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Note 14 - Fair Value
 12 Months Ended
Dec. 31, 2021
Notes to Financial Statements  
Fair Value Disclosures [Text Block]

NOTE 14 – FAIR VALUE

 

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

 

 

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Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

  

 

 

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Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

  

 

 

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Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

 

Securities: The fair values of debt securities are generally determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2).

 

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the allowance policy.

 

Foreclosed assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach with data from comparable properties. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Foreclosed assets are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

 

The following table sets forth the Company’s financial assets that were accounted for at fair value and are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

  

Fair Value Measurements Using

     
  

Quoted Prices in Active Markets for Identical Assets (Level 1)

  

Significant Observable Inputs (Level 2)

  

Significant Unobservable Inputs (Level 3)

  

Fair Value

 

December 31, 2021

                

Securities:

                

U.S. Treasury Notes

 $76,553  $—  $—  $76,553 

Certificates of deposit

  —   2,728   —   2,728 

Mortgage-backed securities – residential

  —   4,833   —   4,833 

Collateralized mortgage obligations – residential

  —   1,580   —   1,580 
  $76,553  $9,141  $—  $85,694 
                 

December 31, 2020

                

Securities:

                

Certificates of deposit

 $—  $15,117  $—  $15,117 

Municipal securities

  —   409   —   409 

Mortgage-backed securities - residential

  —   6,108   —   6,108 

Collateralized mortgage obligations – residential

  —   2,195   —   2,195 
  $—  $23,829  $—  $23,829 

 

The following table sets forth the Company’s assets that were measured at fair value on a non-recurring basis:

 

  

Fair Value Measurement Using

     
  

Quoted Prices in Active Markets for Identical Assets (Level 1)

  

Significant Observable Inputs (Level 2)

  

Significant Unobservable Inputs (Level 3)

  

Fair Value

 

December 31, 2021

                

Impaired loans

 $—  $—  $267  $267 
                 

Foreclosed assets

 $—  $—  $725  $725 
                 

December 31, 2020

                

Impaired loans

 $—  $—  $268  $268 

 

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral–dependent loans, had a carrying amount of $297,000, with a valuation allowance of $30,000 at December 31, 2021, compared to a carrying amount of $296,000 and a valuation allowance of $28,000 at December 31, 2020, resulting in an increase in the provision for loan losses of $2,000 for the year ended December 31, 2021, compared to an increase in the provision for loan losses of $28,000 for the year ended December 31, 2020.

 

Foreclosed assets are carried at the lower of cost or fair value less costs to sell.  At December 31, 2021, foreclosed assets had a carrying value of $952,000 less a valuation allowance of $227,000, or $725,000. At December 31, 2020, there were no foreclosed assets with valuation allowances. There were $420,000 of valuation adjustments of foreclosed assets recorded in the year ended  December 31, 2021, compared to no valuation adjustment recorded for the year ended December 31, 2020.

 

The following table presents quantitative information, based on certain empirical data with respect to Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis:

 

  

Fair Value

 

Valuation Technique

 

Unobservable Input

 

Range (Weighted Average)

 

December 31, 2021

           

Impaired loans

 $267 

Sales comparison

 

Discount applied to valuation

  22.0%
            

Foreclosed assets

 $725 

Redemption value

 

Discount applied to valuation

  15.6%
            

December 31, 2020

           

Impaired loans

 $268 

Sales comparison

 

Discount applied to valuation

  22.0%

 

The carrying amount and estimated fair value of financial instruments are as follows:

 

      

Fair Value Measurements at December 31, 2021 Using:

     
  Carrying Amount  

Level 1

  

Level 2

  

Level 3

  

Total

 

Financial assets

                    

Cash and cash equivalents

 $502,162  $448,552  $53,610  $—  $502,162 

Securities

  85,694   76,553   9,141   —   85,694 

Loans receivable, net of allowance for loan losses

  1,044,207   —   —   1,039,298   1,039,298 

FHLB and FRB stock

  7,490   —   —   —   N/A 

Accrued interest receivable

  4,648   75   17   4,631   4,723 

Financial liabilities

                    

Certificates of deposit

  206,918   —   206,530   —   206,530 

Borrowings

  5,000   —   4,999   —   4,999 

Subordinated Notes

  19,590   —   20,240   —   20,240 

 

      

Fair Value Measurements at December 31, 2020 Using:

     
  Carrying Amount  

Level 1

  

Level 2

  

Level 3

  

Total

 

Financial assets

                    

Cash and cash equivalents

 $503,496  $480,574  $22,922  $—  $503,496 

Securities

  23,829   —   23,829   —   23,829 

Loans receivable, net of allowance for loan losses

  1,002,578   —   —   1,004,854   1,004,854 

FHLB and FRB stock

  7,490   —   —   —   N/A 

Accrued interest receivable

  3,941   —   52   3,889   3,941 

Financial liabilities

                    

Certificates of deposit

  253,000   —   253,906   —   253,906 

Borrowings

  4,000   —   3,998   —   3,998 

 

Loans: The exit price observations are obtained from an independent third-party using its proprietary valuation model and methodology and may not reflect actual or prospective market valuations. The valuation is based on the probability of default, loss given default, recovery delay, prepayment, and discount rate assumptions.

 

While the above estimates are based on management’s judgment of the most appropriate factors, as of the balance sheet date, there is no assurance that the estimated fair values would have been realized if the assets were disposed of or the liabilities settled at that date, since market values may differ depending on the various circumstances. The estimated fair values would also not apply to subsequent dates.

 

In addition, other assets and liabilities that are not financial instruments, such as premises and equipment, are not included in the above disclosures.