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Fair Values of Assets and Liabilities | 6 Months Ended
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Jun. 30, 2023
Fair Value Disclosures [Abstract] |
Fair Values of Assets and Liabilities | 15. Fair Values of Assets and Liabilities Determination of Fair Value The fair value of an asset or liability is 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. The Company uses prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from one level to another. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various assets and liabilities. In cases where quoted market prices are not available, fair values are based on estimates using present value of cash flows or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded, and the observability and reliability of the assumptions used to determine fair value. Level 1 - Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 - Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 - Level 3 inputs are unobservable inputs for the asset or liability. For assets and liabilities, fair value is based upon the lowest level of observable input that is significant to the fair value measurement. In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon models that primarily use, as inputs, observable market-based parameters. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and, therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented therein. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value is set forth below. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all the Company’s financial assets and financial liabilities carried at fair value at June 30, 2023 and December 31, 2022. Financial Assets and Financial Liabilities: Financial assets and financial liabilities measured at fair value on a recurring basis include the following: Securities Available-for-Sale: The Company’s investment in U.S. Government-sponsored entities bonds, U.S Government agency small business administration pools guaranteed by the SBA, collateralized mortgage obligations issued by the FHLMC, residential mortgage-backed securities and other municipal bonds is generally classified within Level 2 of the fair value hierarchy. For these securities, the Company obtains fair value measurements from independent pricing services. The fair value measurements consider observable data that may include reported trades, 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. Mortgage Servicing Rights: Fair value is based on a valuation model that calculates the present value of estimated future net 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 and that can be validated against available market data (see Note 4, Loan Servicing, for more information). These assumptions are inherently sensitive to change as these unobservable inputs are not based on quoted prices in active markets or otherwise observable. Derivative Instruments and Hedges: The valuation of these instruments is determined using the discounted cash flow method on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The following table summarizes financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
|  | Total |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
|  | (Dollars in thousands) |
June 30, 2023 |  |  |
Securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Government-sponsored enterprises obligations |  | $ | 1,840 |  |  | $ | — |  |  | $ | 1,840 |  |  | $ | — |
U.S Government agency small business administration pools guaranteed by the SBA |  |  | 7,788 |  |  |  | — |  |  |  | 7,788 |  |  |  | — |
Collateralized mortgage obligations issued by the FHLMC, FNMA and GNMA |  |  | 5,864 |  |  |  | — |  |  |  | 5,864 |  |  |  | — |
Residential mortgage-backed-securities |  |  | 21,672 |  |  |  | — |  |  |  | 21,672 |  |  |  | — |
Municipal bonds |  |  | 65,141 |  |  |  | — |  |  |  | 65,141 |  |  |  | — |
Corporate debt |  |  | 485 |  |  |  | — |  |  |  | 485 |  |  |  | — |
Corporate subordinated debt |  |  | 7,106 |  |  |  | — |  |  |  | 7,106 |  |  |  | — |
Other assets: |  |  |  |  |  |  |  |  |  |  |  |
Mortgage servicing rights |  |  | 350 |  |  |  | — |  |  |  | — |  |  |  | 350 |
Derivatives |  |  | 326 |  |  |  | — |  |  |  | 326 |  |  |  | — |
Other liabilities: |  |  |
Derivatives |  |  | 48 |  |  |  | — |  |  |  | 48 |  |  |  | — |
|  | Total |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
|  | (Dollars in thousands) |
December 31, 2022 |  |  |
Securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Government-sponsored enterprises obligations |  | $ | 1,826 |  |  | $ | — |  |  | $ | 1,826 |  |  | $ | — |
U.S Government agency small business administration pools guaranteed by the SBA |  |  | 8,359 |  |  |  | — |  |  |  | 8,359 |  |  |  | — |
Collateralized mortgage obligations issued by the FHLMC, FNMA and GNMA |  |  | 6,222 |  |  |  | — |  |  |  | 6,222 |  |  |  | — |
Residential mortgage-backed-securities |  |  | 21,823 |  |  |  | — |  |  |  | 21,823 |  |  |  | — |
Municipal bonds |  |  | 62,416 |  |  |  | — |  |  |  | 62,416 |  |  |  | — |
Corporate debt |  |  | 497 |  |  |  | — |  |  |  | 497 |  |  |  | — |
Corporate subordinated debt |  |  | 4,957 |  |  |  | — |  |  |  | 4,957 |  |  |  | — |
Other assets: |  |  |  |  |  |  |  |  |  |  |  |
Mortgage servicing rights |  | $ | 357 |  |  |  | — |  |  |  | — |  |  |  | 357 |
Derivatives |  |  | 961 |  |  |  | — |  |  |  | 961 |  |  |  | — |
For the six months ended June 30, 2023 and 2022, the changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows:
(Dollars in thousands) |  | Mortgage Servicing Rights (1) |
Balance as of January 1, 2023 |  | $ | 357 |
Included in net (loss) income |  |  | (7 | )
Balance as of June 30, 2023 |  | $ | 350 |
Total unrealized net gains (losses) included in net income related to assets still held as of June 30, 2023 |  | $ | — |
Balance as of January 1, 2022 |  | $ | 322 |
Included in net (loss) income |  |  | 42 |
Balance as of June 30, 2022 |  | $ | 364 |
Total unrealized net gains (losses) included in net income related to assets still held as of June 30, 2022 |  | $ | — |
(1) Realized and unrealized gains and losses related to mortgage servicing rights are reported as a component of loan servicing fee income in the Company’s consolidated statements of (loss) income. For Level 3 assets measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022, the significant unobservable inputs used in the fair value measurements were as follows:
|  | June 30, 2023 |
(Dollars in thousands) |  | Valuation Technique |  | Description |  | Range |  | Weighted Average (1) |  | Fair Value |
Mortgage Servicing Rights |  | Discounted Cash Flow |  | Prepayment Rate |  | 5.70% - 20.69% |  | 7.78% |  | $ | 350 |
|  |  |  | Discount Rate |  | 9.50% - 9.50% |  | 9.00% |  |  |
|  |  |  | Delinquency Rate |  | 1.82% - 2.47% |  | 2.36% |  |  |
|  |  |  | Default Rate |  | 0.14% - 0.20% |  | 0.15% |  |  |
|  | December 31, 2022 |
(Dollars in thousands) |  | Valuation Technique |  | Description |  | Range |  | Weighted Average (1) |  | Fair Value |
Mortgage Servicing Rights |  | Discounted Cash Flow |  | Prepayment Rate |  | 6.48% - 23.49% |  | 7.78% |  | $ | 357 |
|  |  |  | Discount Rate |  | 9.50% - 9.50% |  | 9.50% |  |  |
|  |  |  | Delinquency Rate |  | 2.13% - 2.79% |  | 2.24% |  |  |
|  |  |  | Default Rate |  | 0.14% - 0.20% |  | 0.15% |  |  |
(1) Unobservable inputs for mortgage servicing rights were weighted by loan amount. The significant unobservable inputs used in the fair value measurement of the Company’s mortgage servicing rights are the weighted-average prepayment rate, weighted-average discount rate, weighted average delinquency rate and weighted-average default rate. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement. Although the prepayment rate and the discount rate are not directly interrelated, they generally move in opposite directions of each other. The Company estimates the fair value of mortgage servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income. Observable and unobservable inputs are entered into this model as prescribed by an independent third party to arrive at an estimated fair value. See Note 4, Loan Servicing, for a roll forward of our Level 3 item and related inputs used to determine fair value at June 30, 2023. Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets measured at fair value on a non-recurring basis during the reported periods may include certain individually evaluated loans reported at the fair value of the underlying collateral. Fair value is measured using appraised values of collateral and adjusted as necessary by management based on unobservable inputs for specific properties. However, the choice of observable data is subject to significant judgment, and there are often adjustments based on judgment in order to make observable data comparable and to consider the impact of time, the condition of properties, interest rates and other market factors on current values. Additionally, commercial real estate appraisals frequently involve discounting of projected cash flows, which relies inherently on unobservable data. Therefore, real estate collateral related nonrecurring fair value measurement adjustments have generally been classified as Level 3. Estimates of fair value used for other collateral supporting commercial loans generally are based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3. Financial assets measured at fair value on a non-recurring basis during the reported periods also include loans held for sale. Residential mortgage loans held for sale are recorded at the lower of cost or fair value and are therefore measured at fair value on a non-recurring basis. The fair values for loans held for sale are estimated based on commitments in effect from investors or prevailing market prices for loans with similar terms to borrowers of similar credit quality and are included in Level 3. At June 30, 2023 and December 31, 2022, there were no assets or liabilities measured at fair value on a non-recurring basis. Non-Financial Assets and Non-Financial Liabilities: The Company has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Non-financial assets measured at fair value on a non-recurring basis generally include certain foreclosed assets which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for loan losses and certain foreclosed assets which, subsequent to their initial recognition, are remeasured at fair value through a write-down included in other non-interest expense. There were no foreclosed assets at June 30, 2023 or December 31, 2022. ASC Topic 825,“Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. ASU 2016-01 requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The exit price notion is a market-based measurement of fair value that is represented by the price to sell an asset or transfer a liability in the principal market (or most advantageous market in the absence of a principal market) on the measurement date. At June 30, 2023 and December 31, 2022, fair values of loans are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. Summary of Fair Values of Financial Instruments not Carried at Fair Value The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments at June 30, 2023 and December 31, 2022 are as follows:
(Dollars in thousands) |  | Carrying Amount |  |  | Fair Value |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
June 30, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Financial Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 6,643 |  |  | $ | 6,643 |  |  | $ | 6,643 |  |  | $ | — |  |  | $ | — |
Interest-bearing time deposits with other banks |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Federal Home Loan Bank stock |  |  | 3,615 |  |  |  | 3,615 |  |  |  | — |  |  |  | 3,615 |  |  |  | — |
Bank-owned life insurance |  |  | 4,602 |  |  |  | 4,602 |  |  |  | — |  |  |  | 4,602 |  |  |  | — |
Loans, net |  |  | 413,740 |  |  |  | 369,281 |  |  |  | — |  |  |  | — |  |  |  | 369,281 |
Accrued interest receivable |  |  | 2,001 |  |  |  | 2,001 |  |  |  | 2,001 |  |  |  | — |  |  |  | — |
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | $ | 388,941 |  |  | $ | 386,848 |  |  | $ | 315,895 |  |  | $ | 70,953 |  |  | $ | — |
Advances from Federal Home Loan Bank |  |  | 85,597 |  |  |  | 85,111 |  |  |  | — |  |  |  | 85,111 |  |  |  | — |
Mortgagors’ tax escrow |  |  | 864 |  |  |  | 864 |  |  |  | — |  |  |  | 864 |  |  |  | — |
Accrued interest payable |  |  | 227 |  |  |  | 227 |  |  |  | 227 |  |  |  | — |  |  |  | — |
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Financial Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 8,250 |  |  | $ | 8,250 |  |  | $ | 8,250 |  |  | $ | — |  |  | $ | — |
Interest-bearing time deposits with other banks |  |  | 747 |  |  |  | 747 |  |  |  | — |  |  |  | 747 |  |  |  | — |
Federal Home Loan Bank stock |  |  | 3,502 |  |  |  | 3,502 |  |  |  | — |  |  |  | 3,502 |  |  |  | — |
Bank-owned life insurance |  |  | 4,561 |  |  |  | 4,561 |  |  |  | — |  |  |  | 4,561 |  |  |  | — |
Loans, net |  |  | 398,924 |  |  |  | 361,402 |  |  |  | — |  |  |  | — |  |  |  | 361,402 |
Accrued interest receivable |  |  | 1,988 |  |  |  | 1,988 |  |  |  | 1,988 |  |  |  | — |  |  |  | — |
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | $ | 382,363 |  |  | $ | 379,714 |  |  | $ | 320,624 |  |  | $ | 59,090 |  |  | $ | — |
Advances from Federal Home Loan Bank |  |  | 99,397 |  |  |  | 97,675 |  |  |  | — |  |  |  | 97,675 |  |  |  | — |
Mortgagors’ tax escrow |  |  | 938 |  |  |  | 938 |  |  |  | — |  |  |  | 938 |  |  |  | — |
Accrued interest payable |  |  | 95 |  |  |  | 95 |  |  |  | 95 |  |  |  | — |  |  |  | — |

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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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