Fair Value Measurements

6 Months Ended

Jun. 30, 2023

(10) Fair Value Measurements

The Company reports certain assets at fair value in accordance with GAAP, which defines fair value and establishes a framework for measuring fair value in accordance with generally accepted accounting principles. Fair value is defined as 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. The guidance 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 standard describes three levels of inputs that may be used to measure fair values:

Basis of Fair Value Measurements

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 – Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability;

Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

An asset’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

Fair Values of Assets Measured on a Recurring Basis

The Company’s investments in state and municipal, asset-backed and government mortgage-backed debt securities available-for-sale are generally classified within Level 2 of the fair value hierarchy. For these investments, the Company obtains fair value measurements from independent pricing services. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, trading levels, market consensus prepayment speeds, credit information and the instrument’s terms and conditions.

The following summarizes financial instruments measured at fair value on a recurring basis at June 30, 2023 and December 31, 2022:



	Fair Value Measurements at Reporting Date Using
					Significant		Significant
					Other Observable		Unobservable
					Inputs		Inputs
(In thousands)	Total		Level 1		Level 2		Level 3
June 30, 2023
State and municipal securities	$	11,196	$	—	$	11,196	$	—
Asset-backed securities		6,120		—		6,120		—
Government mortgage-backed securities		10,340		—		10,340		—
Totals	$	27,656	$	—	$	27,656	$	—

December 31, 2022
State and municipal securities	$	11,071	$	—	$	11,071	$	—
Asset-backed securities		6,274		—		6,274		—
Government mortgage-backed securities		11,255		—		11,255		—
Totals	$	28,600	$	—	$	28,600	$	—

Fair Values of Assets Measured on a Non-Recurring Basis

The Company may also be required, from time to time, to measure certain other assets at fair value on a non-recurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from the application of lower-of-cost-or market accounting or write-downs of individual assets.

Certain loans were adjusted to fair value, less cost to sell, of the underlying collateral securing these loans resulting in losses. The loss is not recorded directly as an adjustment to current earnings, but rather as a component in determining the allowance for loan losses. Fair value was measured using appraised values of collateral and adjusted as necessary by management based on unobservable inputs for specific properties.

Other repossessed assets, which consists of repossessed cryptocurrency mining rigs, were accounted for at fair value. Future adjustments, if any, will be recorded directly as an adjustment to current earnings. Fair value was measured using the appraised values of the cryptocurrency mining rigs and adjusted as necessary by management based on unobservable inputs.

The following summarizes assets measured at fair value on a nonrecurring basis at June 30, 2023 and December 31, 2022:



	Fair Value Measurements at Reporting Date Using:
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
(In thousands)	Total		Level 1		Level 2		Level 3
June 30, 2023
Loans
Enterprise value	$	1,835	$	—	$	—	$	1,835
Digital asset		9,549		—		—		9,549
Totals	$	11,384	$	—	$	—	$	11,384

December 31, 2022
Loans
Commercial	$	16,817	$	—	$	—	$	16,817
Other repossessed assets		6,051		—		—		6,051
Totals	$	22,868	$	—	$	—	$	22,868

The following is a summary of the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis at June 30, 2023 and December 31, 2022:



(In thousands)	Fair Value		Valuation Technique	Unobservable Input	Range
June 30, 2023
Loans
Enterprise value	$	1,835	Business or collateral valuation	Comparable company or collateral evaluations	0% - 7%
Digital asset		9,549	Asset valuation	Comparable asset evaluations	0% - 1%

December 31, 2022
Loans
Commercial	$	16,817	Business or collateral valuation	Comparable company or collateral evaluations	0% - 10%
Other repossessed assets		6,051	Asset valuation	Comparable asset evaluations	0% - 3%

At June 30, 2023, the contractual balance of loans measured at fair value on a nonrecurring basis was $6.2 million, net of reserves of $2.5 million and charge-offs of $1.7 million for the enterprise value segment, and $18.1 million, net of reserves of $7.2 million and interest paid to principal of $1.3 million for the digital asset segment. At December 31, 2022, the contractual balance of commercial loans measured at fair value on a nonrecurring basis was $28.7 million, net of reserves of $10.1 million and charge-offs of $1.8 million.

During 2022, the Company repossessed cryptocurrency mining rigs in exchange for the forgiveness of a loan relationship. The repossessed cryptocurrency mining rigs were reported as other repossessed assets and are accounted for at the lower of cost or fair value less estimated costs to sell. At December 31, 2022, other repossessed assets were $6.1 million.

Fair Values of Financial Instruments

GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Certain financial instruments and all nonfinancial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The carrying amounts and estimated fair values of the Company’s financial instruments, all of which are held or issued for purposes other than trading, are as follows at June 30, 2023 and December 31, 2022:



	Carrying		Fair Value
(In thousands)	Amount		Level 1		Level 2		Level 3		Total
June 30, 2023
Financial assets:
Cash and cash equivalents	$	297,858	$	297,858	$	—	$	—	$	297,858
Available-for-sale debt securities		27,656		—		27,656		—		27,656
Federal Home Loan Bank of Boston stock		3,309		N/A		N/A		N/A		N/A
Loans, net		1,333,564		—		—		1,232,255		1,232,255
Accrued interest receivable		5,007		—		5,007		—		5,007
Financial liabilities:
Deposits		1,448,086		—		1,448,873		—		1,448,873
Borrowings		79,763		—		79,513		—		79,513

December 31, 2022
Financial assets:
Cash and cash equivalents	$	80,629	$	80,629	$	—	$	—	$	80,629
Available-for-sale debt securities		28,600		—		28,600		—		28,600
Federal Home Loan Bank of Boston stock		4,266		N/A		N/A		N/A		N/A
Loans, net		1,416,047		—		—		1,341,633		1,341,633
Accrued interest receivable		6,597		—		6,597		—		6,597
Other repossessed assets		6,051		—		—		6,051		6,051
Financial liabilities:
Deposits		1,279,582		—		1,279,665		—		1,279,665
Borrowings		126,829		—		124,590		—		124,590