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Fair Value Accounting and Measurement
3 Months Ended
Mar. 31, 2018
Fair Value Disclosures [Abstract]  
Fair Value Accounting and Measurement
Fair Value Accounting and Measurement

Fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants in the Company’s principal market. The Company has established and documented its process for determining the fair values of its assets and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, management determines the fair value of the Company’s assets and liabilities using valuation models or third-party pricing services, both of which rely on market-based parameters when available, such as interest rate yield curves, option volatilities and credit spreads, or unobservable inputs. Unobservable inputs may be based on management’s judgment, assumptions, and estimates related to credit quality, liquidity, interest rates, and other relevant inputs.

Any changes to valuation methodologies are reviewed by management to ensure they are relevant and justified. Valuation methodologies are refined as more market-based data becomes available.

A three-level valuation hierarchy is used in determining fair value that is based on the transparency of the inputs used in the valuation process. The inputs used in determining fair value in each of the three levels of the hierarchy are as follows:

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 - Either: (i) quoted prices for similar assets or liabilities; (ii) observable inputs, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data.

Level 3 - Unobservable inputs.

The hierarchy gives the highest ranking to Level 1 inputs and the lowest ranking to Level 3 inputs. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the overall fair value measurement.

Qualitative disclosures of valuation techniques - Securities available for sale: where quoted prices are available in an active market, securities are classified as Level 1. Level 1 instruments include highly liquid government bonds, securities issued by the U.S. Treasury, and exchange-traded equity securities.

If quoted prices are not available, management determines fair value using pricing models, quoted prices of similar securities, which are considered Level 2, or discounted cash flows. In certain cases, where there is limited activity in the market for a particular instrument, assumptions must be made to determine their fair value. Such instruments are classified as Level 3.

Assets and liabilities measured at fair value on a recurring basis - Assets and liabilities are considered to be fair valued on a recurring basis if fair value is measured regularly (i.e., daily, weekly, monthly, or quarterly). The following tables show the Company’s assets measured at fair value on a recurring basis at the dates indicated:
 
March 31, 2018
 
Quoted Prices in
Active Markets for
Identical Assets
 or Liabilities
 
Significant
Other
Observable
 Inputs
 
Significant
Unobservable
Inputs
 
 
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 
(In thousands)
Securities available-for-sale
 
 
 
 
 
 
 
Municipal bonds
$

 
$
10,624

 
$

 
$
10,624

ABS agency

 
16,089

 

 
16,089

ABS corporate

 
22,692

 

 
22,692

Corporate debt

 
10,040

 

 
10,040

SBA

 
40,349

 

 
40,349

MBS agency

 
140,172

 

 
140,172

MBS corporate

 
18,252

 

 
18,252

 
$

 
$
258,218

 
$

 
$
258,218

 
 
 
 
 
 
 
 
 
December 31, 2017
 
Quoted Prices in
Active Markets for
Identical Assets
or Liabilities
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
 
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 
(In thousands)
Securities available-for-sale
 
 
 
 
 
 
 
Municipal bonds
$

 
$
13,434

 
$

 
$
13,434

ABS agency

 
21,770

 

 
21,770

ABS corporate

 
22,768

 

 
22,768

Corporate debt

 
19,908

 

 
19,908

SBA

 
47,274

 

 
47,274

MBS agency

 
144,542

 

 
144,542

MBS corporate

 
20,546

 

 
20,546

 
$

 
$
290,242

 
$

 
$
290,242




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

The following tables present the Company’s assets measured at fair value on a nonrecurring basis at the dates indicated:
 
March 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Impaired loans
$

 
$

 
$
13,345

 
$
13,345

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Impaired loans
$

 
$

 
$
6,061

 
$
6,061



At March 31, 2018 and December 31, 2017, there were no impaired loans with discounts to appraisal disposition value or other unobservable inputs.


The following tables present the carrying value and estimated fair value of financial instruments at the dates indicated:
 
March 31, 2018
 
Carrying Amount
 
Estimated Fair Value
 
Fair Value Measurements Using:
 
 
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
25,150

 
$
25,150

 
$
25,150

 
$

 
$

Investment securities available for sale
258,218

 
258,218

 

 
258,218

 

Investment securities held to maturity
47,709

 
47,267

 

 
47,267

 

Loans receivable, net
798,828

 
776,640

 

 

 
776,640

FHLB stock
6,389

 
6,389

 

 
6,389

 

Accrued interest receivable
3,641

 
3,641

 

 
3,641

 

Mortgage servicing rights, net
1,104

 
1,821

 

 

 
1,821

 
 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
 
Demand deposits
$
640,488

 
$
640,488

 
$
640,488

 
$

 
$

Time deposits
240,134

 
237,823

 

 
237,823

 

Borrowings
122,949

 
124,029

 

 
124,029

 

Accrued interest payable
210

 
210

 

 
210




 
December 31, 2017
 
Carrying Amount
 
Estimated Fair Value
 
Fair Value Measurements Using:
 
 
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
36,801

 
$
36,801

 
$
36,801

 
$

 
$

Investment securities available for sale
290,242

 
290,242

 

 
290,242

 

Investment securities held to maturity
50,126

 
50,266

 

 
50,266

 

Loans held for sale
788

 
788

 

 
788

 

Loans receivable, net
779,111

 
768,181

 

 

 
768,181

FHLB stock
7,023

 
7,023

 

 
7,023

 

Accrued interest receivable
3,745

 
3,745

 

 
3,745

 

Mortgage servicing rights, net
1,095

 
1,669

 

 

 
1,669

 
 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
 
Demand deposits
$
645,779

 
$
645,779

 
$
645,779

 
$

 
$

Time deposits
239,253

 
237,841

 

 
237,841

 

Borrowings
144,100

 
145,892

 

 
145,892

 

Accrued interest payable
325

 
325

 

 
325

 



Financial assets and liabilities other than investment securities are not traded in active markets. Estimated fair values require subjective judgments and are approximate. The estimates of fair value in the previous table are not necessarily representative of amounts that could be realized in actual market transactions, or of the underlying value of the Company. The methods and assumptions used by the Company in estimating fair values of financial instruments as set forth below in accordance with ASC Topic 825, Financial Instruments, as amended by ASU 2016-01 requiring public entities to use the exit price notion effective January 1, 2018, are as follows:

Financial instruments with a carrying amount equal to fair value - The fair value of financial instruments that are short-term or reprice frequently and that have little or no risk are considered to have a fair value equal to the carrying amount. These instruments include cash and due from banks, interest bearing deposits with banks, FHLB stock, accrued interest receivable, and accrued interest payable. FHLB stock is not publicly traded, however, it may be redeemed on a dollar-for-dollar basis, for any amount the Bank is not required to hold, subject to the FHLB's discretion. The fair value is therefore equal to the carrying amount.

Securities - Fair values for investment securities are primarily measured using information from a third-party pricing service. The pricing service uses pricing models based on market data. In the event that limited or less transparent information is provided by the third-party pricing service, fair value is estimated using secondary pricing services or non-binding third-party broker quotes.

Loans held for sale - The fair value of loans held for sale is based on quoted market prices from Federal Home Loan Mortgage Corporation ("Freddie Mac"), which are updated daily and represent prices at which loans are exchanged in high volumes and in a liquid market.

Loans receivable, net - At March 31, 2018, the fair value of loans and leases is estimated by discounting the future cash flows using the current rate at which similar loans and leases would be made to borrowers with similar credit and for the same remaining maturities. Additionally, to be consistent with the requirements under FASB ASC Topic 820 for Fair Value Measurements and Disclosures, the loans and leases were valued at a price that represents the Company’s exit price or the price at which these instruments would be sold or transferred.

At December 31, 2017, fair values were estimated for portfolios of loans with similar financial characteristics. Loans were segregated by type, including fixed and variable one- to four-family residential real estate, commercial, and consumer loans. There is an accurate and reliable secondary market for one- to four-family residential mortgage production, and available market benchmarks are used to establish discount factors for estimating fair value for these types of loans. Commercial and consumer loans use market benchmarks when available; however, due to the varied term structures and credit issues involved, they mainly rely on cash flow projections and repricing characteristics within the loan portfolio. These amounts are discounted further by embedded probable losses expected to be realized in the portfolio.

Mortgage servicing rights, net - The estimated fair value of mortgage servicing rights is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income.

Deposits - The fair value of deposits with no stated maturity, such as non-interest bearing deposits, savings and interest checking accounts, and money market accounts, is equal to the amount payable on demand as of March 31, 2018 and December 31, 2017. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

Borrowings - The fair value of FHLB advances and other borrowings are calculated using a discounted cash flow method, adjusted for market interest rates and terms to maturity.

Off-balance-sheet financial instruments - Commitments to extend credit represent all off-balance-sheet financial instruments. The fair value of these commitments is not significant.