FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2013

FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS [Abstract]

FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

NOTE 9 — FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

The following tables present information about the Company’s financial instruments measured at fair value as of September 30, 2013 and December 31, 2012. 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. A fair value measurement hierarchy has been established for inputs in 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 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Determination of the appropriate level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement for the instrument or security.

The fair value hierarchy levels are summarized below:

· Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

· Level 2 inputs are inputs that are observable for the asset or liability, either directly or indirectly.

· Level 3 inputs are unobservable and contain assumptions of the party assessing the fair value of the asset or liability.

 Assets measured at fair value on a recurring basis segregated by fair value hierarchy level are summarized below:

							Balance as of
	Fair value hierarchy levels						September 30,
	Level 1		Level 2		Level 3		2013
	(in thousands)
Assets
Investment securities available for sale
U.S. Government and federal agencies	$	—	$	22,299	$	—	$	22,299
State and political subdivisions		—		59,605		—		59,605
Residential mortgage-backed securities issued by quasi-      governmental agencies		—		47,170		—		47,170
Total investment securities available for sale	$	—	$	129,074	$	—	$	129,074
Loans receivable, held for sale	$	—	$	691	$	—	$	691

							Balance as of
	Fair value hierarchy levels						December 31,
	Level 1		Level 2		Level 3		2012
	(in thousands)
Assets
Investment securities available for sale
State and political subdivisions	$	—	$	59,610	$	—	$	59,610
Residential mortgage-backed securities issued by quasi-      governmental agencies		—		42,674		—		42,674
Total investment securities available for sale	$	—	$	102,284	$	—	$	102,284
Loans receivable, held for sale	$	—	$	706	$	—	$	706

Investment securities available for sale and mortgage-backed securities available for sale are valued primarily by a third party pricing agent. U.S. Government and federal agency securities are primarily priced through a multi-dimensional relational model, a Level 2 hierarchy, which incorporates dealer quotes and other market information including, defined sector breakdown, benchmark yields, base spread, yield to maturity and corporate actions. State and political subdivision securities are valued within the Level 2 hierarchy using inputs with a series of matrices that reflect benchmark yields, ratings updates, and spread adjustments. Mortgage-backed securities include Government National Mortgage Association (“GNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal National Mortgage Association (“FNMA”) certificates which are valued under a Level 2 hierarchy using a matrix correlation to benchmark yields, spread analysis, and prepayment speeds.

 Values for loans held for sale utilize active pricing quotes which exist in the secondary market and are therefore deemed a Level 2 hierarchy.

Assets measured at fair value on a nonrecurring basis segregated by fair value hierarchy level at September 30, 2013 are summarized below:

							Balance as of
	Fair value hierarchy levels						September 30,
	Level 1		Level 2		Level 3		2013
	(in thousands)
Impaired loans	$	—	$	—	$	3,728	$	3,728
Real estate acquired through foreclosure		—		—		5,786		5,786
Mortgage servicing rights		—		1,471		—		1,471

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Bank has utilized Level 3 inputs to determine fair value at September 30, 2013:

		Fair value		Valuation	Unobservable	Range of
Description		estimate		technique	Input	inputs
	(in thousands)
Impaired loans		$	3,728	Appraisal of collateral (1)	Discount rate to reflect current market conditions and ultimate recoverability		5%-15	%
Real estate acquired through foreclosure			5,786	Appraisal of collateral (1)	Discount rate to reflect current market conditions and liquidation expenses		5%-20	%

(1 ) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

The fair value of impaired loans and real estate acquired through foreclosure is generally determined through independent appraisals of the underlying collateral, which generally include level 3 inputs which are not identifiable. 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 are presented as a percent of the appraised value.

Assets measured at fair value on a nonrecurring basis segregated by fair value hierarchy level at December 31, 2012 are summarized below:

							Balance as of
	Fair value hierarchy levels						December 31,
	Level 1		Level 2		Level 3		2012
	(in thousands)
Impaired loans	$	—	$	—	$	6,533	$	6,533
Real estate acquired through foreclosure		—		—		7,282		7,282
Mortgage servicing rights		—		956		—		956

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Bank has utilized Level 3 inputs to determine fair value at December 31, 2012:

		Fair value		Valuation	Unobservable	Range of
Description		estimate		technique	Input	inputs
	(in thousands)
Impaired loans		$	6,533	Appraisal of collateral (1)	Discount rate to reflect current market conditions and ultimate recoverability		5%-15	%
Real estate acquired through foreclosure			7,282	Appraisal of collateral (1)	Discount rate to reflect current market conditions and liquidation expenses		5%-20	%

(1 ) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

The Company retains a qualified valuation service to calculate the amortized cost and to determine the fair value of the mortgage servicing rights. The valuation service utilizes discounted cash flow analyses adjusted for prepayment speeds, market discount rates and conditions existing in the secondary servicing market. Hence, the fair value of mortgage servicing rights is deemed a Level 2 hierarchy. The amortized cost basis of the Company’s mortgage servicing rights was $1.3 million and $1.1 million at September 30, 2013 and December 31, 2012, respectively. The fair value of the mortgage servicing rights was $1.5 million and $956,000 at September 30, 2013 and December 31, 2012, respectively, and was included in other assets in the consolidated balance sheets.

In addition to financial instruments recorded at fair value in the Company’s financial statements, disclosure of the estimated fair value of all of an entity’s assets and liabilities considered to be financial instruments is also required. For the Bank, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments. However, many such instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Also, it is the Company’s general practice and intent to hold its financial instruments to maturity or available for sale and to not engage in trading or significant sales activities. For fair value disclosure purposes, the Company substantially utilized the established fair value measurement hierarchy.

Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. In addition, there may not be reasonable comparability between entities due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values.

Fair values have been estimated using data which management considered the best available, as generally provided by estimation methodologies deemed suitable for the pertinent category of financial instrument. The recorded carrying amounts and fair values segregated by fair value hierarchy level at September 30, 2013 are summarized below:

	Carrying		Fair		Fair value hierarchy levels
	value		value		Level 1		Level 2		Level 3
Assets	(in thousands)
Cash and cash equivalents	$	31,004	$	31,004	$	31,004	$	—	$	—
Investment securities		81,904		81,904		—		81,904		—
Mortgage-backed securities		48,710		48,889		—		48,889		—
Loans receivable,      including loans held for sale		623,021		627,032		—		691		626,341
Liabilities
Deposits with stated maturities	$	193,283	$	196,311	$	—	$	—	$	196,311
Deposits with no stated maturities		488,542		488,542		488,542		—		—
Borrowings with stated maturities		50,990		49,935		—		—		49,935

The recorded carrying amounts and fair values segregated by fair value hierarchy level at December 31, 2012 are summarized below:

	Carrying		Fair		Fair value hierarchy levels
	value		value		Level 1		Level 2		Level 3
Assets	(in thousands)
Cash and cash equivalents	$	31,137	$	31,137	$	31,137	$	—	$	—
Investment securities		59,610		59,610		—		59,610		—
Mortgage-backed securities		44,639		44,945		—		44,945		—
Loans receivable,      including loans held for sale		527,426		539,665		—		706		538,959
Liabilities
Deposits with stated maturities	$	171,417	$	175,025	$	—	$	—	$	175,025
Deposits with no stated maturities		388,898		388,898		388,898		—		—
Borrowings with stated maturities		60,656		60,939		—		—		60,939

The fair value of cash and cash equivalents equals the carrying amount. The fair value of investment and mortgage-backed securities is described and presented under fair value measurement guidelines as discussed earlier.

The fair value of loans receivable has been estimated using the present value of cash flows, discounted at the approximate current market rates, and giving consideration to estimated prepayment risk but not adjusted for credit risk. Loans receivable also includes loans receivable held for sale.

The fair value of deposits and borrowings with stated maturities has been estimated using the present value of cash flows, discounted at rates approximating current market rates for similar liabilities. Fair value of deposits and borrowings with floating interest rates is generally presumed to approximate the recorded carrying amounts.

The fair value of deposits with no stated maturities is generally presumed to approximate the carrying amount (the amount payable on demand). The fair value of deposits with floating interest rates is generally presumed to approximate the recorded carrying amounts.

The Bank’s remaining assets and liabilities are not considered financial instruments. No disclosure of the relationship value of the Bank’s depositors or customers is required.