposits		245,424		—		239,058		—		239,058
Securities sold under agreements to repurchase and other short-term borrowings		209,376		—		209,376		—		209,376
Federal Home Loan Bank advances		20,000		—		21,671		—		21,671
Accrued interest payable		193		—		193		—		193
Rate lock loan commitments		175		—		175		—		175
Interest rate swap agreements		7,121		—		7,121		—		7,121


			Fair Value Measurements at
			December 31, 2021:
									Total
	Carrying								Fair
(in thousands)	Value		Level 1		Level 2		Level 3		Value

Assets:
Cash and cash equivalents	$	756,971	$	756,971	$	—	$	—	$	756,971
Available-for-sale debt securities		495,126		70,112		418,436		6,578		495,126
Held-to-maturity debt securities		44,299		—		44,764		—		44,764
Equity securities with readily determinable fair values		2,620		2,450		170		—		2,620
Mortgage loans held for sale, at fair value		29,393		—		29,393		—		29,393
Consumer loans held for sale, at fair value		19,747		—		—		19,747		19,747
Consumer loans held for sale, at the lower of cost or fair value		2,937		—		—		2,937		2,937
Loans, net		4,431,985		—		—		4,445,244		4,445,244
Federal Home Loan Bank stock		10,311		—		—		—		NA
Accrued interest receivable		9,877		—		9,877		—		9,877
Mortgage servicing rights		9,196		—		11,540		—		11,540
Rate lock loan commitments		1,404		—		1,404		—		1,404
Mandatory forward contracts		66		—		66		—		66
Interest rate swap agreements		5,786		—		5,786		—		5,786

Liabilities:
Noninterest-bearing deposits	$	1,990,781	$	—	$	1,990,781	$	—	$	1,990,781
Transaction deposits		2,553,423		—		2,553,423		—		2,553,423
Time deposits		296,214		—		298,236		—		298,236
Securities sold under agreements to repurchase and other short-term borrowings		290,967		—		290,967		—		290,967
Federal Home Loan Bank advances		25,000		—		25,000		—		25,000
Accrued interest payable		159		—		159		—		159
Interest rate swap agreements		5,786		—		5,786		—		5,786