8. Fair Value Measurements

Fair value estimates are based on quoted market prices, if available, quoted market prices of similar assets or liabilities, or the present value of expected future cash flows and other valuation techniques. These valuations are significantly affected by discount rates, cash flow assumptions and risk assumptions used. Therefore, fair value estimates may not be substantiated by comparison to independent markets and are not intended to reflect the proceeds that may be realizable in an immediate settlement of the instruments.

Fair value is determined at one point in time and is not representative of future value. These amounts do not reflect the total value of a going concern organization. Management does not have the intention to dispose of a significant portion of its assets and liabilities and therefore, the unrealized gains or losses should not be interpreted as a forecast of future earnings and cash flows.

The following is a discussion of assets and liabilities measured at fair value on a recurring basis and valuation techniques applied:

Securities:

The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3). In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) are used to support fair values of certain Level 3 investments, if applicable.

Impaired loans (generally carried at fair value):

The Company measures impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the lowest level of input that is significant to the fair value measurements.

Foreclosed real estate owned (carried at fair value):

Real estate properties acquired through, or in lieu of loan foreclosure are to be sold and are carried at fair value less estimated cost to sell. Fair value is based upon independent market prices, appraised value of the collateral or management’s estimation of the value of the collateral. These assets are included in Level 3 fair value based upon the lowest level of input that is significant to the fair value measurement.

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2013 and December 31, 2012 are as follows:



	Fair Value Measurement Using
	Reporting Date


Description	Total		(Level 1)		(Level 2)		(Level 3)
	(In thousands)

September 30, 2013
Available for Sale:
U.S. Government agencies	$	27,519	$	-	$	27,519	$	-
States and political subdivisions		63,794		-		63,794		-
Corporate obligations		4,754		-		4,754		-
Mortgage-backed securities-government
sponsored agencies		54,494		-		54,494		-
Equity securities-financial services		343		343		-		-
Total	$	150,904	$	343	$	150,561	$	-

December 31, 2012
Available for Sale:
U.S. Government agencies	$	13,092	$	-	$	13,092	$	-
States and political subdivisions		58,786		-		58,786		-
Corporate obligations		8,868		-		8,868		-
Mortgage-backed securities-government						64,325
sponsored agencies		64,325		-				-
Equity securities-financial services		319		319		-		-
Total	$	145,390	$	319	$	145,071	$	-

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2013 and December 31, 2012 are as follows:



			Fair Value Measurement Using Reporting Date

(In thousands)

Description	Total		(Level 1)		(Level 2)		(Level 3)
September 30, 2013
Impaired Loans	$	9,369	$	-	$	-	$	9,369
Foreclosed Real Estate Owned		993		-		-		993


December 31, 2012
Impaired Loans	$	11,616	$	-	$	-	$	11,616
Foreclosed Real Estate Owned		852		-		-		852

The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:



		Quantitative Information about Level 3 Fair Value Measurements
(In thousands)	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)
September 30, 2013
Impaired loans	$	9,369	Appraisal of collateral(1)	Appraisal adjustments(2)	10% (10.0)%

Foreclosed real estate owned	$	993	Appraisal of collateral(1)	Liquidation Expenses(2)	10%



	Quantitative Information about Level 3 Fair Value Measurements
(In thousands)	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)
December 31, 2012
Impaired loans	$	11,616	Appraisal of collateral(1)	Appraisal adjustments(2)	0-30% (24.10%)

Foreclosed real estate owned	$	852	Appraisal of collateral(1)	Liquidation Expenses(2)	20%

(1)	Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable, less any associated allowance.

(2)	Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at September 30, 2013 and December 31, 2012.

Cash and cash equivalents (carried at cost):

The carrying amounts reported in the consolidated balance sheet for cash and short-term instruments approximate those assets’ fair values.

Loans receivable (carried at cost):

The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

Mortgage servicing rights (generally carried at cost)

The Company utilizes a third party provider to estimate the fair value of certain loan servicing rights. Fair value for the purpose of this measurement is defined as the amount at which the asset could be exchanged in a current transaction between willing parties, other than in a forced liquidation.

Regulatory stock (carried at cost):

The Bank as a member of the Federal Home Loan Bank (FHLB) system is required to maintain an investment in capital stock of its district FHLB according to a predetermined formula. This restricted stock has no quoted market value and is carried at cost.

Bank Owned Life Insurance (carried at cost):

The fair value is equal to the cash surrender value of the Bank-owned life insurance.

Accrued interest receivable and payable (carried at cost):

The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.

Deposit liabilities (carried at cost):

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

Short-term borrowings (carried at cost):

The carrying amounts of short-term borrowings approximate their fair values.

Other borrowings (carried at cost):

Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.

Off-balance sheet financial instruments (disclosed at cost):

Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.

The estimated fair values of the Bank’s financial instruments were as follows at September 30, 2013 and December 31, 2012. (In thousands)



	Fair Value Measurements at September 30, 2013
					Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	27,414	$	27,414	$	27,414	$	-	$	-
Securities		151,078		151,080		343		150,737		-
Loans receivable, net		481,409		490,413		-		-		490,413
Mortgage servicing rights		210		210		-		-		210
Regulatory Stock		2,141		2,141		2,141		-		-
Bank owned life insurance		14,653		14,653		14,653		-		-
Accrued interest receivable		2,373		2,373		2,373		-		-

Financial liabilities:
Deposits		548,698		549,844		346,586		-		203,258
Short-term borrowings		38,466		38,466		38,466		-		-
Other borrowings		19,956		22,155		-		-		22,155
Accrued interest payable		1,075		1,075		1,075		-		-

Off-balance sheet financial instruments:
Commitments to extend credit and outstanding letters of credit		-		-		-		-		-



	Fair Value Measurements at December 31, 2012
					Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	12,295	$	12,295	$	12,295	$	-	$	-
Securities		145,563		145,567		319		145,248		-
Loans receivable, net		471,208		485,848		-		-		485,848
Mortgage servicing rights		243		243		-		243		-
Regulatory stock		2,630		2,630		2,630		-		-
Bank owned life insurance		15,357		15,357		15,357		-		-
Accrued interest receivable		2,393		2,393		2,393		-		-

Financial liabilities:
Deposits		524,425		526,081		313,166		-		212,915
Short-term borrowings		28,697		28,697		28,697		-		-
Other borrowings		22,487		25,426		-		-		25,426
Accrued interest payable		1,242		1,242		1,242		-		-

Off-balance sheet financial instruments:
Commitments to extend credit and outstanding letters of credit		-		-		-		-		-