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Fair Value of Assets and Liabilities

3 Months Ended

Mar. 31, 2022

12.	FAIR VALUE OF ASSETS AND LIABILITIES

Determination of fair value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Fair value 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. 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 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 asset or liability.

The following methods and assumptions were used by the Company in estimating fair value disclosures:

Securities – All fair value measurements are obtained from a third-party pricing service and are not adjusted by management. The securities measured at fair value in Level 1 (none at March 31, 2022 and December 31, 2021) are based on quoted market prices in an active exchange market. Securities measured at fair value in Level 2 are based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data.

Loans held for sale – Fair values are based on commitments in effect from investors or prevailing market prices and include the servicing value of the loans.

Loans – Fair values for mortgage loans and other loans are estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Mortgage servicing rights – Fair value is based on a valuation model that calculates the present value of estimated future net servicing income, using various assumptions related to fees, discount rates and prepayment speeds.

On-balance-sheet derivatives - Fair values of forward loan sale commitments and derivative loan commitments are based on fair values of the underlying mortgage loans using current market prices for similar assets in the secondary market. For derivative loan commitments, fair values also consider the value of servicing, costs to be incurred to close loans and the probability of such commitments being exercised.

Off-balance sheet credit-related instruments - Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair values of these instruments are not material.

Assets and liabilities recorded at fair value on a recurring basis

Assets and liabilities recorded at fair value on a recurring basis are summarized below.

							Total
	Level 1		Level 2		Level 3		Fair Value
	(In thousands)
March 31, 2022
Assets:
Securities available for sale	$	—	$	48,836	$	—	$	48,836
Portfolio loans (fair value option)		—		10,177		—		10,177
Loans held for sale (fair value option)		—		22,698		—		22,698
Derivative loan commitments		—		221		—		221
Forward loan sale commitments, including TBAs		—		674		—		674

Liabilities:
Derivative loan commitments		—		199		—		199
Forward loan sale commitments, including TBAs		—		13		—		13

December 31, 2021
Assets:
Securities available for sale	$	—	$	51,666	$	—	$	51,666
Portfolio loans (fair value option)		—		13,780		—		13,780
Loans held for sale (fair value option)		—		44,766		—		44,766
Derivative loan commitments		—		1,364		—		1,364
Forward loan sale commitments		—		50		—		50

Liabilities:
Forward loan sale commitments, including TBAs		—		84		—		84

There were no transfers between levels for assets and liabilities recorded at fair value on a recurring basis during the three months ended March 31, 2022 and 2021.

Assets recorded at fair value on a non-recurring basis

The Company may also be required, from time to time, to record certain other assets at fair value on a non-recurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related assets as of March 31, 2022 and December 31, 2021.

							Period Ended
	March 31, 2022						March 31, 2022
	Level 1		Level 2		Level 3		Total Gains (Losses)
	(In thousands)
Collateral dependent impaired loans	$	—	$	—	$	2,716	$	—
Mortgage servicing rights		—		15,378		—		135
	$	—	$	15,378	$	2,716	$	135

	December 31, 2021
	Level 1		Level 2		Level 3
	(In thousands)
Collateral dependent impaired loans	$	—	$	—	$	2,551
Mortgage servicing rights		—		15,616		—
	$	—	$	15,616	$	2,551

The Company recorded a decrease in the valuation allowance for its MSRs of $135,000 during the three months ended March 31, 2022. The Company utilizes an independent valuation from a third party which uses a discounted cash flow model to estimate the fair value of MSRs. The model uses loan prepayment assumptions based on current market conditions and applies a discount rate based on indicated rates of return required by market participants. The decrease in the valuation allowance during the three months ended March 31, 2022 was caused by slower loan prepayment speeds attributable to the increase in interest rates on residential mortgage loans during the period.

Losses applicable to write-downs of impaired loans and foreclosed real estate are based on the appraised value of the underlying collateral less estimated costs to sell. The losses on impaired loans are not recorded directly as an adjustment to current earnings, but rather as a component in determining the allowance for loan losses. The losses on foreclosed real estate represent adjustments in valuation recorded during the time period indicated and not for losses incurred on sales. Appraised values are typically based on a blend of (a) an income approach using observable cash flows to measure fair value, and (b) a market approach using observable market comparisons. These appraised values may be discounted based on management’s historical knowledge, expertise or changes in market conditions from time of valuation.

There were no liabilities measured at fair value on a non-recurring basis at March 31, 2022 and December 31, 2021.

Summary of fair values of financial instruments

The estimated fair values, and related carrying amounts, of the Company’s financial instruments are presented below. Certain financial instruments and all non-financial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein do not represent the underlying fair value of the Company. This table excludes financial instruments for which the carrying amount approximates fair value. Financial assets for which the fair value approximates carrying value include cash and cash equivalents, and accrued interest receivable. Financial liabilities for which the fair value approximates carrying value include mortgagors’ escrow accounts and accrued interest payable.

	March 31, 2022
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
	(In thousands)
Financial assets:
Securities available for sale		48,836		48,836		—		48,836		—
Loans held for sale		22,698		22,698		—		22,698		—
Loans, net		579,591		569,377		—		—		569,377
Derivative assets		895		895		—		895		—

Financial liabilities:
Deposits	$	624,679	$	624,762	$	—	$	624,762	$	—
FHLBB advances		45,000		44,378		—		44,378		—
Derivative liabilities		212		212		—		212		—

	December 31, 2021
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
	(In thousands)
Financial assets:
Securities available for sale		51,666		51,666		—		51,666		—
Loans held for sale		44,766		44,766		—		44,766		—
Loans, net		544,621		549,674		—		—		549,674
Derivative assets		1,414		1,414		—		1,414		—

Financial liabilities:
Deposits	$	638,147		637,538	$	—	$	637,538	$	—
FHLBB advances		50,000		50,001				50,001
Derivative liabilities		84		84		—		84		—

- 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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