FAIR VALUES

6 Months Ended

Jun. 30, 2016

NOTE 4 - FAIR VALUES

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 value:

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 used to estimate the fair value of the following items:

Securities: The fair values of trading securities and securities available-for-sale are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2).

Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value of underlying collateral. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly 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.

Other Real Estate Owned: 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. 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.

Appraisals for both collateral dependent impaired loans and real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. On an annual basis, 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.

At June 30, 2016 and December 31, 2015, the Company had no liabilities measured at fair value. Assets measured at fair value on a recurring basis are summarized below:

June 30, 2016

Quoted Prices in

Significant

Active Markets

Other

Significant

For Identical

Observable

Unobservable

Assets

Inputs

Total

(Level 1)

(Level 2)

(Level 3)

Securities available-for-sale

U.S. government-sponsored entities

14,272

—

14,272

—

Residential agency mortgage-backed

31,575

—

31,575

—

December 31, 2015

Quoted Prices in

Significant

Active Markets

Other

Significant

For Identical

Observable

Unobservable

Assets

Inputs

Total

(Level 1)

(Level 2)

(Level 3)

Securities available-for-sale

U.S. government-sponsored entities

10,215

—

10,215

—

Residential agency mortgage-backed

39,727

—

39,727

—

There were no transfers between Level 1 and Level 2 during the six months ended June 30, 2016 and the year ended December 31, 2015.

The following tables set forth the Company’s assets that were measured at fair value on a non-recurring basis:

June 30, 2016

Quoted Prices in

Significant

Active Markets

Other

Significant

For Identical

Observable

Unobservable

Assets

Inputs

Total

(Level 1)

(Level 2)

(Level 3)

Other real estate owned:

One—to-four family

—

Multi-family and commercial

—

December 31, 2015

Quoted Prices in

Significant

Active Markets

Other

Significant

For Identical

Observable

Unobservable

Assets

Inputs

Total

(Level 1)

(Level 2)

(Level 3)

Other real estate owned:

One-to-four family

144

—

144

Multi-family and commercial

163

—

163

At June 30, 2016, other real estate owned, which is carried at fair value less estimated costs to sell, had a carrying amount of $40. At December 31, 2015, other real estate owned had a carrying amount of $307, net of a valuation allowance of $3.

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis:

	June 30, 2016
			Valuation		Range
	Fair Value		Technique(s)	Unobservable Input(s)	(Weighted Average)

Other real estate owned:
One-to-four family	$	40	Sales comparison approach	Adjustment for differences between the comparable sales	0.00-11.7% (-0.18%)

	December 31, 2015
			Valuation		Range
	Fair Value		Technique(s)	Unobservable Input(s)	(Weighted Average)

Other real estate owned:
One-to-four family	$	144	Sales comparison approach	Adjustment for differences between the comparable Sales	0.0-15.8% (5.6%)
Multi-family and commercial	163		Sales comparison approach	Adjustment for differences between the comparable sales	0.0-24.7% (11.7%)

The carrying amount and estimated fair value of financial instruments not previously presented were as follows.

	June 30, 2016
	Carrying		Fair Value Measurements Using:
	Amount		Level 1		Level 2		Level 3		Total

Financial assets
Cash and cash equivalents	$	31,485	$	31,485	$	—	$	—	$	31,485
Securities held-to-maturity	274		—		276		—		276
Loans, net	109,959		—		—		112,631		112,631
FHLB stock	598		N/A		N/A		N/A		N/A
Accrued interest receivable	412		—		41		371		412

Financial liabilities
Non-interest-bearing deposits	$	22,129	$	22,129	$	—	$	—	$	22,129
Interest-bearing deposits	142,311		87,080		55,507		—		142,587
Advances from borrowers for taxes	1,999		—		1,999		—		1,999
Accrued interest payable	1		—		1		—		1

	December 31, 2015
	Carrying		Fair Value Measurements Using:
	Amount		Level 1		Level 2		Level 3		Total

Financial assets
Cash and cash equivalents	$	29,922	$	29,922	$	—	$	—	$	29,922
Securities held-to-maturity	326		—		332		—		332
Loans, net (less impaired loans)	114,423		—		—		112,263		112,263
FHLB stock	1,291		N/A		N/A		N/A		N/A
Accrued interest receivable	434		—		27		407		434

Financial liabilities
Non-interest-bearing deposits	$	23,132	$	23,132	$	—	$	—	$	23,132
Interest-bearing deposits	142,517		85,789		56,771		—		142,560
FHLB advances	5,000		—		5,023		—		5,023
Advances from borrowers for taxes	2,135		—		2,135		—		2,135
Accrued interest payable	11		—		11		—		11

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)

Securities Held-to-Maturity

The carrying amounts of held to maturity securities are determined using a pricing matrix resulting in a Level 2 classification.

(c)

FHLB Stock

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

(d)

Loans

The fair values of loans, excluding loans held for sale, 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.

(e)

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.

(f)

Deposits

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook 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, fixed-term money market accounts and 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.

(g)

Federal Home Loan Bank Advances

The fair value of Federal Home Loan Bank advances, which are at a fixed rate, are estimated using discounted cash flow analyses based on current rates for similar advances resulting in a Level 2 classification.

(h)

Securities Sold Under Agreements to Repurchase

The carrying amounts of securities sold under agreements to repurchase approximate fair value resulting in a Level 2 classification.

(i)

Advances From Borrowers For Taxes

The carrying values of short-term borrowings approximated fair value and are classified as Level 2.

(j)

Accrued Interest Payable

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

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details

AJS Bancorp, Inc. 10-Q