FAIR VALUE DISCLOSURES

9 Months Ended

Sep. 30, 2022

Fair Value Disclosures [Abstract]

FAIR VALUE DISCLOSURES

NOTE 10. FAIR VALUE DISCLOSURES

Overview

Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs classified within Level 3 of the hierarchy).

Fair Value Hierarchy

Level 1 - Valuation is based on inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 - Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as interest rates, yield curves observable at commonly quoted intervals, and other market-corroborated inputs.

Level 3 - Valuation is generated from techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon models that primarily use, as inputs, observable market-based parameters. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The Company evaluates fair value measurement inputs on an ongoing basis in order to determine if there is a change of sufficient significance to warrant a transfer between levels. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s valuation process.

Financial Assets and Financial Liabilities Measured on a Recurring Basis

The Company uses the following methods and assumptions in estimating the fair value of its financial assets and financial liabilities on a recurring basis:

Investment Securities Available-for-Sale

We obtain fair values for debt securities from a third-party pricing service, which utilizes several sources for valuing fixed-income securities. The market evaluation sources for debt securities include observable inputs rather than significant unobservable inputs and are classified as Level 2. The service provider utilizes pricing models that vary by asset class and include available trade, bid and other market information. Generally, the methodologies include broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.

Also included in securities are corporate bonds which are valued using significant unobservable inputs and are classified as Level 2 or Level 3 based on market information available during the period.

Financial assets measured at fair value on a recurring basis segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value are presented below as of the dates indicated (in thousands):

	September 30, 2022
	Level 1		Level 2		Level 3		Total
Assets:
U.S. government agencies	$	—	$	25,227	$	—	$	25,227
State and municipal obligations		—		20,162		—		20,162
Mortgage-backed securities - agency		—		25,593		—		25,593
Collateralized mortgage obligations - agency		—		21,782		—		21,782
Asset-backed securities		—		2,099		—		2,099
Corporate bonds		—		—		13,398		13,398
Total recurring assets at fair value	$	—	$	94,863	$	13,398	$	108,261
	December 31, 2021
	Level 1		Level 2		Level 3		Total
Assets:
U.S. government agencies	$	—	$	9,439	$	—	$	9,439
State and municipal obligations		—		26,677		—		26,677
Mortgage-backed securities - agency		—		33,418		—		33,418
Collateralized mortgage obligations - agency		—		27,435		—		27,435
Asset-backed securities		—		2,590		—		2,590
Corporate bonds		—		—		12,403		12,403
Total recurring assets at fair value	$	—	$	99,559	$	12,403	$	111,962

There were no financial liabilities measured at fair value on a recurring basis as of September 30, 2022 or December 31, 2021.

The changes in assets measured at fair value on a recurring basis for which we have utilized Level 3 inputs to determine fair value are presented in the following table for the years indicated (in thousands):

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2022			2021		2022			2021
Balance at beginning of period	$	15,329		$	7,604	$	12,403		$	4,605
Corporate bond additions		—			1,500		3,250			4,450
Corporate bond fair value adjustments		(1,931	)		187		(2,255	)		236
Balance at end of period	$	13,398		$	9,291	$	13,398		$	9,291

Financial Assets Measured on a Nonrecurring Basis

The Company uses the following methods and assumptions in estimating the fair value of its financial assets on a nonrecurring basis:

Impaired Loans

Impaired loans are carried at the lower of recorded investment or fair value. The fair value of collateral dependent impaired loans is estimated using the value of the collateral less selling costs if repayment is expected from liquidation of the collateral. Appraisals may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or our knowledge of the borrower and the borrower’s business. Impaired loans carried at fair value are classified as Level 3. Impaired loans measured using the present value of expected future cash flows are not deemed to be measured at fair value.

Other Real Estate Owned

Other real estate owned, or REO, obtained in partial or total satisfaction of a loan is recorded at the lower of recorded investment in the loan or fair value less cost to sell. Subsequent to foreclosure, these assets are carried at the lower of the amount recorded at acquisition date or fair value less cost to sell. Accordingly, it may be necessary to record nonrecurring fair value adjustments. Fair value, when recorded, is generally based upon appraisals by approved, independent, state certified appraisers. Like impaired loans, appraisals may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or other information available to us. REO carried at fair value is classified as Level 3.

Nonfinancial assets measured at fair value on a nonrecurring basis segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value are presented below as of the dates indicated (in thousands):

	September 30, 2022
	Level 1		Level 2		Level 3		Total
Collateral dependent impaired loans:
One-to four family residential	$	—	$	—	$	39	$	39
Commercial real estate		—		—		290		290
Real estate owned:
Other construction and land	$	—	$	—	$	732	$	732
Total	$	—	$	—	$	1,061	$	1,061
	December 31, 2021
	Level 1		Level 2		Level 3		Total
Collateral dependent impaired loans:
One-to four family residential	$	—	$	—	$	106	$	106
Commercial real estate		—		—		630		630
Commercial		—		—		28		28
Real estate owned:
Other construction and land		—		—		842		842
Total	$	—	$	—	$	1,606	$	1,606

There were no liabilities measured at fair value on a nonrecurring basis as of September 30, 2022 or December 31, 2021.

Impaired loans totaling $2.4 million at September 30, 2022 and $2.1 million at December 31, 2021 were measured using the present value of expected future cash flows. These impaired loans were not deemed to be measured at fair value on a nonrecurring basis.

The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at September 30, 2022 and December 31, 2021.

			September 30,		December 31,
			2022		2021
	Valuation Technique	Unobservable Input	General Range		General Range
Impaired loans	Discounted Appraisals	Collateral discounts		0% - 15%		0% - 15%
Real estate owned	Discounted Appraisals	Collateral discounts and estimated selling cost		43%		10% - 43%
Corporate bonds	Discounted Cash Flows	Recent similar executed financing transactions		3% - 20%		0% - 4%

Fair Value of Financial Assets and Financial Liabilities

The estimated fair value of the Company’s financial assets and financial liabilities are summarized as follows at the dates indicated (in thousands):

	Carrying		Fair Value Measurements at September 30, 2022
	Amount		Total		Level 1		Level 2		Level 3
Assets:
Cash and equivalents	$	108,215	$	108,215	$	108,215	$	—	$	—
Securities available for sale		108,261		108,261		—		94,863		13,398
Securities held to maturity		5,991		5,799		—		5,799		—
Loans receivable, net		995,061		964,421		—		—		964,421
Other investments, at cost		1,911		1,911		—		1,911		—
Accrued interest receivable		5,335		5,335		—		5,335		—
BOLI		15,014		15,014		—		15,014		—
Liabilities:
Demand deposits, money market and savings	$	936,188	$	936,188	$	—	$	936,188	$	—
Time deposits		173,819		182,745		—		182,745		—
Federal Home Loan Bank advances		5,000		5,202		—		5,202		—
Junior subordinated debentures		35,955		32,813		—		32,813		—
Accrued interest payable		653		653		—		653		—
	Carrying		Fair Value Measurements at December 31, 2021
	Amount		Total		Level 1		Level 2		Level 3
Assets:
Cash and equivalents	$	124,101	$	124,101	$	124,101	$	—	$	—
Securities available for sale		111,962		111,962		—		99,559		12,403
Loans receivable, net		933,475		923,958		—		—		923,958
Other investments, at cost		2,984		2,984		—		2,984		—
Accrued interest receivable		4,808		4,808		—		4,808		—
BOLI		14,778		14,778		—		14,778		—
Liabilities:
Demand deposits, money market and savings	$	850,112	$	850,112	$	—	$	850,112	$	—
Time deposits		208,929		209,005		—		209,005		—
Federal Home Loan Bank advances		5,000		5,054		—		5,054		—
Junior subordinated debentures		35,864		36,113		—		36,113		—
Accrued interest payable		383		383		—		383		—