NOTE 6: FAIR VALUE

We record certain assets and liabilities at fair value. Fair value is defined as 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 measurements are also utilized to determine the initial value of certain assets and liabilities, to perform impairment assessments, and for disclosure purposes. We use quoted market prices and observable inputs to the maximum extent possible when measuring fair value. In the absence of quoted market prices, various valuation techniques are utilized to measure fair value. When possible, observable market data for identical or similar financial instruments are used in the valuation. When market data is not available, fair value is determined using valuation models that incorporate Management’s estimates of the assumptions a market participant would use in pricing the asset or liability.

Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While Management believes our valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities, liquid mortgage products, active listed equities and most money market securities. Such instruments are generally classified within Level 1 or Level 2 of the fair value hierarchy. We do not adjust the quoted price for such instruments.

The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include most investment-grade and high-yield corporate bonds; less liquid mortgage products, agency securities, listed equities, state, municipal and provincial obligations; and certain physical commodities. Such instruments are generally classified within Level 2 of the fair value hierarchy.

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions; valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, Management’s best estimate will be used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Subsequent to inception, Management only changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows.

Financial instruments on a recurring basis

The table below presents the balance of financial assets and liabilities at June 30, 2015 measured at fair value on a recurring basis:


		Fair Value Measurements at Reporting Date Using
		Quoted Prices in	Significant
		Active Markets	Other	Significant
		for Identical	Observable	Unobservable
		Assets	Inputs	Inputs
(In thousands)	Total	(Level 1)	(Level 2)	(Level 3)
Assets
U.S. Treasury Obligations	$ 25,248	$ -	$ 25,248	$ -
FHLB Obligations	34,077		34,077
Agency MBSs	108,891	-	108,891	-
Agency CMBSs	23,651	-	23,651	-
Agency CMOs	67,318	-	67,318	-
ABSs	371	-	371	-
Interest rate swap agreements	717	-	717	-
Total assets	$ 260,273	$ -	$ 260,273	$ -
Liabilities
Interest rate swap agreements	942	-	942	-
Total liabilities	$ 942	$ -	$ 942	$ -

The table below presents the balance of financial assets and liabilities at December 31, 2014 measured at fair value on a recurring basis:


		Fair Value Measurements at Reporting Date Using
		Quoted Prices in	Significant
		Active Markets	Other	Significant
		for Identical	Observable	Unobservable
		Assets	Inputs	Inputs
(In thousands)	Total	(Level 1)	(Level 2)	(Level 3)
Assets
U.S. Treasury Obligations	25,093	$ -	25,093	$ -
Agency MBSs	95,407	-	95,407	-
Agency CMBSs	21,704	-	21,704	-
Agency CMOs	60,882	-	60,882	-
ABSs	387	-	387	-
Interest rate swap agreements	618	-	618	-
Total assets	204,091	$ -	204,091	$ -
Liabilities
Interest rate swap agreements	1,096	-	1,096	-
Total liabilities	1,096	$ -	1,096	$ -

Investment securities are reported at fair value utilizing Level 2 inputs. The prices for these instruments are obtained through an independent pricing service or dealer market participant with whom we have historically transacted both purchases and sales of investment securities. Prices obtained from these sources include market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. More information regarding our investment securities can be found in Note 3 to these consolidated financial statements.

The interest rate swaps are reported at their fair value utilizing Level 2 inputs from third parties. The fair value of our interest rate swaps are determined using prices obtained from a third party advisor. The fair value measurement of the interest rate swap is determined by netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on the expectation of future interest rates derived from observed market interest rate curves.

There were no transfers between Level 1 and Level 2 for the six months ended June 30, 2015 and 2014. There were no Level 3 assets measured at fair value on a recurring basis at June 30, 2015 or December 31, 2014.

Financial instruments on a non-recurring basis

Certain financial assets are also measured at fair value on a non-recurring basis; however, they were not material at June 30, 2015 or December 31, 2014. These financial assets include impaired loans and OREO.

The table below presents the balance of financial instruments by class at June 30, 2015 measured at fair value:


	Carrying
(In thousands)	Amount	Fair Value	Level 1	Level 2	Level 3
Cash and cash equivalents	$ 40,645	$ 40,645	$ 40,645	$ -	$ -
Securities available for sale	259,556	259,556	-	259,556	-
Securities held to maturity	129,312	129,872	-	129,872	-
FHLB stock	4,378	N/A	N/A	N/A	N/A
Loans, net of allowance for loan losses	1,191,493	1,191,765	-	-	1,191,765
Interest rate swap agreement	717	717	-	717	-
Accrued interest receivable	3,135	3,135	-	909	2,226
Total assets	$ 1,629,236	$ 1,625,690	$ 40,645	$ 391,054	$ 1,193,991
Deposits	$ 1,346,825	$ 1,346,874	$ 1,147,693	$ 199,181	$ -
Securities sold under agreement to repurchase	169,959	169,940	-	169,940	-
Other long-term debt	2,279	2,227	-	2,227	-
Junior subordinated debentures issued to unconsolidated subsidiary trust	20,619	14,405	-	14,405	-
Interest rate swap agreement	942	942	-	942	-
Accrued interest payable	111	111	15	96	-
Total liabilities	$ 1,540,735	$ 1,534,499	$ 1,147,708	$ 386,791	$ -

The table below presents the balance of financial instruments by class at December 31, 2014 measured at fair value:


	Carrying
(In thousands)	Amount	Fair Value	Level 1	Level 2	Level 3
Cash and cash equivalents	$ 154,459	$ 154,459	$ 154,459	$ -	$ -
Securities available for sale	203,473	203,473	-	203,473	-
Securities held to maturity	138,421	139,171	-	139,171	-
FHLB stock	4,378	N/A	N/A	N/A	N/A
Loans, net of allowance for loan losses	1,170,501	1,172,517	-	-	1,172,517
Interest rate swap agreement	618	618	-	618	-
Accrued interest receivable	3,787	3,787	-	847	2,940
Total assets	$ 1,675,637	$ 1,674,025	$ 154,459	$ 344,109	$ 1,175,457
Deposits	$ 1,308,772	$ 1,308,904	$ 1,097,088	$ 211,816	$ -
Securities sold under agreement to repurchase	258,464	258,438	-	258,438	-
Other long-term debt	2,320	2,277	-	2,277	-
Junior subordinated debentures issued to unconsolidated subsidiary trust	20,619	14,476	-	14,476	-
Interest rate swap agreement	1,096	1,096	-	1,096	-
Accrued interest payable	165	165	19	146	-
Total liabilities	$ 1,591,436	$ 1,585,356	$ 1,097,107	$ 488,249	$ -

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accrued interest receivable and accrued interest payable approximate fair value. It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

The methodologies for other financial assets and financial liabilities are discussed below.

Loans - The fair value for loans is estimated using discounted cash flow analyses, using interest rates and spreads currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

Deposits - The fair value of deposits with no stated maturity, which includes demand, savings, interest bearing checking and money market accounts, is equal to the amount payable on demand resulting in a Level 1 classification. The fair value of variable rate, fixed term certificates of deposit also approximates the carrying amount reported in the consolidated balance sheets. The fair value of fixed rate and fixed term certificates of deposit is estimated using a discounted cash flow method which applies interest rates currently being offered for deposits of similar remaining maturities resulting in a Level 2 classification.

Debt - The fair value of debt is estimated using current market rates for borrowings of similar remaining maturity resulting in a Level 2 classification.

Commitments to Extend Credit and Standby Letters of Credit - The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of financial standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties. The fair value of commitments to extend credit and standby letters of credit is approximately $65 thousand at June 30, 2015 and $47 thousand as of December 31, 2014, respectively.

Limitations ‑ Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments. Because no market exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other such factors.

These estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument. These estimates are subjective in nature and require considerable judgment to interpret market data. Accordingly, the estimates presented herein are not necessarily indicative of the amounts we could realize in a current market exchange, nor are they intended to represent the fair value of us as a whole. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The fair value estimates presented herein are based on pertinent information available to Management as of the respective balance sheet date. Although we are not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein.

Other significant assets, such as premises and equipment, other assets, and liabilities not defined as financial instruments, are not included in the above disclosures. Also, the fair value estimates for deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.