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Fair Value

6 Months Ended

Jun. 30, 2020

(16) Fair Value

In accordance with the Fair Value Measurements and Disclosures topic of the FASB ASC, the Company groups its assets and liabilities measured or disclosed at fair value into three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value as follows:

●Level 1 — Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities traded in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

●Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

●Level 3 — Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect management’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of discounted cash flow models and similar techniques that require the use of significant judgment or estimation.

In accordance with the Fair Value Measurements and Disclosures topic, the Company bases its fair values on the price that it would expect to receive if an asset were sold or the price that it would expect to pay to transfer a liability in an orderly transaction between market participants at the measurement date. Also as required, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when developing fair value measurements.

The Company uses fair value measurements to determine fair value disclosures. Investment securities held for sale and derivatives are recorded at fair value on a recurring basis. From time to time, the Company may be required to record other assets at fair value on a nonrecurring basis, such as loans held for sale, impaired loans and investments, and mortgage servicing assets. These nonrecurring fair value adjustments typically involve application of the lower of cost or fair value accounting or write-downs of individual assets.

Investment Securities Available for Sale. The estimated fair values of U.S. government-sponsored mortgage-backed securities are considered Level 2 inputs because the valuation for investment securities utilized pricing models that varied based on asset class and included trade, bid and other observable market information.

Interest Rate Contracts. The Company may enter into interest rate lock commitments with borrowers on loans intended to be sold. To manage interest rate risk on the lock commitments, the Company may also enter into forward loan sale commitments. The interest rate lock commitments and forward loan sale commitments are treated as derivatives and are recorded at their fair value determined by referring to prices quoted in the secondary market for similar contracts. The fair value inputs are considered Level 2 inputs. Interest rate contracts that are classified as assets are included with prepaid expenses and other assets on the consolidated balance sheet while interest rate contracts that are classified as liabilities are included with accounts payable and accrued expenses.

The estimated fair values of the Company’s financial instruments are as follows:


	Carrying				Fair Value Measurements Using
(Dollars in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
June 30, 2020
Assets
Cash and cash equivalents	$	126,192	$	126,192	$	126,192	$	—	$	—
Investment securities available for sale		4,212		4,212		—		4,212		—
Investment securities held to maturity		332,533		351,799		—		351,799		—
Loans held for sale		2,840		2,985		—		2,985		—
Loans receivable, net		1,537,567		1,642,432		—		—		1,642,432
FHLB stock		8,144		8,144		—		8,144		—
FRB stock		3,134		3,134		—		3,134		—
Accrued interest receivable		6,469		6,469		19		854		5,596
Interest rate contracts		41		41		—		41		—

Liabilities
Deposits		1,645,312		1,650,538		—		1,242,879		407,659
Advances from the Federal Home Loan Bank		141,000		145,524		—		145,524		—
Securities sold under agreements to repurchase		10,000		10,475		—		10,475		—
Accrued interest payable		76		76		—		42		34
Interest rate contracts		41		41		—		41		—

December 31, 2019
Assets
Cash and cash equivalents	$	44,806	$	44,806	$	44,806	$	—	$	—
Investment securities available for sale		8,628		8,628		—		8,628		—
Investment securities held to maturity		363,883		371,305		—		371,305		—
Loans held for sale		470		480		—		480		—
Loans receivable, net		1,584,784		1,627,903		—		—		1,627,903
FHLB stock		8,723		8,723		—		8,723		—
FRB stock		3,128		3,128		—		3,128		—
Accrued interest receivable		5,409		5,409		32		952		4,425
Interest rate contracts		5		5		—		5		—

Liabilities
Deposits		1,631,933		1,632,741		—		1,167,990		464,751
Advances from the Federal Home Loan Bank		156,000		156,906		—		156,906		—
Securities sold under agreements to repurchase		10,000		9,968		—		9,968		—
Accrued interest payable		397		397		—		47		350
Interest rate contracts		5		5		—		5		—

At June 30, 2020 and December 31, 2019, neither the commitment fees received on commitments to extend credit nor the fair value thereof was material to the consolidated financial statements of the Company.

The table below presents the balance of assets and liabilities measured at fair value on a recurring basis:


(Dollars in thousands)	Level 1		Level 2		Level 3		Total
June 30, 2020
Interest rate contracts — assets	$	—	$	41	$	—	$	41
Interest rate contracts — liabilities		—		(41)		—		(41)
Investment securities available for sale		—		4,212		—		4,212

December 31, 2019
Interest rate contracts — assets	$	—	$	5	$	—	$	5
Interest rate contracts — liabilities		—		(5)		—		(5)
Investment securities available for sale		—		8,628		—		8,628

The table below presents the balance of assets measured at fair value on a nonrecurring basis as of June 30, 2020 and December 31, 2019 and the related losses for the six months ended June 30, 2020 and the year ended December 31, 2019:


	Fair Value
(Dollars in thousands)	Adjustment Date	Level 1		Level 2		Level 3		Total			Total Losses

June 30, 2020
Mortgage servicing assets	6/30/2020	$	—	$	—	$	510	$	510	$	(27)

December 31, 2019
Mortgage servicing assets	9/30/2019		—		—		452		452		(16)

Mortgage servicing assets are valued using a discounted cash flow model. Assumptions used in the model include mortgage prepayment speeds, discount rates and cost of servicing. Losses on mortgage servicing assets are included in service fees on loan and deposit accounts in the consolidated statements of income.

The table below presents the significant unobservable inputs for Level 3 nonrecurring fair value measurements. The discount rates and prepayment speeds have been weighted by the relative notional amounts.


				Unobservable		Range
(Dollars in thousands)	Fair Value		Valuation Technique	Input	(Weighted Average)
June 30, 2020:
Mortgage servicing assets	$	510	Discounted cash flow	Discount rate		9.25% - 11.25% (10.25%)
				Prepayment speed (CPR)		9.39 - 17.52 (13.38)
				Annual cost to service (per loan, in dollars)	$	75
December 31, 2019:
Mortgage servicing assets	$	452	Discounted cash flow	Discount rate		9.25% - 11.25% (10.25%)
				Prepayment speed (CPR)		11.09 - 14.24 (12.58)
				Annual cost to service (per loan, in dollars)	$	75

- 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.

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