Fair Value Measurements

3 Months Ended

Mar. 31, 2013

Fair Value Measurements [Abstract]

Fair Value Measurements

(9)  Fair Value Measurements

Accounting guidance related to fair value measurements and disclosures specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. These two types of inputs have created the following fair value hierarchy:

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 – Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

Level 3 – Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable.

An asset's or liability's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs, minimize the use of unobservable inputs, to the extent possible, and considers counterparty credit risk in its assessment of fair value.

The Company used the following methods and significant assumptions to estimate fair value:

Investment securities:  The fair values of securities available for sale are obtained from an independent third party and are based on quoted prices on nationally recognized exchange where available (Level 1).  If quoted prices are not available, fair values are measured by utilizing matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2).  Management made no adjustment to the fair value quotes that were received from the independent third party pricing service.

Interest rate swap derivative:  The fair value of the interest rate swap derivative is calculated based on a discounted cash flow model. All future floating cash flows are projected and both floating and fixed cash flows are discounted to the valuation date.  The curve utilized for discounting and projecting is built by obtaining publicly available third party market quotes for various swap maturity terms.

Impaired loans: Impaired loans are those loans in which the Company has measured impairment generally based on the fair value of the loan's collateral.  Fair value is generally determined based upon market  value evaluations by third parties of the properties and/or estimates by management of working capital collateral or discounted cash flows based upon expected proceeds.  These appraisals may include up to three approaches to value: the sales comparison approach, the income approach (for income-producing property), and the cost approach.  Management modifies the appraised values, if needed, to take into account recent developments in the market or other factors, such as, changes in absorption rates or market conditions from the time of valuation and anticipated sales values considering management's plans for disposition.  Such modifications to the appraised values could result in lower valuations of such collateral. Estimated costs to sell are based on current amounts of disposal costs for similar assets.  These measurements are classified as Level 3 within the valuation hierarchy. Impaired loans are subject to nonrecurring fair value adjustment upon initial recognition or subsequent impairment.  A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance.

Foreclosed real estate:  Fair values for foreclosed real estate are initially recorded based on market value evaluations by third parties, less costs to sell ("initial cost basis").  Any write-downs required when the related loan receivable is exchanged for the underlying real estate collateral at the time of transfer to foreclosed real estate are charged to the allowance for loan losses.  Values are derived from appraisals, similar to impaired loans, of underlying collateral or discounted cash flow analysis.  Subsequent to foreclosure, valuations are updated periodically and assets are marked to current fair value, not to exceed the initial cost basis.  In the determination of fair value subsequent to foreclosure, management also considers other factors or recent developments, such as, changes in absorption rates and market conditions from the time of valuation and anticipated sales values considering management's plans for disposition.  Either change could result in adjustment to lower the property value estimates indicated in the appraisals.  These measurements are classified as Level 3 within the fair value hierarchy.

The following tables summarize assets measured at fair value on a recurring basis as of the indicated dates, segregated by the level of valuation inputs within the hierarchy utilized to measure fair value:

	March 31, 2013
								Total Fair
(In thousands)	Level 1		Level 2			Level 3		Value
Debt investment securities:
US Treasury, agencies and GSEs	$	-	$	19,934		$	-	$	19,934
State and political subdivisions		-		26,311			-		26,311
Corporate		-		21,853			-		21,853
Residential mortgage-backed - US agency		-		54,347			-		54,347
Residential mortgage-backed - private label		-		269			-		269
Equity investment securities:
Mutual funds:
Ultra short mortgage fund		1,286		-			-		1,286
Large cap equity fund		1,208		-			-		1,208
Other mutual funds		-		311			-		311
Common stock - financial services industry		36		400			-		436
Total investment securities	$	2,530	$	123,425		$	-	$	125,955
Interest rate swap derivative	$	-	$	(180	)	$	-	$	(180	)

	December 31, 2012
								Total Fair
(In thousands)	Level 1		Level 2			Level 3		Value
Debt investment securities:
US Treasury, agencies and GSEs	$	-	$	6,183		$	-	$	6,183
State and political subdivisions		-		27,471			-		27,471
Corporate		-		23,006			-		23,006
Residential mortgage-backed - US agency		-		48,251			-		48,251
Residential mortgage-backed - private label		-		305			-		305
Equity investment securities:
Mutual funds:
Ultra short mortgage fund		1,291		-			-		1,291
Large cap equity fund		1,081		-			-		1,081
Other mutual funds		-		319			-		319
Common stock - financial services industry		33		399			-		432
Total investment securities	$	2,405	$	105,934		$	-	$	108,339
Interest rate swap derivative	$	-	$	(195	)	$	-	$	(195	)

The Bank had the following assets measured at fair value on a nonrecurring basis as of March 31, 2013 and December 31, 2012:

	March 31, 2013
							Total Fair
(In thousands)	Level 1		Level 2		Level 3		Value
Impaired loans	$	-	$	-	$	904	$	904
Foreclosed real estate	$	-	$	-	$	-	$	-
	December 31, 2012
							Total Fair
(In thousands)	Level 1		Level 2		Level 3		Value
Impaired loans	$	-	$	-	$	1,951	$	1,951
Foreclosed real estate	$	-	$	-	$	301	$	301

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Level 3 inputs were used to determine fair value.

		Quantitative Information about Level 3 Fair Value Measurements
	Valuation	Unobservable	Range
	Techniques	Input	(Weighted Avg.)
March 31, 2013
Impaired loans	Appraisal of collateral	Appraisal Adjustments		5% - 30% (21%)
		Costs to Sell		6% - 50%  (12%)
Foreclosed real estate	Appraisal of collateral	Appraisal Adjustments		15% - 15% (15%)
		Costs to Sell		6% - 7%  (6%)

		Quantitative Information about Level 3 Fair Value Measurements
	Valuation	Unobservable	Range
	Techniques	Input	(Weighted Avg.)
December 31, 2012
Impaired loans	Appraisal of collateral	Appraisal Adjustments		5% - 30% (21%)
		Costs to Sell		6% - 15% (12%)
Foreclosed real estate	Appraisal of collateral	Appraisal Adjustments		15% - 15% (15%)
		Costs to Sell		6% - 7% (6%)

There have been no transfers of assets in or out of any fair value measurement level.

Required disclosures include fair value information of financial instruments, whether or not recognized in the consolidated statement of condition, for which it is practicable to estimate that value.  In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.

Management uses its best judgment in estimating the fair value of the Company's financial instruments; however, there are inherent weaknesses in any estimation technique.  Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated.  The estimated fair value amounts have been measured as of their respective period-ends, and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates.  As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end.

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 Company, in estimating its fair value disclosures for financial instruments, used the following methods and assumptions:

Cash and cash equivalents – The carrying amounts of these assets approximate their fair value.

Interest earning time deposits – The carrying amounts of these assets approximate their fair value.

Investment securities – The fair values of securities available for sale are obtained from an independent third party and are based on quoted prices on nationally recognized exchange where available (Level 1).  If quoted prices are not available, fair values are measured by utilizing matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities, but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2).  Management made no adjustment to the fair value quotes that were received from the independent third party pricing service.

Federal Home Loan Bank stock – The carrying amount of these assets approximates their fair value.

Loans – For variable-rate loans that re-price frequently, fair value is based on carrying amounts.  The fair value of other loans (for example, fixed-rate commercial real estate loans, mortgage loans, and commercial and industrial loans) is estimated using discounted cash flow analysis, based on interest rates currently being offered in the market for loans with similar terms to borrowers of similar credit quality.  Loan value estimates include judgments based on expected prepayment rates.  The measurement of the fair value of loans, including impaired loans, is classified within Level 3 of the fair value hierarchy.
 

Accrued interest receivable and payable – The carrying amount of these assets approximates their fair value.

Deposits – The fair values disclosed for demand deposits (e.g., interest-bearing and noninterest-bearing checking, passbook savings and certain types of money management accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts) and are classified within Level 1 of the fair value hierarchy.  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 of deposits to a schedule of aggregated expected monthly maturities on time deposits.  Measurements of the fair value of time deposits are classified within Level 2 of the fair value hierarchy.

Borrowings – Fixed/variable term "bullet" structures are valued using a replacement cost of funds approach.  These borrowings are discounted to the FHLBNY advance curve.  Option structured borrowings' fair values are determined by the FHLB for borrowings that include a call or conversion option.  If market pricing is not available from this source, current market indications from the FHLBNY are obtained and the borrowings are discounted to the FHLBNY advance curve less an appropriate spread to adjust for the option. These measurements are classified as Level 2 within the fair value hierarchy.

Junior subordinated debentures – Current economic conditions have rendered the market for this liability inactive.  As such, the Company was formerly unable to determine a good estimate of fair value, resulting in a Level 3 classification at December 31, 2012.  As of March 31, 2013, the Company was able to secure a quote from its pricing service of a security with similar characteristics which resulted in a Level 2 classification for this borrowing. 

Interest rate swap derivative – The fair value of the interest rate swap derivative is obtained from a third party pricing agent and is calculated based on a discounted cash flow model. All future floating cash flows are projected and both floating and fixed cash flows are discounted to the valuation date.  The curve utilized for discounting and projecting is built by obtaining publicly available third party market quotes for various swap maturity terms, and therefore is classified within Level 2 of the fair value hierarchy.

The carrying amounts and fair values of the Company's financial instruments as of the indicated dates are presented in the following table:

			March 31, 2013				December 31, 2012
	Fair Value		Carrying		Estimated		Carrying		Estimated
(Dollars In thousands)	Hierarchy		Amounts		Fair Values		Amounts		Fair Values
Financial assets:
Cash and cash equivalents		1	$	13,218	$	13,218	$	8,665	$	8,665
Interest earning time deposits		1		2,000		2,000		2,000		2,000
Investment securities		1		2,530		2,530		2,405		2,405
Investment securities		2		123,425		123,425		105,934		105,934
Federal Home Loan Bank stock		2		1,505		1,505		1,929		1,929
Net loans		3		334,258		344,647		329,247		341,389
Accrued interest receivable		1		1,912		1,912		1,717		1,717
Financial liabilities:
Demand Deposits, Savings, NOW and MMDA		1	$	259,458	$	259,458	$	228,484	$	228,484
Time Deposits		2		168,927		170,776		163,321		165,491
Borrowings		2		25,936		26,846		34,964		36,054
Junior subordinated debentures		2		5,155		4,429		-		-
Junior subordinated debentures		3		-		-		5,155		5,155
Accrued interest payable		1		142		142		140		140
Interest rate swap derivative		2		180		180		195		195