Note 6: Fair Values of Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:

Level 1Quoted prices in active markets for identical assets or liabilities

Level 2Observable 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 for substantially the full term of the assets or liabilities

Level 3Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities

Items Measured at Fair Value on a Recurring Basis

Following is a description of the valuation methodologies and inputs used for instruments measured at fair value on a recurring basis and recognized in the accompanying comparative balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Available-for-Sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. The Company uses a third-party provider to provide market prices on its securities. Pooled trust preferred securities prices are evaluated by a third party. Level 1 securities include marketable equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include mortgage-backed, collateralized mortgage obligations, small business administration, marketable equity, municipal, federal agency and certain corporate obligation securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include certain corporate obligation securities.

Third party vendors compile prices from various sources and may apply such techniques as matrix pricing to determine the value of identical or similar investment securities (Level 2). Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather relying on investment securities relationship to other benchmark quoted investment securities. Any investment security not valued based upon the methods above are considered Level 3.

The following table presents the fair value measurements of assets measured on a recurring basis and level within the ASC 820 fair value hierarchy.



			Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
March 31, 2016
Mortgage-backed securities	$	106,559	$	-	$	106,559	$	-
Collateralized mortgage obligations		83,873		-		83,873		-
Municipal obligations		64,211		-		64,211		-
Corporate obligations		11,528		-		8,994		2,534
Available-for-sale securities	$	266,171	$	-	$	263,637	$	2,534



			Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
December 31, 2015
Mortgage-backed securities	$	107,838	$	-	$	107,838	$	-
Collateralized mortgage obligations		84,652		-		84,652		-
Municipal obligations		57,188		-		57,188		-
Corporate obligations		11,460		-		8,926		2,534
Available-for-sale securities	$	261,138	$	-	$	258,604	$	2,534

The following is a reconciliation of the beginning and ending balances for the three months ended March 31, 2016 and 2015 of recurring fair value measurements recognized in the accompanying balance sheets using significant unobservable (Level 3) inputs:



	Three Months Ended
	March 31,
		2016		2015
Beginning balance	$	2,534	$	2,522
Total realized and unrealized gains (losses)
Included in net income		-		-
Included in other comprehensive income (loss)		-		-
Purchases, issuances and settlements		-		-
Ending balance	$	2,534	$	2,522
Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets still held at the reporting date	$	0	$	0

Items Measured at Fair Value on a Non-Recurring Basis

From time to time, certain assets may be recorded at fair value on a non-recurring basis. These non-recurring fair value adjustments typically are a result of the application of lower of cost or fair value accounting or a write-down occurring during the period. The following is a description of the valuation methodologies used for certain assets that are recorded at fair value.

The following table presents the fair value measurement of assets measured on a nonrecurring basis and the level within the ASC 820 fair value hierarchy.

Impaired Loans (Collateral Dependent)

Loans for which it is probable that the Bank will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.

Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.



			Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
December 31, 2015
Impaired loans	$	676	$	-	$	-	$	676

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements:



March 31, 2016	Fair Value		Valuation Technique	Unobservable Inputs	Range
Trust Preferred Securities	$	2,534	Discounted cash flow	Discount rate	7.0 - 8.0	%
				Constant prepayment rate	2.0	%
				Cumulative projected prepayments	40.0	%
				Probability of default	1.7 - 1.8	%
				Projected cures given deferral	0 - 15.0	%
				Loss severity	33.8 - 40.2	%



December 31, 2015	Fair Value		Valuation Technique	Unobservable Inputs	Range
Trust Preferred Securities	$	2,534	Discounted cash flow	Discount rate	7.0 - 8.0	%
				Constant prepayment rate	2.0	%
				Cumulative projected prepayments	40.0	%
				Probability of default	1.7 - 1.8	%
				Projected cures given deferral	0 - 15.0	%
				Loss severity	33.8 - 40.2	%
Impaired loans (collateral dependent)	$	676	Third party valuations	Discount to reflect realizable value	20.0 - 50.0	%

The following methods and assumptions were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value:

Cash and Cash Equivalents - The fair value of cash and cash-equivalents approximates carrying value.

Loans Held For Sale - Fair values are based on quoted market prices.

Loans - The fair value for loans is estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

FHLB Stock - Fair value of FHLB stock is based on the price at which it may be resold to the FHLB.

Interest Receivable/Payable - The fair values of interest receivable/payable approximate carrying values.

Deposits - The fair values of noninterest-bearing, interest-bearing demand and savings accounts are equal to the amount payable on demand at the balance sheet date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on such time deposits.

FHLB Advances - The fair value of these borrowings is estimated using a discounted cash flow calculation, based on current rates for similar debt for periods comparable to the remaining terms to maturity of these advances.

Other Borrowings - The fair value of these borrowings is estimated using discounted cash flow analyses using interest rates for similar financial instruments.

Off-Balance Sheet Commitments - Commitments include commitments to purchase and originate mortgage loans, commitments to sell mortgage loans, and standby letters of credit and are generally of a short-term nature. The fair values of such commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of these instruments is insignificant.

The estimated fair values of the Company’s financial instruments not carried at fair value in the consolidated balance sheets as of the dates noted below are as follows:



					Fair Value Measurements Using
March 31, 2016		Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	30,712	$	30,712	$	30,712	$	-	$	-
Interest-bearing time deposits		980		980		980		-		-
Loans held for sale		5,886		6,095		-		6,095		-
Loans, net		1,074,221		1,073,638		-		-		1,073,638
FHLB stock		10,482		10,482		-		10,482		-
Interest receivable		3,962		3,962		-		3,962		-
Liabilities
Deposits		1,113,923		1,116,266		758,627		-		357,639
FHLB advances		218,617		220,523		-		220,523		-
Other borrowings		9,279		9,305		-		9,305		-
Interest payable		248		248		-		248		-



					Fair Value Measurements Using
December 31, 2015		Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	20,915	$	20,915	$	20,915	$	-	$	-
Loans held for sale		5,991		6,058		-		6,058		-
Loans, net		1,068,204		1,056,357		-		-		1,056,357
FHLB stock		10,482		10,482		-		10,482		-
Interest receivable		4,201		4,201		-		4,201		-
Liabilities
Deposits		1,091,382		1,090,975		740,759		-		350,216
FHLB advances		225,617		224,621		-		224,621		-
Other borrowings		9,458		9,459		-		9,459		-
Interest payable		199		199		-		199		-