Note 8 - Fair Value Measurements

3 Months Ended

Mar. 31, 2012

Fair Value Disclosures [Text Block]

8.         FAIR VALUE MEASUREMENTS

ASC 820, formerly SFAS 157, Fair Value Measurement, provides a framework for measuring fair value and defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:

Level 1	Unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data at the measurement date for substantially the full term of the assets or liabilities.
Level 3	Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

Financial instruments are broken down by recurring or nonrecurring measurement status. Recurring assets are initially measured at fair value and are required to be remeasured at fair value in the financial statements at each reporting date. Assets measured on a nonrecurring basis are assets that, due to an event or circumstance, were required to be remeasured at fair value after initial recognition in the financial statements at some time during the reporting period.

The following is a description of inputs and valuation methodologies used for assets recorded at fair value on a recurring basis and recognized in the accompanying statements of financial condition at March 31, 2012 and December 31, 2011, as well as the general classification of such assets pursuant to the valuation hierarchy.

Securities Available for Sale

Investment securities available for sale are recorded at fair value on a recurring basis. The fair values used by the Company are obtained from an independent pricing service, which represent either quoted market prices for the identical asset or fair values determined by pricing models, or other model-based valuation techniques, that consider observable market data, such as interest rate volatilities, London Interbank Offered Rate (“LIBOR”) yield curve, credit spreads and prices from market makers and live trading systems. Recurring Level 2 securities include U.S. government sponsored agency securities, corporate debt securities, and municipal bonds. Inputs used for valuing Level 2 securities include observable data that may include dealer quotes, benchmark yields, market spreads, live trading levels and market consensus prepayment speeds, among other things. Additional inputs include indicative values derived from the independent pricing service’s proprietary computerized models. No securities were included in the Recurring Level 3 category at or for the periods ended March 31, 2012 or December 31, 2011.

The following table presents major categories of assets measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011 (in thousands):

	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2012
Available for sale investment securities:
Municipal securities	$	44,553	$	--	$	44,553	$	--
Corporate debt securities		6,911		--		6,911		--
U.S. Government sponsored agency securities		12,024		--		12,024		--
Total	$	63,488	$	--	$	63,488	$	--
December 31, 2011
Available for sale investment securities:
Municipal securities	$	36,613	$	--	$	36,613	$	--
Corporate debt securities		5,810		--		5,810		--
U.S. Government sponsored agency securities		19,654		--		19,654		--
Total	$	62,077	$	--	$	62,077	$	--

The following is a description of valuation methodologies used for significant assets measured at fair value on a nonrecurring basis.

Impaired Loans Receivable

Loans which meet certain criteria are evaluated individually for impairment. A loan is considered impaired when, based upon current information and events, it is probable the Bank will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the note.  Substantially all of the Bank’s impaired loans at March 31, 2012 and December 31, 2011 are secured by real estate.  These impaired loans are individually assessed to determine that the carrying value of the loan is not in excess of the fair value of the collateral, less estimated selling costs. Fair value is estimated primarily through current appraisals or internal valuations.  Appraisals are obtained from licensed third party appraisers, generally on an annual basis, and reviewed by a licensed review appraiser employed by the Bank.  Internal valuations are prepared by Bank personnel and reviewed by the Bank’s review appraiser.  Fair values may be adjusted by management to reflect current economic and market conditions and, as such, are classified as Level 3.   Fair value adjustments are made by charge-offs to the allowance for loan losses.

Real Estate Owned, net

REO represents real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried at the lower of cost or fair value less estimated selling costs.  Fair value is estimated through current appraisals, internal valuations, real estate brokers’ opinions or listing prices. Appraisals are obtained from licensed third party appraisers, generally on an annual basis, and reviewed by a licensed review appraiser employed by the Bank.  Internal valuations are prepared by Bank personnel and reviewed by the review appraiser.  Brokers’ opinions and listing prices may also be used to establish fair values of REO properties.  Fair values of REO are influenced by management’s marketing strategy, including whether the Bank is willing to hold any given property for the marketing period assumed in the appraisal.  The Bank is currently aggressively marketing certain properties, and as a result, may discount appraised values to account for shorter marketing times. As estimated fair values may be adjusted by management to reflect current economic and market conditions, such fair values are classified as Level 3.  Fair value adjustments are recorded in earnings during the period such adjustments are made.   REO loss provisions recorded during the three months ended March 31, 2012 and 2011 were $28,000 and $1.6 million, respectively.

The following table presents major categories of assets measured at fair value on a nonrecurring basis for the three months ended March 31, 2012 and 2011 (in thousands).  The assets disclosed in the following table represent REO properties or collateral-dependent impaired loans that were remeasured at fair value during the period with a resulting valuation adjustment or fair value write-down.

	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2012
Impaired loans	$	11,725	$	--	$	--	$	11,725
REO, net		1,967		--		--		1,967
March 31, 2011

Impaired loans	$	21,608	$	--	$	--	$	21,608
REO, net		20,451		--		--		20,451