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Fair Value of Financial Instruments | 9 Months Ended
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Sep. 30, 2023
Fair Value Disclosures [Abstract] |
Fair Value of Financial Instruments | Fair Value Measurements 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 on a recurring basis and to determine fair value disclosures. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis. 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 1 inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date. 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. Below is a discussion on the Company’s assets measured at fair value on a recurring basis. Investment Securities Available for Sale Fair value measurement for investment securities AFS 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. Equity Securities Fair value measurement for equity securities is based on quoted market prices retrieved by the Company via on-line resources. Although these securities have readily available fair market values, the Company determined that they should be classified as level 2 investments in the fair value hierarchy due to not being considered traded in a highly active market. LHFS LHFS are carried at fair value, which is determined based on Mark to Trade for allocated/committed loans or Mark to Market analysis for unallocated/uncommitted loans based on third-party pricing models (Level 2). Mortgage Servicing Rights The fair value of mortgage servicing rights (“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. IRLCs 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
September 30, 2023 |  |  |  |  |  |  |  |
MSRs (1) |  | $ | 5,890 |  |  | Market Approach |  | Weighted average prepayment speed (PSA) (2) |  | 108
IRLCs - net asset |  | $ | 39 |  |  | Market Approach |  | Range of pull through rate |  | 84% - 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 |  | $ | 28 |  |  | Market Approach |  | Range of pull through rate |  | 78% - 100%
|  |  |  |  |  | Average pull through rate |  | 92%
____________________________________ (1)The weighted average was calculated with reference to the principal balance of the underlying mortgages. (2)PSA = Public Securities Association Standard Prepayment Model The following table presents activity in MSRs for the three and nine months ended September 30, 2023.
(Dollars in thousands) |  | Three Months Ended September 30, 2023 |  | Nine Months Ended September 30, 2023
Beginning balance |  | $ | 5,466 |  |  | $ | 5,275 |
Servicing rights resulting from sales of loans |  | 390 |  |  | 620 |
Valuation adjustment |  | 34 |  |  | (5) |
Ending balance |  | $ | 5,890 |  |  | $ | 5,890 |
The following table presents activity in the IRLCs for the three and nine months ended September 30, 2023.
(Dollars in thousands) |  | Three Months Ended September 30, 2023 |  | Nine Months Ended September 30, 2023
Beginning balance |  | $ | 32 |  |  | $ | 28 |
Valuation adjustment |  | 7 |  |  | 11 |
Ending balance |  | $ | 39 |  |  | $ | 39 |
Forward Contracts 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 (“GSE”) 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 a level 2 input. We have elected to measure and report best efforts commitments at fair value, when outstanding, using a valuation methodology similar to that used for mandatory commitments. 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. The following tables present the recorded amount of assets measured at fair value on a recurring basis at September 30, 2023 and December 31, 2022. No assets were transferred from one hierarchy level to another during the first nine months of 2023 or 2022.
(Dollars in thousands) |  | Fair Value |  | Quoted Prices (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
September 30, 2023 |  |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |  |
Securities available for sale: |  |  |  |  |  |  |  |
U.S. Government agencies |  | $ | 19,631 |  |  | $ | — |  |  | $ | 19,631 |  |  | $ | — |
Mortgage-backed |  | 53,573 |  |  | — |  |  | 53,573 |  |  | — |
Other debt securities |  | 5,939 |  |  | — |  |  | 5,939 |  |  | — |
|  | 79,143 |  |  | — |  |  | 79,143 |  |  | — |
Equity securities |  | 5,434 |  |  | — |  |  | 5,434 |  |  | — |
TBA forward trades |  | 359 |  |  | — |  |  | 359 |  |  | — |
Loans Held for Sale |  | 14,725 |  |  | — |  |  | 14,725 |  |  | — |
Loans Held for Investment, at fair value |  | 9,302 |  |  | — |  |  | 9,302 |  |  | — |
MSRs |  | 5,890 |  |  | — |  |  | — |  |  | 5,890 |
IRLCs |  | 89 |  |  | — |  |  | — |  |  | 89 |
Total assets at fair value |  | $ | 114,942 |  |  | $ | — |  |  | $ | 108,963 |  |  | $ | 5,979 |
Liabilities: |  |  |  |  |  |  |  |
IRLCs |  | $ | 50 |  |  | $ | — |  |  | $ | — |  |  | $ | 50 |
TBA securities |  | — |  |  | — |  |  | — |  |  | — |
Total liabilities at fair value |  | $ | 50 |  |  | $ | — |  |  | $ | — |  |  | $ | 50 |
(Dollars in thousands) |  | Fair Value |  | Quoted Prices (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable 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 |
Below is a discussion on the Company’s assets measured at fair value on a nonrecurring basis. Individually Evaluated Collateral-Dependent Loans 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. Other Real Estate Owned (Foreclosed Assets) 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 at September 30, 2023 and December 31, 2022. 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 (1)
September 30, 2023 |  |  |  |  |  |  |  |  |  |
Nonrecurring measurements: |  |  |  |  |  |  |  |  |  |
Individually evaluated collateral dependent loans |  | $ | 619 |  |  | Appraisal of collateral |  | Liquidation expense |  | 10% |  | 10%
Other real estate owned |  | $ | 179 |  |  | Appraisal of collateral |  | Appraisal adjustments |  | (0%) - (20%) |  | (0%)
|  | Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands) |  | Fair Value |  | Valuation Technique |  | Unobservable Input |  | Range |  | Weighted Average (1)
December 31, 2022 |  |  |  |  |  |  |  |  |  |
Nonrecurring measurements: |  |  |  |  |  |  |  |  |  |
Other real estate owned |  | $ | 197 |  |  | Appraisal of collateral |  | Appraisal adjustments |  | (0%) - 20% |  | (2%)
_________________________________ (1)Unobservable inputs were weighted by the relative fair value of the instruments. Fair Value of Financial Instruments 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 carrying amounts and estimated fair values of the Company’s financial instruments are presented in the following table. Fair values for September 30, 2023 and December 31, 2022 were estimated using an exit price notion.
September 30, 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 |  | $ | 108,709 |  |  | $ | 108,709 |  |  | $ | 108,709 |  |  | $ | — |  |  | $ | — |
Investment securities - AFS |  | 79,143 |  |  | 79,143 |  |  | — |  |  | 79,143 |  |  | — |
Investment securities - HTM, net |  | 523,051 |  |  | 445,652 |  |  | — |  |  | 445,652 |  |  | — |
Equity securities |  | 5,434 |  |  | 5,434 |  |  | — |  |  | 5,434 |  |  | — |
Restricted securities |  | 13,361 |  |  | 13,361 |  |  | — |  |  | 13,361 |  |  | — |
Loans held for sale |  | 14,725 |  |  | 14,725 |  |  | — |  |  | 14,725 |  |  | — |
TBA derivatives trades |  | 359 |  |  | 359 |  |  | — |  |  | 359 |  |  | — |
Cash surrender value on life insurance |  | 100,950 |  |  | 100,950 |  |  | — |  |  | 100,950 |  |  | — |
Loans, at fair value |  | 9,302 |  |  | 9,302 |  |  | — |  |  | 9,302 |  |  | — |
Loans, net |  | 4,551,366 |  |  | 4,425,585 |  |  | — |  |  | — |  |  | 4,425,585 |
MSRs |  | 5,890 |  |  | 5,890 |  |  | — |  |  | — |  |  | 5,890 |
IRLCs |  | 89 |  |  | 89 |  |  | — |  |  | — |  |  | 89 |
Liabilities |  |  |  |  |  |  |  |  |  |
Deposits: |  |  |  |  |  |  |  |  |  |
Noninterest-bearing demand |  | $ | 1,211,401 |  |  | $ | 1,211,401 |  |  | $ | — |  |  | $ | 1,211,401 |  |  | $ | — |
Checking plus interest |  | 1,210,052 |  |  | 1,210,052 |  |  | — |  |  | 1,210,052 |  |  | — |
Money Market |  | 1,179,049 |  |  | 1,179,049 |  |  | — |  |  | 1,179,049 |  |  | — |
Savings |  | 370,049 |  |  | 370,049 |  |  | — |  |  | 370,049 |  |  | — |
Club |  | 1,706 |  |  | 1,706 |  |  | — |  |  | 1,706 |  |  | — |
Certificates of Deposit |  | 1,136,488 |  |  | 1,124,904 |  |  | — |  |  | 1,124,904 |  |  | — |
Subordinated debt |  | 42,956 |  |  | 41,503 |  |  | — |  |  | 41,503 |  |  | — |
TRUPS |  | 29,079 |  |  | 27,364 |  |  | — |  |  | 27,364 |  |  | — |
IRLCs |  | 50 |  |  | 50 |  |  | — |  |  | — |  |  | 50 |
See the Company’s methodologies disclosed in Note 21 of the Company’s 2022 Annual Report for the fair value methodologies used as of December 31, 2022:
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 |  | 319,814 |  |  | 319,814 |  |  | — |  |  | 319,814 |  |  | — |
Club |  | 374 |  |  | 374 |  |  | — |  |  | 374 |  |  | — |
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 |

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2 -Publisher FASB -URI https://asc.fasb.org//1943274/2147482106/820-10-50-2 + Details
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