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FAIR VALUE MEASUREMENTS
6 Months Ended
Jun. 30, 2022
FAIR VALUE MEASUREMENTS  
FAIR VALUE MEASUREMENTS

NOTE 10 - FAIR VALUE MEASUREMENTS

The Company determines fair value based on the requirements established in Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements, which provides a framework for measuring fair value in accordance with U.S. GAAP and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  ASC 820 defines fair value as the exit price, or the price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions. ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities, requires us to use the exit price notion when measuring the fair value of instruments for disclosure purposes.  

The following definitions describe the levels of inputs that may be used to measure fair value:

Level 1 - Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 - Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following methods were used to estimate the fair value of certain assets and liabilities on a recurring and nonrecurring basis:

Securities - The fair value of securities available-for-sale and held-to-maturity are recorded on a recurring basis. The fair value of investments and mortgage-backed securities are provided by a third-party pricing service. These valuations are based on market data using pricing models that vary by asset class and incorporate available current trade, bid, and other market information, and for structured securities, cash flow, and loan performance data. The pricing processes utilize benchmark curves, benchmarking of similar securities, sector groupings, and matrix pricing. Option adjusted spread models are also used to assess the impact of changes in interest rates and to develop prepayment scenarios (Level 2).

Certain other corporate securities and municipal bonds are generally measured at fair value based on discounted cash flow models (Level 3).  Transfers between the fair value hierarchy are determined through the third-party service provider which, from time to time will transfer between levels based on market conditions per the related security. All models and processes used take into account market convention.

Mortgage Loans Held for Sale - The fair value of loans held for sale reflects the value of commitments with investors and/or the relative price as delivered into a TBA mortgage-backed security (Level 2).

Loans receivable - Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type, including commercial, real estate and consumer loans. Each loan category is further segregated by fixed and adjustable-rate loans. The fair value of loans is calculated by discounting expected cash flows at rates at which similar loans are currently being made. These amounts are discounted further by embedded probable losses expected to be realized in the portfolio. For loans originated as held for sale and transferred into loans held for investment, the fair value is determined based on quoted secondary market prices for similar loans. As of June 30, 2022 and December 31, 2021, there were $14.9 million and $16.1 million, respectively, in residential mortgage loans recorded at fair value as they were previously transferred from held for sale to loans held for investment (Level 2).

Derivative Instruments - Fair values for derivative assets and liabilities are measured on a recurring basis.  The primary use of derivative instruments is related to the mortgage banking activities of the Company.  The fair value of the interest rate lock commitments and forward sales commitments are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-though rate assumptions based on historical information, where appropriate.  TBA mortgage-backed securities are fair valued on similar contracts in active markets (Level 2), while locks and forwards with customers and investors are fair valued using similar contracts in the market and changes in the market interest rates (Level 2 and 3).  Derivative instruments not related to mortgage banking activities include interest rate swap agreements.  The fair values of interest rate swap agreements are based on valuation models using observable market data as of the measurement date (Level 2).  The Company’s 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 market transactions and third-party pricing services.  The fair values of all interest rate swaps are determined from third-party pricing services without adjustment.  

Other Real Estate Owned - Fair value adjustments to OREO are recorded at the lower of carrying amount of the loan or fair value of the collateral less selling costs. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for credit losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell (Level 3).

Loans individually evaluated - Expected credit losses for loans evaluated individually are measured based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or when the Bank determines that foreclosure is probable, the expected credit loss is measured based on the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable. As a practical expedient, the Bank measures the expected credit loss for a loan using the fair value of the collateral, if repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty based on the Bank’s assessment as of the reporting date. In both cases, if the fair value of the collateral is less than the amortized cost basis of the loan, the Bank will recognize an allowance as the difference between the fair value of the collateral, less costs to sell (if applicable), at the reporting date and the amortized cost basis of the loan. If the fair value of the collateral exceeds the amortized cost basis of the loan, any expected recovery added to the amortized cost basis will be limited to the amount previously charged-off by the subsequent changes in the expected credit losses for loans evaluated individually are included within the provision for credit losses in the same manner in which the expected credit loss initially was recognized or as a reduction in the provision that would otherwise be reported (Level 3).

Servicing Rights - The fair value of MSR is estimated using net present value of expected cash flows using a third-party model that incorporates assumptions used in the industry to value such rights, adjusted for factors such as weighted average prepayments speeds based on historical information where appropriate (Level 3).

The following tables present securities available-for-sale, mortgage loans held for sale, loans receivable, and derivative assets and liabilities measured at fair value on a recurring basis at the dates indicated:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Financial Assets

​

At June 30, 2022

Securities available-for-sale:

    

Level 1

    

Level 2

    

Level 3

    

Total

U.S. agency securities

​

$

—

​

$

18,550

​

$

—

​

$

18,550

Corporate securities

​

 

—

​

 

7,739

​

 

1,029

​

 

8,768

Municipal bonds

​

 

—

​

 

127,015

​

 

116

​

 

127,131

Mortgage-backed securities

​

 

—

​

 

77,175

​

 

—

​

 

77,175

U.S. Small Business Administration securities

​

 

—

​

 

16,208

​

 

—

​

 

16,208

Mortgage loans held for sale, at fair value

​

​

—

​

​

34,989

​

​

—

​

​

34,989

Loans receivable, at fair value

​

​

—

​

​

14,863

​

​

—

​

​

14,863

Derivatives:

​

​

​

​

​

​

​

​

​

​

​

​

Mandatory and best effort forward commitments with investors

​

​

—

​

​

—

​

​

518

​

​

518

Forward TBA mortgage-backed securities

​

​

—

​

​

203

​

​

—

​

​

203

Interest rate swaps

​

​

—

​

​

5,601

​

​

—

​

​

5,601

Interest rate lock commitments with customers

​

​

—

​

​

—

​

​

184

​

​

184

Total assets measured at fair value

​

$

—

​

$

302,343

​

$

1,847

​

$

304,190

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Financial Assets

​

At December 31, 2021

Securities available-for-sale:

    

Level 1

    

Level 2

    

Level 3

    

Total

U.S. agency securities

​

$

—

​

$

20,970

​

$

—

​

$

20,970

Corporate securities

​

 

—

​

 

7,995

​

 

1,007

​

 

9,002

Municipal bonds

​

 

—

​

 

135,302

​

 

131

​

 

135,433

Mortgage-backed securities

​

 

—

​

 

89,402

​

 

—

​

 

89,402

U.S. Small Business Administration securities

​

 

—

​

 

16,552

​

 

—

​

 

16,552

Mortgage loans held for sale, at fair value

​

​

—

​

​

125,810

​

​

—

​

​

125,810

Loans receivable, at fair value

​

​

—

​

​

16,083

​

​

—

​

​

16,083

Derivatives:

​

​

​

​

​

​

​

​

​

​

​

​

Mandatory and best effort forward commitments with investors

​

​

—

​

​

—

​

​

808

​

​

808

Forward TBA mortgage-backed securities

​

​

—

​

​

53

​

​

—

​

​

53

Interest rate swaps

​

​

—

​

​

1,168

​

​

—

​

​

1,168

Interest rate lock commitments with customers

​

​

—

​

​

—

​

​

757

​

​

757

Total assets measured at fair value

​

$

—

​

$

413,335

​

$

2,703

​

$

416,038

Financial Liabilities

​

​

​

​

​

​

​

​

​

​

​

​

Derivatives:

​

​

​

​

​

​

​

​

​

​

​

​

Interest rate swaps

​

​

—

​

​

(155)

​

​

—

​

​

(155)

Total liabilities measured at fair value

​

$

—

​

$

(155)

​

$

—

​

$

(155)

​

The following tables present loans individually evaluated, OREO, and servicing rights measured at fair value on a nonrecurring basis for which a nonrecurring change in fair value has been recorded during the reporting periods indicated. The amounts disclosed below represent the fair values at the time the nonrecurring fair value measurements were evaluated.

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

June 30, 2022

​

    

Level 1

    

Level 2

    

Level 3

    

Total

Loans individually evaluated

​

$

—

  

$

—

  

$

6,658

  

$

6,658

OREO

​

​

—

​

​

—

​

​

145

​

​

145

Servicing rights

​

​

—

  

​

—

  

​

34,098

  

​

34,098

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

December 31, 2021

​

    

Level 1

    

Level 2

    

Level 3

    

Total

Loans individually evaluated

​

$

—

  

$

—

  

$

5,829

  

$

5,829

Servicing rights

​

​

—

  

​

—

  

​

26,070

  

​

26,070

​

Quantitative Information about Level 3 Fair Value Measurements - Shown in the table below is the fair value of financial instruments measured under a Level 3 unobservable input on a recurring and nonrecurring basis at June 30, 2022 and December 31, 2021:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Level 3

    

​

    

Significant

    

​

    

Weighted Average

Fair Value

​

Valuation 

​

Unobservable 

​

​

​

June 30,

​

​

December 31,

​

Instruments

     

Techniques

     

Inputs

     

Range

     

2022

​

     

2021

 

RECURRING

 

  

 

  

 

  

 

  

​

​

​

​

Interest rate lock commitments with customers

 

Quoted market prices

 

Pull-through expectations

 

80% - 99%

​

97.5

%

​

93.3

%

Individual forward sale commitments with investors

 

Quoted market prices

 

Pull-through expectations

 

80% - 99%

​

97.5

%

​

93.3

%

Corporate securities

​

Discounted cash flows

​

Discount rate

​

2.1% - 2.7%

​

2.1

%

​

2.2

%

Municipal bonds

​

Discounted cash flows

​

Discount rate

​

6.0%

​

6.0

%

​

6.0

%

NONRECURRING

 

  

 

  

 

  

 

​

​

​

​

​

Loans individually evaluated

 

Fair value of underlying collateral

 

Discount applied to the obtained appraisal

 

10.0%

​

10.0

%

​

10.0

%

OREO

​

Fair value of collateral

​

Discount applied to the obtained appraisal

​

10.0%

​

10.0

%

​

10.0

%

Servicing rights

​

Industry sources

​

Pre-payment speeds

​

0% - 50%

​

8.8

%

​

13.8

%

​

An increase in the pull-through rate utilized in the fair value measurement of the interest rate lock commitments with customers and forward sale commitments with investors will result in positive fair value adjustments (and an increase in the fair value measurement). Conversely, a decrease in the pull-through rate will result in a negative fair value adjustment (and a decrease in the fair value measurement).

The following tables provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three and six months ended June 30, 2022 and 2021:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Purchases

​

​

​

​

​

Net change in

​

Net change in

Three Months Ended

    

Beginning

    

and

    

Sales and

    

Ending

​

fair value for

​

fair value for

June 30, 2022

    

Balance

    

Issuances

    

Settlements

    

Balance

    

gains/(losses) (1)

    

gains/(losses) (2)

Interest rate lock commitments with customers

​

$

250

​

$

22

​

$

(88)

​

$

184

​

$

(66)

​

$

—

Individual forward sale commitments with investors

​

​

885

​

​

2,931

​

​

(3,298)

​

​

518

​

​

(367)

​

​

—

Securities available-for-sale, at fair value

​

​

1,121

​

​

27

​

​

(3)

​

​

1,145

​

​

—

​

​

24

June 30, 2021

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Interest rate lock commitments with customers

​

$

1,985

​

$

7,169

​

$

(7,048)

​

$

2,106

​

$

121

​

$

—

Individual forward sale commitments with investors

​

​

506

​

​

(1,200)

​

​

141

​

​

(553)

​

​

(1,059)

​

​

—

Securities available-for-sale, at fair value

​

​

1,129

​

​

—

​

​

(12)

​

​

1,117

​

​

—

​

​

(9)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

    

​

    

Purchases

    

​

    

​

    

Net change in

    

Net change in

Six Months Ended

    

Beginning

    

and

    

Sales and

    

Ending

    

fair value for

    

fair value for

June 30, 2022

    

Balance

    

Issuances

    

Settlements

    

Balance

    

gains/(losses) (1)

    

gains/(losses) (2)

Interest rate lock commitments with customers

​

$

757

​

$

2,117

​

$

(2,690)

​

$

184

​

$

(573)

​

$

—

Individual forward sale commitments with investors

​

​

808

​

​

5,073

​

​

(5,363)

​

​

518

​

​

(290)

​

​

—

Securities available-for-sale, at fair value

​

​

1,138

​

​

13

​

​

(6)

​

​

1,145

​

​

—

​

​

7

June 30, 2021

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Interest rate lock commitments with customers

​

$

4,024

​

$

14,860

​

$

(16,778)

​

$

2,106

​

$

(1,918)

​

$

—

Individual forward sale commitments with investors

​

​

(67)

​

​

(546)

​

​

60

​

​

(553)

​

​

(486)

​

​

—

Securities available-for-sale, at fair value

​

​

1,111

​

​

12

​

​

(6)

​

​

1,117

​

​

—

​

​

12

___________________________

(1) Relating to items held at end of period included in income.

(2) Relating to items held at end of period included in other comprehensive income (loss).

Gains (losses) on interest rate lock commitments carried at fair value are recorded in other noninterest income. Gains (losses) on forward sale commitments with investors carried at fair value are recorded in noninterest income. Unrealized gains (losses) on securities available-for-sale, at fair value are recorded in accumulated OCI.

The following table provides estimated fair values of the Company’s financial instruments at June 30, 2022 and December 31, 2021, whether or not recognized at fair value on the Consolidated Balance Sheets:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

June 30,

​

December 31,

​

​

2022

​

2021

Financial Assets

    

Carrying

    

Fair

    

Carrying

    

Fair

Level 1 inputs:

 

Amount

 

Value

 

Amount

 

Value

Cash and cash equivalents

​

$

28,659

​

$

28,659

​

$

26,491

​

$

26,491

Certificates of deposit at other financial institutions

​

 

4,960

​

 

4,960

​

 

10,542

​

 

10,542

Level 2 inputs:

​

​

​

​

​

​

​

​

​

​

​

​

Securities available-for-sale, at fair value

​

 

246,687

​

 

246,687

​

 

270,221

​

 

270,221

Securities held-to-maturity

​

​

8,500

​

​

8,342

​

​

7,500

​

​

8,128

Loans held for sale, at fair value

​

 

34,989

​

 

34,989

​

 

125,810

​

 

125,810

FHLB stock, at cost

​

 

6,295

​

 

6,295

​

 

4,778

​

 

4,778

Forward TBA mortgage-backed securities

​

​

203

​

​

203

​

​

53

​

​

53

Loans receivable, at fair value

​

​

14,863

​

​

14,863

​

​

16,083

​

​

16,083

Interest rate swaps

​

​

5,601

​

​

5,601

​

​

1,168

​

​

1,168

Accrued interest receivable

​

 

8,553

​

 

8,553

​

 

7,594

​

 

7,594

Level 3 inputs:

​

​

​

​

​

​

​

​

​

​

​

​

Securities available-for-sale, at fair value

​

​

1,145

​

​

1,145

​

​

1,138

​

​

1,138

Loans receivable, gross

​

 

1,931,209

​

 

1,895,089

​

 

1,738,092

​

 

1,725,651

Servicing rights, held at lower of cost or fair value

​

 

18,516

​

 

34,098

​

 

16,970

​

 

26,070

Fair value interest rate locks with customers

​

 

184

​

 

184

​

 

757

​

 

757

Mandatory and best effort forward commitments with investors

​

 

518

​

 

518

​

 

808

​

 

808

Financial Liabilities

​

​

​

​

​

​

​

​

​

​

​

​

Level 2 inputs:

​

​

​

​

​

​

​

​

​

​

​

​

Deposits

​

 

2,016,100

​

 

1,999,713

​

 

1,915,744

​

 

1,912,498

Borrowings

​

 

78,028

​

 

77,630

​

 

42,528

​

 

43,365

Subordinated notes, excluding unamortized debt issuance costs

​

 

50,000

​

 

47,188

​

 

50,000

​

 

51,688

Accrued interest payable

​

 

952

​

 

952

​

 

766

​

 

766

Interest rate swaps

​

​

—

​

​

—

​

​

155

​

​

155

​