FASB ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

FASB ASC Topic 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on the best information available. In that regard, FASB ASC Topic 820 established a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Available-for-sale securities - Securities classified as available for sale are generally reported at fair value utilizing Level 2 inputs where the Company obtains fair value measurements from an independent pricing service that uses matrix pricing, which is a mathematical technique widely used 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 fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows and the bonds’ terms and conditions, among other things. Securities in Level 2 include U.S. federal government agencies, mortgage-backed securities, asset-backed securities, corporate bonds and municipal securities.

Equity securities – These securities are reported at fair value utilizing Level 1 inputs where the Company obtains fair value measurements from a broker.

Loans held for sale, carried at fair value – The Company elected the fair value option for all conventional residential one-to four-family loans held for sale and all permanent construction loans held for sale that were acquired from UCFC in the Merger. In addition, the Company has elected the fair value option for all loans held for sale originated after January 31, 2020.

The fair value of conventional loans held for sale is determined using the current 15 day forward contract price for either 15 or 30 year conventional mortgages (Level 2). The fair value of permanent construction loans held for sale is determined using the current 60 day forward contract price for 15 or 30 years conventional mortgages which is then adjusted for unobservable market data such as estimated fall out rates and estimated time from origination to completion of construction (Level 3).

Collateral dependent loans - Fair values for individually analyzed collateral dependent loans are generally based on appraisals obtained from licensed real estate appraisers and in certain circumstances consideration of offers obtained to purchase properties prior to foreclosure. Appraisals for commercial real estate generally use three methods to derive value: cost, sales or market comparison and income approach. The cost method bases value on the cost to replace the current property. Value of market comparison approach evaluates the sales price of similar properties in the same market area. The income approach considers net operating income generated by the property and an investor’s required return. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Comparable sales adjustments are based on known sales prices of similar type and similar use properties and duration of time that the property has been on the market to sell. Such adjustments made in the appraisal process are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Real estate held for sale - 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 then reviewed monthly by members of the asset review committee for valuation changes and are 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 may utilize a single valuation approach or a combination of approaches including cost, 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 may be significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for both individually analyzed collateral-dependent loans 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 Company. Once received, a member of the Company’s asset quality or collections department reviews the assumptions and approaches utilized in the appraisal. Appraisal values are discounted from 0% to 30% to account for other factors that may impact the value of collateral. In determining the value of individually analyzed collateral dependent loans and other real estate owned, significant unobservable inputs may be used, which include but are not limited to: physical condition of comparable properties sold, net operating income generated by the property and investor rates of return.

Mortgage servicing rights - On a quarterly basis, mortgage servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount. If the carrying amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the servicing asset is carried at fair value. Fair value is determined at a tranche level based on a model that calculates the present value of estimated future net servicing income. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and are validated against available market data (Level 2).

Mortgage banking derivative - The fair value of mortgage banking derivatives are evaluated monthly based on derivative valuation models using quoted prices for similar assets adjusted for specific attributes of the commitments and other observable market data at the valuation date (Level 2).

Purchased and written certificate of deposit option – The Company acquired purchased and written certificate of deposit options in its Merger with UCFC. These written and purchased options are mirror derivative instruments that are carried at fair value on the statement of financial condition. The Company uses an independent third party to perform a market valuation analysis for purchased and written certificate of deposit options (Level 2).

Interest rate swaps – The Company periodically enters into interest rate swap agreements with its commercial customers who desire a fixed rate loan term that is longer than the Company is willing to extend. The Company then enters into a reciprocal swap agreement with a third party that offsets the interest rate risk from the interest rate swap extended to the customer. The interest rate swaps are derivative instruments which are carried at fair value on the statement of financial condition. The Company uses an independent third party to perform a market valuation analysis for both swap positions (Level 2).

The Company also enters into cash flow hedge derivative instruments to hedge the risk of variability in cash flows (future interest payments) attributable to changes in the contractually specified LIBOR benchmark interest rate on the Company’s floating rate loan pool. The Company uses an independent third party to perform a market valuation analysis for these derivatives (Level 2).

The following table summarizes the financial assets measured at fair value on a recurring basis segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

September 30, 2021	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Assets:
Available for sale securities:
Obligations of U.S. federal government corporations and agencies	$	—	$	176,036	$	—	$	176,036
Mortgage-backed securities		—		216,870		—		216,870
Collateralized mortgage obligations		—		280,058		—		280,058
Asset-backed securities		—		224,860		—		224,860
Corporate bonds		—		69,919		—		69,919
Obligations of state and political subdivisions		—		282,344		—		282,344
Equity securities		12,965		—		—		12,965
Loans held for sale, at fair value		—		38,920		139,570		178,490
Purchased certificate of deposit option		—		1		—		1
Interest rate swaps		—		1,233		—		1,233
Cash flow hedge derivative		—		1,431		—		1,431
Mortgage banking derivative		—		6,279		—		6,279
Liabilities:
Written certificate of deposit option		—		1		—		1
Interest rate swaps		—		1,258		—		1,258

December 31, 2020	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Assets:
Available for sale securities:
Obligations of U.S. federal government corporations and agencies	$	—	$	40,940	$	—	$	40,940
Mortgage-backed securities		—		277,182		—		277,182
Collateralized mortgage obligations		—		106,299		—		106,299
Asset-backed securities		—		30,546		—		30,546
Corporate bonds		—		44,169		—		44,169
Obligations of state and political subdivisions		—		237,518		—		237,518
Equity securities		1,090		—		—		1,090
Loans held for sale, at fair value		—		98,587		123,029		221,616
Purchased certificate of deposit option		—		56		—		56
Interest rate swaps		—		1,870		—		1,870
Mortgage banking derivative		—		3,833		—		3,833
Liabilities:
Written certificate of deposit option		—		56		—		56
Interest rate swaps		—		2,036		—		2,036

The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine month periods ended September 30, 2021 and 2020.

	Construction loans held for sale
	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Balance of recurring Level 3 assets at beginning of period	$	148,659		$	75,739		$	123,029		$	—
Total gains (losses) for the period
Included in change in fair value of loans held for sale		(3	)		4,012			(3,757	)		11,213
Originations		32,055			40,767			96,983			83,032
Acquired in acquisition		—			—			—			37,711
Sales		(41,141	)		(8,496	)		(76,685	)		(19,934	)
Balance of recurring Level 3 assets at end of period	$	139,570		$	112,022		$	139,570		$	112,022

	Securities available-for-sale
	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Balance of recurring Level 3 assets at beginning of period	$	—	$	—	$	—	$	3,411
Balance of assets classified as Level 3 assets during the period		—		—	$	—	$	(3,411	)
Balance of recurring Level 3 assets at end of period	$	—	$	—	$	—	$	—

For Level 3 assets and liabilities measured at fair value on a recurring basis, the significant unobservable inputs used in the fair value measurements were as follows:

The following table summarizes the financial assets measured at fair value on a non-recurring basis segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

September 30, 2021	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Individually analyzed loans
Residential	$	-	$	-	$	178		178
Commercial real estate		—		—		9,067		9,067
Commercial		—		—		13,621		13,621
Total individually analyzed loans		—		—		22,866		22,866
Mortgage servicing rights		—		5,389		—		5,389

December 31, 2020	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Individually analyzed loans
Commercial real estate	$	—	$	—	$	4,601	$	4,601
Commercial		—		—		7,151		7,151
Total individually analyzed loans		—		—		11,752		11,752
Mortgage servicing rights		—		13,153		—		13,153

For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of September 30, 2021, the significant unobservable inputs used in the fair value measurements were as follows:

	Fair Value		Valuation Technique	Unobservable Inputs	Range of Inputs			Weighted Average
			(Dollars in Thousands)
Individually analyzed Loans- Applies to loan classes with an appraisal valuation	$	11,471	Appraisals which utilize sales comparison, net income and cost approach	Discounts for collection issues and changes in market conditions	20-50%				20.60	%
Individually analyzed Loans- Applies to loan classes without an appraisal valuation	$	11,395	Equitable Recoupment claim estimate	Discounts for collection issues		50	%		50.00	%

For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2020, the significant unobservable inputs used in the fair value measurements were as follows:

The Company has elected the fair value option for new applications accepted after January 31, 2020, and subsequently originated for residential mortgage and permanent construction loans held for sale. These loans are intended for sale and the Company believes that fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policies.

The aggregate fair value of the residential mortgage loans held for sale at September 30, 2021 and December 31, 2020 was $38.9 million and $98.6 million, respectively, and they had a contractual balance of $37.9 million and $93.2 million, respectively, for these same periods. The difference between the fair value and the contractual balance is recorded in gains and losses on the sale of loans held for sale. For the three and nine months ended September 30, 2021, $1.2 million and $4.4 million, respectively, was recorded in losses on the sale of loans held for sale for the change in fair value. For the three and nine months ended September 30, 2020, $0.9 million and $5.2 million, respectively, was recorded in gains on the sale of loans held for sale for the change in fair value.

The aggregate fair value of the permanent construction loans held for sale at September 30, 2021 and December 31, 2020, was $139.6 million and $123.0 million, respectively, and they had a contractual balance of $130.3 million and $109.5 million, respectively, for these same periods. The difference between the fair value and the contractual balance is recorded in gains and losses on the sale of loans held for sale. For the three and nine months ended September 30, 2021, $3,000 and $3.9 million, respectively, were recorded in losses on the sale of loans held for sale for the change in fair value. For the three and nine months ended September 30, 2020, $4.0 million and $11.2 million, respectively, were recorded in gains on the sale of loans held for sale for the change in fair value.

In accordance with FASB ASC Topic 825, the Fair Value Measurements tables are a comparative condensed consolidated statement of financial condition based on carrying amount and estimated fair values of financial instruments as of September 30, 2021, and December 31, 2020. Accordingly, the aggregate fair value amounts presented do not represent the underlying value to Premier.

Much of the information used to arrive at “fair value” is highly subjective and judgmental in nature and therefore the results may not be precise. Subjective factors include, among other things, estimated cash flows, risk characteristics and interest rates, all of which are subject to change. With the exception of investment securities, the Company’s financial instruments are not readily marketable and market prices do not exist. Since negotiated prices for the instruments, which are not readily marketable, depend greatly on the motivation of the buyer and seller, the amounts that will actually be realized or paid per settlement or maturity of these instruments could be significantly different.

The carrying amount of cash and cash equivalents, as a result of their short-term nature, is considered to be equal to fair value and are classified as Level 1.

It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.

The Company’s loans were valued on an individual basis, with consideration given to the loans’ underlying characteristics, including account types, remaining terms (in months), annual interest rates or coupons, interest types, past delinquencies, timing of principal and interest payments, current market rates, loss exposures, and remaining balances. The model utilizes a discounted cash flow (“DCF”) approach to estimate the fair value of the loans using assumptions for the coupon rates, remaining maturities, prepayment speeds, projected default probabilities, losses given defaults, and estimates of prevailing discount rates. The DCF approach models the credit losses directly in the projected cash flows. The model applies various assumptions regarding credit, interest, and prepayment risks for the loans based on loan types, payment types and fixed or variable classifications. The estimated fair value of individually analyzed loans is based on the fair value of the collateral, less estimated cost to sell, or the present value of the loan’s expected future cash flows (discounted at the loan’s effective interest rate). All individually analyzed loans are classified as Level 3 within the valuation hierarchy.

The fair value of non-interest bearing deposits are considered equal to the amount payable on demand at the reporting date (i.e. carrying value) and are classified as Level 1. The fair value of savings, checking and certain money market accounts are equal to their carrying amounts and are a Level 1 classification. Fair values of fixed rate certificates of deposit are estimated using a DCF calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

The carrying value of notes payable, as a result of their short-term nature, is considered to be equal to fair value and are classified as Level 1.

The fair values of securities sold under repurchase agreements are equal to their carrying amounts resulting in a Level 1 classification. The carrying value of floating rate subordinated debentures was considered to be the carrying value as the debt is floating rate and can be prepaid at any time without penalty. The carrying value of fixed rate subordinated debt is estimated using a DCF calculation that applies interest rates currently being offered in the market to the expected maturity of the debt.

FHLB advances with maturities greater than 90 days are valued based on a DCF analysis, using interest rates currently being quoted for similar characteristics and maturities resulting in a Level 2 classification. The cost or value of any call or put options is based on the estimated cost to settle the option at September 30, 2021.

The carrying value and estimated fair values of financial instruments at September 30, 2021 and December 31, 2020, were as follows:

			Fair Value Measurements at September 30, 2021
			(In Thousands)
	Carrying Value		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	115,094	$	115,094	$	115,094	$	—	$	—
Securities available for sale		1,250,087		1,250,087		—		1,250,087		—
Equity securities		12,965		12,965		12,965		—		—
Federal Home Loan Bank Stock		11,585	N/A		N/A		N/A		N/A
Loans receivable, net		5,196,349		5,239,573		—		—		5,239,573
Loans held for sale, carried at fair value		178,490		178,490		—		38,920		139,570

Financial Liabilities:
Deposits	$	6,248,658	$	6,251,904	$	5,367,729	$	884,175	$	—
Notes Payable	$	18,812	$	18,812	$	18,812	$	—	$	—
Subordinated debentures		84,944		84,841		—		84,841		—

			Fair Value Measurements at December 31, 2020
			(In Thousands)
	Carrying Value		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	159,266	$	159,266	$	159,266	$	—	$	—
Securities available for sale		736,654		736,654		—		736,654		—
Equity securities		1,090		1,090		1,090		—		—
Federal Home Loan Bank Stock		16,026	N/A		N/A		N/A		N/A
Loans receivable, net		5,409,161		5,412,814		—		—		5,412,814
Loans held for sale, carried at fair value		221,616		221,616		—		98,587		123,029

Financial Liabilities:
Deposits	$	6,047,841	$	6,056,426	$	4,925,411	$	1,131,015	$	—
Subordinated debentures		84,860		83,237		—		—		83,237