NOTE (7) – Fair Value

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 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:

The fair values of securities available-for-sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique to value 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).

The Company’s loans receivable held for sale are carried at the lower of cost or fair value. The fair value of loans receivable held for sale is determined by pricing for comparable assets or by outstanding commitments from third party investors, resulting in a Level 2 classification.

The fair value of impaired loans that are collateral dependent is generally based upon the fair value of the collateral which is obtained from 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. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Assets acquired through or by transfer in lieu 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 the lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated every nine months. 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. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Appraisals for collateral-dependent impaired loans and 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, an independent third-party licensed appraiser reviews the appraisals for accuracy and reasonableness, reviewing 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.

Assets Measured on a Recurring Basis

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

	Fair Value Measurements at March 31, 2015
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(In thousands)
Assets:
Securities available-for-sale - residential mortgage-backed	$	-	$	14,503	$	-	$	14,503
Securities available-for-sale - U.S. Government and federal agency	1,983		-		-		1,983

	Fair Value Measurements at December 31, 2014
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(In thousands)
Assets:
Securities available-for-sale - residential mortgage-backed	$	-	$	15,118	$	-	$	15,118
Securities available-for-sale - U.S. Government and federal agency		1,957		-		-		1,957

There were no transfers between Level 1, Level 2, or Level 3 during the three months ended March 31, 2015 and 2014.

Assets Measured on a Non-Recurring Basis

Assets are considered to be reflected at fair value on a non-recurring basis if the fair value measurement of the instrument does not necessarily result in a change in the amount recorded on the balance sheet. Generally, a non-recurring valuation is the result of the application of other accounting pronouncements that require assets to be assessed for impairment or recorded at the lower of cost or fair value.

The following table provides information regarding the carrying values of our assets measured at fair value on a non-recurring basis at the dates indicated. The fair value measurement for all of these assets falls within Level 3 of the fair value hierarchy, except for loans receivable held for sale which is a Level 2 classification.

	March 31, 2015		December 31, 2014
	(In thousands)
Assets:
Loans receivable held for sale:
Multi-family	$	19,982	$	19,679
Impaired loans carried at fair value of collateral:
Single family	521		549
Multi-family	-		323
Commercial real estate	1,126		1,177
Church	2,874		3,779
Real estate owned:
Church	2,479		2,082

The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at March 31, 2015 and December 31, 2014:

	March 31, 2015
	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
	(Dollars in thousands)

Impaired loans – single family	$	521	Sales comparison approach	Adjustment for differences between the comparable sales	-9% to -3% (-6%)

Impaired loans – commercial real estate	1,126		Sales comparison approach	Adjustment for differences between the comparable sales	0% to 1% (0%)
			Income approach	Capitalization rate	4.75% to 7.25% (6.57%)

Impaired loans – church	2,874		Sales comparison approach	Adjustment for differences between the comparable sales	-12% to 18% (5%)

Real estate owned – church	2,479		Sales comparison approach	Adjustment for differences between the comparable sales	-2% to -1% (-1%)

	December 31, 2014
	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
	(Dollars in thousands)

Impaired loans – single family	$	549	Sales comparison approach	Adjustment for differences between the comparable sales	-1% to 9% (-4%)

Impaired loans – multi-family	323		Sales comparison approach	Adjustment for differences between the comparable sales	-18%

			Income approach	Capitalization rate	7%

Impaired loans – commercial real estate	1,177		Sales comparison approach	Adjustment for differences between the comparable sales	0% to 1% (0%)

			Income approach	Capitalization rate	5% to 7.25% (6.64%)

Impaired loans – church	3,779		Sales comparison approach	Adjustment for differences between the comparable sales	-12% to 18% (5%)

			Income approach	Capitalization rate	6%

Real estate owned – church	2,082		Sales comparison approach	Adjustment for differences between the comparable sales	-1% to 2% (0%)

Fair Values of Financial Instruments

The carrying amounts and estimated fair values of financial instruments, at March 31, 2015 and December 31, 2014 were as follows:

				Fair Value Measurements at March 31, 2015
	Carrying Value			Level 1		Level 2		Level 3		Total
	(In thousands)
Financial Assets:
Cash and cash equivalents	$	28,549		$	28,549	$	-	$	-	$	28,549
Securities available-for-sale	16,486			1,983		14,503		-		16,486
Loans receivable held for sale	19,813			-		19,982		-		19,982
Loans receivable held for investment	272,514			-		-		272,864		272,864
Accrued interest receivable	1,172			12		37		1,123		1,172
Federal Home Loan Bank stock	3,972			-		-		-		N/A
Financial Liabilities:
Deposits	$		222,092	$	-	$	215,316	$	-	$	215,316
Federal Home Loan Bank advances	84,500			-		86,817		-		86,817
Junior subordinated debentures	5,100			-		-		2,980		2,980
Accrued interest payable	42			-		36		6		42

			Fair Value Measurements at December 31, 2014
	Carrying Value		Level 1		Level 2		Level 3		Total
	(In thousands)
Financial Assets:
Cash and cash equivalents	$	20,790	$	20,790	$	-	$	-	$	20,790
Securities available-for-sale	17,075		1,957		15,118		-		17,075
Loans receivable held for sale	19,481		-		19,679		-		19,679
Loans receivable held for investment	276,643		-		-		277,000		277,000
Accrued interest receivable	1,216		6		39		1,171		1,216
Federal Home Loan Bank stock	4,254		-		-		-		N/A
Financial Liabilities:
Deposits	$	217,867	$	-	$	210,181	$	-	$	210,181
Federal Home Loan Bank advances	86,000		-		88,246		-		88,246
Junior subordinated debentures	5,100		-		-		2,034		2,034
Accrued interest payable	69		-		39		30		69

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

(a) Cash and Cash Equivalents

The carrying amounts of cash and cash equivalents approximate fair values and are classified as Level 1.

(b) Loans receivable held for investment

Fair values of loans, excluding loans receivable held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

(d) Accrued Interest Receivable/Payable

The carrying amounts of accrued interest receivable/payable approximate their fair value and are classified the same as the related asset.

(e) Deposits

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in Level 2 classification. Fair values for fixed rate certificates of deposit are estimated using discounted cash flow calculations that apply interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

(f) Federal Home Loan Bank Advances

The fair values of the Federal Home Loan Bank advances are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

(g) Junior Subordinated Debentures

The fair values of the Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.