18. Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. The Company uses prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from one level to another. When market assumptions are not readily available, the Company's own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. If there has been a significant decrease in the volume and level of activity for the asset or liability, regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same.

ASC 820 defines fair value and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below:

Level 1—Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2—Valuations based on 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—Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Valuation techniques—There have been no changes in the valuation techniques used during the current period.

Transfers—There were no transfers of assets and liabilities measured at fair value on a recurring or nonrecurring basis during the current period.

Assets and Liabilities Measured at Fair Value on a Recurring Basis:

Available-for-sale securities— Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Examples of such instruments include publicly-traded common and preferred stocks. If quoted prices are not available, then fair values are estimated by using pricing models (i.e., matrix pricing) and market interest rates and credit assumptions or quoted prices of securities with similar characteristics and are classified within Level 2 of the valuation hierarchy. Examples of such instruments include government agency and government sponsored agency mortgage-backed securities, as well as certain preferred and trust preferred stocks. Level 3 securities are securities for which significant unobservable inputs are utilized.

Derivative financial instruments— The valuation of the Company's interest rate swaps and caps are determined using widely accepted valuation techniques including discounted cash flow analyses on the expected cash flows of derivatives. These analyses reflect the contractual terms of the derivatives, including the period to maturity, and use observable market-based inputs, including interest rate curves and implied volatilities. Unobservable inputs, such as credit valuation adjustments are insignificant to the overall valuation of the Company's derivative financial instruments. Accordingly, the Company has determined that its interest rate derivatives fall within Level 2 of the fair value hierarchy.

The fair value of derivative loan commitments and forward loan sale agreements are estimated using the anticipated market price based on pricing indications provided from syndicate banks. These commitments and agreements are categorized as Level 2. The fair value of such instruments was nominal at each date presented.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis:

Collaterally dependent impaired loans— Valuations of impaired loans measured at fair value are determined by a review of collateral values. Certain inputs used in appraisals are not always observable, and therefore impaired loans are generally categorized as Level 3 within the fair value hierarchy.

Real estate owned and other repossessed collateral— The fair values of real estate owned and other repossessed collateral are estimated based upon appraised values less estimated costs to sell. Certain inputs used in appraisals are not always observable, and therefore may be categorized as Level 3 within the fair value hierarchy. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified as Level 3 within the fair value hierarchy.

Loan servicing rights— The fair value of the SBA and mortgage servicing rights is based on a valuation model that calculates the present value of estimated future net servicing income. Adjustments are only recorded when the discounted cash flows derived from the valuation model are less than the carrying value of the asset. Certain inputs are not observable, and therefore loan servicing rights are generally categorized as Level 3 within the fair value hierarchy.

Fair Value of other Financial Instruments:

Cash and cash equivalents— The fair value of cash, due from banks, interest bearing deposits and FHLB overnight deposits approximates their relative book values, as these financial instruments have short maturities.

FHLB stock— The carrying value of FHLB stock approximates fair value based on redemption provisions of the FHLB.

Loans— Fair values are estimated for portfolios of loans with similar financial characteristics. The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimates of maturity are based on the Company's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic conditions, lending conditions and the effects of estimated prepayments.

Loans held for sale— The fair value of loans held-for-sale is estimated based on bid quotations received from loan dealers.

Accrued Interest receivable— The fair value of this financial instrument approximates the book value as this financial instrument has a short maturity. It is the Company's policy to stop accruing interest on loans past due by more than 90 days. Therefore, this financial instrument has been adjusted for estimated credit loss.

Deposits— The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW accounts and money market accounts, is equal to the amount payable on demand. The fair values of time deposits are based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. If that value were considered, the fair value of the Company's net assets could increase.

Borrowings— The fair value of the Company's borrowings with the FHLB is estimated by discounting the cash flows through maturity or the next re-pricing date based on current rates available to the Company for borrowings with similar maturities. The fair value of the Company's short-term borrowings, capital lease obligations, wholesale repurchase agreements and other borrowings is estimated by discounting the cash flows through maturity based on current rates available to the Company for borrowings with similar maturities.

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 fair value of such instruments was nominal at each date presented.

Assets and liabilities measured at fair value on a recurring basis are summarized below.

	June 30, 2015
	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Assets
Securities available-for-sale:
U.S. Government agency securities	$	48,230	$	—	$	48,230	$	—
Agency mortgage-backed securities		53,678		—		53,678		—
Other assets—interest rate caps		199		—		199		—
Liabilities
Other liabilities—interest rate swaps	$	1,048	$	—	$	1,048	$	—

	June 30, 2014
	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Assets
Securities available-for-sale:
U.S. Government agency securities	$	48,418	$	—	$	48,418	$	—
Agency mortgage-backed securities		65,463		—		65,463		—
Other assets—interest rate caps		—		—		—		—
Liabilities
Other liabilities—interest rate swaps	$	714	$	—	$	714	$	—

Assets measured at fair value on a nonrecurring basis are summarized below.

	June 30, 2015
	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Collateral dependent impaired loans	$	932	$	—	$	—	$	932
Real estate owned and other repossessed collateral		1,651		—		—		1,651
Loan servicing rights		1,123		—		—		1,123

	June 30, 2014
	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Collateral dependent impaired loans	$	1,467	$	—	$	—	$	1,467
Real estate owned and other repossessed collateral		1,991		—		—		1,991
Loan servicing rights		300						300

The table below presents quantitative information about significant unobservable inputs (Level 3) for assets measured at fair value on a nonrecurring basis at the dates indicated.

	Fair Value
	June 30, 2015		June 30, 2014		Valuation Technique
	(Dollars in thousands)
Collateral dependent impaired loans	$	932	$	1,467	Appraisal of collateral(1)
Real estate owned and other repossessed collateral		1,651		1,991	Appraisal of collateral(1)
Loan servicing rights		1,123		300	Discounted cash flow(2)


(1)	Fair value is generally determined through independent appraisals of the underlying collateral. The Company may also use another available source of collateral assessment to determine a reasonable estimate of the fair value of the collateral. Appraisals may be adjusted by management for qualitative factors such as economic factors and estimated liquidation expenses. The range of these possible adjustments may vary.
(2)	Fair value is determined using a discounted cash flow model. The unobservable inputs include anticipated rate of loan prepayments and discount rates. The range of prepayment assumptions used was 6.08% to 13.14%. For discount rates, the range was 7.25% to 7.50%.

The following table presents the estimated fair value of the Company's financial instruments.

			Fair Value Measurements at June 30, 2015
	Carrying Amount		Fair Value Measurements at June 30, 2015
	Carrying Amount		Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	89,850	$	89,850	$	89,850	$	—	$	—
Available-for-sale securities		101,908		101,908		—		101,908		—
Federal Home Loan Bank stock		4,102		4,102		—		4,102		—
Loans held for sale		9,035		9,035		—		9,035		—
Loans, net		610,211		613,896		—		—		613,896
Accrued interest receivable		1,335		1,335		—		1,335		—
Interest rate caps		199		199		—		199		—
Financial liabilities:
Deposits		674,759		675,285		—		675,285		—
FHLB advances		30,188		30,867		—		30,867		—
Wholesale repurchase agreements		10,037		10,098		—		10,098		—
Short-term borrowings		2,349		2,349		—		2,349		—
Capital lease obligation		1,368		1,448		—		1,448		—
Subordinated debentures		8,626		8,471		—		—		8,471
Interest rate swaps		1,048		1,048		—		1,048		—

			Fair Value Measurements at June 30, 2014
	Carrying Amount		Fair Value Measurements at June 30, 2014
	Carrying Amount		Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	82,259	$	82,259	$	82,259	$	—	$	—
Available-for-sale securities		113,881		113,881		—		113,881		—
Federal Home Loan Bank stock		4,102		4,102		—		4,102		—
Loans held for sale		11,945		11,945		—		11,945		—
Loans, net		515,049		522,154		—		—		522,154
Accrued interest receivable		1,216		1,216		—		1,216		—
Interest rate caps		—		—		—		—		—
Financial liabilities:
Deposits		574,329		574,868		—		574,868		—
FHLB advances		42,824		43,843		—		43,843		—
Wholesale repurchase agreements		10,199		10,484		—		10,484		—
Short-term borrowings		2,984		2,984		—		2,984		—
Capital lease obligation		1,558		1,701		—		1,701		—
Subordinated debentures		8,440		7,858		—		—		7,858
Interest rate swaps		714		714		—		714		—