8. Fair Value

9 Months Ended

Sep. 30, 2015

Notes

8. Fair Value

8.  Fair Value

Fair Value Measurement

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic of ASC 820, the fair value of a financial instrument 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 is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance in FASB ASC 820 provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions. In accordance with this guidance, the Company groups its assets and liabilities carried at fair value in three levels as follows:

Level 1

·       Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2

·      

Quoted prices for similar assets or liabilities in active markets.

·      

Quoted prices for identical or similar assets or liabilities in markets that are not active.

·       Inputs other than quoted prices that are observable, either directly or indirectly, for the term of the asset or liability (e.g., interest rates, yield curves, credit risks, prepayment speeds or volatilities) or “market corroborated inputs.”

Level 3

·       Prices or valuation techniques that require inputs that are both unobservable (i.e., supported by little or no market activity) and that are significant to the fair value of the assets or liabilities.

·       These assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.

Fair Value on a Recurring Basis

Securities Available for Sale (“AFS”):  Where quoted prices are available in an active market, securities would be classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government bonds and mutual funds. 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 flow models. Level 2 securities include U.S. agency securities and mortgage backed agency securities.  In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

Loans Held for Sale. Fair values are estimated by using actual quoted market bids on a loan by loan basis.

Loans Held at Fair Value.  Fair values for loans for which the guaranteed portion is intended to be sold are estimated by using actual quoted market bids on a loan by loan basis. Fair values for the un-guaranteed portion of SBA loans are estimated based on the present value of future cashflows for each asset based on their unique characteristics, market-based assumptions for prepayment speeds, discount rates, default and voluntary prepayments as well as assumptions for losses and recoveries.

Assets on the consolidated balance sheets measured at fair value on a recurring basis are summarized below.

(in 000’s)		Fair Value Measurements at Reporting Date Using:
	Assets Measured at Fair Value at September 30, 2015	Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Investment securities available-for-sale:
U.S. Government agency securities	$3,090	$-	$3,090	$-
Government Sponsored Enterprises residential mortgage-backed securities	3,944	-	3,944	-
Money Market Funds	130	130	-	-
Total	$7,164	$130	$7,034	$-
Loans held for sale	$535	$-	$535	$-
Loans held at fair value	$2,473	$-	$-	$2,473

(in 000’s)		Fair Value Measurements at Reporting Date Using:
	Assets/Liabilities Measured at Fair Value 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)
Investment securities available-for-sale:
U.S. Government Agency securities	$4,036	$-	$4,036	$-
Government Sponsored Enterprises residential mortgage-backed securities	4,374	-	4,374	-
Money Market Funds	130	130	-	-
Total	$8,540	$130	$8,410	$-
Loans held for sale	$6,160	$-	$6,160	$-
Loans held at fair value	$629	$-	$-	$629

The fair value of the Bank’s AFS securities portfolio was approximately $7,164,000 and $8,540,000 at September 30, 2015 and December 31, 2014, respectively. All the residential mortgage-backed securities were issued or guaranteed by the Government National Mortgage Association (“GNMA”), the Federal National Mortgage Association (“FNMA”) or the Federal Home Loan Mortgage Corporation (“FHLMC”).  The underlying loans for these securities are residential mortgages that are geographically dispersed throughout the United States.  The valuation of AFS securities using Level 2 inputs was primarily determined using the market approach, which uses quoted prices for similar instruments and all relevant information.  There were no transfers between Level 1 and Level 2 assets during the periods ended September 30, 2015 and 2014.

When estimating the fair value of Level 3 financial instruments, management uses various observable and unobservable inputs.  

These inputs include estimated cashflows, prepayment speeds, average projected default rate and discount rates as follows:

(in 000’s)

Assets measured at fair value	September 30, 2015 Fair value	December 31, 2014 Fair Value	Principal valuation techniques	Significant observable inputs	September 30, 2015 Range of inputs	December 31, 2014 Range of inputs
Loans held at fair value:	$2,473	$629	Discounted cash flow	Constant prepayment rate	6.96% to 9.68%	7.58% to 8.52%
				Weighted average discount rate	7.45% to 9.58%	9.02% to 9.24%
				Weighted average life	3.42 yrs to 9.83 yrs	3.75 yrs to 4.25 yrs

Due to the inherent uncertainty of determining the fair value of assets that do not have a readily available market value, fair value as determined by management may fluctuate from period to period.

The following table summarizes additional information about assets measured at fair value on a recurring basis for which level 3 inputs were utilized to determine fair value:

(in 000’s)	Loans held at fair value
Balance at December 31, 2014	$629
Origination of loans	2,894
Principal repayments	(835)
Change in fair value of financial instruments	(215)
Balance at September 30, 2015	2,473

Fair Value on a Nonrecurring Basis

Certain assets are not measured at fair value on a recurring basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).  

The following table presents the assets carried on the consolidated balance sheet by level within the hierarchy as of September 30, 2015 and December 31, 2014, for which a nonrecurring change in fair value has been recorded during the nine months ended September 30, 2015 and year ended December 31, 2014.

Carrying Value at September 30, 2015:

(in 000’s)	Total	Quoted Prices in Active markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)	Total fair value gain (loss) during 9 months ended
Impaired loans	$1,687	$-	$-	$1,687	$-
Other real estate owned (“OREO”)	$719	$ -	$ -	$719	$88

Carrying Value at December 31, 2014:

(in 000’s)	Total	Quoted Prices in Active markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)	Total fair value gain (loss) during 12 months ended
Impaired Loans	$1,731	$-	$-	$1,731	$(142)
Other real estate owned (“OREO”)	$564	$-	$-	$564	$(13)

The measured impairment for collateral dependent impaired loans is determined by the fair value of the collateral less estimated liquidation costs.  Collateral values for loans and OREO are determined by annual or more frequent appraisals if warranted by volatile market conditions, which may be discounted up to 10% based upon management’s review and the estimated cost of liquidation. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.  Adjustments are routinely made on the appraisal process by the appraisers 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. The valuation allowance for impaired loans is adjusted as necessary based on changes in the value of collateral as well as the cost of liquidation.  It is included in the allowance for loan losses in the consolidated statements of condition.

Fair Value of Financial Instruments

FASB 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 measured and reported at fair value on a recurring basis or non-recurring basis.

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

Cash and cash equivalents: The carrying amounts reported in the statement of condition for cash and cash equivalents approximate those assets’ fair values.

Investment securities: Fair values for investment securities available-for-sale are as described above.  If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Loans held for sale:  Fair values for loans held for sale are estimated by using actual quoted market bids on a loan by loan basis.

Loans held at fair value: The fair value of loans held at fair value was estimated based on the present value of future cashflows for each asset based on their unique characteristics, market-based assumptions for prepayment speeds, default and voluntary prepayments as well as loan specific assumptions for losses and recoveries.

Loans (other than impaired loans): The fair value of loans was estimated using a discounted cash flow analysis, which considered estimated pre­payments, amortizations, and non performance risk.  Prepayments and discount rates were based on current marketplace estimates and rates.

 Accrued interest receivable:  The carrying amount of accrued interest receivable approximates fair value.

Deposit liabilities: The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings, and certain types of money market accounts) are equal to the amounts payable on demand at the reporting date (e.g., their carrying amounts).  The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit approximate the fair values at the reporting date.  Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation.  The Treasury yield curve was utilized for discounting cash flows as it approximates the average marketplace certificate of deposit rates across the relevant maturity spectrum.

Accrued interest payable:  The carrying amounts of accrued interest payable approximate fair value.

Commitments to extend credit: The carrying amounts for commitments to extend credit approximate fair value as such commitments are not substantially different from the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparts.  The carrying amount of accrued interest payable approximates fair market value.

The fair value of assets and liabilities are depicted below:

		September 30, 2015		December 31, 2014
(in 000’s)	Level in	Carrying	Fair	Carrying	Fair
	Value Hierarchy	Amount	Value	Amount	Value
(Dollars in thousands)
Assets:
Cash and cash equivalents	Level 1	$12,835	$12,835	$3,237	$3,237
Available for sale securities	(1)	7,164	7,164	8,540	8,540
Loans held for sale	Level 2	535	535	6,160	6,160
Loans held at fair value	Level 3	2,473	2,473	629	629
Loans, net of allowance for loan losses	(2)	34,085	34,524	40,127	40,069
Accrued interest receivable	Level 2	189	189	250	250
Liabilities:
Demand deposits	Level 2	29,691	29,691	28,723	28,723
Savings deposits	Level 2	11,597	11,597	12,091	12,091
Time deposits	Level 2	14,586	14,596	16,148	16,157
Accrued interest payable	Level 2			16	16

(1)   Level 1 for money market funds; Level 2 for all other securities.

(2)   Level 2 for non-impaired loans; Level 3 for impaired loans.