| Fair Value |
Fair Value of Financial Instruments
Fair value is defined 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.
The Company determines the fair values of its financial instruments based on the fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair values. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect its estimate for market assumptions.
Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability using one of the three valuation techniques. Inputs can be observable or unobservable. Observable inputs are those assumptions that market participants would use in pricing the particular asset or liability. These inputs are based on market data and are obtained from an independent source. Unobservable inputs are assumptions based on the Company’s own information or estimate of assumptions used by market participants in pricing the asset or liability. Unobservable inputs are based on the best and most current information available on the measurement date.
All inputs, whether observable or unobservable, are ranked in accordance with a prescribed fair value hierarchy:
| | • | Level 1 - Quoted prices for identical instruments in active markets. |
| | • | Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable. |
| | • | Level 3 - Instruments whose significant value drivers are unobservable. |
The tables below present the balances of assets and liabilities measured at fair value on a recurring basis (there were no transfers between Level 1, Level 2 and Level 3 recurring measurements during the periods presented): | | | | | | | | | | | | | | | | | | December 31, 2016 | | Fair Value Measurements | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | (In thousands) | Available-for-sale investments: | | | | | | | | Mortgage-backed investments: | | | | | | | | Fannie Mae | $ | 41,332 |
| | $ | — |
| | $ | 41,332 |
| | $ | — |
| Freddie Mac | 18,009 |
| | — |
| | 18,009 |
| | — |
| Ginnie Mae | 18,634 |
| | — |
| | 18,634 |
| | — |
| Municipal bonds | 13,107 |
| | — |
| | 13,107 |
| | — |
| U.S. Government agencies | 15,857 |
| | — |
| | 15,857 |
| | — |
| Corporate bonds | 22,321 |
| | — |
| | 22,321 |
| | — |
| Total available-for-sale investments | 129,260 |
| | — |
| | 129,260 |
| | — |
| Derivative fair value asset | 1,333 |
| | — |
| | 1,333 |
| | — |
| | $ | 130,593 |
| | $ | — |
| | $ | 130,593 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | December 31, 2015 | | Fair Value Measurements | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | (In thousands) | Available-for-sale investments: | | | | | | | | Mortgage-backed investments: | | | | | | | | Fannie Mae | $ | 50,321 |
| | $ | — |
| | $ | 50,321 |
| | $ | — |
| Freddie Mac | 26,137 |
| | — |
| | 26,137 |
| | — |
| Ginnie Mae | 13,732 |
| | — |
| | 13,732 |
| | — |
| Municipal bonds | 12,064 |
| | — |
| | 12,064 |
| | — |
| U.S. Government agencies | 13,542 |
| | — |
| | 13,542 |
| | — |
| Corporate bonds | 13,769 |
| | — |
| | 13,769 |
| | — |
| | $ | 129,565 |
| | $ | — |
| | $ | 129,565 |
| | $ | — |
|
The estimated fair value of Level 2 investments is based on quoted prices for similar investments in active markets, identical or similar investments in markets that are not active, and model-derived valuations whose inputs are observable.
The tables below present the balances of assets and liabilities measured at fair value on a nonrecurring basis at December 31, 2016, and 2015. | | | | | | | | | | | | | | | | | | December 31, 2016 | | Fair Value Measurements | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | (In thousands) | Impaired loans (included in loans receivable, net)(1) | $ | 30,632 |
| | $ | — |
| | $ | — |
| | $ | 30,632 |
| OREO | 2,331 |
| | — |
| | — |
| | 2,331 |
| Total | $ | 32,963 |
| | $ | — |
| | $ | — |
| | $ | 32,963 |
|
_______________ (1) Total value of impaired loans is net of $309,000 of specific reserves on performing TDRs.
| | | | | | | | | | | | | | | | | | December 31, 2015 | | Fair Value Measurements | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | (In thousands) | Impaired loans (included in loans receivable, net)(1) | $ | 42,557 |
| | $ | — |
| | $ | — |
| | $ | 42,557 |
| OREO (2) | 3,663 |
| | — |
| | — |
| | 3,663 |
| Total | $ | 46,220 |
| | $ | — |
| | $ | — |
| | $ | 46,220 |
|
________________ (1) Total value of impaired loans is net of $732,000 of specific reserves on performing TDRs.
OREO properties are measured at the lower of their carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis. | | | | | | | | | | | | December 31, 2016 | | Fair Value | | Valuation Technique(s) | | Unobservable Input(s) | | Range (Weighted Average Change in Fair Value) | | (Dollars in thousands) | Impaired Loans | $ | 30,632 |
| | Market approach | | Appraised value discounted by market or borrower conditions | | 0.0% (0.00%) | | | | | | | | | OREO | $ | 2,331 |
| | Market approach | | Appraised value less selling costs | | 0.0% (0.00%) |
| | | | | | | | | | | | December 31, 2015 | | Fair Value | | Valuation Technique(s) | | Unobservable Input(s) | | Range (Weighted Average Change in Fair Value) | | (Dollars in thousands) | Impaired Loans | $ | 42,557 |
| | Market approach | | Appraised value discounted by market or borrower conditions | | 0.0% - 2.1% (0.3%) | | | | | | | | | OREO | $ | 3,663 |
| | Market approach | | Appraised value less selling costs | | 0.0% -13.6% (1.0%) |
The carrying amounts and estimated fair values of financial instruments at December 31, 2016, and 2015, were as follows: | | | | | | | | | | | | | | | | | | | | | | December 31, 2016 | | Fair Value Measurements Using: | | Carrying Value | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 | | (In thousands) | Financial Assets: | | | | | | | | | | Cash on hand and in banks | $ | 5,779 |
| | $ | 5,779 |
| | $ | 5,779 |
| | $ | — |
| | $ | — |
| Interest-earning deposits | 25,573 |
| | 25,573 |
| | 25,573 |
| | — |
| | — |
| Investments available-for-sale | 129,260 |
| | 129,260 |
| | — |
| | 129,260 |
| | — |
| Loans receivable, net | 815,043 |
| | 818,054 |
| | — |
| | — |
| | 818,054 |
| FHLB stock | 8,031 |
| | 8,031 |
| | — |
| | 8,031 |
| | — |
| Accrued interest receivable | 3,147 |
| | 3,147 |
| | — |
| | 3,147 |
| | — |
| Derivative fair value asset | 1,333 |
| | 1,333 |
| | — |
| | 1,333 |
| | — |
| | | | | | | | | | | Financial Liabilities: | | | | | |
| | |
| | | Deposits | 285,335 |
| | 285,335 |
| | 285,335 |
| | — |
| | — |
| Certificates of deposit, retail | 356,653 |
| | 356,723 |
| | — |
| | 356,723 |
| | — |
| Certificates of deposit, brokered | 75,488 |
| | 75,431 |
| | — |
| | 75,431 |
| | — |
| Advances from the FHLB | 171,500 |
| | 170,221 |
| | — |
| | 170,221 |
| | — |
| Accrued interest payable | 231 |
| | 231 |
| | — |
| | 231 |
| | — |
|
| | | | | | | | | | | | | | | | | | | | | | December 31, 2015 | | Fair Value Measurements Using: | | Carrying Value | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 | | (In thousands) | | | | | | | Financial Assets: | | | | | | | | | | Cash on hand and in banks | $ | 5,713 |
| | $ | 5,713 |
| | $ | 5,713 |
| | $ | — |
| | $ | — |
| Interest-earning deposits | 99,998 |
| | 99,998 |
| | 99,998 |
| | — |
| | — |
| Investments available-for-sale | 129,565 |
| | 129,565 |
| | — |
| | 129,565 |
| | — |
| Loans receivable, net | 685,072 |
| | 693,480 |
| | — |
| | — |
| | 693,480 |
| FHLB stock | 6,137 |
| | 6,137 |
| | — |
| | 6,137 |
| | — |
| Accrued interest receivable | 2,968 |
| | 2,968 |
| | — |
| | 2,968 |
| | — |
| | | | | | | | | | | Financial Liabilities: | | | | | |
| | |
| | | Deposits | 285,416 |
| | 285,416 |
| | 285,416 |
| | — |
| | — |
| Certificates of deposit, retail | 323,840 |
| | 324,135 |
| | — |
| | 324,135 |
| | — |
| Certificates of deposit, brokered | 66,151 |
| | 66,947 |
| | — |
| | 66,947 |
| | — |
| Advances from the FHLB | 125,500 |
| | 125,466 |
| | — |
| | 125,466 |
| | — |
| Accrued interest payable | 135 |
| | 135 |
| | — |
| | 135 |
| | — |
|
Fair value estimates, methods, and assumptions are set forth below for the Company’s financial instruments:
| | • | Financial instruments with book value equal to fair value: The fair value of financial instruments that are short-term or reprice frequently and that have little or no risk are considered to have a fair value equal to book value. These instruments include cash on hand and in banks, interest-bearing deposits, accrued interest receivable, and accrued interest payable. |
| | • | FHLB stock: FHLB stock is not publicly-traded, however, it may be redeemed on a dollar-for-dollar basis, for any amount the Bank is not required to hold, subject to the FHLB’s discretion. The fair value is therefore equal to the book value. |
| | • | Investments available-for-sale: The fair value of all investments excluding FHLB stock was based upon quoted market prices for similar investments in active markets, identical or similar investments in markets that are not active, and model-derived valuations whose inputs are observable. |
| | • | Loans receivable: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair value of fixed-rate loans is estimated using discounted cash flow analysis, utilizing interest rates that would be offered for loans with similar terms to borrowers of similar credit quality. As a result of current market conditions, cash flow estimates have been further discounted to include a credit factor. The fair value of nonperforming loans is estimated using the fair value of the underlying collateral. |
| | • | Derivatives: The fair value of derivatives is based on dealer quotes, pricing models, discounted cash flow methodologies or similar techniques for which the determination of fair value may require significant management judgment or estimation. |
| | • | Liabilities: The fair value of deposits with no stated maturity, such as statement savings, interest bearing deposits, and money market accounts, is equal to the amount payable on demand. The fair value of certificates of deposit is based on the discounted value of contractual cash flows using current interest rates for certificates of deposit with similar remaining maturities. The fair value of FHLB advances is estimated based on discounting the future cash flows using current interest rates for debt with similar remaining maturities. |
| | • | Off balance sheet commitments: No fair value adjustment is necessary for commitments made to extend credit, which represents commitments for loan originations or for outstanding commitments to purchase loans. These commitments are at variable rates, are for loans with terms of less than one year and have interest rates which approximate prevailing market rates, or are set at the time of loan closing. |
Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business. The fair value has not been estimated for assets and liabilities that are not considered financial instruments. |