Fair Value Measurements

9 Months Ended

Sep. 30, 2015

Fair Value Disclosures [Abstract]

Fair Value Measurements

Note 10. Fair Value Measurements

ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

ASC Topic 820 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 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 other 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 reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Investment securities available for sale: The fair values of exchange-listed equity securities are based on quoted market prices and are categorized as Level 1 of the fair value hierarchy. The fair values of debt securities were generally determined based on matrix pricing. Matrix pricing is a mathematical technique that utilizes observable market inputs including, for example, yield curves, credit ratings and prepayment speeds. Fair values determined using matrix pricing are categorized as Level 2 in the fair value hierarchy.

Redeemable common stock: The Company has certain shares of common stock outstanding whereby the holder may put its shares to the Company for cash. This redeemable common stock is recorded at its fair value in the mezzanine equity section of our consolidated balance sheets and changes in fair value are recorded in retained earnings. The fair value of a share of common stock was determined by applying a market valuation approach based upon comparative financial and pricing analysis of the Company with a peer group of publicly traded financial institutions. The comparative financial analysis is based on three types of market pricing ratios: price to earnings, price to book (or price to tangible book) and price to assets, with a greater emphasis given to price to earnings and price to book value. Valuations include assumptions not observable in the marketplace, and the related fair value measurements have been categorized as Level 3 measurements.

The Company is required, on a nonrecurring basis, to adjust the carrying value of certain assets or provide valuation allowances related to certain assets, using fair value measurements in accordance with generally accepted accounting principles.

Impaired loans: The specific reserves for collateral-dependent impaired loans are based on the fair value of the collateral less estimated costs to sell. The fair value of collateral was determined based on appraisals, with further adjustments made to the appraised values due to various factors, including the age of the appraisal, age of comparables included in the appraisal, and changes in the market and in the collateral. As these significant adjustments are based on unobservable inputs, the resulting fair value measurements have been categorized as Level 3 measurements.

Foreclosed real estate: Foreclosed real estate is recorded at fair value based on property appraisals, less estimated selling costs, at the date of transfer. The carrying value of foreclosed real estate is not remeasured to fair value on a recurring basis, but is subject to fair value adjustments when the carrying value exceeds the fair value, less estimated selling costs. Property appraisals are based on assumptions generally not observable in the marketplace, and the related nonrecurring fair value measurement adjustments have generally been classified as Level 3.

Mortgage servicing rights: Mortgage servicing rights are initially measured at fair value in the Company’s consolidated balance sheet. The Company utilizes the amortization method to subsequently measure its capitalized servicing assets. In accordance with ASC Topic 860, the Company must record impairment charges when the carrying value of certain strata exceeds their estimated fair value. To estimate the fair value of servicing rights, the Company considers market prices for similar assets and the present value of expected future cash flows associated with the servicing rights calculated using assumptions that market participants would use in estimating future servicing income and expense. Such assumptions include estimates of the cost of servicing loans, loan default rates, an appropriate discount rate, and prepayment speeds. For purposes of evaluating and measuring impairment of capitalized servicing rights, the Company stratifies such assets based on the predominant risk characteristics of the underlying financial instruments that are expected to have the most impact on projected prepayments, cost of servicing, and other factors affecting future cash flows associated with the servicing rights. Such factors may include financial asset or loan type, note rate and term. The amount of impairment recognized is the amount by which the carrying value of the capitalized servicing rights for a stratum exceeds estimated fair value. Impairment is recognized through a valuation allowance. The determination of fair value of capitalized servicing rights is considered a Level 3 valuation.

The following tables summarize assets and liabilities measured at fair value as of September 30, 2015 and December 31, 2014, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

	September 30, 2015
	Level 1		Level 2		Level 3			Total
	Inputs		Inputs		Inputs			Fair Value
Recurring:
Investment securities available for sale:
Residential mortgage-backed securities	$	-	$	22,381	$	-		$	22,381
SBA pools		-		2,646		-			2,646
Obligations of states and political subdivisions		-		10,343		-			10,343
Government-sponsored enterprise equity securities		-		125		-			125
Redeemable common stock		-		-		(2,257	)		(2,257	)
Nonrecurring:
Foreclosed real estate		-		-		1,975			1,975
Collateral-dependent impaired loans		-		-		1,914			1,914
Mortgage servicing rights		-		-		315			315

	December 31, 2014
	Level 1		Level 2		Level 3			Total
	Inputs		Inputs		Inputs			Fair Value
Recurring:
Investment securities available for sale:
Residential mortgage-backed securities	$	-	$	22,545	$	-		$	22,545
SBA pools		-		1,832		-			1,832
Obligations of states and political subdivisions		-		9,698		-			9,698
Government-sponsored enterprise equity securities		-		102		-			102
Redeemable common stock		-		-		(2,533	)		(2,533	)
Nonrecurring:
Foreclosed real estate		-		-		3,656			3,656
Collateral-dependent impaired loans		-		-		3,002			3,002
Mortgage servicing rights		-		-		646			646

The following tables present additional quantitative information about the unobservable inputs used in the fair value measurement of mortgage servicing rights measured on a non-recurring basis that were categorized within Level 3 of the fair value hierarchy:

	Fair Value at September 30, 2015		Valuation Technique	Unobservable Input	Range
	(in thousands)
Mortgage servicing rights	$	315	Discounted cash flows(1)	Prepayment PSA		157 – 335
				Discount rate		8.50% – 9.25%
				Maturity (months) WAM		37 – 325
				Costs to service		$65 - $750

	Fair Value at December 31, 2014		Valuation Technique	Unobservable Input	Range
	(in thousands)
Mortgage servicing rights	$	646	Discounted cash flows(1)	Prepayment PSA		157- 335
				Discount rate		8.50% – 9.25%
				Maturity (months) WAM		37- 325
				Costs to service		$65 - $750

(1) The estimated fair value on mortgage servicing rights is determined through a cash flow analysis performed at the loan level and is based on the objective attributes of the portfolio (i.e., note rate, loan amount, etc.) and industry assumptions used in the marketplace.

There was no change in the per share fair value of redeemable common stock, which is a recurring fair value measurements using significant unobservable inputs (Level 3), between December 31, 2014 and September 30, 2015.

For the three and nine months ended September 30, 2015 and 2014 there were no transfers in or out of Levels 1, 2, and 3.

ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not recognized at fair value on a recurring basis or nonrecurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are recognized at fair value on a recurring or nonrecurring basis are discussed above.

The estimated fair values of the Company’s financial instruments are as follows:

		September 30,				December 31,
		2015				2014
	Level in Fair Value	Carrying		Fair		Carrying		Fair
	Hierarchy	Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents	Level 1	$	9,896	$	9,896	$	14,373	$	14,373
Certificates of deposit	Level 2		9,521		9,521		4,181		4,181
Federal funds sold	Level 2		3,000		3,000		2,000		2,000
Securities available for sale	Level 2		35,495		35,495		34,177		34,177
Federal Home Loan Bank stock	Level 2		2,036		2,036		2,079		2,079
Loans held for sale	Level 2		1,719		1,719		1,707		1,707
Loans receivable, net	Level 2		197,336		201,241		182,050		183,219
Accrued interest receivable	Level 2		1,252		1,252		834		834
Mortgage servicing rights	Level 3		1,862		2,143		1,886		2,578
Financial liabilities:
Deposits	Level 2		232,714		232,131		221,972		215,199
Advances from borrowers for taxes and insurance	Level 2		3,639		3,639		2,630		2,630
Accrued interest payable	Level 2		83		83		17		17
Redeemable common stock	Level 3		2,257		2,257		2,533		2,533