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Fair Value Measurements

6 Months Ended

Jun. 30, 2020

The Company determines the fair values of its financial instruments based on the requirements established in Accounting Standards Codification (“ASC”) 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 values for financial instruments as the exit price, 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. The Company’s fair values for financial instruments at June 30, 2020 were determined based on these requirements.

The following methods and assumptions were used to estimate the fair value of other financial instruments:

Cash and cash equivalents - The estimated fair value is equal to the carrying amount.

Available-for-Sale Securities – Available-for-sale securities are recorded at fair value based on quoted market prices, if available. If quoted market prices are not available, management utilizes third-party pricing services or broker quotations from dealers in the specific instruments. Level 2 securities include those traded on an active exchange, as well as U.S. government securities.

Loans Held-for-Sale - Residential mortgage loans held-for-sale are recorded at the lower of cost or fair value. The fair value of fixed-rate residential loans is based on whole loan forward prices obtained from government sponsored enterprises. At June 30, 2020 and December 31, 2019, loans held-for-sale were carried at cost, as no impairment was required.

Loans Held-for-Portfolio - The estimated fair value of loans-held-for portfolio consists of a credit adjustment to reflect the estimated adjustment to the carrying value of the loans due to credit-related factors and a yield adjustment, to reflect the estimated adjustment to the carrying value of the loans due to a differential in yield between the portfolio loan yields and estimated current market rate yields on loans with similar characteristics. The estimated fair values of loans held for portfolio reflect exit price assumptions. The liquidity premium/discounts are part of the valuation for exit pricing.

Mortgage Servicing Rights –The fair value of mortgage servicing rights is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds, discount rates, and delinquency rate assumptions as inputs.

FHLB stock - The estimated fair value is equal to the par value of the stock.

Non-maturity deposits - The estimated fair value is equal to the carrying amount.

Time deposits - The estimated fair value of time deposits is based on the difference between interest costs paid on the Company’s time deposits and current market rates for time deposits with comparable characteristics.

Borrowings - The fair value of borrowings are estimated using the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

A description of the valuation methodologies used for impaired loans and OREO is as follows:

Impaired Loans - The fair value of collateral dependent loans is based on the current appraised value of the collateral less estimated costs to sell, or internally developed models utilizing a calculation of expected discounted cash flows which contain management’s assumptions.

OREO and Repossessed Assets – The fair value of OREO and repossessed assets is based on the current appraised value of the collateral less estimated costs to sell.

Off-balance sheet financial instruments - The fair value for the Company’s off-balance sheet loan commitments are estimated based on fees charged to others to enter into similar agreements taking into account the remaining terms of the agreements and credit standing of the Company’s clients. The estimated fair value of these commitments is not significant.

The following tables present information about the level in the fair value hierarchy for the Company’s financial assets and liabilities, whether or not recognized or recorded at fair value as of June 30, 2020 and December 31, 2019 (in thousands):


	June 30, 2020						Fair Value Measurements Using:
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
FINANCIAL ASSETS:
Cash and cash equivalents	$	130,537	$	130,537	$	130,537	$	—	$	—
Available-for-sale securities	10,198		10,198		—		10,198		—
Loans held-for-sale	7,364		7,364		—		7,364		—
Loans held-for-portfolio, net	684,672		696,385		—		—		696,385
Mortgage servicing rights	3,113		3,113		—		—		3,113
FHLB stock	1,164		1,164		—		1,164		—
FINANCIAL LIABILITIES:
Non-maturity deposits	455,480		455,480		—		455,480		—
Time deposits	238,842		243,721		—		243,721		—
FHLB and other Borrowings	79,841		79,841		—		79,841		—


	December 31, 2019						Fair Value Measurements Using:
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
FINANCIAL ASSETS:
Cash and cash equivalents	$	55,770	$	55,770	$	55,770	$	—	$	—
Available-for-sale securities	9,306		9,306		—		9,306		—
Loans held-for-sale	1,063		1,063		—		1,063		—
Loans held-for-portfolio, net	614,247		622,147		—		—		622,147
Mortgage servicing rights	3,239		3,239		—		—		3,239
FHLB stock	1,160		1,160		—		1,160		—
FINANCIAL LIABILITIES:
Non-maturity deposits	365,331		365,331		—		365,331		—
Time deposits	251,387		255,261		—		255,261		—
FHLB Borrowings	7,500		7,500		—		7,500		—

The following tables present the balance of assets measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019 (in thousands):


	Fair Value at June 30, 2020
Description	Total		Level 1		Level 2		Level 3

Municipal bonds	$	4,363	$	—	$	4,363	$	—
Agency mortgage-backed securities	5,835		—		5,835		—
Mortgage servicing rights	3,113		—		—		3,113


	Fair Value at December 31, 2019
Description	Total		Level 1		Level 2		Level 3
Municipal bonds	$	3,370	$	—	$	3,370	$	—
Agency mortgage-backed securities	5,936		—		5,936		—
Mortgage servicing rights	3,239		—		—		3,239

The following tables provide a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring basis at June 30, 2020 and December 31, 2019:

June 30, 2020

Financial Instrument

Valuation Technique

Unobservable Input(s)

Range
(Weighted-Average)

Mortgage Servicing Rights

Discounted cash flow

Prepayment speed assumption

152%-238% (216%)

Discount rate

10%-12% (10.1%)

December 31, 2019

Financial Instrument

Valuation Technique

Unobservable Input(s)

Range
(Weighted-Average)

Mortgage Servicing Rights

Discounted cash flow

Prepayment speed assumption

132%-485% (187%)

Discount rate

12.5%-13.5% (12.5%)

Generally, any significant increases in the constant prepayment rate and discount rate utilized in the fair value measurement of the mortgage servicing rights will result in a negative fair value adjustment (and decrease in the fair value measurement). Conversely, a decrease in the constant prepayment rate and discount rate will result in a positive fair value adjustment (and increase in the fair value measurement). An increase in the weighted average life assumptions will result in a decrease in the constant prepayment rate and conversely, a decrease in the weighted-average life will result in an increase of the constant prepayment rate.

There were no assets or liabilities (excluding mortgage servicing rights) measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three and six months ended June 30, 2020 and June 30, 2019.

Mortgage servicing rights are measured at fair value using a significant unobservable input (Level 3) on a recurring basis - additional information is included in Note 6 – Mortgage Servicing Rights.

The following tables present the balance of assets measured at fair value on a nonrecurring basis at the dates indicated (in thousands):


	Fair Value at June 30, 2020
	Total		Level 1		Level 2		Level 3
OREO and repossessed assets	$	575	$	—	$	—	$	575
Impaired loans	9,079		—		—		9,079


	Fair Value at December 31, 2019
	Total		Level 1		Level 2		Level 3
OREO and repossessed assets	$	575	$	—	$	—	$	575
Impaired loans	12,393		—		—		12,393

There were no liabilities carried at fair value, measured on a recurring or nonrecurring basis, at June 30, 2020 and December 31, 2019.

The following tables provide a description of the valuation technique, observable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a nonrecurring basis at June 30, 2020 and December 31, 2019:

June 30, 2020

Financial
Instrument

Valuation Technique(s)

Unobservable Input(s)

Range (Weighted Average)

OREO

Market approach

Adjustment for differences
between comparable sales

0-0% (0%)

Impaired loans

Market approach

Adjustment for differences
between comparable sales

0-100% (8%)

December 31, 2019

Financial
Instrument

Valuation Technique(s)

Unobservable Input(s)

Range
(Weighted Average)

OREO

Market approach

Adjusted for difference
between comparable sales

0-0% (0%)

Impaired loans

Market approach

Adjusted for difference
between comparable sales

0-100% (6%)

- 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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