NOTE 4: FAIR VALUE MEASUREMENTS

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an 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. In estimating fair value, we utilize valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability.

ASC 820, Fair Value Measurements and Disclosure, establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1Quoted prices in active markets for identical instruments.

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 that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The estimated fair value amounts have been determined by us using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amount we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies could have a material effect on our estimated fair value amounts. There were no significant changes in valuation methods used to estimate fair value during the six months ended June 30, 2016.

A description of the valuation methodologies used for instruments measured at fair value on a recurring basis is as follows:

Available for sale securities – The fair value of U.S. Government and federal agency securities, equity securities, and residential mortgage-backed securities is estimated based on quoted market prices or dealer quotes. The fair value of other investments such as obligations of state and political subdivisions is estimated based on quoted market prices. We obtain fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and bond’s terms and conditions, among other things. We review the prices supplied by our independent pricing service, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices.

Derivative instruments – We utilize an interest rate swap agreement to convert one of our variable-rate subordinated debentures to a fixed rate. This has been designated as a cash flow hedge. We also offer an interest rate swap program that permits qualified customers to manage interest rate risk on variable rate loans with Bank SNB. Derivative contracts are executed between our customers and Bank SNB. Offsetting contracts are executed by Bank SNB and approved counterparties. The counterparty contracts are identical to customer contracts, except for a fixed pricing spread or fee paid to us and collateral requirements. The fair value of the interest rate swap agreements are obtained from dealer quotes.

The following table summarizes financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015:



			Fair Value Measurement at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(Dollars in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
At June 30, 2016
Available for sale securities:
Federal agency securities	$	68,287	$	-	$	68,287	$	-
Obligations of state and political subdivisions		48,317		-		48,317		-
Residential mortgage-backed securities		259,007		-		259,007		-
Asset-backed securities		9,417		-		9,417		-
Corporate debt		25,107		137		24,970		-

Derivative asset		5,163		-		5,163		-
Derivative liability		(6,322)		-		(6,322)		-
Total	$	408,976	$	137	$	408,839	$	-

At December 31, 2015
Available for sale securities:
Federal agency securities	$	78,211		-		78,211		-
Obligations of state and political subdivisions		47,564		-		47,564		-
Residential mortgage-backed securities		239,888		-		239,888		-
Asset-backed securities		9,415		-		9,415		-
Corporate debt		25,253		137		25,116		-

Derivative asset		1,793		-		1,793		-
Derivative liability		(3,163)		-		(3,163)		-
Total	$	398,961	$	137	$	398,824	$	-

Certain financial assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). These assets are recorded at the lower of cost or fair value. Valuation methodologies for assets measured on a nonrecurring basis are as follows:

Impaired loans – Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from collateral. Collateral values are estimated using inputs based on third-party appraisals. Certain other impaired loans are analyzed and reported through a specific valuation allowance based upon the net present value of cash flows.

Loans held for sale –Real estate mortgage loans held for sale are carried at the lower of cost or market, which is determined on an individual loan basis. The fair value of loans held for sale is based on existing investor commitments.

Other real estate – Other real estate fair value is based on third-party appraisals for significant properties less the estimated costs to sell the asset.

Mortgage loan servicing rights – There is no active trading market for loan servicing rights. The fair value of loan servicing rights is estimated by calculating the present value of net servicing revenue over the anticipated life of each loan. A cash flow model is used to determine fair value. Key assumptions and estimates, including projected prepayment speeds and assumed servicing costs, earnings on escrow deposits, ancillary income, and discount rates, used by this model are based on current market sources. A separate third party model is used to estimate prepayment speeds based on interest rates, housing turnover rates, estimated loan curtailment, anticipated defaults, and other relevant factors. The prepayment model is updated for changes in market conditions.

Core deposit premiums – The fair value of core deposit premiums are based on third-party appraisals. There has been no impairment during 2016 or 2015; therefore, no fair value adjustment was recorded through earnings.

Goodwill – Fair value of goodwill is based on the fair value of each of our reporting units to which goodwill is allocated compared with their respective carrying value. There has been no impairment during 2016 or 2015; therefore, no fair value adjustment was recorded through earnings.

Assets that were measured at fair value on a nonrecurring basis as of June 30, 2016 and December 31, 2015 are summarized below.



			Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(Dollars in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
At June 30, 2016
Impaired loans at fair value :
Commercial real estate	$	14,403	$	-	$	-	$	14,403
One-to-four family residential		1,821		-		-		1,821
Real estate construction		207		-		-		207
Commercial		5,796		-		-		5,796

Loans held for sale:
One-to-four family residential		7,010		-		7,010		-

Mortgage loan servicing rights		3,350		-		3,350		-
Total	$	32,587	$	-	$	10,360	$	22,227

At December 31, 2015
Impaired loans at fair value :
Commercial real estate	$	11,182	$	-	$	-	$	11,182
One-to-four family residential		185		-		-		185
Real estate construction		390		-		-		390
Commercial		9,845		-		-		9,845

Loans held for sale:
One-to-four family residential		7,453		-		7,453		-

Other real estate		2,274		-		-		2,274
Mortgage loan servicing rights		3,721		-		3,721		-
Total	$	35,050	$	-	$	11,174	$	23,876

As of June 30, 2016, impaired loans measured at fair value with a carrying amount of $26.9 million were written down to a fair value of $22.2 million, resulting in a life-to-date impairment of $4.7 million. As of December 31, 2015, impaired loans measured at fair value with a carrying amount of $25.9 million were written down to a fair value of $21.6 million at December 31, 2015, resulting in a life-to-date impairment charge of $4.3 million.

As of December 31, 2015, other real estate assets were written down to their fair values, resulting in an impairment charge of $0.1 million, which was included in noninterest expense. No impairment was recognized during the period ended June 30, 2016.

As of June 30, 2016 and December 31, 2015, mortgage servicing rights were written down to their fair values, resulting in an impairment charge of $0.5 million and $0.1 million, respectively, which was included in noninterest income.

No impairment of core deposit premiums or goodwill was recognized during the periods ending June 30, 2016 or December 31, 2015.

ASC 825, Financial Instruments, requires an entity to provide disclosures about fair value of financial instruments, including those that are not measured and reported at fair value on a recurring or nonrecurring basis. The methodologies used in estimating the fair value of financial instruments that are measured on a recurring or nonrecurring basis are discussed above. The methodologies for the other financial instruments are discussed below:

Cash and cash equivalents – For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value.

Securities held to maturity – The investment securities held to maturity are carried at cost. The fair value of the held to maturity securities is estimated based on quoted market prices or dealer quotes.

Loans, net of allowance – Fair values are estimated for certain homogenous categories of loans adjusted for differences in loan characteristics. Our loans have been aggregated by categories consisting of commercial, real estate, and other consumer. The fair value of loans is estimated by discounting the cash flows using risks inherent in the loan category and interest rates currently offered for loans with similar terms and credit risks.

Accrued interest receivable – The carrying amount is a reasonable estimate of fair value for accrued interest receivable.

Investments included in other assets – The estimated fair value of investments included in other assets, which primarily consists of investments carried at cost, approximates their carrying values.

Deposits – The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the statement of financial condition date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.

Accrued interest payable and other liabilities – The estimated fair value of accrued interest payable and other liabilities, which primarily includes trade accounts payable, approximates their carrying values.

Other borrowings – Included in other borrowings are FHLB advances and securities sold under agreements to repurchase. The fair value for fixed rate FHLB advances is based upon discounted cash flow analysis using interest rates currently being offered for similar instruments. The fair values of other borrowings are the amounts payable at the statement of financial condition date, as the carrying amount is a reasonable estimate of fair value due to the short-term maturity rates.

Subordinated debentures – Our two subordinated debentures have floating rates that reset quarterly. The fair value of the floating rate subordinated debentures approximates carrying value at June 30, 2016.

Loan commitments and letters of credit – The fair values of commitments are estimated using the fees currently charged to enter into similar agreements, taking into account the terms of the agreements. The fair values of letters of credit are based on fees currently charged for similar agreements.

The carrying values and estimated fair values of our financial instruments segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value were as follows:



	At June 30, 2016				At December 31, 2015
	Carrying		Fair		Carrying		Fair
(Dollars in thousands)	Values		Values		Values		Values
Financial assets:
Level 2 inputs:
Cash and cash equivalents	$	68,088	$	68,088	$	78,129	$	78,129
Securities held to maturity		12,161		12,660		11,797		12,282
Accrued interest receivable		5,730		5,730		5,767		5,767
Investments included in other assets		14,398		14,398		10,383		10,383
Level 3 inputs:
Total loans, net of allowance		1,794,501		1,780,222		1,753,323		1,728,114
Financial liabilities:
Level 2 inputs:
Deposits		1,902,865		1,839,860		1,884,105		1,780,954
Accrued interest payable		931		931		867		867
Other liabilities		9,823		9,823		10,314		10,314
Other borrowings		153,568		154,476		110,927		112,149
Subordinated debentures		46,393		46,393		51,548		51,548
Loan commitments				466,205				446,412
Letters of credit				7,112				6,563