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FAIR VALUE OF ASSETS AND LIABILITIES

9 Months Ended

Sep. 30, 2021

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 fair value:

Securities: For securities available-for-sale and equity securities, fair value was estimated using a market approach. The majority of the Company’s securities are fixed income instruments that are not quoted on an exchange, but are traded in active markets. Prices for these instruments are obtained through third party data service providers or dealer market participants with which the Company has historically transacted both purchases and sales of securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing, a Level 2 input as defined by ASC 820, is a mathematical technique used principally to value certain securities to benchmark or comparable securities. The Company evaluates the quality of Level 2 matrix pricing through comparison to similar assets with greater liquidity and evaluation of projected cash flows. The Company also holds equity securities and debt instruments issued by the U.S. government and U.S. government sponsored agencies that are traded in active markets with readily accessible quoted market prices that are considered Level 1 inputs.

Derivatives: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). The Company’s derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.

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. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Assets Held for Sale: Nonrecurring adjustments to certain non-residential properties classified as assets held for sale are measured at fair value, less costs to sell. Fair values are based on contracts / letters of intent.

REO: Nonrecurring adjustments to certain non-residential, construction and land, and residential one-to-four family real estate properties classified as real estate owned (“REO”) are measured at fair value, less costs to sell. Fair values are based on recent real estate appraisals. These appraisals may use 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. Adjustments that are based on contracts / letters of intent result in a Level 2 classification.

The following table summarizes the fair value of assets and liabilities as of September 30, 2021:


			Fair Value Measurements at September 30, 2021, Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
	(In thousands)
Measured on a recurring basis:
Financial assets
Securities available for sale:
U.S. Treasury Note	$	6,773	$	6,773	$	—	$	—
Domestic Corporate Bonds	88,118		—		88,118		—
U.S. Government agency obligations	25,240		19,318		5,922		—
Obligations issued by U.S. states and their political subdivisions	22,264		—		22,264		—
Mortgage-backed securities:
Residential one-to-four family	122,803		—		122,803		—
Multifamily	42,214		—		42,214		—
Asset-backed securities	6,734		$	—	6,734		—
	$	314,146	$	26,091	$	288,055	$	—

Financial Liabilities
Derivatives	$	(1,520)	$	—	$	(1,520)	$	—

Measured on a nonrecurring basis:
Nonfinancial assets
Assets held for sale	$	5,225	$	—	$	5,225	$	—
Real estate owned	624		—		624		—

In June 2021, certain REO was designated to held for sale and were transferred at cost basis in the amount of $892 thousand, and is therefore not included in the above table.

The following table summarizes the fair value of assets and liabilities as of December 31, 2020:


			Fair Value Measurements at December 31, 2020, Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
	(In thousands)
Measured on a recurring basis:
Financial assets
Securities available for sale
U.S. Treasury Note	$	10,000	$	10,000	$	—	$	—
Domestic Corporate Bonds	59,341		—		59,341		—
U.S. Government agency obligations	19,675		12,417		7,258		—
Obligations issued by U.S. states and their political subdivisions	24,795		—		24,795		—
Mortgage-backed securities:
Residential one-to-four family	72,716		—		72,716		—
Multifamily	58,060		—		58,060		—
	$	244,587	$	22,417	$	222,170	$	—

Financial Liabilities
Derivatives	$	(5,545)	$	—	$	(5,545)	$	—

Measured on a nonrecurring basis:
Nonfinancial assets
Assets held for sale	$	5,295	$	—	$	5,295	$	—
Real estate owned	624		—		624		—

In March 2020, certain premises and REO were re-designated to held for sale, which resulted in a write-down from book value to fair value. The impairment recorded on the premises was $12.8 million which resulted in a remaining book value on those assets of $5.3 million that were reclassified from premises to assets held for sale. The impairment recorded on the REO was $1.4 million, which resulted in a remaining book value on those assets of $624 thousand.

The fair value measurements presented are consistent with Topic 820, Fair Value Measurement, in which fair value represents exit price. The carrying amounts and fair value of financial instruments not carried at fair value, at September 30, 2021 and December 31, 2020 are as follows:


			Fair Value Measurements at September 30, 2021, Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Book Value		(Level 1)		(Level 2)		(Level 3)
	(In thousands)
Financial assets
Cash and due from banks	$	324,291	$	324,291	$	—	$	—
Securities held-to-maturity	23,325		—		23,147		—
Loans, net	1,238,975						1,235,172

Financial liabilities
Deposits other than time deposits	744,107		744,107
Time Deposits	521,510		—		521,294		—
Federal Home Loan advances	247,600				244,611


			Fair Value Measurements at December 31, 2020, Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Book Value		(Level 1)		(Level 2)		(Level 3)
	(In thousands)

Financial assets
Cash and due from banks	$	316,445	$	316,445	$	—	$	—
Securities held-to-maturity	7,005		—		6,978		—
Loans, net	1,267,114		—		—		1,290,740

Financial liabilities
Deposits other than time deposits	638,753		638,753		—		—
Time Deposits	717,431		—		725,110		—
Federal Home Loan advances	329,400				336,377		—

- 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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