Disclosures about Fair Value of Assets and Liabilities

9 Months Ended

Sep. 30, 2012

Disclosures about Fair Value of Assets and Liabilities [Abstract]

DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES

NOTE H – DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES

ASC Topic 820, Fair Value Measurements, defines fair value 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. A fair value hierarchy has been established that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 Quoted prices in active markets for identical assets or liabilities.

Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active 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 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Recurring Measurements: Available-for-sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. The security valued in Level 1 is a mutual fund.

Level 2 securities include U.S. Government agency and U.S. Government-sponsored enterprise pass-through mortgage-backed securities and collateralized mortgage obligations. Level 2 securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs, and the values are reviewed by the Bank’s management. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of securities with similar characteristics and, because many fixed-income securities do not trade on a daily basis, apply available information through processes such as benchmark curves, benchmarking of like securities, sector grouping and matrix pricing. In addition, model processes, such as an option adjusted spread model is used to develop prepayment and interest rate scenarios for securities with prepayment features. The Company has reviewed the methodologies used by the third party and has determined that the securities are properly classified as Level 2.

Level 3 securities consist of municipal securities and are valued by a third party who uses a discounted cash flow model to determine the price, and the values are reviewed by the Bank’s management. Management challenges the reasonableness of the assumptions used and reviews the methodology to ensure the estimated fair value complies with accounting standards generally accepted in the United States. The key inputs to the discounted cash flow model are the coupon, yield, and expected maturity date. Appropriate market yields are determined based on credit, structure, and related Wall Street trades, quotes, and issuances.

The following table presents the fair value measurements of assets recognized in the accompanying balance sheet measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2012 and December 31, 2011 (dollars in thousands):

			Fair Value Measurements Using
Available-for-sale securities:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
At September 30, 2012:
Ginnie Mae and GSE mortgage-backed pass-through securities	$	37,476	$	—	$	37,476	$	—
Ginnie Mae collateralized mortgage obligations		2,590				2,590
Municipal securities		2,350		—		—		2,350
Mutual fund		1,850		1,850		—		—
	$	44,266	$	1,850	$	40,066	$	2,350
At December 31, 2011:
Ginnie Mae and GSE mortgage-backed pass-through securities	$	39,714	$	—	$	39,714	$	—
Municipal securities		2,351		—		—		2,351
Mutual fund		1,782		1,782		—		—
	$	43,847	$	1,782	$	39,714	$	2,351

Transfers between Levels

Transfers between levels did not occur during the three months and nine months ended September 30, 2012.

Level 3 Reconciliation

The following is a reconciliation of the beginning and ending balance for the three months and nine months ended September 30, 2012 of fair value measurements recognized in the accompanying balance sheet using significant unobservable (Level 3) inputs (dollars in thousands):

	Three Months Ended September 30, 2012			Three Months Ended September 30, 2011		Nine Months Ended September 30, 2012			Nine Months Ended September 30, 2011
Beginning balance	$	2,362		$	—	$	2,351		$	—
Total realized and unrealized gains and losses
Included in net income		—			—		—			—
Included in other comprehensive income		(12	)		78		(1	)		78
Purchases, issuances and settlements		—			2,321		—			2,321
Transfers in or out of Level 3		—			—		—			—
Ending balance	$	2,350		$	2,399	$	2,350		$	2,399

Nonrecurring Measurements:

Following is a description of valuation methodologies used for instruments measured at fair value on a non-recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Impaired Loans (Collateral Dependent)

Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.

Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

Other Real Estate Owned

The fair value of the Company’s other real estate owned is determined using Level 3 inputs, which include current and prior appraisals and estimated costs to sell.

The following table presents the fair value measurements of assets recognized in the accompanying balance sheet measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2012 and December 31, 2011. The totals represent only those impaired loans and other real estate owned as of that date that experienced a change in fair value since the beginning of the year (dollars in thousands):

			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
At September 30, 2012:
Impaired loans	$	15,824	$	—	$	—	$	15,824
Other real estate owned		233		—		—		233
At December 31, 2011:
Impaired loans	$	10,442	$	—	$	—	$	10,442
Other real estate owned		2,486		—		—		2,486

Unobservable (Level 3) Inputs:

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at September 30, 2012 (dollars in thousands):

	Fair Value		Valuation Technique		Unobservable Inputs	Rate/Rate Range (Weighted Average)
Municipal securities	$	2,350		Discounted cash flow model	Unrated security yield adjustment Liquidity yield adjustment Extension risk yield adjustment	2.0%                 2.0%                 1.0%
Impaired loans		15,824		Third party valuations	Discount to reflect realizable value	0.1% - 46.5%                 (8.7%)
Other real estate owned		233		Third party valuations	Discount to reflect realizable value	9.1% -9.1%                 (9.1%)

Sensitivity of Significant Unobservable Inputs

The following is a discussion of the sensitivity of significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used in recurring fair value measurement and of how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement.

Municipal Securities

The significant unobservable inputs used in the fair value measurement of the Company’s municipal securities are premiums for unrated securities and marketability yield adjustments. Significant increases (decreases) in either of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, changes in either of those inputs will not affect the other input.

Fair Value of Financial Instruments

Fair values are based on estimates using present value and other valuation techniques in instances where quoted market prices are not available. These techniques are significantly affected by the assumptions used, including discount rates and estimates of future cash flows. As such, the derived fair value estimates may not be realized upon an immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent, and should not be construed to represent, the underlying value of the Company.

The following table presents the estimates of fair value of financial instruments (dollars in thousands):

	December 31, 2011
	Carrying Value		Fair Value
Assets
Cash and cash equivalents	$	9,709	$	9,709
Investment securities available for sale		43,847		43,847
Loans held for sale		252		252
Loans		312,509		322,066
Stock in FHLB		4,472		4,472
Mortgage servicing rights		577		577
Interest and dividends receivable		1,089		1,089
Liabilities
Deposits		337,250		339,930
Borrowings		49,810		46,780
Drafts payable		2,532		2,532
Interest and dividends payable		107		107

The following table presents the estimates of fair value of financial instruments and the level within the fair value hierarchy in which the fair value measurements fall (dollars in thousands):

	Fair Value Measurements Using
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
At September 30, 2012
Assets
Cash and cash equivalents	$	24,722	$	24,722	$	—	$	—
Interest-bearing time deposits		5,704		5,704
Investment securities available for sale		44,266		1,850		40,066		2,350
Loans held for sale		197		—		197		—
Loans		308,928		—		307,513		15,417
Stock in FHLB		4,472		—		4,472		—
Mortgage servicing rights		542		—		—		542
Interest and dividends receivable		774		—		774		—
Liabilities
Deposits		357,922		215,596		144,597		—
Borrowings		45,810		—		38,164		4,488
Drafts payable		1,506		—		1,506		—
Interest and dividends payable		475		—		475		—

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

Cash and Cash Equivalents and Stock in FHLB: The carrying amounts reported in the consolidated balance sheets approximate those assets’ fair values.

Interest-bearing time deposits: The carrying amounts reported in the consolidated balance sheets approximate those assets’ fair values.

Loans Held for Sale: The carrying amounts reported in the consolidated balance sheets approximate those assets’ fair values.

Loans: The fair values for loans are estimated using a discounted cash flow calculation that applies external interest rates used to price new similar loans to a schedule of aggregated expected monthly maturities on loans.

Mortgage Servicing Rights: The initial amount recorded is an estimate of the fair value of the streams of net servicing revenues that will occur over the estimated life of the servicing arrangement, and the initial amount recorded is then amortized over the estimated life. Annually, a valuation of the servicing rights is performed by an independent third party and reviewed by the Bank’s management, with impairment, if any, recognized through a valuation allowance. The valuation is based on the discounted cash flow method utilizing Bloomberg’s Median Forecasted Prepayment Speeds for mortgage-backed securities assumed to possess enough similarities to the Bank’s servicing portfolio to facilitate a comparison.

Interest and Dividends Receivable/Payable: The fair value of accrued interest and dividends receivable/payable approximates carrying values.

Deposits: The fair values of non-maturity demand, savings, and money market accounts are equal to the amount payable on demand at the balance sheet date. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on deposits to a schedule of aggregated expected monthly maturities on deposits.

Borrowings: The fair value of borrowings is estimated using a discounted cash flow calculation, based on borrowing rates for periods comparable to the remaining terms to maturity of the borrowings.

Drafts Payable: The fair value approximates carrying value.