Fair Value Measurements

3 Months Ended

Mar. 31, 2013

Fair Value Measurements [Abstract]

Fair Value Measurements

Note 6 – Fair Value Measurements

The following table presents information about the level in the fair value hierarchy for the Company's financial assets and liabilities that are measured at fair value as of March 31, 2013:

	Fair Value at March 31, 2013
Description	Total		Level 1		Level 2		Level 3
Financial assets:	(In thousands)
Cash and cash equivalents	$	8,795	$	8,795	$	-	$	-
Available for sale securities		19,713		-		17,016		2,697
FHLB Stock		2,379		-		-		2,379
Loans held for sale		2,083		-		2,083		-
Loans, net		341,695		-		-		341,695
Accrued interest receivable		1,303		1,303		-		-
Bank owned life insurance, net		10,798		-		10,798		-
Mortgage servicing rights		2,396		-		-		2,396
Financial liabilities:
Non-maturity deposits		171,851		-		171,851		-
Time deposits		146,266		-		146,266		-
Borrowings		25,567		-		25,567		-
Accrued interest payable		78		-		78		-
Advance payments from borrowers for taxes and insurance		585		-		585		-

The following table presents information about the level in the fair value hierarchy for the Company's financial assets and liabilities that are not measured at fair value as of December 31, 2012:

	Fair Value at December 31, 2012
Description	Total		Level 1		Level 2		Level 3
Financial assets:	(In thousands)
Cash and cash equivalents	$	12,727	$	12,727	$	-	$	-
Available for sale securities		22,900		-		20,127		2,773
FHLB Stock		2,401		-		-		2,401
Loans held for sale		1,725		-		1,725		-
Loans, net		327,078		-		-		327,078
Accrued interest receivable		1,280		1,280		-		-
Bank owned life insurance, net		7,220				7,220		-
Mortgage servicing rights		2,306		-		-		2,306
Financial liabilities:
Non-maturity deposits		177,097		-		177,097		-
Time deposits		134,007		-		134,007		-
Borrowings		21,708		-		21,708		-
Accrued interest payable		83		-		83		-
Advance payments from borrowers for taxes and insurance		331		-		331		-

The following table presents the balance of assets measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012:

	Fair Value at March 31, 2013
Description	Total		Level 1		Level 2		Level 3
	(In thousands)
Agency mortgage-backed securities	$	17,016	$	-	$	17,016	$	-
Non-agency mortgage-backed securities		2,697		-		-		2,697
Mortgage servicing rights		2,396		-		-		2,396

	Fair Value at December 31, 2012
Description	Total		Level 1		Level 2		Level 3
	(In thousands)
Agency mortgage-backed securities	$	20,127	$	-	$	20,127	$	-
Non-agency mortgage-backed securities		2,773		-		-		2,773
Mortgage servicing rights		2,306		-		-		2,306

For the three months ended March 31, 2013 and 2012 there were no transfers between Level 1 and Level 2 nor between Level 2 and Level 3.

The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company's assets and liabilities classified as Level 3 and measured at fair value on a recurring basis at March 31, 2013:

Financial Instrument	Valuation Technique	Unobservable Input(s)	Range (Weighted Average)
Mortgage Servicing Rights	Discounted cash flow	Prepayment speed assumption	284-550% (310%)
		Discount rate	8-12% (10%)
Non-agency mortgage-backed securities	Discounted cash flow	Discount rate	(8%)

Generally, any significant increases in the constant prepayment rate and discount rate utilized in the fair value measurement of the mortgage servicing rights will result in a negative fair value adjustment (and decrease in the fair value measurement). Conversely, a decrease in the constant prepayment rate and discount rate will result in a positive fair value adjustment (and increase in the fair value measurement). An increase in the weighted average life assumptions will result in a decrease in the constant prepayment rate and conversely, a decrease in the weighted average life will result in an increase of the constant prepayment rate.

The following table provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three months ended March 31, 2013 and 2012:

	Three Months Ended March 31,
	2013			2012
	(In thousands)
Beginning balance, at fair value	$	2,773		$	2,933
OTTI impairment losses		(19	)		(91	)
Sales and principal payments		(133	)		(131	)
Change in unrealized loss		76			266
Ending balance, at fair value	$	2,697		$	2,977

Mortgage servicing rights are measured at fair value using significant unobservable input (Level 3) on a recurring basis and a reconciliation of this asset can be found in Note 7 – Mortgage Servicing Rights.

The following table presents the balance of assets measured at fair value on a nonrecurring basis at the dates indicated:

	Fair Value at March 31, 2013
Description	Total		Level 1		Level 2		Level 3
	(in thousands)
OREO and repossessed assets	$	2,453	$	-	$	-	$	2,453
Impaired loans		10,869		-		-		10,869

	Fair Value at December 31, 2012
Description	Total		Level 1		Level 2		Level 3
	(in thousands)
OREO and repossessed assets	$	2,503	$	-	$	-	$	2,503
Impaired loans		11,993		-		-		11,993

The following table presents the total losses during the three months ended March 31, 2013 and 2012 resulting from fair value adjustments:

	Three Months Ended March 31,
Description	2013		2012
	(in thousands)
OREO and repossessed assets	$	675	$	469
Impaired loans		494		1,615

There were no liabilities carried at fair value, measured on a recurring or nonrecurring basis, at March 31, 2013 or December 31, 2012.

The following table provides a description of the valuation technique, observable input, and qualitative information about the unobservable inputs for the Company's assets and liabilities classified as Level 3 and measured at fair value on a nonrecurring basis at March 31, 2013:

Financial Instrument	Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
OREO	Market approach	Adjusted for difference between comparable sales	0-44% (12%)
Impaired loans	Market approach	Adjusted for difference between comparable sales	0-100% (7%)

A description of the valuation methodologies used for impaired loans and OREO is as follows:

Impaired Loans - The fair value of collateral dependent loans is based on the current appraised value of the collateral or internally developed models utilizing a calculation of expected discounted cash flows which contain

management's assumptions.

OREOand Repossessed Assets – The fair value of OREO and repossessed assets is based on the current appraised value of the collateral or internally developed models utilizing a calculation of expected discounted cash flows which contain management's assumptions.

The following methods and assumptions were used to estimate the fair value of other financial instruments:

Cash and cash equivalents, accrued interest receivable and payable, and advance payments from borrowers for taxes and insurance - The estimated fair value is equal to the carrying amount.

AFS Securities – AFS securities are recorded at fair value based on quoted market prices, if available. If quoted market prices are not available, management utilizes third-party pricing services or broker quotations from dealers in the specific instruments. Level 2 securities include those traded on an active exchange, as well as U.S. government and its agencies securities. Level 3 securities include private label mortgage-backed securities.

Loans Held for Sale - Residential mortgage loans held for sale are recorded at the lower of cost or fair value. The fair value of fixed-rate residential loans is based on whole loan forward prices obtained from government sponsored enterprises. At March 31, 2013 and December 31, 2012, loans held for sale were carried at cost.

Loans - The estimated fair value for all fixed rate loans is determined by discounting the estimated cash flows using the current rate at which similar loans would be made to borrowers with similar credit ratings and maturities. The estimated fair value for variable rate loans is the carrying amount. The fair value for all loans also takes into account projected loan losses as a part of the estimate.

Mortgage Servicing Rights –The fair value of mortgage servicing rights is determined though a discounted cash flow analysis, which uses interest rates, prepayment speeds, discount rates, and delinquency rate assumptions as inputs.

FHLB stock - The estimated fair value is equal to the par value of the stock, which approximates fair value.

Bank-owned Life Insurance - The estimated fair value is equal to the cash surrender value of policies, net of surrender charges.

Deposits - The estimated fair value of deposit accounts (savings, demand deposit, and money market accounts) is the carrying amount. The fair values of fixed-maturity time certificates of deposit are estimated by discounting the estimated cash flows using the current rate at which similar certificates would be issued.

Borrowings - The fair value of borrowings are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.

Off-balance-sheet financial instruments - The fair value for the Company's off-balance-sheet loan commitments are estimated based on fees charged to others to enter into similar agreements taking into account the remaining terms of the agreements and credit standing of the Company's customers. The estimated fair value of these commitments is not significant.

We assume interest rate risk (the risk that general interest rate levels will change) as a result of our normal operations. As a result, the fair values of our financial instruments will change when interest rate levels change, which may be favorable or unfavorable to us. Management attempts to match maturities of assets and liabilities to the extent necessary or possible to minimize interest rate risk. However, borrowers with fixed-rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by establishing early withdrawal penalties for certificates of deposit, creating interest rate floors for certain variable rate loans, adjusting terms of new loans and deposits, by borrowing at fixed rates for fixed terms and investing in securities with terms that mitigate our overall interest rate risk.