Note 8 - Fair Value

9 Months Ended

Sep. 30, 2020

Notes to Financial Statements

Fair Value Disclosures [Text Block]

NOTE 8 – 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:

• 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.

• 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.

• 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.

Other real estate owned: 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. Real estate owned properties 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
September 30, 2020
Securities:
Certificates of deposit	$	—	$	32,724	$	—	$	32,724
Municipal securities		—		512		—		512
Mortgage-backed securities – residential		—		6,429		—		6,429
Collateralized mortgage obligations – residential		—		2,383		—		2,383
	$	—	$	42,048	$	—	$	42,048
December 31, 2019
Securities:
Certificates of deposit	$	—	$	48,666	$	—	$	48,666
Municipal securities		—		513		—		513
Mortgage-backed securities - residential		—		8,037		—		8,037
Collateralized mortgage obligations – residential		—		2,977		—		2,977
	$	—	$	60,193	$	—	$	60,193

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
September 30, 2020
Impaired loans - nonresidential real estate	$	—	$	—	$	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 $288,000, with a valuation allowance of $20,000 at September 30, 2020.  At  December 31, 2019 there were no impaired loans that were measured for impairment using the fair value of the collateral for collateral–dependent loans and which had specific valuation allowances.  There is an increase in the provision for loan losses of $20,000 for the three and nine months ended September 30, 2020, compared to no specific provision for loan losses for the three and nine months ended September 30, 2019.

At September 30, 2020 and December 31, 2019 there were no OREO properties with valuation allowances.

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 at September 30, 2020:

	Fair Value		Valuation Technique(s)	Significant Unobservable Input(s)	Range (Weighted Average)
September 30, 2020
Impaired loans - nonresidential real estate	$	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 September 30, 2020 Using:
	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	429,665	$	13,740	$	415,925	$	—	$	429,665
Securities		42,048		—		42,048		—		42,048
Loans receivable, net of allowance for loan losses		1,065,892		—		—		1,073,308		1,073,308
FHLB and FRB stock		7,490		—		—		—		N /A
Accrued interest receivable		4,354		—		158		4,196		4,354
Financial liabilities
Certificates of deposit		301,351		—		302,791		—		302,791
Borrowings		4,000		—		3,997		—		3,997

			Fair Value Measurements at December 31, 2019 Using:
	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	190,325	$	9,785	$	180,540	$	—	$	190,325
Securities		60,193		—		60,193		—		60,193
Loans receivable, net of allowance for loan losses		1,168,008		—		—		1,177,459		1,177,459
FHLB and FRB stock		7,490		—		—		—		N /A
Accrued interest receivable		4,563		—		252		4,311		4,563
Financial liabilities
Certificates of deposit		402,034		—		402,914		—		402,914
Borrowings		61		—		61		—		61

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.