Note 7 – Fair Value Measures

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (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. There are three levels of inputs that may be used to measure fair values:

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 company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Securities Available-for-Sale: The fair values of securities available-for-sale are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust 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. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Repossessed Assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust 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. Other real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified appraisers whose qualifications and licenses have been reviewed and verified by the Company. Once received, management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. Upon sale of collateral, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value for the remaining assets carried at fair value.

Assets Measured on a Recurring Basis

Assets measured at fair value on a recurring basis are summarized below:


			Fair Value Measurements Using
	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2015
Assets
Securities available for sale
U.S. government-sponsored entities	$	8,006	$	—	$	8,006	$	—
Residential mortgaged-backed		635		—		635		—

	$	8,641	$	—	$	8,641	$	—

December 31, 2014
Assets
Securities available for sale
U.S. government-sponsored entities	$	5,966	$	—	$	5,966	$	—
Residential mortgaged-backed		670		—		670		—

	$	6,636	$	—	$	6,636	$	—

There were no transfers between Level 1, Level 2, and Level 3 during the three-months ended March 31, 2015 or the year ended December 31, 2014.

Assets Measured on a Non-Recurring Basis

Assets measured at fair value on a non-recurring basis are summarized below:


			Fair Value Measurements Using
	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2015
Assets
Impaired loans
Multi-family	$	2,102	$	—	$	—	$	2,102

Total impaired loans	$	2,102	$	—	$	—	$	2,102

Repossessed assets
Commercial real estate	$	389	$	—	$	—		389
Land		102		—		—		102
Automobile		2		—		—		2

Total repossessed assets	$	493	$	—	$	—	$	493

December 31, 2014
Assets
Impaired loans
One-to-four-family	$	272	$	—	$	—	$	272
Multi-family		2,102		—		—		2,102

Total impaired loans	$	2,374	$	—	$	—	$	2,374

Repossessed assets
Commercial real estate		389		—		—		389
Land		102		—		—		102
Automobile		13		—		—		13

Total repossessed assets	$	504	$	—	$	—	$	504

Impaired loans, which are measured for impairment using the fair value of the collateral (less cost to sell) for collateral dependent loans, had an aggregate balance of $2,310 with a $208 valuation allowance at March 31, 2015. The impaired loans resulted in no provision for loan loss for the three months ended March 31, 2015. At December 31, 2014, impaired loans had an aggregate balance of $2,653 with a $279 valuation allowance. The impaired loans resulted in no provision for loan loss for the three months ended March 31, 2014.

Repossessed assets, consisting of other real estate owned, repossessed automobiles, and other repossessed assets are measured at the lower of cost or fair value less costs to sell. Repossessed assets were carried at $493 at March 31, 2015 consisting of the cost basis of $646 and a valuation allowance of $153. Repossessed assets were carried at $504 at December 31, 2014, consisting of the cost basis of $657 and a valuation allowance of $153. There were no write-downs on repossessed assets for the three months ended March 31, 2015 and 2014.

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at March 31, 2015 and December 31, 2014:

March 31, 2015


	Fair Value		Valuation Technique	Unobservable Inputs	Range
Impaired loans
Multi-family	$	2,102	Sales comparison approach	Adjustment for differences between the comparable sales	(11.6%) – 20.7%
Other real estate owned
Commercial real estate	$	389	Sales comparison approach	Adjustment for differences between the comparable sales	(1.2%) – (21.7%)
Land	$	102	Sales comparison approach	Adjustment for differences between the comparable sales	(48.2%) – 4.5%

December 31, 2014


	Fair Value		Valuation Technique	Unobservable Inputs	Range
Impaired loans
One-to-four-family	$	272	Sales comparison approach	Adjustment for differences between the comparable sales	(18.9%) - 15.0%
Multi-family	$	2,102	Sales comparison approach	Adjustment for differences between the comparable sales	(11.6%) – 20.7%
Other real estate owned
Commercial real estate	$	389	Sales comparison approach	Adjustment for differences between the comparable sales	(1.2%) – (21.7%)
Land	$	102	Sales comparison approach	Adjustment for differences between the comparable sales	(48.2%) – 4.5%

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


			Fair Value Measurements at March 31, 2015 (Unaudited) Using:
	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	17,923	$	17,923	$	—	$	—	$	17,923
Securities available-for-sale		8,641		—		8,641		—		8,641
Loans receivable, net		57,951		—		—		58,445		58,445
FHLB stock		921		N/A		N/A		N/A		N/A
Accrued interest receivable		197		—		19		178		197
Financial liabilities
Demand, money market, and savings	$	35,936	$	35,936	$	—	$	—	$	35,936
Certificates of deposits		39,635		—		39,734		—		39,734
Advances by borrowers for taxes and insurance		464		464		—		—		464
Accrued interest payable		1		—		1		—		1

			Fair Value Measurements at December 31, 2014 Using:
	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	19,014	$	19,014	$	—	$	—	$	19,014
Securities available-for-sale		6,636		—		6,636		—		6,636
Loans receivable, net		60,405		—		—		61,858		61,858
FHLB stock		921		N/A		N/A		N/A		N/A
Accrued interest receivable		188		—		15		173		188
Financial liabilities
Demand, money market, and savings	$	39,392	$	39,392	$	—	$	—	$	39,392
Certificates of deposits		40,593		—		40,566		—		40,566
Advances by borrowers for taxes and insurance		682		682		—		—		682
Accrued interest payable		—		—		—		—		—

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

(a) Cash and Cash Equivalents

The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1

(b) Loans receivable, net

Fair values of loans receivable, net are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

(c) FHLB Stock

It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

(d) Accrued Interest Receivable

The carrying amount of accrued interest receivable approximates its fair value and is classified as Level 2 for securities and Level 3 for loans.

(e) Deposits

The fair values disclosed for demand deposits (e.g., interest and non-interest demand, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) and are classified as Level 1. The carrying amounts of variable rate certificates of deposit approximate their fair values at the reporting date are classified as a Level 2. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

(f) Accrued Interest Payable

The carrying amount of accrued interest payable approximates its fair value and is classified as Level 2.