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FAIR VALUE

3 Months Ended

Mar. 31, 2024

7. FAIR VALUE

FASB ASC No. 820-10 defines fair value 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. Fair value is best determined using quoted market prices. However, in many instances, quoted market prices are not available. In such instances, fair values are determined using appropriate valuation techniques. Various assumptions and observable inputs must be relied upon in applying these techniques. Accordingly, categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. As such, the fair value estimates may not be realized in an immediate transfer of the respective asset or liability.

FASB ASC 820-10 also establishes a fair value hierarchy and describes three levels of inputs that may be used to measure fair values. The three levels within the fair value hierarchy are as follows:

●

Level 1: Valuation is based upon unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

●

Level 2: Fair value is calculated using significant inputs other than quoted market prices that are directly or indirectly observable for the asset or liability. The valuation may rely on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, rate volatility, prepayment speeds, credit ratings) or inputs that are derived principally or corroborated by market data, by correlation, or other means.

●

Level 3: Inputs for determining the fair value of the respective assets or liabilities are not observable. Level 3 valuations are reliant upon pricing models and techniques that require significant management judgment or estimation.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

Assets Measured at Fair Value on a Recurring Basis

The following presents fair value measurements on a recurring basis at March 31, 2024 and December 31, 2023:


		March 31, 2024
					Fair Value Measurements Using:
					Quoted Prices In						Significant
					Active Markets			Significant Other			Unobservable
		Carrying			for Identical Assets			Observable Inputs			Inputs
(in thousands)		Amount			(Level 1)			(Level 2)			(Level 3)
Financial assets:
Available-for-sale securities:
U.S. Treasury securities		$	29,956		$	—		$	29,956		$	—
U.S. GSE residential mortgage-backed securities			164			—			164			—
Collateralized loan obligations			50,582			—			50,582			—
Corporate bonds			12,007			—			12,007			—
Loan servicing rights			5,087			—			—			5,087
Derivatives			188			—			188			—
Total		$	97,984		$	—		$	92,897		$	5,087

Financial liabilities:
Derivatives		$	666		$	—		$	666		$	—


		December 31, 2023
					Fair Value Measurements Using:
					Quoted Prices In
					Active Markets						Significant
					for Identical			Significant Other			Unobservable
		Carrying			Assets			Observable Inputs			Inputs
(In thousands)		Amount			(Level 1)			(Level 2)			(Level 3)
Financial assets:
Available-for-sale securities:
U.S. GSE residential mortgage-backed securities		$	201		$	—		$	201		$	—
Collateralized loan obligations			50,266			—			50,266			—
Corporate bonds			10,952			—			10,952			—
Loan servicing rights			4,668			—			—			4,668
Total		$	66,087		$	—		$	61,419		$	4,668

Financial liabilities:
Derivatives		$	2,361		$	—		$	2,361		$	—

The fair value for the securities available-for-sale were obtained from an independent broker based upon 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. The Company has determined these are classified as Level 2 inputs within the fair value hierarchy.

Derivatives represent interest rate swaps for which the estimated fair values are based on valuation models using observable market data as of the measurement date resulting in a Level 2 classification.

The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated future servicing income. The valuation model utilizes interest rate, prepayment speed, and default rate assumptions that market participants would use in estimating future net servicing income. The fair value of loan servicing rights related to residential mortgage loans at March 31, 2024 was determined based on discounted expected future cash flows using discount rates ranging from 12.75% to 15.25%, a prepayment speed of 26.25% and a weighted average life ranging from 1.51 to 2.72 years. Fair value at December 31, 2023 for loan servicing rights was determined based on discounted expected future cash flows using discount rates ranging from 12.38% to 14.88%, prepayment speed of 26.25% and a weighted average life ranging from 1.55 to 2.78 years.

The fair value of loan servicing rights for SBA loans at March 31, 2024 was determined based on discounted expected future cash flows using discount rates ranging from 6.74% to 42.55%, prepayment speeds ranging from 8.94% to 31.31% and a weighted average life ranging from 1.00 to 5.34 years. The fair value of loan servicing rights for SBA loans at December 31, 2023 was determined based on discounted expected future cash flows using discount rates ranging from 9.61% to 41.46%, prepayment speeds ranging from 8.85% to 30.24% and a weighted average life ranging from 1.08 to 5.71 years.

The Company has determined these are mostly unobservable inputs and considers them Level 3 inputs within the fair value hierarchy.

The following table presents the changes in mortgage servicing rights for the periods presented:


		Three Months Ended March 31,
(in thousands)		2024			2023
Balance at beginning of period		$	4,668		$	4,402
Additions			557			212
Adjustment to fair value			(138)			(185)
Balance at end of period		$	5,087		$	4,429

Assets Measured at Fair Value on a Non-recurring Basis

The Company had no significant financial instruments measured at fair value on a non-recurring basis at March 31, 2024.

Financial assets measured at fair value on a non-recurring basis as of December 31, 2023 include certain individually evaluated loans reported at fair value of the underlying collateral if repayment is expected solely from the the collateral.

December 31, 2023

Fair Value Measurements Using:

Quoted Prices In

Significant

Active Markets

Significant Other

Unobservable

Carrying

for Identical Assets

Observable Inputs

Inputs

(in thousands)

Amount

(Level 1)

(Level 2)

(Level 3)

Individually evaluated loans - Multi-family

$

1,180

$

—

$

—

$

1,180

The fair value amounts shown in the table above are individually evaluated loans net of reserves allocated to said loans. The total reserves allocated to these loans were $397 thousand at December 31, 2023.

The table below presents additional quantitative information about level 3 fair value measurements for assets measured at fair value on a non-recurring basis at December 31, 2023:

Range

December 31, 2023

Fair Value

Valuation Technique

Unobservable Input

(Weighted Average)

(Dollar in thousands)

Individually evaluated loans - Multi-family

$

1,180

Appraisal of collateral

Appraisal and

50.00%

adjustments ⁽¹⁾

(50.00%)

(1)

The appraisal of the underlying collateral property generally includes various significant unobservable inputs (level 3). This was performed by certified general appraisers. Management adjusted the appraisal downward for factors such as the condition of the property and liquidation expenses. The range of other appraisal adjustments and liquidation expenses are shown as a percentage of the appraisal.

Financial Instruments Not Measured at Fair Value

The following presents the carrying amounts and estimated fair values of the Company’s financial instruments not carried at fair value at March 31, 2024 and December 31, 2023:


		March 31, 2024
					Fair Value Measurements Using:
					Quoted Prices In
					Active Markets						Significant
					for Identical			Significant Other			Unobservable
		Carrying			Assets			Observable Inputs			Inputs			Total Fair
(In thousands)		Amount			(Level 1)			(Level 2)			(Level 3)			Value
Financial assets:
Cash and cash equivalents		$	136,481		$	136,481		$	—		$	—		$	136,481
Securities held-to-maturity			3,973			—			3,751			—			3,751
Loans, net			1,985,642			—			—			1,941,105			1,941,105
Accrued interest receivable			12,379			—			1,198			11,181			12,379

Financial liabilities:
Time deposits			464,227			—			462,372			—			462,372
Demand and other deposits			1,453,035			1,453,035			—			—			1,453,035
Borrowings			148,953			—			147,533			—			147,533
Subordinated debentures			24,648			—			24,740			—			24,740
Accrued interest payable			2,031			176			1,855			—			2,031


		December 31, 2023
					Fair Value Measurements Using:
					Quoted Prices In
					Active Markets						Significant
					for Identical			Significant Other			Unobservable
		Carrying			Assets			Observable Inputs			Inputs			Total Fair
(In thousands)		Amount			(Level 1)			(Level 2)			(Level 3)			Value
Financial assets:
Cash and cash equivalents		$	177,207		$	177,207		$	—		$	—		$	177,207
Securities held-to-maturity			4,041			—			3,835			—			3,835
Loans, net			1,937,541			—			—			1,890,113			1,890,113
Accrued interest receivable			11,915			—			1,156			10,759			11,915

Financial liabilities:
Time deposits			522,198			—			520,022			—			520,022
Demand and other deposits			1,382,397			1,382,397			—			—			1,382,397
Borrowings			128,953			—			128,165			—			128,165
Subordinated debentures			24,635			—			26,601			—			26,601
Accrued interest payable			1,724			161			1,563			—			1,724

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.

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