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Fair Value Measurements | 3 Months Ended
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Jun. 30, 2016
Notes |
Fair Value Measurements | 10. FAIR VALUE MEASUREMENTS GAAP defines fair value, establishes a framework for measuring fair value, and requires certain disclosures about fair value measurements. The categories of fair value measurement prescribed by GAAP and used in the tables presented under fair value measurements are as follows: Quoted prices in active markets for identical assets (Level 1): Inputs that are quoted unadjusted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. An active market 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 or liabilities in active markets, quoted prices for identical or similar assets or liabilities 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 the reporting entity's own assumptions about the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances. Financial instruments are presented in the tables that follow 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 consolidated financial statements at each reporting date. Assets measured on a nonrecurring basis are assets that, as a result of an event or circumstance, were required to be remeasured at fair value after initial recognition in the consolidated financial statements at some time during the reporting period. The following tables present assets that are measured at estimated fair value on a recurring basis at the dates indicated (in thousands):
|  |  |  | Estimated Fair Value Measurements Using
June 30, 2016 | Total Estimated Fair Value |  | Level 1 |  | Level 2 |  | Level 3
Investment securities available for sale: |  |  |  |  |  |  |  |  |  |  |
Trust preferred | $ | 1,777 |  | $ | - |  | $ | - |  | $ | 1,777
Agency securities |  | 17,083 |  |  | - |  |  | 17,083 |  |  | -
Real estate mortgage investment conduits |  | 45,265 |  |  | - |  |  | 45,265 |  |  | -
Mortgage-backed securities |  | 81,783 |  |  | - |  |  | 81,783 |  |  | -
Other mortgage-backed securities |  | 17,776 |  |  | - |  |  | 17,776 |  |  | -
Total assets measured at fair value on a recurring basis | $ | 163,684 |  | $ | - |  | $ | 161,907 |  | $ | 1,777
March 31, 2016 |  |  |
Investment securities available for sale: |  |  |  |  |  |  |  |  |  |  |
Trust preferred | $ | 1,808 |  | $ | - |  | $ | - |  | $ | 1,808
Agency securities |  | 19,569 |  |  | - |  |  | 19,569 |  |  | -
Real estate mortgage investment conduits |  | 43,924 |  |  | - |  |  | 43,924 |  |  | -
Mortgage-backed securities |  | 76,353 |  |  | - |  |  | 76,353 |  |  | -
Other mortgage-backed securities |  | 9,036 |  |  | - |  |  | 9,036 |  |  | -
Total assets measured at fair value on a recurring basis | $ | 150,690 |  | $ | - |  | $ | 148,882 |  | $ | 1,808
There were no transfers of assets into or out of Levels 1, 2 or 3 for the three months ended June 30, 2016 and 2015. The following table presents a reconciliation of assets that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the periods indicated (in thousands):
| For the Three Months Ended |
|  | June 30, 2016 |  |  | June 30, 2015 |
|  | Available for sale securities |  |  | Available for sale securities |
Beginning balance | $ | 1,808 |  | $ | 1,812 |
Transfers into Level 3 |  | - |  |  | - |
Included in earnings |  | - |  |  | - |
Included in other comprehensive income |  | (31 | ) |  | (32 | )
Ending balance | $ | 1,777 |  | $ | 1,780 |
The following methods were used to estimate the fair value of financial instruments above: Investment securities – Investment securities are included within Level 1 of the hierarchy when quoted prices in an active market for identical assets are available. The Company uses a third-party pricing service to assist the Company in determining the fair value of its Level 2 securities, which incorporates pricing models and/or quoted prices of investment securities with similar characteristics. The Company’s Level 3 assets consist of a single pooled trust preferred security. For Level 2 securities, the independent pricing service provides pricing information by utilizing evaluated pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data from market research publications. The Company’s third-party pricing service has established processes for the Company to submit inquiries regarding the estimated fair value. In such cases, the Company’s third-party pricing service will review the inputs to the evaluation in light of any new market data presented by the Company. The Company’s third-party pricing service may then affirm the original estimated fair value or may update the evaluation on a go-forward basis. Management reviews the pricing information received from the third-party pricing service through a combination of procedures that include an evaluation of methodologies used by the pricing service, analytical reviews and performance analysis of the prices against statistics and trends. Based on this review, management determines whether the current placement of the security in the fair value hierarchy is appropriate or whether transfers may be warranted. As necessary, the Company compares prices received from the pricing service to discounted cash flow models or by performing independent valuations of inputs and assumptions similar to those used by the pricing service in order to ensure prices represent a reasonable estimate of fair value. The Company has determined that the market for its collateralized debt obligation secured by a pool of trust preferred securities is inactive. This determination was made by the Company after considering the last known trade dates for this specific security, the low number of transactions for similar types of securities, the low number of new issuances for similar securities, the bid-ask spread in the brokered markets in which these securities trade, the implied liquidity risk premium for similar securities, the lack of information that is released publicly and discussions with third-party industry analysts. Due to the inactivity in the market, observable market data was not readily available for all significant inputs for this security. Accordingly, the collateralized debt obligation was classified as Level 3 in the fair value hierarchy. The Company utilized observable inputs where available and unobservable data, and modeled the cash flows adjusted by an appropriate liquidity and credit risk adjusted discount rate using an income approach valuation technique, in order to measure the fair value of the security. Significant unobservable inputs were used that reflect the Company’s estimate of assumptions that a market participant would use to price the security. Significant unobservable inputs included the discount rate, the default rate and repayment assumptions. The Company estimated the discount rate by comparing rates for similarly rated corporate bonds, with additional consideration given to market liquidity. The default rates and repayment assumptions were estimated based on the individual issuer’s financial condition and historical repayment information, as well as the Company’s future expectations of the capital markets. For the three months ended June 30, 2016, there were no real estate owned (“REO”) properties measured for fair value on a nonrecurring basis. The following tables present assets that are measured at estimated fair value on a nonrecurring basis at the dates indicated (in thousands):
|  |  |  | Estimated Fair Value Measurements Using
June 30, 2016 | Total Estimated Fair Value |  | Level 1 |  | Level 2 |  | Level 3
Impaired loans | $ | 937 |  | $ | - |  | $ | - |  | $ | 937
June 30, 2015 |  |  |  |  |  |  |  |  |  |  |
Impaired loans | $ | 949 |  | $ | - |  | $ | - |  | $ | 949
REO |  | 970 |  |  | - |  |  | - |  |  | 970
Total assets measured at fair value on a nonrecurring basis | $ | 1,919 |  | $ | - |  | $ | - |  | $ | 1,919
The following table presents quantitative information about Level 3 inputs for financial instruments measured at fair value on a nonrecurring basis at June 30, 2016 and 2015:
|  | Valuation Technique |  | Significant Unobservable Inputs |  | June 30, 2016 Range |  | June 30, 2015 Range
Impaired loans |  | Appraised value |  | Adjustment for market conditions |  | N/A (1) |  | N/A (1)
REO |  | Appraised value |  | Adjustment for market conditions |  | N/A (1) |  | 0% - 10.6%
(1) There were no adjustments to these categories for the three month periods noted. |  |
The following methods were used to estimate the fair value of each class of financial instrument above: Impaired loans – For information regarding the Company’s method for estimating the fair value of impaired loans, see Note 7 – Allowance For Loan Losses. In determining the estimated net realizable value of the underlying collateral, the Company primarily uses third-party appraisals which 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 appraisers to adjust for differences between the comparable sales and income data available and include consideration of variations in location, size, and income production capacity of the property. Additionally, the appraisals are periodically further adjusted by the Company in consideration of charges that may be incurred in the event of foreclosure and are based on management’s historical knowledge, changes in business factors and changes in market conditions. Impaired loans are reviewed and evaluated quarterly for additional impairment and adjusted accordingly based on the same factors identified above. Because of the high degree of judgment required in estimating the fair value of collateral underlying impaired loans and because of the relationship between fair value and general economic conditions, the Company considers the fair value of impaired loans to be highly sensitive to changes in market conditions. REO – REO is real property that the Bank has taken ownership of in partial or full satisfaction of a loan or loans. REO is recorded at the estimated fair value less estimated costs to sell. This amount becomes the property’s new basis. Any write downs based on the property’s estimated fair value less estimated costs to sell at the date of acquisition are charged to the allowance for loan losses. At acquisition date, any write ups (whereby the fair value less estimated costs to sell exceeds the loan basis) are first recovered through the allowance for loan losses if there was a prior charge-off and then applied to any outstanding accrued interest. If no prior charge-off or accrued interest is present, the amount is recorded as a gain on transfer of REO. The Company considers third-party appraisals in determining the fair value of particular properties. 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 appraisers to adjust for differences between the comparable sales and income data available and include consideration of variations in location, size, and income production capacity of the property. Additionally, the appraisals are periodically further adjusted by the Company in consideration of charges that may be incurred in the event of foreclosure and are based on management’s historical knowledge, changes in business factors and changes in market conditions. Management periodically reviews REO to help ensure that the property is carried at the lower of its new basis or fair value, net of estimated costs to sell. Any additional write-downs based on a re-evaluation of the property’s fair value are charged to non-interest expense. Because of the high degree of judgment required in estimating the fair value of REO and because of the relationship between fair value and general economic conditions, the Company considers the fair value of REO to be highly sensitive to changes in market conditions. The following disclosure of the estimated fair value of financial instruments is made in accordance with GAAP. The Company, using available market information and appropriate valuation methodologies, has determined the estimated fair value amounts. However, considerable judgment is necessary to interpret market data in the development of the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in the future. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The carrying amount and estimated fair value of financial instruments is as follows at the dates indicated (in thousands):
June 30, 2016 | Carrying Amount |  | Level 1 |  | Level 2 |  | Level 3 |  | Estimated Fair Value
Assets: |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $50,377 |  | $50,377 |  | $- |  | $- |  | $50,377
Certificates of deposit held for investment | 16,271 |  | - |  | 16,451 |  | - |  | 16,451
Loans held for sale | 457 |  | - |  | 457 |  | - |  | 457
Investment securities available for sale | 163,684 |  | - |  | 161,907 |  | 1,777 |  | 163,684
Investment securities held to maturity | 72 |  | - |  | 74 |  | - |  | 74
Loans receivable, net | 619,854 |  | - |  | - |  | 586,700 |  | 586,700
FHLB stock | 1,060 |  | - |  | 1,060 |  | - |  | 1,060
Liabilities: |  |  |  |  |  |  |  |  |
Demand and savings deposits | 674,534 |  | 674,534 |  | - |  | - |  | 674,534
Time deposits | 115,021 |  | - |  | 114,989 |  | - |  | 114,989
Junior subordinated debentures | 22,681 |  | - |  | - |  | 8,003 |  | 8,003
Capital lease obligation | 2,470 |  | - |  | 2,470 |  | - |  | 2,470
March 31, 2016 |  |  |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $55,400 |  | $55,400 |  | $- |  | $- |  | $55,400
Certificates of deposit held for investment | 16,769 |  | - |  | 16,959 |  | - |  | 16,959
Loans held for sale | 503 |  | - |  | 503 |  | - |  | 503
Investment securities available for sale | 150,690 |  | - |  | 148,882 |  | 1,808 |  | 150,690
Investment securities held to maturity | 75 |  | - |  | 76 |  | - |  | 76
Loans receivable, net | 614,934 |  | - |  | - |  | 571,068 |  | 571,068
FHLB stock | 1,060 |  | - |  | 1,060 |  | - |  | 1,060
Liabilities: |  |  |  |  |  |  |  |  |
Demand and savings deposits | 660,421 |  | 660,421 |  | - |  | - |  | 660,421
Time deposits | 119,382 |  | - |  | 119,143 |  | - |  | 119,143
Junior subordinated debentures | 22,681 |  | - |  | - |  | 7,705 |  | 7,705
Capital lease obligation | 2,475 |  | - |  | 2,475 |  | - |  | 2,475
Fair value estimates were based on existing financial instruments without attempting to estimate the value of anticipated future business. The fair value was not estimated for assets and liabilities that were not considered financial instruments. Fair value estimates, methods and assumptions are set forth below: Cash and cash equivalents – Fair value approximates the carrying amount. Certificates of deposit held for investment – The fair value of certificates of deposit with stated maturities was based on the discounted value of contractual cash flows. The discount rate was estimated using rates currently available in the local market. Loans receivable and loans held for sale – Loans receivable were priced using a discounted cash flow analysis. The fair value of loans held for sale was based on the loans’ carrying values, as the agreements to sell these loans are short-term fixed rate commitments, and no material difference between the carrying value and expected sales price is deemed likely. Investment securities – See descriptions above. FHLB stock – Fair value approximates the carrying amount. Deposits – The fair value of deposits with no stated maturities such as non-interest-bearing demand deposits, interest checking, money market and savings accounts was equal to the amount payable on demand. The fair value of time deposits with stated maturities was based on the discounted value of contractual cash flows. The discount rate was estimated using rates currently available in the local market. Junior subordinated debentures – The fair value of the Debentures was based on the discounted cash flow method. Management believes that the discount rate utilized is indicative of those that would be used by market participants for similar types of debentures. Capital lease obligation – The fair value of the Company's capital lease obligation 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 financial instruments – The estimated fair value of loan commitments approximates fees recorded associated with such commitments. Since the majority of the Company’s off-balance-sheet financial instruments consist of non-fee producing, variable rate commitments, the Company has determined that they do not have a distinguishable fair value.

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- Definition The entire disclosure of the fair value measurement of assets and liabilities, which includes financial instruments measured at fair value that are classified in shareholders' equity, which may be measured on a recurring or nonrecurring basis. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=36462937&loc=d3e19279-110258 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=36462937&loc=d3e19207-110258 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=36462937&loc=d3e19190-110258 + Details
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