Fair Value

9 Months Ended

Sep. 30, 2022

NOTE (8) – Fair Value

The Company used the following methods and significant assumptions to estimate fair value:

The fair values of securities available-for-sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique 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 inputs).

The fair value of impaired loans that are collateral dependent is generally based upon the fair value of the collateral, which is obtained from 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. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Assets acquired through or by transfer in lieu 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 the lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated every nine months. 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. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Appraisals for collateral-dependent impaired loans and assets acquired through or by transfer of in lieu of foreclosure are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, an independent third-party licensed appraiser reviews the appraisals for accuracy and reasonableness, reviewing the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.

Assets Measured on a Recurring Basis

Assets measured at fair value on a recurring basis are summarized below:

	Fair Value Measurement
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(In thousands)
At September 30, 2022:
Securities available-for-sale:
Federal agency mortgage-backed	$	–	$	78,591	$	–	$	78,591
Federal agency CMO		–		24,852		–		24,852
Federal agency debt		–		52,204		–		52,204
Municipal bonds		–		4,127		–		4,127
U.S. Treasuries		–		160,185		–		160,185
SBA pools		–		12,786		–		12,786

At December 31, 2021:
Securities available-for-sale:
Federal agency mortgage-backed	$	–	$	70,030	$	–	$	70,030
Federal agency CMO		–		9,287		–		9,287
Federal agency debt		–		37,988		–		37,988
Municipal bonds		–		4,915		–		4,915
U.S. Treasuries		–		17,951		–		17,951
SBA pools		–		16,225		–		16,225

There were no transfers between Level 1, Level 2, or Level 3 during the nine months ended September 30, 2022 and 2021.

As of September 30, 2022 and December 31, 2021, the Bank did not have any assets carried at fair value on a nonrecurring basis.

Fair Values of Financial Instruments

The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments not recorded at fair value on a recurring basis as of September 30, 2022 and December 31, 2021. For short-term financial assets such as cash and due from banks, interest-bearing deposits in other banks, and accrued interest receivable/payable, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For non-marketable equity securities such as Federal Home Loan Bank stock, the carrying amount is a reasonable estimate of fair value as these securities can only be redeemed or sold at their par value and only to the respective issuing government supported institution or to another member institution. For financial liabilities such as noninterest-bearing demand, interest-bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.

			Fair Value Measurements at September 30, 2022
	Carrying Value		Level 1		Level 2		Level 3		Total
	(In thousands)
Financial Assets:
Cash and cash equivalents	$	52,217	$	52,217	$	–	$	–	$	52,217
Securities available-for-sale		332,745		–		332,745		–		332,745
Loans receivable held for investment		722,685		–		–		603,731		603,731
Accrued interest receivables		3,467		266		849		2,352		3,467
Bank owned life insurance		3,222		3,222		–		–		3,222

Financial Liabilities:
Deposits	$	768,511	$	–	$	682,420	$	–	$	682,420
Federal Home Loan Bank advances		32,888		–		31,581		–		31,581
Securities sold under agreements to repurchase		65,407		–		62,716		–		62,716
Note payable		14,000		–		–		14,000		14,000
Accrued interest payable		186		–		186		–		186

			Fair Value Measurements at December 31, 2021
	Carrying Value		Level 1		Level 2		Level 3		Total
	(In thousands)
Financial Assets:
Cash and cash equivalents	$	231,520	$	231,520	$	–	$	–	$	231,520
Securities available-for-sale		156,396		–		156,396		–		156,396
Loans receivable held for investment		648,513		–		–		623,778		623,778
Accrued interest receivables		3,372		19		1,089		2,264		3,372
Bank owned life insurance		3,190		3,190		–		–		3,190

Financial Liabilities:
Deposits	$	788,052	$	–	$	754,181	$	–	$	754,181
Federal Home Loan Bank advances		85,952		–		87,082		–		87,082
Securities sold under agreements to repurchase		51,960		–		51,960		–		51,960
Note payable		14,000		–		–		14,000		14,000
Accrued interest payable		119		–		119		–		119

In accordance with ASU No. 2016-01, the fair value of financial assets and liabilities was measured using an exit price notion. Although the exit price notion represents the value that would be received to sell an asset or paid to transfer a liability, the actual price received for a sale of assets or paid to transfer liabilities could be different from exit price disclosed.

- 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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