16.FAIR VALUE OF ASSETS AND LIABILITIES

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine their fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

Determination of fair value

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 obtained from a third-party pricing service and are based on 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. No further adjustments to such values are typically made by the Company.

Federal Home Loan Bank stock: Fair value is based on redemption provisions of the FHLB. 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, 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, third party proprietary analysis of prepayment rates embedded in liquid mortgage securities markets and modeled against the serviced loan portfolio by the 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 approximate 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.

Mortgagors’ escrow accounts: The fair values disclosed for mortgagors’ escrow accounts are equal to the amounts payable on demand at the reporting date (i.e. their carrying amounts).

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

Forward loan sale commitments and derivative loan commitments: Fair value is determined using secondary market pricing, including expected normal servicing rights. In estimating fair value, the Bank assigns a probability to a loan commitment based on an expectation that it will be exercised and the loan will be funded.

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 December 31, 2014 and 2013, the fair value of commitments outstanding is not significant since fees charged are not material.

Assets and liabilities measured at fair value on a recurring basis

Assets measured at fair value on a recurring basis are summarized as follows:

							Total
							Assets
	Level 1		Level 2		Level 3		at Fair Value
			(In thousands)
At December 31, 2014

Assets

Securities available for sale

State and municipal	$	—	$	2,507	$	—	$	2,507

Residential mortgage-backed securities	—		17,019		—		17,019

Total securities available for sale	$	—	$	19,526	$	—	$	19,526

At December 31, 2013

Assets

Securities available for sale

State and municipal	$	—	$	2,394	$	—	$	2,394

Residential mortgage-backed securities	—		15,887		—		15,887

Total securities available	$	—	$	18,281	$	—	$	18,281

Assets and liabilities measured at fair value on a non-recurring basis

The Company did not have any significant transfers of assets between levels 1 and 2 of the fair value hierarchy during the year ended December 31, 2014.

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. There are no liabilities measured at fair value on a non-recurring basis at December 31, 2014 and 2013. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets as of December 31, 2014 and 2013. The adjustments to fair value represent the amount of write down recorded during the years ended December 31, 2014 and 2013 on the assets held at December 31, 2014 and 2013, respectively.

							Assets		Adjustments
	Level 1		Level 2		Level 3		at Fair Value		to Fair Value
	(In thousands)
At December 31, 2014

Impaired loans	$	—	$	—	$	310	$	310	$	(7	)

							Assets		Adjustments
	Level 1		Level 2		Level 3		at Fair Value		to Fair Value
	(In thousands)
At December 31, 2013

Impaired loans	$	—	$	—	$	2,492	$	2,492	$	(333	)

Fair values of impaired loans are based on the appraised value of the underlying collateral considering discounting factors, if deemed appropriate, and as 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. Fair value adjustments are reflected in the provision for loan losses.

Summary of fair value of financial instruments

The estimated fair values and related carrying amounts of the Company’s financial instruments are as follows. Certain financial instruments and all nonfinancial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.

	December 31, 2014
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total
	(In thousands)
Financial assets:
Cash and cash equivalents	$	4,918	$	4,918	$	—	$	—	$	4,918
Securities available for sale	19,526		—		19,526		—		19,526
Securities held to maturity	837		—		916		—		916
FHLB stock	2,907		2,907		—		—		2,907
Loans held for sale	990		1,016		—		—		1,016
Loans, net	231,293		—		—		231,971		231,971
Accrued interest receivable	752		752		—		—		752
Capitalized mortgage servicing rights	834		—		1,335		—		1,335

Financial liabilities:
Deposits	$	182,354	$	—	$	182,799	$	—	$	182,799
Short-term FHLB advances	30,000		30,000		—		—		30,000
Long-term FHLB advances	24,600		—		24,847		—		24,847
Mortgagors’ escrow accounts	1,194		1,194		—		—		1,194
Accrued interest payable	52		52		—		—		52

	December 31, 2013
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total
	(In thousands)
Financial assets:
Cash and cash equivalents	$	6,295	$	6,295	$	—	$	—	$	6,295
Securities available for sale	18,281		—		18,281		—		18,281
Securities held to maturity	1,050		—		1,136		—		1,136
FHLB stock	2,907		2,907		—		—		2,907
Loans held for sale	1,001		1,019		—		—		1,019
Loans, net	223,912		—		—		223,659		223,659
Accrued interest receivable	729		729		—		—		729
Capitalized mortgage servicing rights	1,058		—		1,361		—		1,361

Financial liabilities:
Deposits	$	175,961	$	—	$	176,405	$	—	$	176,405
Short-term FHLB advances	32,825		32,825		—		—		32,825
Long-term FHLB advances	22,100		—		22,405		—		22,405
Mortgagors’ escrow accounts	1,230		1,230		—		—		1,230
Accrued interest payable	45		45		—		—		45