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Fair Value | 3 Months Ended
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Mar. 31, 2024
Fair Value Disclosures [Abstract] |
Fair Value | Fair Value Fair value is 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. This includes certain U.S. Treasury and other U.S. Government and government agency securities actively traded in over-the-counter markets. 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 company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. The Company used the following methods and significant assumptions to estimate fair value on a recurring basis: Investment securities available for sale - The fair values for investment securities available for sale are provided by an independent pricing service and are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing, which is a mathematical technique commonly used to price debt securities that are not actively traded, values 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). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Loans held for sale - The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2). Derivative financial instruments - The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. The Company has categorized its financial instruments measured at fair value on a recurring basis as of March 31, 2024 and December 31, 2023 as follows:
(in thousands) |  |  |  |  |  |  |  |
March 31, 2024 |  | Total |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
Investment securities available for sale |  |  |  |  |  |  |  |
U.S. Treasuries |  | $ | 128,683 |  |  | $ | 128,683 |  |  | $ | — |  |  | $ | — |
Municipal |  | 9,254 |  |  | — |  |  | 9,254 |  |  | — |
Corporate |  | 4,457 |  |  | — |  |  | 4,457 |  |  | — |
Asset-backed securities |  | 6,581 |  |  | — |  |  | 6,581 |  |  | — |
Mortgage-backed securities |  | 53,279 |  |  | — |  |  | 53,279 |  |  | — |
Total |  | $ | 202,254 |  |  | $ | 128,683 |  |  | $ | 73,571 |  |  | $ | — |
Loans held for sale |  | $ | 10,303 |  |  | $ | — |  |  | $ | 10,303 |  |  | $ | — |
Derivative assets |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Derivative liabilities |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
December 31, 2023 |  |  |  |  |  |  |  |
Investment securities available for sale |  |  |  |  |  |  |  |
U.S. Treasuries |  | $ | 149,228 |  |  | $ | 149,228 |  |  | $ | — |  |  | $ | — |
Municipal |  | 9,372 |  |  | — |  |  | 9,372 |  |  | — |
Corporate |  | 4,413 |  |  | — |  |  | 4,413 |  |  | — |
Asset-backed securities |  | 7,045 |  |  | — |  |  | 7,045 |  |  | — |
Mortgage-backed securities |  | 38,271 |  |  | — |  |  | 38,271 |  |  | — |
Total |  | $ | 208,329 |  |  | $ | 149,228 |  |  | $ | 59,101 |  |  | $ | — |
Loans held for sale |  | $ | 7,481 |  |  | $ | — |  |  | $ | 7,481 |  |  | $ | — |
Derivative assets |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Derivative liabilities |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Financial instruments recorded using FASB ASC 825-10 Under FASB ASC 825-10, the Company may elect to report most financial instruments and certain other items at fair value on an instrument-by-instrument basis with changes in fair value reported in net income. After the initial adoption, the election is made at the acquisition of an eligible financial asset, financial liability or firm commitment or when certain specified reconsideration events occur. The fair value election, with respect to an item, may not be revoked once an election is made. The following table reflects the difference between the fair value carrying amount of loans held for sale, measured at fair value under FASB ASC 825-10, and the aggregate unpaid principal amount the Company is contractually entitled to receive at maturity:
Fair Value of Loans Held for Sale |  |  |  |
(in thousands) |  | March 31, 2024 |  | December 31, 2023
Aggregate fair value |  | $ | 10,303 |  |  | $ | 7,481 |
Contractual principal |  | 7,425 |  |  | 5,168 |
Difference |  | $ | 2,878 |  |  | $ | 2,313 |
The Company has elected to account for loans held for sale at fair value to eliminate the mismatch that would occur by recording changes in market value on derivative instruments used to hedge loans held for sale while carrying the loans at the lower of cost or market. As of March 31, 2024 and December 31, 2023, there were no held for sale loans which were classified as nonaccrual. Fair value measurements on a nonrecurring basis Individually evaluated loans - The Company has measured expected credit losses based on the fair value of the loan's collateral and discounted cash flow analysis, where appropriate. Fair value of the collateral is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values. As of March 31, 2024 and December 31, 2023, the fair values consist of loan balances of $14.4 million and $16.0 million, with specific reserves of $879 thousand and $422 thousand, respectively. Foreclosed real estate - The Company's foreclosed real estate is measured at fair value less cost to sell. Fair value is determined based on offers and/or appraisals. Cost to sell the real estate is based on standard market factors. The Company categorizes its foreclosed real estate as Level 3. As of March 31, 2024 and December 31, 2023, there was no foreclosed real estate held by the Company. The Company has categorized its financial instruments measured at fair value on a nonrecurring basis as of March 31, 2024 and December 31, 2023 as follows:
(in thousands) |  | March 31, 2024 |  | December 31, 2023
Individually evaluated loans for credit loss, net |  |  |  |
Level 3 inputs |  | 13,481 |  |  | 15,620 |
Total |  | $ | 13,481 |  |  | 15,620 |
The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at March 31, 2024 and December 31, 2023:
Unobservable Inputs |  |  |
| Valuation Technique |  | Unobservable Inputs |  | Range of Inputs
Individually evaluated loans | Appraised Value/Discounted Cash Flows |  | Discounts to appraisals or cash flows for estimated holding and/or selling costs |  | 0 to 25%
Fair value of financial instruments Fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value is based upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership in an entity, or contracts that convey or impose on an entity the contractual right or obligation to either receive or deliver cash for another financial instrument. The information used to determine fair value is highly subjective in nature and, therefore, the results are imprecise. Subjective factors include, among other things, estimates of cash flows, risk characteristics, credit quality, and interest rates, all of which are subject to change. Since the fair value is estimated as of the balance sheet date, the amounts that will actually be realized or paid upon settlement or maturity on these various instruments could be significantly different. As of March 31, 2024, the techniques used by the Company to estimate the exit price of the loan portfolio consists of similar procedures to those used as of December 31, 2023. The fair value of the Company’s loan portfolio includes a credit risk assumption in the determination of the fair value of its loans. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the following categories: variable rate loans, individually analyzed loans, and all other loans. The results are then adjusted to account for credit risk as described above, and a further credit risk discount is applied through the use of a discounted cash flow model to compensate for illiquidity risk, based on certain assumptions included within the discounted cash flow model, primarily the use of discount rates that better capture inherent credit risk over the lifetime of a loan. For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values. Fair values for impaired loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral. The fair value of cash and cash equivalents and investments in restricted stocks is the carrying amount. Restricted investments includes equity of the Federal Reserve and other banker’s banks. The fair value of noninterest-bearing deposits and securities sold under agreements to repurchase is the carrying amount. The fair value of checking, savings, and money market deposits is the amount payable on demand at the reporting date. Fair value of fixed maturity term accounts and individual retirement accounts is estimated using rates currently offered for accounts of similar remaining maturities. The fair value of certificates of deposit in other financial institutions is estimated based on interest rates currently offered for deposits of similar remaining maturities. The fair value of borrowings is estimated by discounting the value of contractual cash flows using current market rates for borrowings with similar terms and remaining maturities. The fair value of outstanding loan commitments, unused lines of credit, and letters of credit are not included in the table since the carrying value generally approximates fair value. These instruments generate fees that approximate those currently charged to originate similar commitments. The table below presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments.
| March 31, 2024 |  | December 31, 2023
(in thousands) | Carrying Amount |  | Fair Value |  | Carrying Amount |  | Fair Value
Financial assets |  |  |  |  |  |  |
Level 1 |  |  |  |  |  |  |
Cash and due from banks | $ | 12,361 |  |  | $ | 12,361 |  |  | $ | 14,513 |  |  | $ | 14,513 |
Interest-bearing deposits at other financial institutions | 72,787 |  |  | 72,787 |  |  | 39,044 |  |  | 39,044 |
Federal funds sold | 56 |  |  | 56 |  |  | 407 |  |  | 407 |
Level 3 |  |  |  |  |  |  |
Portfolio loans receivable, net | $ | 1,935,175 |  |  | $ | 1,902,408 |  |  | $ | 1,874,678 |  |  | $ | 1,855,158 |
Restricted investments | 4,441 |  |  | 4,441 |  |  | 4,353 |  |  | 4,353 |
Financial liabilities |  |  |  |  |  |  |
Level 1 |  |  |  |  |  |  |
Noninterest-bearing deposits | $ | 665,812 |  |  | $ | 665,812 |  |  | $ | 617,373 |  |  | $ | 617,373 |
Level 3 |  |  |  |  |  |  |
Interest-bearing deposits | $ | 1,339,883 |  |  | $ | 1,339,795 |  |  | $ | 1,278,623 |  |  | $ | 1,280,682 |
FHLB advances and other borrowed funds | 34,062 |  |  | 31,620 |  |  | 49,062 |  |  | 46,634 |

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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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