7. Fair Value

9 Months Ended

Sep. 30, 2014

Fair Value Disclosures [Abstract]

Note 7. Fair Value

Note 7.  Fair Value

Certain assets and liabilities are recorded at fair value to provide additional insight into the Company’s quality of earnings. The fair values of some of these assets and liabilities are measured on a recurring basis while others are measured on a non-recurring basis, with the determination based upon applicable existing accounting pronouncements. For example, securities available-for-sale are recorded at fair value on a recurring basis. Other assets, such as mortgage servicing rights, loans held-for-sale, impaired loans, and OREO are recorded at fair value on a non-recurring basis using the lower of cost or market methodology to determine impairment of individual assets. The Company groups assets and liabilities which are recorded 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. The level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with Level 1 considered highest and Level 3 considered lowest). A brief description of each level follows.

Level 1 Quoted prices in active markets for identical assets or liabilities.  Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasury, other U.S. Government debt securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2 Observable inputs other than Level 1 prices such as quoted prices for similar assets and 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 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.  This category generally includes mortgage servicing rights, impaired loans and OREO.

Level 3 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.

The following methods and assumptions were used by the Company in estimating its fair value measurements and disclosures:

Cash and cash equivalents:  The carrying amounts reported in the balance sheet for cash and cash equivalents approximate their fair values.  As such, the Company classifies these financial instruments as Level 1.

Securities Available-for-Sale and Held-to-Maturity: Fair value measurement is based upon quoted prices for similar assets, if available. If quoted prices are not available, fair values are measured using matrix pricing models, or other model-based valuation techniques requiring observable inputs other than quoted prices such as yield curves, prepayment speeds and default rates.  Level 1 securities would include U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets.  Level 2 securities include federal agency securities and securities of local municipalities.

Restricted equity securities:  Restricted equity securities are comprised of Federal Reserve Bank of Boston (FRBB) stock and Federal Home Loan Bank of Boston (FHLBB) stock.  These securities are carried at cost, which is believed to approximate fair value, based on the redemption provisions of the FRBB and the FHLBB.  The stock is nonmarketable, and redeemable at par value, subject to certain conditions.  As such the Company classifies these securities as Level 2.

Loans and loans held-for-sale:  For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts.  The fair values for other loans (for example, fixed rate residential, commercial real estate, and rental property mortgage loans, and commercial and industrial loans) are estimated using discounted cash flow analyses, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics.  Loan impairment is deemed to exist when full repayment of principal and interest according to the contractual terms of the loan is no longer probable.  Impaired loans are reported based on one of three measures: the present value of expected future cash flows discounted at the loan’s effective interest rate; the loan’s observable market price; or the fair value of the collateral if the loan is collateral dependent.  If the fair value is less than an impaired loan’s recorded investment, an impairment loss is recognized as part of the allowance for loan losses.  Accordingly, certain impaired loans may be subject to measurement at fair value on a non-recurring basis.  Management has estimated the fair values of these assets using Level 2 inputs, such as the fair value of collateral based on independent third-party appraisals for collateral-dependent loans.  All other loans are valued using Level 3 inputs.

The fair value of loans held-for-sale is based upon an actual purchase and sale agreement between the Company and an independent market participant.  The sale is executed within a reasonable period following quarter end at the stated fair value.

Mortgage servicing rights:  Mortgage servicing rights represent the value associated with servicing residential mortgage loans. Servicing assets and servicing liabilities are reported using the amortization method. In evaluating the carrying values of mortgage servicing rights, the Company obtains third party valuations based on loan level data including note rate, and the type and term of the underlying loans. As such, the Company classifies mortgage servicing rights as non-recurring Level 2.

OREO:  Real estate acquired through or in lieu of foreclosure and bank properties no longer used as bank premises are initially recorded at fair value. The fair value of OREO is based on property appraisals and an analysis of similar properties currently available. As such, the Company records OREO as non-recurring Level 2.

Deposits, federal funds purchased and borrowed funds:  The fair values disclosed for demand deposits (for example, checking accounts, savings accounts and repurchase agreements) are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The fair values for certificates of deposit and borrowed funds are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates and indebtedness to a schedule of aggregated contractual maturities on such time deposits and indebtedness.  As such the Company classifies deposits, federal funds purchased and borrowed funds as Level 2.

Capital lease obligations:  Fair value is determined using a discounted cash flow calculation using current rates.  Based on current rates, carrying value approximates fair value.  As such the Company classifies these obligations as Level 2.

Junior subordinated debentures:  Fair value is estimated using current rates for debentures of similar maturity.  As such the Company classifies these instruments as Level 2.

Accrued interest:  The carrying amounts of accrued interest approximate their fair values.  As such the Company classifies accrued interest as Level 2.

Off-balance-sheet credit related instruments:  Commitments to extend credit are evaluated and fair value is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit-worthiness of the counterparties.  For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.

FASB Accounting Standards Codification (ASC) Topic 825 “Financial Instruments”, requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, if the fair values can be reasonably determined. 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 using observable inputs when available. 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. Topic 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Assets measured at fair value on a recurring basis and reflected in the consolidated balance sheets at the dates presented, segregated by fair value hierarchy, are summarized below:

September 30, 2014	Level 1		Level 2		Total
Assets: (market approach)
U.S. GSE debt securities	$	0	$	15,885,881	$	15,885,881
U.S. Government securities		4,002,500		0		4,002,500
Agency MBS		0		9,279,144		9,279,144
December 31, 2013
Assets: (market approach)
U.S. GSE debt securities	$	0	$	29,138,914	$	29,138,914
U.S. Government securities		6,049,688		0		6,049,688
September 30, 2013
Assets: (market approach)
U.S. GSE debt securities	$	0	$	28,389,611	$	28,389,611
U.S. Government securities		7,062,460		0		7,062,460

There were no transfers between Levels 1 and 2 for the periods presented.  There were no Level 3 assets or liabilities measured on a recurring basis as of the balance sheet dates presented.

Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis

The following table includes assets measured at fair value on a non-recurring basis that have had a fair value adjustment since their initial recognition. Impaired loans measured at fair value only include impaired loans with a related specific allowance for loan losses and are presented net of specific allowances as disclosed in Note 5.

Assets measured at fair value on a non-recurring basis and reflected in the consolidated balance sheets at the dates presented, segregated by fair value hierarchy, are summarized below:

September 30, 2014	Level 2
Assets: (market approach)
Residential mortgage servicing rights	$	1,326,543
Impaired loans, net of related allowance		775,305
OREO		1,097,820
December 31, 2013
Assets: (market approach)
Residential mortgage servicing rights	$	1,329,079
Impaired loans, net of related allowance		978,892
OREO		1,105,525
September 30, 2013
Assets: (market approach)
Residential mortgage servicing rights	$	1,227,790
Impaired loans, net of related allowance		1,249,931
OREO		1,125,105

There were no Level 1 or Level 3 assets or liabilities measured on a non-recurring basis as of the balance sheet dates presented.

The estimated fair values of commitments to extend credit and letters of credit were immaterial as of the dates presented in the tables below.  The estimated fair values of the Company's financial instruments were as follows:

September 30, 2014			Fair		Fair		Fair		Fair
	Carrying		Value		Value		Value		Value
	Amount		Level 1		Level 2		Level 3		Total
	(Dollars in Thousands)
Financial assets:
Cash and cash equivalents	$	10,852	$	10,852	$	0	$	0	$	10,852
Securities held-to-maturity		48,070		0		48,472		0		48,472
Securities available-for-sale		29,168		4,003		25,165		0		29,168
Restricted equity securities		3,332		0		3,332		0		3,332
Loans and loans held-for-sale
Commercial & industrial		63,242		0		962		63,697		64,659
Commercial real estate		159,916		0		1,667		163,360		165,027
Residential real estate - 1st lien		164,589		0		901		168,133		169,034
Residential real estate - Jr lien		43,834		0		335		44,446		44,781
Consumer		7,848		0		0		8,239		8,239
Mortgage servicing rights		1,327		0		1,561		0		1,561
Accrued interest receivable		1,689		0		1,689		0		1,689
Financial liabilities:
Deposits
Other deposits		454,629		0		455,002		0		455,002
Brokered deposits		19,749		0		19,751		0		19,751
Federal funds purchased and short-term borrowings		10,175		0		10,175		0		10,175
Repurchase agreements		23,360		0		23,360		0		23,360
Capital lease obligations		659		0		659		0		659
Subordinated debentures		12,887		0		12,870		0		12,870
Accrued interest payable		65		0		65		0		65

December 31, 2013			Fair		Fair		Fair		Fair
	Carrying		Value		Value		Value		Value
	Amount		Level 1		Level 2		Level 3		Total
	(Dollars in Thousands)
Financial assets:
Cash and cash equivalents	$	18,330	$	18,330	$	0	$	0	$	18,330
Securities held-to-maturity		37,937		0		38,370		0		38,370
Securities available-for-sale		35,189		6,050		29,139		0		35,189
Restricted equity securities		3,633		0		3,633		0		3,633
Loans and loans held-for-sale
Commercial & industrial		55,069		0		346		56,035		56,381
Commercial real estate		154,696		0		1,239		157,843		159,082
Residential real estate - 1st lien		171,498		0		1,689		174,776		176,465
Residential real estate - Jr lien		45,292		0		483		45,785		46,268
Consumer		8,708		0		0		9,130		9,130
Mortgage servicing rights		1,329		0		1,608		0		1,608
Accrued interest receivable		1,778		0		1,778		0		1,778
Financial liabilities:
Deposits
Other deposits		463,160		0		464,220		0		464,220
Brokered deposits		18,393		0		18,401		0		18,401
Repurchase agreements		29,645		0		29,645		0		29,645
Capital lease obligations		711		0		711		0		711
Subordinated debentures		12,887		0		12,880		0		12,880
Accrued interest payable		75		0		75		0		75

September 30, 2013			Fair		Fair		Fair		Fair
	Carrying		Value		Value		Value		Value
	Amount		Level 1		Level 2		Level 3		Total
	(Dollars in Thousands)
Financial assets:
Cash and cash equivalents	$	13,382	$	13,382	$	0	$	0	$	13,382
Securities held-to-maturity		39,219		0		39,610		0		39,610
Securities available-for-sale		35,452		7,062		28,390		0		35,452
Restricted equity securities		3,633		0		3,633		0		3,633
Loans and loans held-for-sale
Commercial & industrial		54,994		0		319		56,038		56,357
Commercial real estate		145,266		0		1,601		148,401		150,002
Residential real estate - 1st lien		174,135		0		1,624		177,800		179,424
Residential real estate - Jr lien		44,739		0		483		45,272		45,755
Consumer		9,278		0		0		9,742		9,742
Mortgage servicing rights		1,228		0		1,228		0		1,228
Accrued interest receivable		1,633		0		1,633		0		1,633
Financial liabilities:
Deposits
Other deposits		454,521		0		455,772		0		455,772
Brokered deposits		16,029		0		16,038		0		16,038
Federal funds purchased and short-term borrowings		8,325		0		8,325		0		8,325
Long-term borrowings		0		0		0		0		0
Repurchase agreements		23,686		0		23,686		0		23,686
Capital lease obligations		727		0		727		0		727
Subordinated debentures		12,887		0		12,872		0		12,872
Accrued interest payable		73		0		73		0		73