UNITED SECURITY BANCSHARESUBFO
UNITED SECURITY BANCSHARES Fair Value Disclosure
Fair Value Measurements and Disclosure
The following summary disclosures are made in accordance with the guidance provided by ASC Topic 825 “Fair Value Measurements and Disclosures” which requires the disclosure of fair value information for both on- and off-balance sheet financial instruments where it is practicable to estimate that value.
GAAP guidance clarifies the definition of fair value, describes methods used to appropriately measure fair value in accordance with generally accepted accounting principles and expands fair value disclosure requirements. This guidance applies whenever other accounting pronouncements require or permit fair value measurements.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:
•Level 1 inputs are unadjusted quoted prices in active markets (as defined) for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
•Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
•Level 3 inputs are unobservable inputs for the asset or liability, and reflect the reporting entity’s assumptions regarding the pricing of an asset or liability by a market participant (including assumptions about risk).
The table below is a summary of fair value estimates for financial instruments and the level of the fair value hierarchy within which the fair value measurements are categorized at the periods indicated:
| December 31, 2024 | ||||||||||||||||||||||||||||||||
| (In thousands) | Carrying Amount | Estimated Fair Value | Quoted Prices In Active Markets for Identical Assets Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | |||||||||||||||||||||||||||
| Financial Assets: | ||||||||||||||||||||||||||||||||
| Investment securities | $ | 157,382 | $ | 157,382 | $ | — | $ | 157,382 | $ | — | ||||||||||||||||||||||
| Marketable equity securities | 3,326 | 3,326 | 3,326 | — | — | |||||||||||||||||||||||||||
| Loans, net | 912,416 | 874,105 | — | — | 874,105 | |||||||||||||||||||||||||||
| Financial Liabilities: | ||||||||||||||||||||||||||||||||
| Time deposits | 78,356 | 77,981 | — | — | 77,981 | |||||||||||||||||||||||||||
| Junior subordinated debentures | 11,572 | 11,572 | — | — | 11,572 | |||||||||||||||||||||||||||
| December 31, 2023 | ||||||||||||||||||||||||||||||||
| (In thousands) | Carrying Amount | Estimated Fair Value | Quoted Prices In Active Markets for Identical Assets Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | |||||||||||||||||||||||||||
| Financial Assets: | ||||||||||||||||||||||||||||||||
| Investment securities | $ | 181,266 | $ | 181,266 | $ | 12,438 | $ | 168,828 | $ | — | ||||||||||||||||||||||
| Marketable equity securities | 3,354 | 3,354 | 3,354 | — | — | |||||||||||||||||||||||||||
| Loans, net | 904,384 | 871,681 | — | — | 871,681 | |||||||||||||||||||||||||||
| Financial Liabilities: | ||||||||||||||||||||||||||||||||
| Time deposits | 71,848 | 71,414 | — | — | 71,414 | |||||||||||||||||||||||||||
| Short-term borrowings | 62,000 | 62,000 | 62,000 | — | — | |||||||||||||||||||||||||||
| Junior subordinated debentures | 11,213 | 11,213 | — | — | 11,213 | |||||||||||||||||||||||||||
The Company performs fair value measurements on certain assets and liabilities as the result of the application of current accounting guidelines. Some fair value measurements, such as investment securities and TRUPs are performed on a recurring basis, while others, such as impairment of loans, other real estate owned, goodwill and other intangibles, are performed on a nonrecurring basis.
•Level 1 financial assets consist of money market funds and highly liquid mutual funds for which fair values are based on quoted market prices.
•Level 2 financial assets include highly liquid debt instruments of U.S. Government agencies, collateralized mortgage obligations, corporate debt instruments, and debt obligations of states and political subdivisions, whose fair values are obtained from readily-available pricing sources for the identical or similar underlying security that may, or may not, be actively traded.
•Level 3 financial assets include certain instruments where the assumptions may be made by the Company or third parties about assumptions that market participants would use in pricing the asset or liability.
The Company recognizes transfers between Level 1, 2, and 3 when a change in circumstances warrants a transfer. There were no transfers in or out of Level 1 and Level 2 fair value measurements during the year ended December 31, 2024.
The following methods and assumptions were used in estimating the fair values of financial instruments measured at fair value on a recurring and non-recurring basis:
Investment Securities - Available-for-sale and marketable equity security values are based on open-market price quotes obtained from reputable third-party brokers. Market pricing is based upon specific CUSIP identification for each individual security. To the extent there are observable prices in the market, the mid-point of the bid/ask price is used to determine the fair value of individual securities. If that data is not available for the last 30 days, a Level 2-type matrix pricing-approach, based on
comparable securities in the market, is utilized. Level 2 pricing may include the use of a forward spread from the last observable trade or may use a proxy bond, such as a TBA mortgage, to determine the price for the security being valued. Changes in fair market value are recorded through other-accumulated-comprehensive-income as an unrecognized gain or loss on fair value.
Loans – Fair values of loans are estimated as follows: Fixed and variable loans are valued using discounted cash flow analysis, which takes into account various factors, including the type of loan, expected credit losses, and prepayment expectations. The cash flows from the loans are discounted to their present value by using a combination of current market rates, liquidity spreads, and the underlying index rates and margins on variable-rate loans. This process results in a Level 3 classification for the valuations.
Individually-Evaluated Loans - Fair value measurements for individually-evaluated loans are performed pursuant to authoritative accounting guidance and are based upon either collateral values supported by third party appraisals or observed market prices. Collateral-dependent loans are measured for impairment using the fair value of the collateral. There were no individually-evaluated loans measured at fair value as of December 31, 2024, or December 31, 2023.
Other Real Estate Owned - Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized. No OREO properties were measured at fair value as of December 31, 2024, or December 31, 2023.
Time Deposits - The fair value is calculated by applying the current SOFR/SWAP curve rate to the discounted value of contractual cash flows.
Short-Term Borrowings - The fair value is calculated by applying rates currently available for debt with similar terms and remaining maturities to the existing debt.
Junior Subordinated Debentures - The fair value of junior subordinated debentures (TRUPs) is based on a discounted cash flow model utilizing observable market rates and credit characteristics for similar debt instruments. In its analysis, the Company uses characteristics that market participants would generally use, and considers factors specific to the liability and the principal, or most advantageous, market for the liability. Cash flows are discounted at a rate which incorporates a current market rate for similar-term debt instruments, adjusted for credit and liquidity risks associated with similar debt and circumstances unique to the Company. The Company believes that the subjective nature of these inputs, credit concerns in the capital markets, and inactivity in the trust preferred markets, limit the observability of market spreads, requiring TRUPs to be classified at a Level 3 fair value.
The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s liabilities classified as Level 3 and measured at fair value on a recurring basis at December 31, 2024, and 2023:
| December 31, 2024 | December 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||
| Financial Instrument | Valuation Technique | Unobservable Input | Weighted Average | Financial Instrument | Valuation Technique | Unobservable Input | Weighted Average | |||||||||||||||||||||||||||||||||||||
| Junior Subordinated Debentures | Discounted cash flow | Market credit risk adjusted spreads | 6.40% | Junior Subordinated Debentures | Discounted cash flow | Market credit risk adjusted spreads | 6.14% | |||||||||||||||||||||||||||||||||||||
Management believes that the credit risk-adjusted spread utilized in the fair value measurement of TRUPs is indicative of the nonperformance risk premium a willing market participant would require under current, inactive market conditions. Management attributes the change in fair value of TRUPs to market changes in the nonperformance expectations and pricing of this type of debt. Generally, an increase in the credit risk adjusted spread and/or a decrease in the forward three-month SOFR curve will result in a positive fair value adjustment and a decrease in the fair value measurement. Conversely, a decrease in the credit risk adjusted spread and/or an increase in the forward three-month SOFR curve will result in a negative fair value adjustment and an increase in the fair value measurement. The increase in discount rate between the periods ended December 31, 2024, and December 31, 2023, is primarily due to increases in rates for similar debt instruments.
The following tables summarize the Company’s assets and liabilities that were measured at fair value on a recurring as of December 31, 2024:
| (In thousands) | December 31, 2024 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| AFS Securities: | ||||||||||||||||||||||||||
| U.S. Government agencies | $ | 2,644 | $ | — | $ | 2,644 | $ | — | ||||||||||||||||||
| U.S. Government collateralized mortgage obligations | 78,881 | — | 78,881 | — | ||||||||||||||||||||||
| Municipal bonds | 42,367 | — | 42,367 | — | ||||||||||||||||||||||
| Corporate bonds | 33,490 | — | 33,490 | — | ||||||||||||||||||||||
| Total AFS securities | 157,382 | — | 157,382 | — | ||||||||||||||||||||||
| Marketable equity securities | 3,326 | 3,326 | — | — | ||||||||||||||||||||||
| Total assets | $ | 160,708 | $ | 3,326 | $ | 157,382 | $ | — | ||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Junior subordinated debentures | $ | 11,572 | $ | — | $ | — | $ | 11,572 | ||||||||||||||||||
| Total liabilities | $ | 11,572 | $ | — | $ | — | $ | 11,572 | ||||||||||||||||||
There were no non-recurring fair value adjustments at December 31, 2024.
The following tables summarize the Company’s assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2023:
| (In thousands) | December 31, 2023 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| AFS Securities: | ||||||||||||||||||||||||||
| U.S. Government agencies | $ | 6,156 | $ | — | $ | 6,156 | $ | — | ||||||||||||||||||
| U.S. Government collateralized mortgage obligations | 88,184 | — | 88,184 | — | ||||||||||||||||||||||
| Municipal bonds | 42,365 | — | 42,365 | — | ||||||||||||||||||||||
| U.S. Treasury securities | 12,438 | — | 12,438 | — | ||||||||||||||||||||||
| Corporate bonds | 32,122 | — | 32,122 | — | ||||||||||||||||||||||
| Total AFS securities | 181,265 | — | 181,265 | — | ||||||||||||||||||||||
| Marketable equity securities | 3,354 | 3,354 | — | — | ||||||||||||||||||||||
| Total assets | $ | 184,619 | $ | 3,354 | $ | 181,265 | $ | — | ||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Junior subordinated debentures | $ | 11,213 | $ | — | $ | — | $ | 11,213 | ||||||||||||||||||
| Total liabilities | $ | 11,213 | $ | — | $ | — | $ | 11,213 | ||||||||||||||||||
There were no non-recurring fair value adjustments at December 31, 2023.
The following tables provide a reconciliation of liabilities at fair value using significant unobservable inputs (Level 3) on a recurring basis during the years ended:
Junior Subordinated Debentures (in thousands) | December 31, 2024 | December 31, 2023 | ||||||||||||
| Beginning balance | $ | 11,213 | $ | 10,883 | ||||||||||
| Total (gains) losses included in earnings | 614 | (274) | ||||||||||||
| Total gains (losses) included in other comprehensive income | (245) | 544 | ||||||||||||
| Capitalized interest | (10) | 60 | ||||||||||||
| Ending balance | $ | 11,572 | $ | 11,213 | ||||||||||
| The amount of total losses (gains) for the period included in earnings attributable to the change in unrealized gains or losses relating to liabilities still held at the reporting date | $ | 614 | $ | (274) | ||||||||||
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2024 | Mar 20, 2025 | Showing above |
| 2020 | Mar 5, 2021 | |
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.