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Note 14: Disclosures About Fair Value of Financial Instruments: Fair Value Measurement, Policy (Policies)

3 Months Ended

Sep. 30, 2015

ASC Topic 820, Fair Value Measurements, 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 at the measurement date. Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

· Quoted prices in active markets for identical assets or liabilities (Level 1): Inputs that are quoted unadjusted prices in active markets for identical assets that the Company has the ability to access at the measurement date. An active market for the asset is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

· Other observable inputs (Level 2): Inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity including quoted prices for similar assets, quoted prices for securities in inactive markets and inputs derived principally from or corroborated by observable market data by correlation or other means.

· Significant unobservable inputs (Level 3): Inputs that reflect assumptions of a source independent of the reporting entity or the reporting entity's own assumptions that are supported by little or no market activity or observable inputs.

Financial instruments are broken down as follows by recurring or nonrecurring measurement status. Recurring assets are initially measured at fair value and are required to be remeasured at fair value in the financial statements at each reporting date. Assets measured on a nonrecurring basis are assets that, due to an event or circumstance, were required to be remeasured at fair value after initial recognition in the financial statements at some time during the reporting period.

The Company considers transfers between the levels of the hierarchy to be recognized at the end of related reporting periods. From December 31, 2014 to September 30, 2015, no assets for which fair value is measured on a recurring basis transferred between any levels of the hierarchy.

Recurring Measurements

The following table presents the fair value measurements of assets recognized in the accompanying statements of financial condition measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2015 and December 31, 2014:

		Fair value measurements using
		Quoted prices
		in active
		markets	Other	Significant
		for identical	observable	unobservable
		assets	inputs	inputs
	Fair value	(Level 1)	(Level 2)	(Level 3)
(In Thousands)
September 30, 2015
U.S. government agencies	$19,983	$—	$19,983	$—
Mortgage-backed securities	171,930	—	171,930	—
States and political subdivisions	77,853	—	77,853	—
Equity securities	3,479	—	3,479	—
Mortgage servicing rights	149	—	—	149
Interest rate derivative asset	3,705	—	—	3,705
Interest rate derivative liability	(3,827)	—	—	(3,827)

December 31, 2014
U.S. government agencies	$19,514	$—	$19,514	$—
Mortgage-backed securities	257,798	—	257,798	—
States and political subdivisions	85,040	—	85,040	—
Equity securities	3,154	—	3,154	—
Mortgage servicing rights	185	—	—	185
Interest rate derivative asset	2,502	—	—	2,502
Interest rate derivative liability	(2,187)	—	—	(2,187)

The following is a description of inputs and valuation methodologies used for assets recorded at fair value on a recurring basis and recognized in the accompanying statements of financial condition at September 30, 2015 and December 31, 2014, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the three-month and nine-month periods ended September 30, 2015. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Securities Available for Sale. Investment securities available for sale are recorded at fair value on a recurring basis. The fair values used by the Company are obtained from an independent pricing service, which represent either quoted market prices for the identical asset or fair values determined by pricing models, or other model-based valuation techniques, that consider observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems. Recurring Level 2 securities include U.S. government agency securities, mortgage-backed securities, state and municipal bonds and certain equity securities. Inputs used for valuing Level 2 securities include observable data that may include dealer quotes, benchmark yields, market spreads, live trading levels and market consensus prepayment speeds, among other things. Additional inputs include indicative values derived from the independent pricing service’s proprietary computerized models. There were no recurring Level 3 securities at September 30, 2015 or December 31, 2014.

Mortgage Servicing Rights. Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy.

Interest Rate Derivatives. The fair value is estimated using forward-looking interest rate curves and is calculated using discounted cash flows that are observable or that can be corroborated by observable market data and, therefore, are classified within Level 3 of the valuation hierarchy.

Level 3 Reconciliation

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying statements of financial condition using significant unobservable (Level 3) inputs.

	Mortgage Servicing Rights
	2015	2014
(In Thousands)
Balance, July 1	$166	$196
Additions	12	28
Amortization	(29)	(35)
Balance, September 30	$149	$189

	Mortgage Servicing Rights
	2015	2014
(In Thousands)
Balance, January 1	$185	$211
Additions	54	81
Amortization	(90)	(103)
Balance, September 30	$149	$189

	Interest Rate Derivative Asset
	2015	2014
(In Thousands)
Balance, July 1	$2,166	$1,722
Change in fair value through earnings	1,451	(210)
Balance, September 30	$3,617	$1,512

	Interest Rate Derivative Asset
	2015	2014

(In Thousands)
Balance, January 1	$2,087	$1,859
Change in fair value through earnings	1,530	(347)
Balance, September 30	$3,617	$1,512

	Interest Rate Cap Derivative Asset Designated as Hedging Instrument
	2015	2014
(In Thousands)
Balance, July 1	$207	$462
Change in fair value through other
comprehensive income	—	81
Amortization of cost of interest rate cap	(119)	(5)
Balance, September 30	$88	$538

	Interest Rate Cap Derivative Asset Designated as Hedging Instrument
	2015	2014
(In Thousands)
Balance, January 1	$415	$685
Change in fair value through other
comprehensive income	(171)	(138)
Amortization of cost of interest rate cap	(156)	(9)
Balance, September 30	$88	$538

	Interest Rate Swap Liability
	2015	2014
(In Thousands)
Balance, July 1	$2,244	$1,711
Change in fair value through earnings	1,583	(222)
Balance, September 30	$3,827	$1,489

	Interest Rate Swap Liability
	2015	2014
(In Thousands)
Balance, January 1	$2,187	$1,613
Change in fair value through earnings	1,640	(124)
Balance, September 30	$3,827	$1,489

Nonrecurring Measurements

The following tables present the fair value measurements of assets measured on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2015 and December 31, 2014:

		Fair Value Measurements Using
		Quoted prices
		in active
		markets	Other	Significant
		for identical	observable	unobservable
		assets	inputs	inputs
	Fair value	(Level 1)	(Level 2)	(Level 3)
(In Thousands)
September 30, 2015
Impaired loans
One- to four-family residential construction	$—	$—	$—	$—
Subdivision construction	194	—	—	194
Land development	968	—	—	968
Owner occupied one- to four-family residential	270	—	—	270
Non-owner occupied one- to four-family residential	161	—	—	161
Commercial real estate	4,547	—	—	4,547
Other residential	—	—	—	—
Commercial business	916	—	—	916
Consumer auto	146	—	—	146
Consumer other	343	—	—	343
Home equity lines of credit	210	—	—	210
Total impaired loans	$7,755	$—	$—	$7,755

Foreclosed assets held for sale	$1,533	$—	$—	$1,533

December 31, 2014
Impaired loans
One- to four-family residential construction	$—	$—	$—	$—
Subdivision construction	274	—	—	274
Land development	3,946	—	—	3,946
Owner occupied one- to four-family residential	862	—	—	862
Non-owner occupied one- to four-family residential	288	—	—	288
Commercial real estate	5,333	—	—	5,333
Other residential	—	—	—	—
Commercial business	320	—	—	320
Consumer auto	38	—	—	38
Consumer other	399	—	—	399
Home equity lines of credit	198	—	—	198
Total impaired loans	$11,658	$—	$—	$11,658

Foreclosed assets held for sale	$6,975	$—	$—	$6,975