Mechanics BancorpMCHB
Mechanics Bancorp Fair Value Disclosure
FAIR VALUE MEASUREMENTS
The term “fair value” is defined as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. 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 Company’s approach is to maximize the
use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements.
Fair Value Hierarchy
A three-level valuation hierarchy has been established under ASC 820 for disclosure of fair value measurements. The
valuation hierarchy is based on the observability of inputs to the valuation of an asset or liability as of the measurement
date. A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is
significant to the fair value measurement. The levels are defined as follows:
•Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity
can access at the measurement date. An active market for the asset or liability is a market in which transactions for
the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing
basis.
•Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability,
either directly or indirectly. This includes quoted prices for similar assets and liabilities in active markets and
inputs that are observable for the asset or liability for substantially the full term of the financial instrument.
•Level 3 – Unobservable inputs for the asset or liability. These inputs reflect the Company’s assumptions of what
market participants would use in pricing the asset or liability.
The Company’s policy regarding transfers between levels of the fair value hierarchy is that all transfers are assumed to
occur at the end of the reporting period.
Estimation of Fair Value
Fair value is based on quoted market prices, when available. In cases where a quoted price for an asset or liability is not
available, the Company uses valuation models to estimate fair value. These models incorporate inputs such as forward
yield curves, loan prepayment assumptions, expected loss assumptions, market volatilities and pricing spreads utilizing
market-based inputs where readily available. The Company believes its valuation methods are appropriate and consistent
with those that would be used by other market participants. However, imprecision in estimating unobservable inputs and
other factors may result in these fair value measurements not reflecting the amount realized in an actual sale or transfer of
the asset or liability in a current market exchange.
The following table summarizes the fair value measurement methodologies, including significant inputs and assumptions
and classification of the Company’s assets and liabilities valued at fair value on a recurring basis.
Asset/Liability class | Valuation methodology, inputs and assumptions | Classification | ||
Investment securities | ||||
U.S Treasury securities (Trading securities and Investment securities AFS) | Fair Value is based on quoted prices in an active market. | Level 1 recurring fair value measurement. | ||
Investment securities AFS (level 2) | Observable market prices of identical or similar securities are used where available. | Level 2 recurring fair value measurement. | ||
Investment securities AFS (level 3) | If market prices are not readily available, value is based on discounted cash flows using the following significant inputs: •Expected prepayment speeds •Estimated credit losses •Market liquidity adjustments | Level 3 recurring fair value measurement. | ||
LHFS | ||||
Single family loans | Fair value is based on observable market data, including: •Quoted market prices, where available •Dealer quotes for similar loans •Forward sale commitments | Level 2 recurring fair value measurement. | ||
Equity securities | Observable market prices of identical or similar securities are used where available. | Level 2 recurring fair value measurement. | ||
Mortgage servicing rights | ||||
Single family MSRs | For information on how the Company measures the fair value of its single family MSRs, including key economic assumptions and the sensitivity of fair value to changes in those assumptions, see Note 13, “Mortgage Banking Operations.” | Level 3 recurring fair value measurement. | ||
Derivatives | ||||
Futures and Options | Fair value is based on closing exchange prices. | Level 1 recurring fair value measurement. | ||
Forward sale commitments and interest rate swaps | Fair value is based on quoted prices for identical or similar instruments, when available. When quoted prices are not available, fair value is based on internally developed modeling techniques, which require the use of multiple observable market inputs including: •Forward interest rates •Interest rate volatilities | Level 2 recurring fair value measurement. | ||
IRLC | The fair value considers several factors including: •Fair value of the underlying loan based on quoted prices in the secondary market, when available. •Value of servicing •Fall-out factor | Level 3 recurring fair value measurement. |
The following tables present the levels of the fair value hierarchy for the Company’s assets and liabilities measured at fair
value on a recurring basis:
December 31, 2025 | |||||||
(in thousands) | Fair Value | Level 1 | Level 2 | Level 3 | |||
Assets: | |||||||
Trading securities - U.S. Treasury securities | $49,518 | $49,518 | $— | $— | |||
Securities available-for-sale: | |||||||
Obligations of states and political subdivisions | 471,159 | — | 471,159 | — | |||
Mortgage backed securities - residential | 2,884,289 | — | 2,882,704 | 1,585 | |||
Mortgage backed securities - commercial | 371,806 | — | 371,806 | — | |||
Collateralized loan obligations | 188,316 | — | 188,316 | — | |||
Corporate bonds | 49,915 | — | 49,870 | 45 | |||
U.S. Treasury securities | 20,669 | 20,669 | — | — | |||
Agency debentures | 7,231 | — | 7,231 | — | |||
Total securities available-for-sale | 3,993,385 | 20,669 | 3,971,086 | 1,630 | |||
Single family LHFS | 5,967 | — | 5,967 | — | |||
Single family mortgage servicing rights | 58,095 | — | — | 58,095 | |||
Equity securities | 15,567 | — | 15,567 | — | |||
Derivatives: | |||||||
Forward loan sale commitments | 148 | — | 148 | — | |||
Interest rate lock commitments | 75 | — | — | 75 | |||
Interest rate swaps | 9,406 | — | 9,406 | — | |||
Total assets | $4,132,161 | $70,187 | $4,002,174 | $59,800 | |||
Liabilities: | |||||||
Derivatives: | |||||||
Forward loan sale commitments | $28 | $— | $28 | $— | |||
Interest rate swaps | 8,543 | — | 8,543 | — | |||
Futures | 2 | 2 | — | — | |||
Total liabilities | $8,573 | $2 | $8,571 | $— | |||
December 31, 2024 | |||||||
(in thousands) | Fair Value | Level 1 | Level 2 | Level 3 | |||
Assets: | |||||||
Securities available-for-sale: | |||||||
Obligations of states and political subdivisions | $91,299 | $— | $91,299 | $— | |||
Mortgage backed securities - residential | 2,643,688 | — | 2,643,688 | — | |||
Mortgage backed securities - commercial | 240,862 | — | 240,862 | — | |||
Collateralized loan obligations | 50,000 | — | 50,000 | — | |||
Corporate bonds | 39,402 | — | 39,402 | — | |||
Total securities available-for-sale | 3,065,251 | — | 3,065,251 | — | |||
Equity securities | 15,355 | — | 15,355 | — | |||
Derivatives: | |||||||
Interest rate swaps | 12,835 | — | 12,835 | ||||
Total assets | $3,093,441 | $— | $3,093,441 | $— | |||
Liabilities: | |||||||
Derivatives: | |||||||
Interest rate swaps | $11,056 | $— | $11,056 | $— | |||
Interest rate lock commitments | 7 | — | — | 7 | |||
Total liabilities | $11,063 | $— | $11,056 | $7 | |||
There were no transfers between levels of the fair value hierarchy for 2025 and 2024.
Level 3 Recurring Fair Value Measurements
The Company’s Level 3 recurring fair value measurements consist of investment securities AFS, single family MSRs, and
interest rate lock commitments, which are accounted for as derivatives. For information regarding fair value changes and
activity for single family MSRs during 2025, see Note 13, “Mortgage Banking Operations.”
The fair value of IRLCs considers several factors, including the fair value in the secondary market of the underlying loan
resulting from the exercise of the commitment, the expected net future cash flows related to the associated servicing of the
loan (referred to as the value of servicing) and the probability that the commitment will not be converted into a funded loan
(referred to as a fall-out factor). The fair value of IRLCs on LHFS, while based on interest rates observable in the market,
is highly dependent on the ultimate closing of the loans. The significance of the fall-out factor to the fair value
measurement of an individual IRLC is generally highest at the time that the rate lock is initiated and declines as closing
procedures are performed and the underlying loan gets closer to funding. The fall-out factor applied is based on historical
experience. The value of servicing is impacted by a variety of factors, including prepayment assumptions, discount rates,
delinquency rates, contractually specified servicing fees, servicing costs and underlying portfolio characteristics. Because
these inputs are not observable in market trades, the fall-out factor and value of servicing are considered to be Level 3
inputs. The fair value of IRLCs decreases in value upon an increase in the fall-out factor and increases in value upon an
increase in the value of servicing. Changes in the fall-out factor and value of servicing do not increase or decrease based on
movements in other significant unobservable inputs.
The Company recognizes unrealized gains and losses from the time that an IRLC is initiated until the gain or loss is
realized at the time the loan closes, which generally occurs within 30-90 days. For IRLCs that fall out, any unrealized gain
or loss is reversed, which generally occurs at the end of the commitment period. The gains and losses recognized on IRLC
derivatives generally correlates to volume of single family interest rate lock commitments made during the reporting period
(after adjusting for estimated fallout) while the amount of unrealized gains and losses realized at settlement generally
correlates to the volume of single family closed loans during the reporting period.
The following information presents significant Level 3 unobservable inputs used to measure fair value of certain assets as
of December 31, 2025. As of December 31, 2024, there were no assets measured at fair value using Level 3 unobservable
inputs.
(dollars in thousands) | Fair Value | Valuation Technique | Significant Unobservable Inputs | Low | High | Weighted Average | |||||
December 31, 2025 | |||||||||||
Investment securities AFS | $1,630 | Income approach | Implied spread to benchmark interest rate curve | 2.25% | 2.25% | 2.25% | |||||
Interest rate lock commitments | 75 | Income approach | Fall-out factor | 0.60% | 20.65% | 10.11% | |||||
Value of servicing | 1.04% | 1.43% | 1.15% |
The following table presents fair value changes and activity for certain Level 3 assets for the periods indicated:
(in thousands) | Beginning balance | Additions (1) | Transfers | Payoffs/Sales | Change in mark to market | Ending balance | |||||
Year Ended December 31, 2025 | |||||||||||
Investment securities AFS | $— | $1,649 | $— | $(7) | $(12) | $1,630 |
(1)Includes the assets acquired from the Merger on September 2, 2025
The following table presents fair value changes and activity for Level 3 interest rate lock commitments:
Year Ended December 31, | |
(in thousands) | 2025 |
Beginning balance, net | $— |
IRLC acquired (1) | 514 |
Total realized/unrealized gains | 70 |
Settlements | (509) |
Ending balance, net | $75 |
(1)Represents the interest rate lock commitments acquired from the Merger on September 2, 2025.
Assets and Liabilities Measured on a Nonrecurring Basis
Collateral Dependent Loan Receivables: The fair value of collateral dependent loan receivables with specific allocations
of the allowance for credit losses based on collateral values is generally based on recent appraisals or evaluations. These
appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the
income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences
between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3
classification of the inputs for determining fair value. Loss exposure for collateral dependent loans is typically determined
by the “practical expedient” which allows these loans to be assessed using the fair value of collateral method, which
compares the net realizable value of the collateral (fair value less costs of sale) to the amortized cost basis of the loan
(carrying value).
The following tables present collateral dependent loans that were measured at fair value on a nonrecurring basis, and still
held on the consolidated balance sheets, as well as the valuation methodology and unobservable inputs, and the losses
resulting from those fair value adjustments for the periods indicated.
December 31, 2025 | |||||||||
(in thousands) | Fair Value | Valuation Technique | Unobservable Input | Input or Range | Weighted Average | ||||
Commercial and industrial loans | $2,955 | Third party appraisal | Discount for market conditions | 10% - 20% | 18% | ||||
Estimated selling costs | 10% | 10% | |||||||
Third party evaluation | Estimated selling costs | 7% | 7% | ||||||
Commercial real estate loans | $23,006 | Third party appraisal | Discount for market conditions | 6% - 36% | 24% | ||||
Estimated selling costs | 8% - 10% | 10% | |||||||
Income approach | Vacancy, collection loss, concessions | 15% | 15% | ||||||
Capitalization rate | 6% | 6% | |||||||
Year Ended December 31, | |
(in thousands) | 2025 |
Losses: (1) | |
Commercial and industrial loans | $2,569 |
Commercial real estate loans | 8,596 |
Total | $11,165 |
(1)The losses represent re-measurements of collateral-dependent impaired loans with specific allowance for credit loss allocations.
As of December 31, 2024, there were no collateral dependent loans with specific allowance for credit loss allocations,
which are measured for impairment using the fair value of collateral.
Other real estate owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified
as other real estate owned are measured at the lower of the carrying amount or fair value, less costs to sell. Fair values are
generally based on third party appraisals of the property or internal evaluations based on comparable sales, resulting in a
Level 3 classification. Appraisals for both collateral-dependent impaired loans and 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 Appraisal
Department 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. These appraisals may
utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. In
cases where the carrying amount exceeds the fair value, less cost to sell, an impairment loss is recognized. Management
also considers inputs regarding market trends or other relevant factors and selling and commission costs.
Other real estate owned assets fall under a Level 3 fair value measurement methodology. The following tables present other
real estate owned that were measured at fair value on a nonrecurring basis and still held on the consolidated balance sheets,
as well as the valuation methodology, unobservable inputs and losses resulting from those fair value adjustments for the
periods indicated. Other real estate owned of $1.7 million as of December 31, 2025 was acquired in the Merger and
recorded at fair value as of the Merger date.
December 31, 2025 | |||||||||
(in thousands) | Fair Value | Valuation Technique | Unobservable Inputs | Input | Weighted Average | ||||
Other real estate owned-commercial real estate | $1,675 | Income approach | Estimated selling costs | 10% | 10% | ||||
December 31, 2024 | |||||||||
(in thousands) | Fair Value | Valuation Technique | Unobservable Inputs | Input | Weighted Average | ||||
Other real estate owned-commercial real estate | $15,600 | Sales price | Estimated selling costs | 3% | 3% | ||||
Year Ended December 31, | |||
(in thousands) | 2025 | 2024 | |
Losses due to write downs: | |||
Other real estate owned-commercial real estate (1) | $— | $1,200 | |
(1)Losses are included in other real estate owned related expense within noninterest expense on the consolidated income statements.
The following is a summary of the estimated fair value and carrying value of the Company’s financial instruments not
recorded at fair value in the consolidated financial statements as of December 31, 2025 and 2024:
December 31, 2025 | |||||||||
Fair Value | |||||||||
(in thousands) | Carrying Value | Total | Level 1 | Level 2 | Level 3 | ||||
Assets: | |||||||||
Cash and cash equivalents | $1,029,983 | $1,029,983 | $1,029,983 | $— | $— | ||||
Securities held-to-maturity | 1,336,632 | 1,170,818 | — | 1,167,818 | 3,000 | ||||
Loan receivables, net | 14,023,617 | 13,665,520 | — | — | 13,665,520 | ||||
Mortgage servicing rights – multifamily and SBA | 27,737 | 28,276 | — | 28,276 | — | ||||
Liabilities: | |||||||||
Time deposits | $2,784,608 | $2,768,873 | $— | $2,768,873 | $— | ||||
Long-term debt | 192,014 | 203,272 | — | 203,272 | — | ||||
December 31, 2024 | |||||||||
Carrying Value | Fair Value | ||||||||
(in thousands) | Total | Level 1 | Level 2 | Level 3 | |||||
Assets: | |||||||||
Cash and cash equivalents | $999,711 | $999,711 | $999,711 | $— | $— | ||||
Securities held-to-maturity | 1,440,494 | 1,196,000 | — | 1,193,000 | 3,000 | ||||
Loans held for sale - single family | 543 | 543 | 543 | ||||||
Loan receivables, net | 9,554,939 | 8,817,007 | — | — | 8,817,007 | ||||
Liabilities: | |||||||||
Time deposits | $970,053 | $960,276 | $— | $960,276 | $— | ||||
Fair Value Option
Single family loans held for sale accounted under the fair value option are measured initially at fair value with subsequent
changes in fair value recognized in earnings. Gains and losses from such changes in fair value are recognized in net gain on
mortgage loan origination and sale activities within other noninterest income. The change in fair value of loans held for
sale is primarily driven by changes in interest rates subsequent to loan funding and changes in fair value of the related
servicing asset, resulting in revaluation adjustments to the recorded fair value. The use of the fair value option allows the
change in the fair value of loans to more effectively offset the change in fair value of derivative instruments that are used as
economic hedges of loans held for sale.
The following table presents the difference between the aggregate fair value and the aggregate unpaid principal balance of
loans held for sale accounted for under the fair value option as of December 31, 2025. As of December 31, 2024, there
were no single family loans held for sale accounted for under the fair value option, since this election was made following
the Merger.
December 31, 2025 | |||||
(in thousands) | Fair Value | Aggregate Unpaid Principal Balance | Fair Value Less Aggregated Unpaid Principal Balance | ||
Single family LHFS | $5,967 | $5,883 | $84 | ||
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Mar 17, 2026 | Showing above |
| 2024 | Mar 7, 2025 | |
| 2023 | Mar 6, 2024 | |
| 2022 | Mar 6, 2023 | |
| 2021 | Mar 4, 2022 | |
| 2020 | Mar 12, 2021 | |
| 2019 | Mar 6, 2020 | |
| 2018 | Mar 6, 2019 | |
| 2017 | Mar 6, 2018 | |
| 2016 | Mar 9, 2017 | |
| 2015 | Mar 11, 2016 | |
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.