Note 11 - Fair Value Measurement and Disclosure

6 Months Ended

Jun. 30, 2016

Fair Value, Measurement Inputs, Disclosure [Text Block]

NOTE 11 – FAIR VALUE MEASUREMENT AND DISCLOSURE

FASB ASC Topic 820, Fair Value Measurements and Disclosures, clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants and is not adjusted for transaction costs. This guidance also 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 measurement inputs) and the lowest priority to unobservable inputs (Level 3 measurement inputs). The three levels of the fair value hierarchy under FASB ASC 820 are described below:

Basis of Fair Value Measurement:

•

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets.

•

Level 2 - Significant other observable inputs other than Level 1 prices such as quoted prices in markets that are not active, quoted prices for similar assets, or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset.

•

Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value:

Securities Available for Sale

Securities classified as available for sale are recorded at fair value on a recurring basis using pricing obtained from an independent pricing service. Where quoted market prices are available in an active market, securities are classified within Level 1. The Company has no securities classified within Level 1. If quoted market prices are not available, the pricing service estimates the fair values by using pricing models or quoted prices of securities with similar characteristics. For these securities, the inputs used by the pricing service to determine fair value consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and bonds’ terms and conditions, among other things resulting in classification within Level 2. Level 2 securities include state and municipal securities, and residential mortgage-backed securities. In cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3. The Company has no securities classified within Level 3.

Foreclosed Assets

Foreclosed assets, consisting of foreclosed real estate and repossessed assets, are adjusted to fair value less estimated costs to sell upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of cost or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as non-recurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as non-recurring Level 3.

Impaired Loans

Impaired loans are evaluated and adjusted to the lower of carrying value or fair value less estimated costs to sell at the time the loan is identified as impaired. Impaired loans are carried at the lower of cost or fair value. Fair value is measured based on the value of the collateral securing these loans. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as non-recurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as non-recurring Level 3.

The Company did not have any transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy during the six months ended June 30, 2016 and the year ended December 31, 2015. The Company’s policy for determining transfers between levels occurs at the end of the reporting period when circumstances in the underlying valuation criteria change and result in transfers between levels.

The tables below present the recorded amount of assets measured at fair value on a recurring basis at June 30, 2016 and December 31, 2015.

							Total
June 30, 2016	Level 1		Level 2		Level 3		Fair Value
State and municipal securities available for sale	$	-	$	18,917,721	$	-	$	18,917,721
Residential mortgage-backed securities available for sale		-		26,904,144		-		26,904,144
	$	-	$	45,821,865	$	-	$	45,821,865

							Total
December 31, 2015	Level 1		Level 2		Level 3		Fair Value
State and municipal securities available for sale	$	-	$	19,237,208	$	-	$	19,237,208
Residential mortgage-backed securities available for sale		-		27,747,699		-		27,747,699
	$	-	$	46,984,907	$	-	$	46,984,907

The tables below present the recorded amount of assets measured at fair value on a non-recurring basis at June 30, 2016 and December 31, 2015.

							Total
June 30, 2016	Level 1		Level 2		Level 3		Fair Value
Foreclosed assets	$	-	$	-	$	334,253	$	334,253
Impaired loans, net		-		-		2,050,933		2,050,933

							Total
December 31, 2015	Level 1		Level 2		Level 3		Fair Value
Foreclosed assets	$	-	$	-	$	330,245	$	330,245
Impaired loans, net		-		-		2,277,918		2,277,918

The following tables present additional quantitative information about assets measured at fair value on a non-recurring basis for which the Company has utilized Level 3 inputs to determine fair value.

Quantitative Information about Level 3 Fair Value Measurements

Fair Value

Valuation

Unobservable

Estimate

Techniques

Input

Range

June 30, 2016

Foreclosed assets

334,253

Appraisal of collateral

Appraisal adjustments

-6.7%

-89.1%

Impaired loans, net

1,761,986

Appraisal of collateral

Appraisal adjustments

-24.8

-53.6%

Impaired loans, net

288,947

Discounted Future Cash Flows

Payment Stream

N/A

Discount Rate

10%

December 31, 2015

Foreclosed assets

330,245

Appraisal of collateral

Appraisal adjustments

-6.7%

-63.6%

Impaired loans, net

2,170,027

Appraisal of collateral

Appraisal adjustments

-10%

-70%

Impaired loans, net

107,891

Discounted Future Cash Flows

Payment Stream

N/A

Discount Rate

10%

In accordance with accounting pronouncements, the carrying value and estimated fair value of the Company’s financial instruments as of June 30, 2016 and December 31, 2015 are as follows:

			Fair Value Measurements at
	Carrying		June 30, 2016 using:
	Amount		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	2,566,232	$	2,566,232	$	-	$	-	$	2,566,232
Time deposits		250,000		250,000		-		-		250,000
Federal funds sold		-		-		-		-		-
Securities		46,575,186		-		45,821,865		753,321		46,575,186
Accrued interest receivable		841,408		841,408		-		-		841,408
Net loans		150,115,863		-		-		151,767,000		151,767,000
Loans held for sale		506,544		506,544		-		-		506,544
Mortgage servicing rights		313,482		-		-		313,482		313,482
Financial Liabilities:
Non-interest bearing deposits		9,860,488		9,860,488		-		-		9,860,488
Interest bearing deposits		166,243,344		-		-		162,302,512		162,302,512
Accrued interest payable		1,371		1,371		-		-		1,371
FHLB advances		1,128,961		-		1,128,961		-		1,128,961
Federal funds purchased		3,705,000		3,705,000		-		-		3,705,000

	Carrying		December 31, 2015 using:
	Amount		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	7,135,719	$	7,135,719	$	-	$	-	$	7,135,719
Time deposits		250,000		250,000		-		-		250,000
Federal funds sold		1,604,000		1,604,000		-		-		1,604,000
Securities		48,343,028		-		46,984,907		1,358,121		48,343,028
Accrued interest receivable		775,641		775,641		-		-		775,641
Net loans		140,110,201		-		-		141,665,000		141,665,000
Loans held for sale		-		-		-		-		-
Mortgage servicing rights		285,927		-		-		285,927		285,927
Financial Liabilities:
Non-interest bearing deposits		10,325,832		10,325,832		-		-		10,325,832
Interest bearing deposits		166,409,076		-		-		161,173,168		161,173,168
Accrued interest payable		394		394		-		-		394
FHLB advances		2,139,117		-		2,139,117		-		2,139,117

The following methods and assumptions were used by the Bank in estimating the fair value of financial instruments:

Cash and

ash

quivalents:

The carrying amounts reported in the balance sheets for cash and cash equivalents approximate fair values.

Time deposits

The carrying amounts reported in the balance sheets for time deposits approximate fair values.

Federal

unds

old:

The carrying amounts reported in the balance sheets for federal funds sold approximate fair values.

Securities:

The Company obtains fair value measurements of available for sale securities from an independent pricing service. See Note 11 - Fair Value Measurement and Disclosure for further detail on how fair values of securities available for sale are determined. The carrying value of non-marketable equity securities approximates fair value.

Loans:

For variable-rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans (for example, fixed rate commercial real estate and rental property mortgage loans and commercial and industrial loans) are estimated using discounted cash flow analysis, based on market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. Fair values for impaired loans are estimated using underlying collateral values, where applicable or discounted cash flows.

Loans held for sale

The carrying amounts reported in the balance sheets for loans held for sale approximate fair values, as usually these loans are originated with the intent to sell and funding of the sales usually occurs within three days.

Accrued

nterest

eceivable and

ayable:

The carrying amounts of accrued interest receivable and payable approximate fair values.

Mortgage

ervicing

ights:

The carrying amounts of mortgage servicing rights approximate their fair values.

Deposits:

The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

FHLB

dvances:

The carrying value of FHLB advances is estimated by discounting future cash flows at the currently offered rates for borrowings of similar remaining maturities.

Federal

unds

purchased

The carrying amounts reported in the balance sheets for federal funds purchased approximate fair values.

Loan

ommitments:

Commitments to extend credit were evaluated and fair value was estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counter-parties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The Bank does not charge fees to enter into these agreements. As of June 30, 2016 and December 31, 2015, the fair values of the commitments are immaterial in nature.

In addition, other assets and liabilities of the Bank that are not defined as financial instruments, such as property and equipment, are not included in the above disclosures. Also, non-financial instruments typically not recognized in financial statements nevertheless may have value but are not included in the above disclosures. These include, among other items, the estimated earnings power of core deposit accounts, the trained work force, customer goodwill and similar items.

Ottawa Savings Bancorp, Inc. 10-Q