Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2023

Fair Value of Financial Instruments [Abstract]

Fair Value of Financial Instruments

Note 8 - Fair Value of Financial Instruments

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sale transaction on the dates indicated. The estimated fair value amounts have been measured as of June 30, 2023 and December 31, 2022 and have not been re-evaluated or updated for purposes of these unaudited consolidated financial statements subsequent to those respective dates. The estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported here.

GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities measurements (Level 1) and the lowest priority to unobservable input measurements (Level 3). The three levels of the fair value hierarchy are as follows:

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly.

Level 3: Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company’s consolidated statements of financial condition contain investment securities and derivative instruments that are recorded at fair value on a recurring basis. For financial instruments measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2023 and December 31, 2022 were as follows:

	Fair Value Measurements at June 30, 2023
				Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Other Unobservable Inputs
	Fair Value			(Level 1)		(Level 2)		(Level 3)
		(Dollars in thousands)
Measured at fair value on a recurring basis:
Securities:
Debt Securities
U.S. government agencies	$		1,841	$	—	$	1,841	$	—
Municipal bonds			36,692		—		36,692		—
Mortgage-backed securities:
Collateralized mortgage obligations-private label			10		—		10		—
Collateralized mortgage obligations-government    sponsored entities			11,097		—		11,097		—
Government National Mortgage Association			57		—		57		—
Federal National Mortgage Association			10,563		—		10,563		—
Federal Home Loan Mortgage Corporation			5,011		—		5,011		—
Asset-backed securities:
Private label			93		—		93		—
Government sponsored entities			3		—		3		—
Total Debt Securities	$		65,367	$	—	$	65,367	$	—
Equity securities			10		10		—		—
Total Securities	$		65,377	$	10	$	65,367	$	—

	Fair Value Measurements at December 31, 2022
				Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Other Unobservable Inputs
	Fair Value			(Level 1)		(Level 2)		(Level 3)
		(Dollars in thousands)
Measured at fair value on a recurring basis:
Securities:
Debt Securities
U.S. government agencies	$		1,833	$	—	$	1,833	$	—
Municipal bonds			42,414		—		42,414		—
Mortgage-backed securities:
Collateralized mortgage obligations-private label			11		—		11		—
Collateralized mortgage obligations-government    sponsored entities			12,155		—		12,155		—
Government National Mortgage Association			59		—		59		—
Federal National Mortgage Association			11,246		—		11,246		—
Federal Home Loan Mortgage Corporation			5,221		—		5,221		—
Asset-backed securities:
Private label			96		—		96		—
Government sponsored entities			4		—		4		—
Total Debt Securities	$		73,039	$	—	$	73,039	$	—
Equity securities			8		8		—		—
Total Securities	$		73,047	$	8	$	73,039	$	—
Interest Rate Swap(1)	$		273	$	—	$	273	$	—

(1)Included in Other Assets on the consolidated statements of financial condition.

Level 2 inputs for assets or liabilities measured at fair value on a recurring basis might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment projections, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means. The following is a description of valuation methodologies used for financial assets recorded at fair value on a recurring basis:

•Investment securities - the fair values are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1) or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted prices. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution date, market consensus prepayment projections, credit information, and the security’ terms and conditions, among other things. Level 2 securities which are fixed income instruments that are not quoted on an exchange, but are traded in active markets, are valued using prices obtained from our custodian, who use third party data service providers.

•Interest Rate Swap – the fair value is based on a discounted cash flow model. The model’s key assumptions include the contractual term of the derivative contract, including the period to maturity, and the use of observable market based inputs, such as interest rates, yield curves, nonperformance risk and implied volatility.

Assets Measured at Fair Value on a Non-Recurring Basis

In addition to disclosure of the fair value of assets on a recurring basis, GAAP requires disclosures for assets and liabilities measured at fair value on a non-recurring basis. The following is a description of the valuation methods used for assets measured at fair value on a non-recurring basis.

Collateral-Dependent Loans. Loans for which repayment is substantially expected to be provided through the operations or sale of collateral are considered collateral dependent, and are valued based on the estimated fair value of the collateral,

less estimated costs to sell at the reporting date, based on either a recent appraisal or discounted cash flows based on current market conditions. Accordingly, collateral dependent loans are classified within Level 3 of the fair value hierarchy. As of June 30, 2023 and December 31, 2022, the Company did not record any non-recurring adjustments on collateral dependent loans.

Foreclosed Real Estate and Repossessed Assets. Foreclosed real estate and repossessed assets are held at the lower of cost or fair value and are considered to be measured at fair value when recorded below cost. The fair value of foreclosed real estate is calculated using independent appraisals, less estimated selling costs. Certain repossessed assets may require assumptions about factors that are not observable in an active market when determining fair value. Accordingly, foreclosed real estate and repossessed assets are classified within Level 3 of the fair value hierarchy. Foreclosed real estate was $139,000 and $95,000 at June 30, 2023 and December 31, 2022, respectively and was included as a component of other assets on the consolidated statements of financial condition. No non-recurring adjustments were made to foreclosed real estate at June 30, 2023 or December 31, 2022.

Mortgage Servicing Rights. Mortgage servicing rights do not trade in an active market with readily observable market data. As a result, the Company estimates the fair value of loan servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income. The key assumptions used in the model include the estimated life of loans sold with servicing retained and the estimated cost to service the loans. Loan servicing rights are classified as Level 3 measurements due to the use of unobservable inputs, as well as management judgment and estimation.

For assets subject to measurement at fair value on a non-recurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2023 and December 31, 2022 were as follows:

	Fair Value Measurements
				Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Other Unobservable Inputs
	Fair Value			(Level 1)		(Level 2)		(Level 3)
		(Dollars in thousands)
Measured at fair value on a non-recurring basis:
At June 30, 2023
Collateral-dependent loans	$		160	$	—	$	—	$	160
Foreclosed real estate			139		—		—		139
Mortgage servicing rights			202		—		—		202
At December 31, 2022
Mortgage servicing rights			209		—		—		209

The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:

	Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands)	Fair Value Estimate		Valuation Technique	Unobservable Input	Range			Weighted Average
At June 30, 2023
Collateral-dependent loans	$	160	Appraisal of collateral (1)	Direct Disposal Costs (3)		8.00	%		8.00	%
Foreclosed real estate		139	Appraisal of collateral (1)	Direct Disposal Costs (3)	7.00% - 8.00%				7.33	%
Mortgage servicing rights		202	Discounted Cash Flow Model (2)	Servicing Fees		0.25	%		0.25	%
				Servicing Costs		0.14	%		0.14	%
				Estimated Life of Loans	4.6 years			4.6 years
At December 31, 2022
Mortgage servicing rights		209	Discounted Cash Flow Model (2)	Servicing Fees		0.25	%		0.25	%
				Servicing Costs		0.15	%		0.15	%
				Estimated Life of Loans	5.0 years			5.0 years

(1)Fair value is generally determined through independent third-party appraisals of the underlying collateral or by a purchase offer for the related property, which generally includes various Level 3 inputs which are not observable.

(2)The fair value is based on a discounted cash flow model. The model's key assumptions are the estimated life of loans sold with servicing retained and the estimated cost to service the loans.

(3)The fair value basis may be adjusted to reflect management estimates of disposal costs including, but not necessarily limited to, real estate brokerage commissions, legal fees, and delinquent property taxes.

The carrying amount and estimated fair value of the Company’s financial instruments, whether carried at cost or fair value, are as follows:

	Fair Value Measurements at June 30, 2023
	Carrying		Estimated		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Other Unobservable Inputs
	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	35,582	$	35,582	$	35,582	$	—	$	—
Securities		65,377		65,377		10		65,367		—
Federal Home Loan Bank stock		2,347		2,347		—		2,347		—
Loans receivable, net		569,503		527,330		—		—		527,330
Accrued interest receivable		2,724		2,724		—		2,724		—
Bank-owned life insurance		23,432		23,432		—		23,432		—
Mortgage servicing rights		202		202		—		—		202
Financial liabilities:
Deposits		581,965		583,954		—		583,954		—
Long-term debt		36,450		35,191		—		35,191		—
Accrued interest payable		435		435		—		435		—

	Fair Value Measurements at December 31, 2022
	Carrying		Estimated		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Other Unobservable Inputs
	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	9,633	$	9,633	$	9,633	$	—	$	—
Securities		73,047		73,047		8		73,039		—
Federal Home Loan Bank stock		2,330		2,330		—		2,330		—
Loans receivable, net		573,537		546,278		—		—		546,278
Accrued interest receivable		2,796		2,796				2,796
Interest rate swap		273		273		—		273		—
Mortgage servicing rights		209		209		—		—		209
Financial liabilities:
Deposits		570,119		571,521		—		571,521		—
Short-term borrowings		12,596		12,596		—		12,596		—
Long-term debt		24,950		23,946		—		23,946		—
Accrued interest payable		66		66		—		66		—