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FAIR VALUE

9 Months Ended

Sep. 30, 2023

NOTE 6 – FAIR VALUE

ASC Topic 820 provides a framework for measuring and disclosing fair value under GAAP. ASC 820 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available-for-sale investment securities) or a nonrecurring basis (for example, impaired loans).

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an 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. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The Fair Value Hierarchy

ASC 820-10 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. In accordance with ASC 820-10, these inputs are summarized in the three broad levels listed below:

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

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Level 2 – Other significant observable inputs (including quoted prices in active markets for similar securities).

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Level 3 – Significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value:

Investment Securities Available-for-Sale and Interest Rate Swaps. Investment securities available-for-sale and interest rate swap contracts are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the-counter markets, and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities, and interest rate swap contracts. Securities classified as Level 3 include asset-backed securities in illiquid markets.

The Bank may be required, from time to time, to measure certain other financial and non-financial assets and liabilities at fair value on a non-recurring basis in accordance with GAAP.

Loans. Impaired loans totaled $583,917 with $171,074 of specific reserves as of September 30, 2023. These assets included single-family residential, commercial, and industrial, and automobile loans. They have been classified as impaired and include nonaccrual, past due 90 days or more and still accruing, and a homogeneous pool of indirect loans all considered to be impaired loans, which are valued under Level 3 inputs. Foreclosed real estate assets are primarily valued on a nonrecurring basis at the fair values of the underlying real estate collateral. The Company is predominantly a cash flow lender with real estate serving as collateral on a majority of loans. On a quarterly basis, the Company determines such fair values through a variety of data points and mostly relies on appraisals from independent appraisers. We obtain an appraisal of properties when they become impaired and conduct new appraisals at least every year. Typically, these appraisals do not include an inside inspection of the property as our loan documents do not require the borrower to allow access to the property. Therefore, the most significant unobservable inputs are the details of the amenities included within the property and the condition of the property. Further, we cannot always accurately assess the amount of time it takes to gain ownership of our collateral through the foreclosure process and the damage, as well as potential looting, of the property further decreasing our value. Thus, in determining the fair values we discount the current independent appraisals, within a range of 0% to 16%, based on individual circumstances.

The changes in the assets subject to fair value measurements are summarized below by level:


											Fair
(dollars in thousands)		Level 1			Level 2			Level 3			Value
September 30, 2023
Recurring:
Securities available for sale
Collateralized mortgage obligations		$	—		$	13,489		$	—		$	13,489
Agency mortgage-backed securities			—			45,487			—			45,487
Municipal securities			—			29,978			—			29,978
Corporate securities			—			1,262			—			1,262
U.S. Government agency securities			—			35,721			—			35,721
U.S. Treasury securities			—			16,768			—			16,768

Non-recurring:
Impaired loans			—			—			413			413
		$	—		$	142,705		$	413		$	143,118
December 31, 2022
Recurring:
Securities available for sale
Collateralized mortgage obligations		$	—		$	15,255		$	—		$	15,255
Agency mortgage-backed securities			—			51,893			—			51,893
Municipal securities			—			32,297			—			32,297
Corporate securities			—			1,325			—			1,325
U.S. Government agency securities			—			36,580			—			36,580
U.S. Treasury securities			—			6,783			—			6,783

Non-recurring:
Impaired loans			—			—			330			330
		$	—		$	144,133		$	330		$	144,463

The estimated fair values of the Company’s financial instruments at September 30, 2023 and December 31, 2022 are summarized in the following table. The fair values of a significant portion of these financial instruments are estimates derived using present value techniques and may not be indicative of the net realizable or liquidation values. Also, the calculation of estimated fair values is based on market conditions at a specific point in time and may not reflect current or future fair values.


		September 30, 2023						December 31, 2022
(dollars in thousands)		Carrying			Fair			Carrying			Fair
		Amount			Value			Amount			Value
Financial assets:
Cash and due from banks		$	2,380		$	2,380		$	2,035		$	2,035
Interest-bearing deposits in other financial institutions			11,970			11,970			22,680			22,680
Federal funds sold			172			172			5,377			5,377
Investment securities available for sale			142,705			142,705			144,133			144,133
Investments in restricted stock			980			980			221			221
Ground rents			130			130			131			131
Loans, less allowance for credit losses			172,702			160,294			184,278			177,254
Accrued interest receivable			1,373			1,373			1,159			1,159
Cash value of life insurance			8,614			8,614			8,493			8,493

Financial liabilities:
Deposits			314,841			256,126			362,947			299,773
Short-term borrowings			25,000			24,988			—			—
Accrued interest payable			225			225			9			9
Unrecognized financial instruments:
Commitments to extend credit			30,536			30,536			30,718			30,718
Standby letters of credit			45			45			45			45

The following table presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments that were estimated using an exit pricing notion.


(dollars in thousands)
		Carrying			Fair
September 30, 2023		Amount			Value			Level 1			Level 2			Level 3

Financial instruments - Assets
Cash and cash equivalents		$	14,522		$	14,522		$	14,522		$	—		$	—
Loans receivable, net			172,702			160,294			—			—			160,294
Cash value of life insurance			8,614			8,614			—			8,614			—
Financial instruments - Liabilities
Deposits			314,841			256,126			—			256,126			—
Short-term debt			25,000			24,988			—			24,988			—

Fair values are based on quoted market prices for similar instruments or estimated using discounted cash flows. The discounts used are estimated using comparable market rates for similar types of instruments adjusted to be commensurate with the credit risk, overhead costs, and optionality of such instruments.

The fair value of cash and due from banks, federal funds sold, investments in restricted stocks and accrued interest receivable are equal to the carrying amounts. The fair values of investment securities are determined using market quotations, if available, or measured using pricing models or other model-based valuation techniques such as present value and future value cash flows. The fair value of loans receivable is estimated using discounted cash flow analysis. For cash surrender value of life insurance, the carrying value is a reasonable estimate of fair value. The cash surrender value of life insurance is reported in the Level 2 fair value category. The fair value of the Bank Term Funding Program loans is equal to the carrying amounts. The fair value of FHLB borrowings is estimated based upon discounted future cash flows using a discounted rate comparable to the current market rate for such borrowings. FHLB borrowings are reported in the Level 2 fair value category.

The fair value of noninterest-bearing deposits, interest-bearing checking, savings, and money market deposit accounts, securities sold under agreements to repurchase, and accrued interest payable are equal to the carrying amounts. The fair value of fixed-maturity time deposits is estimated using discounted cash flow analysis.

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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