Accounting guidance under GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an 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. This accounting guidance also 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.

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available for sale and equity securities with readily determinable fair values are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans, loans held for sale and OREO (foreclosed assets). These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

Under fair value accounting guidance, assets and liabilities are grouped at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine their fair values. These hierarchy levels are:

Level 2 inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

Fair value measurement for investment securities available for sale is based on quoted prices from an independent pricing service. The fair value measurements consider observable data that may include present value of future cash flows, prepayment assumptions, credit loss assumptions and other factors. The Company classifies its investments in U.S. Treasury securities, if any, as Level 1 in the fair value hierarchy, and it classifies its investments in U.S. Government agencies securities and mortgage-backed securities issued or guaranteed by U.S. Government sponsored entities as Level 2.

Fair value measurement for equity securities is based on quoted market prices retrieved by the Company via online resources. Although these securities have readily available fair market values, the Company deems that they be classified as level 2 investments in the fair value hierarchy due to not being considered traded in a highly active market.

The fair value of MSRs is determined using a valuation model administered by a third party that calculates the present value of estimated future net servicing income (Level 3). The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, default rates, cost to service (including delinquency and foreclosure costs), escrow account earnings, contractual servicing fee income, and other ancillary income such as late fees. Management reviews all significant assumptions on a quarterly basis. Mortgage loan prepayment speed, a key assumption in the model, is the annual rate at which borrowers are forecasted to repay their mortgage loan principal. The discount rate used to determine the present value of estimated future

net servicing income, another key assumption in the model, is an estimate of the required rate of return investors in the market would require for an asset with similar risk. Both assumptions can, and generally will, change as market conditions and interest rates change.

The significant unobservable inputs used in the fair value measurement of the reporting entity’s residential MSRs are prepayment speeds, probability of default, rate of return, and cost of servicing. Significant increases/decreases in any of those inputs in isolation would have resulted in a significantly lower/higher fair value measurement. Generally, a change in the assumption used for prepayment speeds would have been accompanied by a directionally similar change in the markets, i.e., the 10-Year Treasury, and in the probability of default.

We utilize a third-party specialist model to estimate the fair value of our IRLCs, which are valued based upon mortgage securities (TBA) prices less estimated costs to process and settle the loan. Fair value is adjusted for the estimated probability of the loan closing with the borrower (Level 3).

(Dollars in thousands)

Fair Value

Valuation Technique

Unobservable Input

Range

December 31, 2023

MSRs (1)

5,926

Market Approach

Weighted average prepayment speed (PSA) (2)

129

IRLCs - net asset

110

Market Approach

Range of pull through rate

78% - 100%

Average pull through rate

98%

(Dollars in thousands)

Fair Value

Valuation Technique

Unobservable Input

Range

December 31, 2022

MSRs (1)

5,275

Market Approach

Weighted average prepayment speed (PSA) (2)

121

IRLCs - net asset

Market Approach

Range of pull through rate

78% - 100%

Average pull through rate

92%


(Dollars in thousands)	For the Year Ended December 31, 2023
Beginning balance	$	5,275
Servicing rights resulting from sales of loans	712
Servicing rights acquired in acquisition of TCFC	190
Valuation adjustment	(251)
Ending balance	$	5,926

To avoid interest rate risk, we hedge the open locked/closed position with TBA forward trades. On a regular basis, we allocate disbursed loans to mandatory commitments with government-sponsored enterprises and private investors delivering the loans within 120 days of origination to maximize interest earnings. For a small percentage of our business, we enter into best efforts forward sales commitments with investors at the time we make an IRLC to a borrower. Once a loan has been closed and funded, the best efforts commitments convert to mandatory forward sales commitments. The mandatory commitments are derivatives, and we measure and report them at fair value. Fair value is based on the gain or loss that would occur if we were to pair-off the transaction with the investor at the measurement date. This is

Market assumptions utilized in the fair value measurement of the reporting entity’s residential mortgage derivatives, inclusive of IRLCs, Closed Loan Inventory, TBA derivative trades, and Mandatory Forwards may be subject to investor overlays that may result in a significantly lower fair value measurement. Generally such overlays are announced with advanced notice in order to include the risk adjuster, however there are times when announcements are mandated resulting in a lower fair value measurement. Additionally market assumptions such as spec pool payups may result in a significantly higher fair value measurement at time of loan allocation to specific trades.


(Dollars in thousands)	Fair Value		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Observable Inputs (Level 3)
December 31, 2023
Assets:
Securities available for sale:
U.S. Government agencies	$	20,475	$	—	$	20,475	$	—
Mortgage-backed	84,027		—		84,027		—
Other debt securities	6,019		—		6,019		—
	110,521		—		110,521		—

Equity securities	5,703		—		5,703		—

TBA forward trades	2		—		2		—
Loans Held for Sale	8,782		—		8,782		—
Loans Held for Investment, at fair value	9,944		—		9,944		—
MSRs	5,926		—		—		5,926
IRLCs	110		—		—		110
Total assets at fair value	$	140,988	$	—	$	134,952	$	6,036

Liabilities:

TBA forward trades	$	176	$	—	$	176	$	—
Total liabilities at fair value	$	176	$	—	$	176	$	—


(Dollars in thousands)	Fair Value		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Observable Inputs (Level 3)
December 31, 2022
Assets:
Securities available for sale:
U.S. Government agencies	$	18,178	$	—	$	18,178	$	—
Mortgage-backed	63,519		—		63,519		—
Other debt securities	1,890		—		1,890		—
	83,587		—		83,587		—

Equity securities	1,233		—		1,233		—

TBA forward trades	41		—		41		—
Loans Held for Sale	4,248		—		4,248		—
Loans Held for Investment, at fair value	8,437		—		8,437		—
MSRs	5,275		—		—		5,275
IRLCs	35		—		—		35
Total assets at fair value	$	102,856	$	—	$	97,546	$	5,310

Liabilities:
IRLCs	$	7	$	—	$	—	$	7
TBA securities	6		—		6		—
Total liabilities at fair value	$	13	$	—	$	6	$	7

Loans for which repayment is substantially expected to be provided through the operation or sale of collateral are considered collateral dependent, and are valued based on the estimated fair value of the collateral, less estimated costs to sell at the reporting date, where applicable. Accordingly, collateral dependent loans are classified within Level 3 of the fair value hierarchy.

Foreclosed assets are adjusted for fair value upon transfer of loans to foreclosed assets establishing a new cost basis. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. The estimated fair value for foreclosed assets included in Level 3 are determined by independent market based appraisals and other available market information, less costs to sell, that may be reduced further based on market expectations or an executed sales agreement. If the fair value of the collateral deteriorates subsequent to the initial recognition, the Company records the foreclosed asset as a non-recurring Level 3 adjustment. Valuation techniques are consistent with those techniques applied in prior periods.

The following tables set forth the Company’s financial and nonfinancial assets subject to fair value adjustments (impairment) on a nonrecurring basis for the years ended December 31, that are valued at the lower of cost or market. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Quantitative Information about Level 3 Fair Value Measurements

(Dollars in thousands)

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted Average

December 31, 2023

Nonrecurring measurements:

Individually evaluated collateral dependent loan

633

Appraisal of collateral(1)

Appraisal adjustment(2)

Liquidation expense(2)

51%

10%

51%

10%

Other real estate owned

179

Appraisal of collateral(1)

Appraisal adjustment(2)

0% - 20%

Quantitative Information about Level 3 Fair Value Measurements

(Dollars in thousands)

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted Average

December 31, 2022

Nonrecurring measurements:

Other real estate owned

197

Appraisal of collateral(1)

Appraisal adjustment(2)

0% - 20%

(2%)

(2)Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

Financial instruments require disclosure of fair value information, whether or not recognized in the consolidated balance sheets, when it is practical to estimate the fair value. A financial instrument is defined as cash, evidence of an ownership interest in an entity or a contractual obligation which requires the exchange of cash. Certain items are specifically excluded from the financial instrument fair value disclosure requirements, including the Company’s common stock, OREO, premises and equipment and other assets and liabilities.

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments for the years ended December 31, 2023 and December 31, 2022. Fair values for December 31, 2023 and December 31, 2022 were estimated using an exit price notion.


December 31, 2023	Carrying Amount		Fair Value		Fair Value Measurements
Description of Asset (dollars in thousands)					Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	372,413	$	372,413	$	372,413	$	—	$	—
Investment securities - AFS	110,521		110,521		—		110,521		—
Investment securities - HTM, net	513,188		457,830		—		457,830		—
Equity securities	5,703		5,703		—		5,703		—
Restricted securities	17,900		17,900		—		17,900		—
Loans held for sale	8,782		8,782		—		8,782		—
TBA derivatives trades	2		2		—		2		—
Cash surrender value on life insurance	101,704		101,704		—		101,704		—
Loans, at fair value	9,944		9,944		—		9,944		—
Loans, net	4,573,715		4,477,468		—		—		4,477,468
MSRs	5,926		5,926		—		—		5,926
IRLCs	110		110		—		—		110

Liabilities
Deposits:
Noninterest-bearing demand	$	1,258,037	$	1,258,037	$	—	$	1,258,037	$	—
Checking plus interest	1,165,546		1,165,546		—		1,165,546		—
Money Market	1,430,603		1,430,603		—		1,430,603		—
Savings	347,324		347,324		—		347,324		—
Certificates of Deposit	1,184,610		1,184,447		—		1,184,447		—

Subordinated debt	43,139		42,579		—		42,579		—
TRUPS	29,158		28,266		—		28,266		—
TBA Securities	176		176		—		176		—


December 31, 2022	Carrying Amount		Fair Value		Fair Value Measurements
Description of Asset (dollars in thousands)					Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	55,499	$	55,499	$	55,499	$	—	$	—
Investment securities - AFS	83,587		83,587		—		83,587		—
Investment securities - HTM	559,455		494,626		—		494,626		—
Equity securities	1,233		1,233		—		1,233		—
Restricted securities	11,169		11,169		—		11,169		—
Loans held for sale	4,248		4,248		—		4,248		—
TBA securities	41		41		—		41		—
Cash surrender value on life insurance	59,218		59,218		—		59,218		—
Loans, at fair value	8,437		8,437		—		8,437		—
Loans, net	2,531,027		2,431,808		—		—		2,431,808
MSRs	5,275		5,275		—		—		5,275
IRLCs	35		35		—		—		35

Liabilities
Deposits:
Noninterest-bearing demand	$	862,015	$	862,015	$	—	$	862,015	$	—
Checking plus interest	694,101		694,101		—		694,101		—
Money Market	709,132		709,132		—		709,132		—
Savings	320,188		320,188		—		320,188		—
Certificates of Deposit	424,348		410,455		—		410,455		—
Advances from FHLB - short term	40,000		40,002		—		40,002		—
Subordinated debt	43,072		41,193		—		41,193		—
TBA Securities	6		6		—		6		—
IRLCs	7		7		—		—		7