FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

3 Months Ended

Mar. 31, 2014

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 March 31, 2014 and December 31, 2013. 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						March 31,
	Level 1		Level 2		Level 3		2014
	(in thousands)
Assets
Investment securities available for sale
U.S. Government and federal agencies	$	—	$	16,387	$	—	$	16,387
State and political subdivisions		—		60,411		—		60,411
Residential mortgage-backed securities issued by quasi- governmental agencies		—		52,093		—		52,093
Total investment securities available for sale	$	—	$	128,891	$	—	$	128,891

Loans receivable, held for sale	$	—	$	1,319	$	—	$	1,319

							Balance as of
	Fair value hierarchy levels						December 31,
	Level 1		Level 2		Level 3		2013
	(in thousands)
Assets
Investment securities available for sale
U.S. Government and federal agencies	$	—	$	18,063	$	—	$	18,063
State and political subdivisions		—		60,669		—		60,669
Residential mortgage-backed securities issued by quasi- governmental agencies		—		45,280		—		45,280
Total investment securities available for sale	$	—	$	124,012	$	—	$	124,012

Loans receivable, held for sale	$	—	$	349	$	—	$	349

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 multidimensional 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 March 31, 2014 are summarized below:

							Balance as of
	Fair value hierarchy levels						March 31,
	Level 1		Level 2		Level 3		2014
	(in thousands)

Impaired loans	$	—	$	—	$	2,974	$	2,974
Real estate acquired through foreclosure		—		—		6,108		6,108
Mortgage servicing rights		—		1,452		—		1,452

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 March 31, 2014:

						Range of
		Fair value		Valuation	Unobservable	inputs
Description		estimate		technique	Input	(weighted average)
	(in thousands)

Impaired loans		$	2,974	Appraisal of collateral (1)	Discount rate to reflect current market		5%-15%
					conditions and ultimate recoverability		(7.39%)
Real estate acquired through foreclosure			6,108	Appraisal of collateral (1)	Discount rate to reflect current market		5%-20%
					conditions and liquidation expenses		(16.67%)

)

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

Assets measured at fair value on a nonrecurring basis segregated by fair value hierarchy level at December 31, 2013 are summarized below:

							Balance as of
	Fair value hierarchy levels						December 31,
	Level 1		Level 2		Level 3		2013
	(in thousands)

Impaired loans	$	—	$	—	$	5,178	$	5,178
Real estate acquired through foreclosure		—		—		5,601		5,601
Mortgage servicing rights		—		1,472		—		1,472

						Range of
		Fair value		Valuation	Unobservable	inputs
Description		estimate		technique	Input	(weighted average)
	(in thousands)

Impaired loans		$	5,178	Appraisal of collateral (1)	Discount rate to reflect current market		5%-15%
					conditions and ultimate recoverability		(6.59%)
Real estate acquired through foreclosure			5,601	Appraisal of collateral (1)	Discount rate to reflect current market		5%-20%
					conditions and liquidation expenses		(17.47%)

)

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

The fair value of impaired loans is generally determined through independent appraisals of the underlying collateral, which generally include Level 3 inputs that are not identifiable. Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. Impaired loans are evaluated and valued while the loan is identified as impaired, at the lower of the recorded investment in the loan or fair value. The range and weighted average of liquidation expenses are presented as a percent of the appraised value.

Real estate acquired through foreclosure is initially valued at the lower of the recorded investment in the loan or fair value at foreclosure and subsequently adjusted for further decreases in market value, less costs to sell, if necessary. Fair value is determined by using the value of the real estate acquired through foreclosure based on appraisals prepared by qualified independent licensed appraisers contracted by the Company to perform the assessment and is therefore classified as a Level 3 hierarchy.

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 $1.5 million at March 31, 2014 and December 31, 2013, respectively. The fair value of the mortgage servicing rights was $1.5 million at March 31, 2014 and December 31, 2013, 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 March 31, 2014 and December 31, 2013 are summarized below:

	At March 31, 2014
	Carrying		Fair		Fair value hierarchy levels
	value		value		Level 1		Level 2		Level 3
Assets	(in thousands)
Cash and cash equivalents	$	60,175	$	60,175	$	60,175	$	—	$	—
Investment securities		76,798		76,798		—		76,798		—
Mortgage-backed securities		53,494		53,670		—		53,670		—
Loans receivable, net		604,975		613,668		—		1,319		612,349

Liabilities
Deposits with stated maturities	$	187,143	$	188,734	$	—	$	—	$	188,734
Deposits with no stated maturities		505,067		505,067		505,067		—		—
Borrowings with stated maturities		48,311		47,450		—		—		47,450

	At December 31, 2013
	Carrying		Fair		Fair value hierarchy levels
	value		value		Level 1		Level 2		Level 3
Assets	(in thousands)
Cash and cash equivalents	$	45,310	$	45,310	$	45,310	$	—	$	—
Investment securities		78,732		78,732		—		78,732		—
Mortgage-backed securities		46,770		46,960		—		46,960		—
Loans receivable, net		614,517		614,246		—		349		613,897

Liabilities
Deposits with stated maturities	$	190,492	$	193,258	$	—	$	—	$	193,258
Deposits with no stated maturities		493,410		493,410		493,410		—		—
Borrowings with stated maturities		49,605		48,426		—		—		48,426

The fair value of cash and cash equivalents equals the historical book value. 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.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

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Reference 3: http://www.xbrl.org/2003/role/presentationRef

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-Name Statement of Financial Accounting Standard (FAS)

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