XML 33 R23.htm IDEA: XBRL DOCUMENT v3.22.1
Fair Value of Financials Instruments
 12 Months Ended
Dec. 31, 2021
Fair Value Disclosures [Abstract]  
Fair Value Disclosures [Text Block]

Note 16. Fair Value of Financials Instruments

 

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. FASB ASC Topic 820, Fair Value Measurement, establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

 

 

●

Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

 

●

Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These 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 speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

  

●

Level 3 Inputs - 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.

 

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The Company has no securities in the Level 1 or Level 3 inputs.

 

The following table summarizes securities available for sale measured at fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

(In thousands)

  

Level 1

Inputs

    

Level 2

Inputs

    

Level 3

Inputs

    

Total

Fair Value

  

As of December 31, 2021

                                

Securities available for sale:

                                

U.S. government agencies

   $ -     $ 15,402     $ -     $ 15,402  

Mortgage-backed securities

     -       1,754       -       1,754  

As of December 31, 2020

                                

Securities available for sale:

                                

U.S. government agencies

   $ -     $ 14,949     $ -     $ 14,949  

Mortgage-backed securities

     -       2,447       -       2,447  

 

Market valuations of our investment securities which are classified as level 2 are provided by an independent third party. The fair values are determined by using several sources for valuing fixed income securities. Their techniques include pricing models that vary based on the type of asset being valued and incorporate available trade, bid and other market information. In accordance with the fair value hierarchy, the market valuation sources include observable market inputs and are therefore considered Level 2 inputs for purposes of determining the fair values.

 

The Company considers transfers between the levels of the hierarchy to be recognized at the end of related reporting periods. During the year ended December 31, 2021, no assets for which fair value is measured on a recurring basis transferred between any levels of the hierarchy.

 

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

 

Financial assets measured at fair value on a non-recurring basis during the reported periods include impaired loans and loans held for sale.

 

Impaired loans. As of December 31, 2021 and 2020, there were no impaired loans that were reduced by specific valuation allowances.

 

The significant unobservable inputs (Level 3) used in the fair value measurement of collateral for collateral-dependent impaired loans primarily relate to the specialized discounting criteria applied to the borrower’s reported amount of collateral. The amount of the collateral discount depends upon the condition and marketability of the collateral, as well as other factors which may affect the collectability of the loan. As the Company’s primary objective in the event of default would be to liquidate the collateral to settle the outstanding balance of the loan, collateral that is less marketable would receive a larger discount. During the years ended December 31, 2021 and 2020, there were no discounts for collateral-dependent impaired loans.

 

The valuation of our not readily marketable investment securities which are classified as Level 3 are based on the Company’s own assumptions and inputs that are both significant to the fair value measurement, and are unobservable.

 

Our assessment of the significance of a particular input to the Level 3 fair value measurements in their entirety requires judgment and considers factors specific to the assets. It is reasonably possible that a change in the estimated fair value for instruments measured using Level 3 inputs could occur in the future.

 

Loans held for sale. Loans held for sale include the guaranteed portion of SBA and USDA loans and are reported at the lower of cost or estimated fair value. Fair value for SBA and USDA loans is based on market indications available in the market. There were no impairments reported for the periods presented.

 

Non-financial assets measured at fair value on a non-recurring basis during the reported periods include other real estate owned which, upon initial recognition, was re-measured and reported at fair value through a charge-off to the allowance for loan losses. Additionally, foreclosed assets which, subsequent to their initial recognition, are re-measured at fair value through a write-down included in other non-interest expense. Regulatory guidelines require the Company to reevaluate the fair value of foreclosed assets on at least an annual basis. The fair value of foreclosed assets, upon initial recognition and impairment, are re-measured using Level 2 inputs based on observable market data. Estimated fair value of other real estate is based on appraisals. Appraisers are selected from the list of approved appraisers maintained by management. At December 31, 2021, foreclosed assets totaled $1.1 million consisting of two loans that were foreclosed during 2021 and were recorded at fair value. At December 31, 2020, there were no foreclosed assets. There were no foreclosed assets re-measured during the years ended December 31, 2021 and 2020.

 

The methods and assumptions used to estimate fair value of financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis are described as follows:

 

Carrying amount is the estimated fair value for cash and cash equivalents, restricted securities, accrued interest receivable and accrued interest payable. The estimated fair value of demand and savings deposits is the carrying amount since rates are regularly adjusted to market rates and amounts are payable on demand. For borrowed funds and variable rate loans or deposits that re-price frequently and fully, the estimated fair value is the carrying amount. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent re-pricing, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. For loans held for sale, the estimated fair value is based on market indications for similar assets in the active market. The estimated fair value of other financial instruments and off-balance-sheet loan commitments approximate cost and are not considered significant to this presentation.

 

The Company adds a servicing asset when loans are sold and the servicing is retained, and uses the amortization method for the treatment of the servicing asset. The servicing asset is carried at lower of cost or fair value. Loan servicing assets do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using a discounted cash flow model having significant inputs of discount rate, prepayment speed and default rate. Due to the nature of the valuation inputs, servicing rights are classified within Level 3 of the hierarchy. During the year ended December 31, 2021, the Company added a servicing asset of $19,000 in connection with the sale of $1.1 million in loans. During the year ended December 31, 2020, the Company added a servicing asset of $152,000 in connection with the sale of $9.8 million in loans. For the years ended December 31, 2021 and 2020, the Company amortized $326,000 and 460,000, respectively, using the amortization method for the treatment of servicing loans. The Company recorded no allowance for the year ended December 31, 2021. The Company recorded an allowance credit provision for the year ended December 31, 2020 totaling $199,000.

 

FASB ASC Topic 825, Financial Instruments, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The estimated fair value approximates carrying value for cash and cash equivalents and accrued interest. The methodologies for other financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis are discussed below:

 

Securities held to maturity. The securities in this category are Property Assessed Clean Energy investments. These investment contracts or bonds originate under a contractual obligation between the property owners, the local county administration, and a third-party administrator and sponsor. These investments have no readily determinable fair value.

 

Loans. The estimated fair value approximates carrying value for variable-rate loans that reprice frequently and with no significant change in credit risk. The fair value of fixed-rate loans and variable-rate loans which reprice on an infrequent basis is estimated by discounting future cash flows using the current interest rates at which similar loans with similar terms would be made to borrowers of similar credit quality.

 

Deposits. The fair values of demand deposits, savings deposits are, by definition, equal to the amount payable on demand and, therefore, approximate their carrying amounts. The fair values for time deposits are estimated using a discounted cash flow calculation that utilizes interest rates currently being offered on time deposits with similar contractual maturities.

 

Borrowed Funds. The estimated fair value approximates carrying value for short-term borrowings. The fair value of long-term fixed-rate borrowings is estimated using quoted market prices, if available, or by discounting future cash flows using current interest rates for similar financial instruments. The estimated fair value approximates carrying value for variable-rate junior subordinated deferrable interest debentures that reprice quarterly.

 

Loan Commitments, Standby and Commercial Letters of Credit. Our lending commitments have variable interest rates and “escape” clauses if the customer’s credit quality deteriorates. Therefore, the fair values of these items are not significant and are not included in the following table.

 

Carrying amounts and estimated fair values of other financial instruments by level of valuation input were as follows:

 

   

December 31, 2021

  

(In thousands)

  

Carrying

Amount

    

Estimated

Fair Value

  

Financial assets:

                

Level 1 inputs:

                

Cash and cash equivalents

   $ 45,992     $ 45,992  

Level 2 inputs:

                

Securities available for sale

     17,156       17,156  

Securities, restricted

     2,432       2,432  

Loans held for sale

     33,762       37,549  

Accrued interest receivable

     2,268       3,787  

Level 3 inputs:

                

Securities held to maturity

     19,673       19,673  

Securities not readily marketable

     100       100  

Loans, net

     424,595       430,810  

Servicing asset

     503       503  

Financial liabilities:

                

Level 1 inputs:

                

Non-interest bearing deposits

     88,876       88,876  

Level 2 inputs:

                

Interest bearing deposits

     355,293       359,606  

Borrowed funds

     46,521       46,521  

Accrued interest payable

     561       561  

 

   

December 31, 2020

  

(In thousands)

  

Carrying

Amount

    

Estimated

Fair Value

  

Financial assets:

                

Level 1 inputs:

                

Cash and cash equivalents

   $ 46,868     $ 46,868  

Level 2 inputs:

                

Securities available for sale

     17,396       17,396  

Securities, restricted

     2,431       2,431  

Loans held for sale

     14,864       16,462  

Accrued interest receivable

     2,440       2,440  

Level 3 inputs:

                

Securities held to maturity

     5,776       5,776  

Securities not readily marketable

     100       100  

Loans, net

     397,601       389,143  

Servicing asset

     809       809  

Financial liabilities:

                

Level 1 inputs:

                

Non-interest bearing deposits

     57,112       57,112  

Level 2 inputs:

                

Interest bearing deposits

     290,903       292,174  

Borrowed funds

     95,690       95,690  

Accrued interest payable

     596       596