Fair Values of Financial Instruments

3 Months Ended

Mar. 31, 2022

Fair Value Disclosures [Abstract]

Fair Values of Financial Instruments

NOTE 10 – FAIR VALUES OF FINANCIAL INSTRUMENTS

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 reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability; or generated from model-based techniques that use at least one significant assumption not observable in the market. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

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

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded, values 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). Equity securities are carried at fair value, with changes in fair value reported in net income. This investment is considered an equity security with readily determinable fair value not held for trading (Level 3).

NOTE 10 – FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). The Company’s taxable municipal investment securities’ fair values are determined based on a discounted cash flow analysis prepared by an independent third party.

Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. For collateral dependent loans, fair value is commonly 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. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. 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 accordingly.

Foreclosed Real Estate: 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. 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.

For appraisals where the value is $100 or above for both collateral-dependent impaired loans and other real estate owned 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, a member of the Loan Department reviews 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. In accordance to company policy, if the Company holds the property for over two years, an updated appraisal or validation would be obtained in order to determine if the fair value amount should be adjusted.

NOTE 10 – FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

Assets and Liabilities Measured on a Recurring Basis

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

	Fair Value Measurement Using
	Quoted Prices in Active markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2022
Financial assets:
U.S Government entities	$	—	$	2,668	$	—
Municipal- Taxable		—		12,879		—
Municipal- Tax exempt		—		1,362		—
Residential MB, GSE		—		9,365
SBA guaranteed debenture		—		816		—
Total AFS	$	—	$	27,090	$	—
Equity Securities	$	—	$	—	$	994

	Fair Value Measurement Using
	Quoted Prices in Active markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2021
Financial assets:
U.S Government entities	$	—	$	2,957	$	—
Municipal- Taxable		—		14,157		—
Municipal- Tax exempt		—		1,399		—
Residential MB, GSE		—		1,669		—
SBA guaranteed debenture		—		1,131		—
Total AFS	$	—	$	21,313	$	—

NOTE 10 – FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

There were no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2021. The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarter ended March 31, 2022:

	Equity Securities
	2022
Beginning Balance of recurring Level 3 assets	$	—
Purchase		1,000
Unrealized loss		(6	)
Ending Balance of recurring Level 3 assets	$	994

There were no transfers between levels during 2022 or 2021.

Assets and Liabilities Measured on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of March 31, 2022 and December 31, 2021 (amounts in thousands):

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	March 31, 2022		December 31, 2021
Impaired loans:
RE loans:
One-to four family	$	13	$	14
Commercial		—		90
Foreclosed real estate:
One-to four family	$	74	$	74
Commercial		—		326

NOTE 10 – FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

The Company has estimated the fair values of these assets using Level 3 inputs, specifically the appraised value of the collateral. Impaired loan balances represent those collateral dependent impaired loans where management has estimated the credit loss by comparing the loan’s carrying value against the expected realizable fair value of the impaired loan for the amount of the credit loss. The Company had no Level 3 assets measured at fair value on a recurring basis at March 31, 2022 and December 31, 2021. For Level 3 assets measured at fair value on a nonrecurring basis as of March 31, 2022 and December 31, 2021 appraisals were used for the valuation technique. For the significant unobservable input, the appraisal discounts and the weighted average input of 15-20% were used. This is for the period ended March 31, 2022 and December 31, 2021.

The carrying amounts and estimated fair values of the Company’s on-balance sheet financial instruments at March 31, 2022 and December 31, 2021 are summarized below:

			Fair Value Measurements at March 31, 2022 Using:
	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and cash equivalents	$	38,670	$	38,670	$	—	$	—	$	38,670
Securities available for sale		27,090		—		27,090		—		27,090
Equity Securities		994		—		—		994		994
Loans held for sale		238		—		238		—		238
Loan, net		267,527		—		—		273,527		273,527
Accrued interest receivable		849		—		138		711		849
Restricted equity securities		176		—		—		—	N/A
Financial liabilities:
Deposits	$	250,370	$	173,651	$	87,024	$	—		260,675
Federal Home Loan Bank advances		—		—		—		—		—
Accrued interest payable		7		4		3		—		7

NOTE 10 – FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

			Fair Value Measurements at December 31, 2021 Using:
	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and cash equivalents	$	61,938	$	61,938	$	—	$	—	$	61,938
Securities available for sale		21,313		—		21,313		—		21,313
Loans held for sale		—		—		—		—		—
Loan, net		252,160		—		—		259,152		259,152
Accrued interest receivable		775		—		162		613		775
Restricted equity securities		859		—		—		—	N/A
Financial liabilities:
Deposits	$	232,021	$	156,921	$	80,281	$	—	$	237,202
Federal Home Loan Bank advances		18,500		—		18,322		—		18,322
Accrued interest payable		60		3		57		—		60