Fair Value Measurements

9 Months Ended

Sep. 30, 2013

Fair Value Measurements

Fair Value Measurements

(8) Fair Value Measurements

The Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value as follows:

Level l - Valuation is based on quoted prices in active markets for identical assets or liabilities. Level l assets and liabilities generally include debt and equity securities that are traded in an active exchange market. At September 30, 2013, the Company had no assets or liabilities valued using Level 1 measurements.

Level 2 - Valuation is based on observable inputs other than Level l 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 for substantially the full term of the assets or liabilities.

Level 3 - Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

All of the Company’s securities that are measured at fair value are included in Level 2 and are based on pricing models from independent, third party pricing services that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data. There are no liabilities measured at fair value. All of the Company’s impaired loans and other real estate owned that are measured at fair value are included in Level 3 and are based on the appraised value of the underlying collateral considering discounting factors, if deemed appropriate, and adjusted for selling costs. These appraised values may be discounted based on management’s historical knowledge, expertise or changes in market conditions from time of valuation. The Company did not have any significant transfers of assets or liabilities to or from Levels 1 and 2 of the fair value hierarchy during the nine month period ended September 30, 2013.

Assets and liabilities measured at fair value on a recurring basis at September 30, 2013 and December 31, 2012 are summarized below.

							Assets
	Level 1		Level 2		Level 3		at Fair Value
	(In thousands)
At September 30, 2013
Assets
Securities available for sale
State and municipal	$	—	$	2,400	$	—	$	2,400
Residential mortgage-backed securities	—		16,629		—		16,629
Total securities available for sale	$	—	$	19,029	$	—	$	19,029
At December 31, 2012
Assets
Securities available for sale
Residential mortgage-backed securities	$	—	$	8,184	$	—	$	8,184

The Company may also be required, from time to time, to measure certain other financial assets on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. Assets measured at fair value on a non-recurring basis at September 30, 2013 and December 31, 2012 are summarized below. The fair value adjustments relate to the amount of write-down recorded or related allowance recorded as of September 30, 2013 and December 31, 2012.

							Assets		Adjustments
	Level 1		Level 2		Level 3		at Fair Value		to Fair Value
	(In thousands)
At September 30, 2013
Impaired loans	$	—	$	—	$	2,513	$	2,513	$	(217	)
Other real estate owned	—		—		20		20		(24		)
	$	—	$	—	$	2,533	$	2,533	$	(241	)

							Assets		Adjustments
	Level 1		Level 2		Level 3		at Fair Value		to Fair Value
	(In thousands)
At December 31, 2012
Impaired loans	$	—	$	—	$	2,763	$	2,763	$	(320	)
Other real estate owned	—		—		203		203		(19		)
	$	—	$	—	$	2,966	$	2,966	$	(339	)

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments.

Cash and cash equivalents: The carrying amounts of cash and short-term investments approximate fair values.

Securities: Fair values for the Company’s debt securities are based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data.

Federal Home Loan Bank stock: Fair value is based on redemption provisions of the FHLB of Boston. The FHLB stock has no quoted market value.

Loans held for sale: Fair value is based on committed secondary market prices.

Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Capitalized mortgage servicing rights: Fair value is based on a quarterly, independent third-party valuation model that calculates the present value of estimated future net servicing income. The model utilizes a variety of assumptions, the most significant of which are loan prepayment assumptions and the discount rate used to discount future cash flows. Prepayment assumptions, which are impacted by loan rates and terms, are calculated using a moving average of prepayment data published by the Securities Industry and Financial Markets Association and a third party proprietary analysis of prepayment rates embedded in liquid mortgage securities markets and modeled against the serviced loan portfolio by the independent third party valuation specialist. The discount rate is the moving average 10-year, U.S. Treasury rate plus 5.0% and adjusted to reflect the current credit spreads and conditions in the market. Other assumptions include delinquency rates, foreclosure rates, servicing cost inflation, and annual unit loan cost. All assumptions are adjusted periodically to reflect current circumstances and all are obtained from independent market sources.

Deposits: The fair values for non-certificate accounts are, by definition, equal to the amount payable on demand at the reporting date which is the carrying amount. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Short-term FHLB advances: The fair value of short-term FHLB advances approximates carrying value, as they generally mature within 90 days.

Long-term FHLB advances: The fair value for long-term FHLB advances is estimated using discounted cash flow analyses based on current market borrowing rates for similar types of borrowing arrangements.

Accrued interest:  The carrying amounts of accrued interest approximate fair value.

Off-balance-sheet instruments:  Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. At September 30, 2013 and December 31, 2012, the fair value of commitments outstanding is not significant since fees charged are not material.

The estimated fair values and related carrying amounts of the Company’s financial instruments at September 30, 2013 and December 31, 2012 are as follows.

	September 30, 2013
	Carrying
	Amount		Fair Value
			Level 1		Level 2		Level 3		Total
	(In thousands)
Financial assets:
Cash and cash equivalents	$	8,307	$	8,307	$	—	$	—	$	8,307
Securities available for sale	19,029		—		19,029		—		19,029
Securities held to maturity	1,169		—		1,263		—		1,263
FHLB stock	2,649		2,649		—		—		2,649
Loans held for sale	1,012		1,027		—		—		1,027
Loans, net	205,900		—		—		206,781		206,781
Accrued interest receivable	682		682		—		—		682
Capitalized mortgage servicing rights	1,033		—		1,286		—		1,286
Financial liabilities:
Deposits	$	162,007	$	—	$	162,383	$	—	$	162,383
Short-term FHLB advances	34,575		—		34,575		—		34,575
Long-term FHLB advances	18,100		—		18,402		—		18,402
Mortgagers’ escrow accounts	1,248		1,248		—		—		1,248
Accrued interest payable	44		44		—		—		44

	December 31, 2012
	Carrying
	Amount		Fair Value
			Level 1		Level 2		Level 3		Total
	(In thousands)
Financial assets:
Cash and cash equivalents	$	6,789	$	6,789	$	—	$	—	$	6,789
Securities available for sale	8,184		—		8,184		—		8,184
Securities held to maturity	1,594		—		1,731		—		1,731
FHLB stock	2,861		2,861		—		—		2,861
Loans held for sale	2,606		2,642		—		—		2,642
Loans, net	180,599		—		—		188,198		188,198
Accrued interest receivable	617		617		—		—		617
Capitalized mortgage servicing rights	890		—		1,099		—		1,099
Financial liabilities:
Deposits	$	154,439	$	—	$	154,860	$	—	$	154,860
Long-term FHLB advances	23,600		—		24,100		—		24,100
Mortgagers’ escrow accounts	1,034		1,034		—		—		1,034
Accrued interest payable	60		60		—		—		60