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FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
6 Months Ended
Jun. 30, 2014
FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS [Abstract]  
FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
NOTE 10 — 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 June 30, 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
  
June 30,
 
 
 
Level 1
  
Level 2
  
Level 3
  
2014
 
 
 
(in thousands)
 
Assets
 
  
  
  
 
Investment securities available for sale
 
  
  
  
 
U.S. Government and federal agencies
 
$
-
  
$
11,761
  
$
-
  
$
11,761
 
State and political subdivisions
  
-
   
61,650
   
-
   
61,650
 
Residential mortgage-backed securities issued by quasi- governmental agencies
  
-
   
56,275
   
-
   
56,275
 
Total investment securities available for sale
 
$
-
  
$
129,686
  
$
-
  
$
129,686
 
 
                
Loans receivable, held for sale
 
$
-
  
$
129
  
$
-
  
$
129
 

 
 
  
  
  
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 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 June 30, 2014 are summarized below:

 
 
  
  
  
Balance as of
 
 
 
Fair value hierarchy levels
  
June 30,
 
 
 
Level 1
  
Level 2
  
Level 3
  
2014
 
 
 
(in thousands)
 
Impaired loans
 
$
-
  
$
-
  
$
3,478
  
$
3,478
 
Real estate acquired through foreclosure
  
-
   
-
   
5,711
   
5,711
 
Mortgage servicing rights
  
-
   
1,472
   
-
   
1,472
 

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 June 30, 2014:

 
 
 
 
    
 
Range of
 
 
 
 
 
    
 
inputs
 
Description
 
Fair value estimate
 
Valuation
technique
Unobservable
Input
 
(weighted average)
 
 
 
 
 
 
 
 
Impaired loans
 
$
3,478
 
 Appraisal of collateral (1)
 Discount rate to reflect current market conditions and ultimate recoverability
  
5%-15%(14.00
%)
Real estate acquired through foreclosure
  
5,711
 
 Appraisal of collateral (1)
 Discount rate to reflect current market conditions and liquidation expenses
  
5%-20%(16.90
%)

(1)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
 

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, 2013:

 
 
 
 
    
 
Range of
 
 
 
 
 
    
 
inputs
 
Description
 
Fair value estimate
 
Valuation
technique
Unobservable
Input
 
(weighted average)
 
 
 
 
 
 
 
 
Impaired loans
 
$
5,178
 
 Appraisal of collateral (1)
 Discount rate to reflect current market conditions and ultimate recoverability
  
5%-15%(6.59
%)
Real estate acquired through foreclosure
  
5,601
 
 Appraisal of collateral (1)
 Discount rate to reflect current market conditions and liquidation expenses
  
5%-20%(17.47
%)

(1)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 June 30, 2014 and December 31, 2013. The fair value of the mortgage servicing rights was $1.5 million at June 30, 2014 and December 31, 2013 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 June 30, 2014 and December 31, 2013 are summarized below:

 
 
At June 30, 2014
 
 
 
Carrying
  
Fair
  
Fair value hierarchy levels
 
 
 
value
  
value
  
Level 1
  
Level 2
  
Level 3
 
Assets
 
(in thousands)
 
Cash and cash equivalents
 
$
48,291
  
$
48,291
  
$
48,291
  
$
-
  
$
-
 
Investment securities
  
73,411
   
73,411
   
-
   
73,411
   
-
 
Mortgage-backed securities
  
57,615
   
57,790
   
-
   
57,790
   
-
 
Loans receivable, net
  
610,226
   
620,094
   
-
   
129
   
619,965
 
 
                    
Liabilities
                    
Deposits with stated maturities
 
$
181,875
  
$
183,453
  
$
-
  
$
-
  
$
183,453
 
Deposits with no stated maturities
  
504,113
   
504,113
   
504,113
   
-
   
 
Borrowings with stated maturities
  
47,120
   
46,678
   
-
   
-
   
46,678
 

 
 
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 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 include 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.