FAIR VALUE

6 Months Ended

Jun. 30, 2024

FAIR VALUE

FAIR VALUE

10. FAIR VALUE

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 3 “Investment Securities” for additional discussion regarding the Bank’s private label mortgage-backed security.

The Company acquired its TRUP investment in 2015 and considered the most recent bid price for the same instrument to approximate market value as of June 30, 2024. 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 CRA 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: The 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 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 may be significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for collateral-dependent loans, impaired premises and other real estate owned 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 Bank. Once the appraisal is received, a member of the Bank’s CCAD 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. On at least an annual basis, the Bank performs a back test of collateral appraisals by comparing actual selling prices on recent collateral sales to the most recent appraisal of such collateral. Back tests are performed for each collateral class, e.g., residential real estate or commercial real estate, and may lead to additional adjustments to the value of unliquidated collateral of similar class.

Mortgage servicing rights: At least quarterly, MSRs are evaluated for impairment based upon the fair value of the MSRs as compared to carrying amount. If the carrying amount of an individual tranche exceeds fair value, impairment is recorded, and the respective individual tranche is carried at fair value. If the carrying amount of an individual tranche does not exceed fair value, impairment is reversed if previously recognized and the carrying value of the individual tranche is based on the amortization method. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and can generally be validated against available market data (Level 2).

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 June 30, 2024 is presented net of any applicable ACL.

	Fair Value Measurements at
	June 30, 2024 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
Financial assets:
Available-for-sale debt securities:
U.S. Treasury securities and U.S. Government agencies	$	49,383	$	265,606	$	—	$	314,989
Private label mortgage-backed security		—		—		1,716		1,716
Mortgage-backed securities - residential		—		137,819		—		137,819
Collateralized mortgage obligations		—		20,437		—		20,437
Corporate bonds		—		2,015		—		2,015
Trust preferred security		—		—		4,093		4,093
Total available-for-sale debt securities	$	49,383	$	425,877	$	5,809	$	481,069
Equity securities with readily determinable fair value:
Freddie Mac preferred stock	$	—	$	281	$	—	$	281
Total equity securities with readily determinable fair value	$	—	$	281	$	—	$	281
Mortgage loans held for sale	$	—	$	9,703	$	—	$	9,703
Consumer loans held for sale		—		—		8,341		8,341
Rate lock commitments		—		445		—		445
Mandatory forward contracts		—		42		—		42
Interest rate swap agreements - Bank clients		—		7,384		—		7,384
Financial liabilities:
Interest rate swap agreements - Bank clients		—		7,384		—		7,384
Interest rate swap agreements on FHLB advances		—		537		—		537

	Fair Value Measurements at
	December 31, 2023 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
Financial assets:
Available-for-sale debt securities:
U.S. Treasury securities and U.S. Government agencies	$	177,784	$	229,249	$	—	$	407,033
Private label mortgage-backed security		—		—		1,773		1,773
Mortgage-backed securities - residential		—		154,710		—		154,710
Collateralized mortgage obligations		—		21,659		—		21,659
Corporate bonds		—		2,020		—		2,020
Trust preferred security		—		—		4,118		4,118
Total available-for-sale debt securities	$	177,784	$	407,638	$	5,891	$	591,313
Equity securities with readily determinable fair value:
Freddie Mac preferred stock	$	—	$	174	$	—	$	174
Total equity securities with readily determinable fair value	$	—	$	174	$	—	$	174
Mortgage loans held for sale	$	—	$	3,227	$	—	$	3,227
Consumer loans held for sale		—		—		7,914		7,914
Rate lock commitments		—		243		—		243
Interest rate swap agreements - Bank clients		—		8,933		—		8,933
Financial liabilities:
Mandatory forward contracts	$	—	$	61	$	—	$	61
Interest rate swap agreements - Bank clients		—		8,933		—		8,933

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 six months ended June 30, 2024 and 2023.

Private Label Mortgage-Backed Security

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):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2024		2023		2024		2023
Balance, beginning of period	$	1,772	$	2,010	$	1,773	$	2,127
Total gains or losses included in earnings:
Net change in unrealized gain (loss)		(8)		26		49		32
Principal paydowns		(48)		(48)		(106)		(171)
Balance, end of period	$	1,716	$	1,988	$	1,716	$	1,988

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:

	Fair		Valuation
June 30, 2024 (dollars in thousands)	Value		Technique	Unobservable Inputs	Range
Private label mortgage-backed security	$	1,716	Discounted cash flow	(1) Constant prepayment rate	2.3% - 2.4%
				(2) Probability of default	0.2% - 9.9%
				(3) Loss severity	25%

	Fair		Valuation
December 31, 2023 (dollars in thousands)	Value		Technique	Unobservable Inputs	Range
Private label mortgage-backed security	$	1,773	Discounted cash flow	(1) Constant prepayment rate	3.9% - 4.5%
				(2) Probability of default	1.8% - 9.4%
				(3) Loss severity	25% - 35%

Trust Preferred Security

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):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2024		2023		2024		2023
Balance, beginning of period	$	4,027	$	4,001	$	4,118	$	3,855
Total gains or losses included in earnings:
Discount accretion		15		15		30		29
Net change in unrealized gain (loss)		51		(270)		(55)		(138)
Balance, end of period	$	4,093	$	3,746	$	4,093	$	3,746

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.

Mortgage Loans Held for Sale

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 June 30, 2024 and December 31, 2023.

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

(in thousands)	June 30, 2024		December 31, 2023
Aggregate fair value	$	9,703	$	3,227
Contractual balance		9,538		3,168
Unrealized gain		165		59

The total amount of gains and losses from changes in fair value included in earnings for the three and six months ended June 30, 2024 and 2023 for mortgage loans held for sale are presented in the following table:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2024		2023		2024		2023
Interest income	$	191	$	61	$	277	$	122
Change in fair value		(38)		47		107		39
Total included in earnings	$	153	$	108	$	384	$	161

Consumer Loans Held for Sale

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 June 30, 2024 and December 31, 2023.

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:

	Fair		Valuation
June 30, 2024 (dollars in thousands)	Value		Technique	Unobservable Inputs	Rate
Consumer loans held for sale	$	8,341	Contract Terms	(1) Net Premium	0.15%
				(2) Discounted Sales	10.00%

	Fair		Valuation
December 31, 2023 (dollars in thousands)	Value		Technique	Unobservable Inputs	Rate
Consumer loans held for sale	$	7,914	Contract Terms	(1) Net Premium	0.15%
				(2) Discounted Sales	10.00%

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

(in thousands)	June 30, 2024		December 31, 2023
Aggregate fair value	$	8,341	$	7,914
Contractual balance		8,394		7,964
Unrealized loss		(53)		(50)

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:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2024		2023		2024		2023
Interest income	$	1,358	$	949	$	2,531	$	1,714
Change in fair value		(17)		(9)		(3)		(6)
Total included in earnings	$	1,341	$	940	$	2,528	$	1,708

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

	Fair Value Measurements at
	June 30, 2024 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	$	—	$	—	$	64	$	64
Total collateral-dependent loans*	$	—	$	—	$	64	$	64
Other real estate owned:
Commercial real estate	$	—	$	—	$	1,265	$	1,265
Total other real estate owned	$	—	$	—	$	1,265	$	1,265

	Fair Value Measurements at
	December 31, 2023 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	$	—	$	—	$	1,580	$	1,580
Commercial real estate		—		—		795		795
Home equity		—		—		104		104
Total collateral-dependent loans*	$	—	$	—	$	2,479	$	2,479
Other real estate owned:
Residential real estate	$	—	$	—	$	1,370	$	1,370
Total other real estate owned	$	—	$	—	$	1,370	$	1,370

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
June 30, 2024 (dollars in thousands)	Value		Technique	Inputs	Average)
Collateral-dependent loans - residential real estate owner-occupied	$	64	Sales comparison approach	Adjustments determined for differences between comparable sales	62% (62%)
Other real estate owned - commercial real estate	$	1,265	Sales comparison approach	Adjustments determined for differences between comparable sales	39% (39%)

					Range
	Fair		Valuation	Unobservable	(Weighted
December 31, 2023 (dollars in thousands)	Value		Technique	Inputs	Average)
Collateral-dependent loans - residential real estate owner-occupied	$	1,580	Sales comparison approach	Adjustments determined for differences between comparable sales	0% - 27% (4%)
Collateral-dependent loans - commercial real estate	$	795	Sales comparison approach	Adjustments determined for differences between comparable sales	11% (11%)
Collateral-dependent loans - home equity	$	104	Sales comparison approach	Adjustments determined for differences between comparable sales	5% (5%)
Other real estate owned - commercial real estate	$	1,370	Sales comparison approach	Adjustments determined for differences between comparable sales	39% (39%)

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.

The Provision on collateral-dependent loans follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2024		2023		2024		2023
Provision on collateral-dependent loans	$	(7)	$	—	$	53	$	(14)

Other Real Estate Owned

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

(in thousands)	June 30, 2024		December 31, 2023
Other real estate owned carried at fair value	$	1,265	$	1,370
Total carrying value of other real estate owned	$	1,265	$	1,370

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2024		2023		2024		2023
Other real estate owned write-downs during the period	$	52	$	52	$	105	$	105

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

			Fair Value Measurements at
			June 30, 2024:
									Total
	Carrying								Fair
(in thousands)	Value		Level 1		Level 2		Level 3		Value
Assets:
Cash and cash equivalents	$	400,059	$	400,059	$	—	$	—	$	400,059
Available-for-sale debt securities		481,069		49,383		425,877		5,809		481,069
Held-to-maturity debt securities		76,109		—		75,988		—		75,988
Equity securities with readily determinable fair values		281		—		281		—		281
Mortgage loans held for sale, at fair value		9,703		—		9,703		—		9,703
Consumer loans held for sale, at fair value		8,341		—		—		8,341		8,341
Consumer loans held for sale, at the lower of cost or fair value		23,860		—		—		23,860		23,860
Loans, net		5,183,583		—		—		4,931,672		4,931,672
Federal Home Loan Bank stock		23,840		—		—		—		NA
Accrued interest receivable		19,536		—		2,858		16,678		19,536
Mortgage servicing rights		7,030		—		17,001		—		17,001
Rate lock commitments		445		—		445		—		445
Mandatory forward contracts		42		—		42		—		42
Interest rate swap agreements - Bank clients		7,384		—		7,384		—		7,384
Liabilities:
Noninterest-bearing deposits	$	1,279,390	$	—	$	1,279,390	$	—	$	1,279,390
Transaction deposits		3,308,504		—		3,308,504		—		3,308,504
Time deposits		481,153		—		480,693		—		480,693
Securities sold under agreements to repurchase and other short-term borrowings		74,008		—		74,008		—		74,008
Federal Home Loan Bank advances		370,000		—		369,646		—		369,646
Accrued interest payable		3,836		—		3,836		—		3,836
Rate lock commitments		445		—		445		—		445
Interest rate swap agreements - Bank clients		7,384		—		7,384		—		7,384
Interest rate swap agreements on FHLB advances		537		—		537		—		537

			Fair Value Measurements at
			December 31, 2023:
									Total
	Carrying								Fair
(in thousands)	Value		Level 1		Level 2		Level 3		Value
Assets:
Cash and cash equivalents	$	316,567	$	316,567	$	—	$	—	$	316,567
Available-for-sale debt securities		591,313		177,784		407,638		5,891		591,313
Held-to-maturity debt securities		76,387		—		76,167		—		76,167
Equity securities with readily determinable fair values		174		—		174		—		174
Mortgage loans held for sale, at fair value		3,227		—		3,227		—		3,227
Consumer loans held for sale, at fair value		7,914		—		—		7,914		7,914
Consumer loans held for sale, at the lower of cost or fair value		16,094		—		—		16,094		16,094
Loans, net		5,157,731		—		—		4,874,974		4,874,974
Federal Home Loan Bank stock		23,770		—		—		—		NA
Accrued interest receivable		18,447		—		4,097		14,350		18,447
Mortgage servicing rights		7,411		—		16,054		—		16,054
Rate lock commitments		243		—		243		—		243
Interest rate swap agreements - Bank clients		8,933		—		8,933		—		8,933
Liabilities:
Noninterest-bearing deposits	$	1,676,998	$	—	$	1,676,998	$	—	$	1,676,998
Transaction deposits		2,924,114		—		2,924,114		—		2,924,114
Time deposits		452,051		—		446,218		—		446,218
Securities sold under agreements to repurchase and other short-term borrowings		99,530		—		99,530		—		99,530
Federal Home Loan Bank advances		380,000		—		382,062		—		382,062
Accrued interest payable		4,073		—		4,073		—		4,073
Rate lock commitments		243		—		243		—		243
Mandatory forward contracts		61		—		61		—		61
Interest rate swap agreements - Bank clients		8,933		—		8,933		—		8,933