Fair Value

9 Months Ended

Sep. 30, 2012

Fair Value [Abstract]

Fair Value

NOTE (8) – Fair Value

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 values:

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 to estimate fair value:

The fair values of securities available-for-sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

The fair value of non-performing loans receivable held-for-sale is generally based upon the fair value of the collateral which is obtained from 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 typically significant and result in a Level 3 classification of the inputs for determining fair value. Non-performing loans held for sale are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

At the time a loan is considered impaired, it is valued at the lower of cost or fair value. 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. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

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. Real estate owned is reviewed and evaluated on at least an annual basis for additional impairment and adjusted accordingly.

Assets Measured on a Recurring Basis

Assets measured at fair value on a recurring basis are summarized below:

	Fair Value Measurements at September 30, 2012 Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(In thousands)
Assets:
Securities available-for-sale - residential mortgage-backed	$	0	$	14,584	$	0	$	14,584

	Fair Value Measurements at December 31, 2011 Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(In thousands)
Assets:
Securities available-for-sale - residential mortgage-backed	$	0	$	17,910	$	0	$	17,910
Securities available-for-sale – U.S. government and federal agency		0		1,069		0		1,069

There were no transfers between Level 1, Level 2, or Level 3 during the three and nine months ended September 30, 2012 and 2011.

Assets Measured on a Non-Recurring Basis

The following table provides information regarding our assets measured at fair value on a non-recurring basis at the dates indicated. The fair value measurement for all of these assets falls within Level 3 of the fair value hierarchy.

	Principal Amount		Valuation Allowance		Principal Amount		Valuation Allowance
	September 30, 2012				December 31, 2011
	(In thousands)
Assets:
Non-performing loans receivable held-for-sale (1):
Five or more units	$	2,001	$	0	$	2,496	$	382
Commercial real estate		0		0		338		0
Church		1,567		0		2,778		0
Impaired loans carried at fair value of collateral (2):
One to four units		4,483		184		6,697		496
Five or more units		978		29		1,025		151
Commercial real estate		4,146		0		2,869		0
Church		10,852		225		13,706		553
Construction		284		87		302		97
Other		69		69		70		70
Real estate owned:
One to four units		0		0		759		41
Commercial real estate		574		55		3,374		248
Church		2,144		371		2,913		58

(1) Includes $1.7 million and $2.7 million of loans held for sale that were carried at cost at September 30, 2012 and December 31, 2011 as the fair value of the collateral on these loans exceeded the book value as a result of charge-offs.

(2) Includes $19.1 million and $18.6 million of loans that were carried at cost at September 30, 2012 and December 31, 2011 as the fair value of the collateral on these loans exceeded the book value as a result of charge-offs.

Collateral-dependent impaired loans and non-performing loans held for sale are measured for impairment using the fair value of the collateral. To determine the fair value of collateral, the Company primarily relies on third party appraisals, which are generally obtained every six to nine months. For one-to-four family residential loans, appraised values are based on the comparable sales approach. A significant unobservable input in the sales approach is the adjustment for the differences between the comparable sales. At September 30, 2012, these adjustments ranged from an upward adjustment of 7% to a discount of 30%. For five or more unit residential, commercial real estate and church loans, appraisers may use a single valuation approach or a combination of approaches such as the comparable sales, cost or income approaches. At September 30, 2012, adjustments made on five or more units residential, commercial real estate and church loans valued using the comparable sales approach ranged from an upward adjustment of 5% to a discount of 45%. A significant unobservable input in the income approach is the estimated income capitalization rate. At September 30, 2012, capitalization rates of 7% and 9% were utilized to determine the fair value of the underlying collateral of a commercial real estate loan, a church loan and two five or more units residential loans. The Company’s calculation of net realizable value considers any third party liens in place on the underlying collateral.

Real estate owned is measured at fair value less estimated costs to sell, The fair value of REO is determined using a third party appraisal and is based on the comparable sales, cost or income approach, or a combination of these approaches. A significant unobservable input in the sales approach is the adjustment for the differences between the comparable sales. At September 30, 2012, these adjustments ranged from an upward adjustment of 17% to a discount of 45%. A significant unobservable input in the income approach is the estimated income capitalization rate. At September 30, 2012, capitalization rates of 10.50% and 12% were utilized to determine the fair value of the underlying collateral of two commercial real estate loan, and a church loan.

The following table provides information regarding gains (losses) recognized on assets measured at fair value on a non-recurring basis for the three and nine months ended September 30, 2012 and 2011.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
	(In thousands)
Non-performing loans receivable held-for-sale, net (1)	$	296		$	(702	)	$	109		$	(667	)
Impaired loans carried at fair value of collateral (2)		(669	)		(4,463	)		(1,585	)		(9,523	)
Real estate owned (3)		(427	)		(1,251	)		(739	)		(2,033	)
Total	$	(800	)	$	(6,416	)	$	(2,215	)	$	(12,223	)

(1) Gains (losses) are charged to provision for losses on loans receivable held-for-sale.

(2) Gains (losses) are charged against the allowance for loan losses.

(3) Losses are charged against the allowance for loan losses in the case of a write-down upon the transfer of a loan to REO. Gains (losses) subsequent to the transfer of a loan to REO are charged to provision for losses on REO.

Fair Values of Financial Instruments

The carrying amounts and estimated fair values of financial instruments, at September 30, 2012 and December 31, 2011 were as follows:

				Fair Value Measurements at September 30, 2012 Using
	Carrying Value			Level 1		Level 2			Level 3			Total
	(In thousands)
Financial Assets:
Cash and cash equivalents	$	56,545		$	56,545	$	0		$	0		$	56,545
Securities available-for-sale		14,584			0		14,584			0			14,584
Loans receivable held for sale, net		11,215			0		0			11,215			11,215
Loans receivable, net		282,292			0		0			282,037			282,037
Federal Home Loan Bank stock		3,901			0		0			N/A			N/A
Accrued interest receivable		1,395			0		50			1,345			1,395
Financial Liabilities:
Deposits	$	(262,808	)	$	0	$	(261,696	)	$	0		$	(261,696	)
Federal Home Loan Bank advances		(83,000	)		0		(88,931	)		0			(88,931	)
Junior subordinated debentures		(6,000	)		0		0			(5,537	)		(5,537	)
Other borrowings		(5,000	)		0		0			(4,615	)		(4,615	)
Accrued interest payable		(1,837	)		0		(169	)		(1,668	)		(1,837	)

	December 31, 2011
	Carrying Amount			Estimated Fair Value
Financial Assets:
Cash and cash equivalents	$	31,597		$	31,597
Securities available-for-sale		18,979			18,979
Loans receivable held for sale, net		12,983			12,983
Loans receivable, net		322,770			323,090
Federal Home Loan Bank stock		4,089			N/A
Accrued interest receivable		1,698			1,698
Financial Liabilities:
Deposits	$	(294,686	)	$	(294,313	)
Federal Home Loan Bank advances		(83,000	)		(88,911	)
Junior subordinated debentures		(6,000	)		(5,319	)
Other borrowings		(5,000	)		(4,434	)
Advance payments by borrowers for taxes and insurance		(813	)		(813	)
Accrued interest payable		(1,302	)		(1,302	)

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 cash equivalents approximate fair values and are classified as Level 1.

(b) Loans receivable held for sale

The fair value of loans held for sale is estimated based on quoted prices from third party sale analyses, existing sale agreements or appraisal reports adjusted by sales commission assumptions resulting in a Level 3 classification.

(c) Loans receivable

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.

(d) FHLB Stock

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

(e) 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) resulting in Level 2 classification. Fair values for fixed rate certificates of deposit are estimated using discounted cash flow calculations that apply interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

(f) Federal Home Loan Bank Advances

The fair values of the Federal Home Loan Bank advances are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

(g) Subordinated Debentures and Other Borrowings

The fair values of the Company’s Subordinated Debentures and other borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

(h) Accrued Interest Receivable/Payable

The carrying amounts of accrued interest are classified the same as the related asset / liability.