(7)Fair Value Measurements

The Bank uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of an asset or liability is the price which a seller would receive in an orderly transaction between market participants (an exit price). Assets and liabilities are placed in a fair value hierarchy based on fair value measurements using three levels of inputs: (Level 1) quoted market prices in active markets for identical assets or liabilities; (Level 2) significant other observable inputs, including quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs such as interest rates and yield curves, volatilities, prepayment speeds, credit risks and default rates which provide a reasonable basis for fair value determination or inputs derived principally from observed market data; (Level 3) significant unobservable inputs for situations in which there is little, if any, market activity for the asset or liability. Unobservable inputs must reflect reasonable assumptions that market participants would use in pricing the asset or liability, which are developed on the basis of the best information available under the circumstances.

Effective January 1, 2015, the Bank elected the fair value option pursuant to Accounting Standards Codification (“ASC”) 825, “Financial Instruments” for certain closed mortgage loans intended for sale and transferred the placement of loans held for sale to Level 2 in the fair value hierarchy. ASC 825 allows for the irrevocable option to elect fair value accounting for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis that may otherwise not be required to be measured at fair value under other accounting standards. The Bank elected the fair value option for certain residential real estate mortgage loans held for sale pursuant to forward sale commitments in order to better match changes in fair values for the loans with changes in the fair value of the forward loan sale contracts used to economically hedge them. The aggregate fair value of loans held for sale, the contractual balance of loans held for sale and the gain on loans held for sale totaled $11.6 million, $11.3 million and $278,000 at March 31, 2015. The change in fair value of loans held for sale reported as a component of net gains on sale of loans and other mortgage banking income was $60,000 for the three months ended March 31, 2015.

The following tables summarize significant assets and liabilities carried at fair value and placement in the fair value hierarchy at the dates specified:

	March 31, 2015
(Dollars in thousands)	(Level 1)		(Level 2)		(Level 3)
Assets measured on a recurring basis:
Loans held for sale	$	—	$	11,583	$	—
Derivative loan commitments	—		—		158
Liabilities measured on a recurring basis:
Forward loan sale commitments	—		—		36
Assets measured on a non-recurring basis:
Impaired loans (collateral dependent)	—		—		1,034

	December 31, 2014
(Dollars in thousands)	(Level 1)		(Level 2)		(Level 3)
Assets measured on a recurring basis:
Derivative loan commitments	$	—	$	—	$	98
Liabilities measured on a recurring basis:
Forward loan sale commitments	—		—		96
Assets measured on a non-recurring basis:
Impaired loans (collateral dependent)	—		—		2,075
Foreclosed real estate	—		—		1,285
Real estate held for sale	—		—		3,831

The Bank did not have cause to transfer any assets between the fair value measurement levels during the three months ended March 31, 2015 or the year ended December 31, 2014.

Impaired loan balances in the table above represent those collateral dependent impaired loans where management has estimated the credit loss by comparing the loan’s carrying value against the expected realizable fair value of the collateral (appraised value or internal analysis less estimated cost to sell, adjusted as necessary for changes in relevant valuation factors subsequent to the measurement date). Certain inputs used in these assessments, and possible subsequent adjustments, are not always observable, and therefore, collateral dependent impaired loans are categorized as Level 3 within the fair value hierarchy. A specific allowance or partial charge-off is recorded to the collateral dependent impaired loan for the amount of management’s estimated credit loss. The provision to the allowance for loan losses on collateral dependent impaired loans for the three months ended March 31, 2015 and 2014, totaled $108,000 and $123,000, respectively.

Real estate acquired by the Bank through foreclosure proceedings or the acceptance of a deed in lieu of foreclosure is classified as foreclosed real estate. When property is acquired, it is generally recorded at the lesser of the loan’s remaining principal balance, net of unamortized deferred fees, or the estimated fair value of the property acquired, less estimated costs to sell. The estimated fair value is based on market appraisals and the Bank’s internal analysis. Certain inputs used in appraisals or the Bank’s internal analysis, are not always observable, and therefore, foreclosed real estate may be categorized as Level 3 within the fair value hierarchy. There were no losses on foreclosed real estate held at period end for the three months ended March 31, 2015. Losses on foreclosed real estate for assets held at period end for the three months ended March 31, 2014 totaled $38,000.

When real estate is determined to be held for sale, it is recorded at the lower of estimated fair value less estimated cost to sell. The fair value less costs to sell is determined based on current appraisals that utilize prices in observed transactions involving similar assets or estimated selling price less costs to sell. There were no write-downs on real estate held for sale during the three months ended March 31, 2015 and 2014.

Derivatives fair value methodology

Fair value changes in mortgage banking derivatives (interest rate lock commitments and commitments to sell fixed-rate residential mortgages) subsequent to inception are estimated using anticipated market prices based on pricing indications provided from syndicate banks and consideration of pull-through and fallout rates. The fair value of the mortgage banking derivatives are considered to be Level 3 assets.

The table below presents for the three months ended March 31, 2015 and 2014, the change in Level 3 assets and liabilities that are measured on a recurring basis:

	Derivative Loan Commitments and Forward Loan Sale Commitments
(Dollars in thousands)	2015			2014

Balance at beginning of period	$	2		$	244
Total realized and unrealized gains (losses) included in net income	121			(11		)
Settlements and closed loans	(1		)	73
Balance at end of period	122			306
Total unrealized gains (losses) relating to instruments still held at period end	$	121		$	(11	)

The following tables present additional quantitative information about assets and liabilities measured at fair value on a recurring and non-recurring basis for which the Bank utilized Level 3 inputs (significant unobservable inputs for situations in which there is little, if any, market activity for the asset or liability) to determine fair value:

March 31, 2015

(Dollars in thousands)	Fair Value			Valuation Technique	Unobservable Input	Unobservable Input Value or Range
Assets measured on a recurring basis:
Derivative loan commitments	$	158		Investor pricing	Pull-through rate	82.5-100%
					Pricing spreads	98.58-106.86%
Liabilities measured on a recurring basis:
Forward loan sale commitments	(36		)	Investor pricing	Pull-through rate	82.5-100%
					Pricing spreads	98.58-107.66%
Assets measured on a non-recurring basis:
Impaired loans (collateral dependent)	1,034			Appraisal of collateral	Collateral discounts/selling costs	5% - 30%

December 31, 2014

Assets measured on a recurring basis:
Derivative commitments	$	98		Investor pricing	Pull-through rate	82.5-100%
					Pricing spreads	99.30-107.46%
Liabilities measured on a recurring basis:
Forward loan sale commitments	(96		)	Investor pricing	Pull-through rate	82.5-100%
					Pricing spreads	99.33-108.00%
Assets measured on a non-recurring basis:
Impaired loans (collateral dependent)	2,075			Appraisal of collateral	Collateral discounts/selling costs	5% - 30%
Foreclosed real estate	1,285			Appraisal of collateral	Collateral discounts/selling costs	5% - 30%
Real estate held for sale	3,831			Appraisal of collateral	Selling costs	5% - 6%

Estimated Fair Values of Assets and Liabilities

In addition to disclosures regarding the measurement of assets and liabilities carried at fair value on the balance sheet, the Corporation is also required to disclose fair value information about financial instruments for which it is practicable to estimate that value, whether or not recognized on the balance sheet. In cases where quoted fair values are not available, fair values are based upon estimates using various 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 following methods and assumptions were used by the Corporation in estimating fair values of its financial instruments.

The following methods and assumptions were used by the Corporation in estimating fair value disclosures:

Cash and cash equivalents — The carrying amounts of cash and cash equivalents approximate fair values based on the short-term nature of the assets.

Certificates of deposit — The carrying value of certificates of deposit is deemed to approximate fair value, based on both the current interest rate and the maturity date.

Federal Home Loan Bank stock — It is not practical to determine the fair value of Federal Home Loan Bank stock due to restrictions placed on its transferability.

Loans, net — For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Loans held for sale — Fair values of loans held for sale are based on prevailing market rates for loans with similar characteristics.

Deposits — The fair values of deposits with no stated maturity, such as demand deposits, savings, club and money market accounts, are equal to the amount payable on demand at the reporting date. Fair values for term certificates are estimated using a discounted cash flow calculation that applies market interest rates currently being offered for deposits of similar remaining maturities.

Borrowed funds — The fair values of the Bank’s FHLB advances are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.

Accrued interest — The carrying amounts of accrued interest approximate fair value.

Off-balance sheet credit-related instruments — Fair values for off-balance-sheet, credit related financial instruments 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 estimates of fair value of financial instruments were based on information available at March 31, 2015 and December 31, 2014 and are not indicative of the fair market value of those instruments as of the date of this report. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation’s entire holdings of a particular financial instrument. The fair value of the Corporation’s time deposit liabilities do not take into consideration the value of the Corporation’s long-term relationships with depositors, which may have significant value.

Because no active market exists for a portion of the Corporation’s financial instruments, fair value estimates were based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates were based on existing on- and off-balance sheet financial instruments without an attempt to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments, including premises and equipment and foreclosed real estate, and real estate held for sale.

The carrying values, estimated fair values and placement in the fair value hierarchy of the Corporation’s financial instruments(1) for which fair value is only disclosed but not recognized on the balance sheet at the dates indicated are summarized as follows:

	March 31, 2015 (unaudited)				Fair value measurement
(Dollars in thousands)	Carrying Amount		Fair Value		Level 1 inputs		Level 2 Inputs		Level 3 Inputs
Financial assets:
Loans, net	$	391,242	$	398,137	$	—	$	—	$	398,137
FHLB stock	3,207		N/A		—		—		N/A
Financial liabilities:
Certificates of deposit	117,116		118,560		—		118,560		—
Borrowed funds	37,000		37,000		—		37,000		—

	December 31, 2014				Fair value measurement
(Dollars in thousands)	Carrying Amount		Fair Value		Level 1 inputs		Level 2 Inputs		Level 3 Inputs
Financial assets:
Loans, net	$	383,909	$	387,560	$	—	$	—	$	387,560
Loans held for sale	10,995		11,173		—		—		11,173
FHLB stock	3,207		N/A		—		—		N/A
Financial liabilities:
Certificates of deposit	118,206		119,987		—		119,987		—
Borrowed funds	47,800		47,809		—		47,809		—

(1) Excluded from this table are certain financial instruments that approximate fair value, as they wereshort-term in nature or payable on demand. These include cash and cash equivalents, certificates of deposit, accrued interest receivable, non-term deposit accounts, and accrued interest payable. The respective carrying values of cash and cash equivalents, certificates of deposit and non-term deposit accounts would all be considered to be classified within Level 1 of their fair value hierarchy. The $1.3 million carrying value of accrued interest receivable on loans would generally be considered Level 3 in the fair value hierarchy and the carrying value of accrued interest payable of $9,000 would be considered Level 2