NOTE 4 – FAIR VALUE MEASUREMENTS

The Company provides disclosures about assets and liabilities carried at fair value. The framework provides a fair value hierarchy that 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 and lowest priority to unobservable inputs. The three broad levels of the fair value hierarchy are described below:

 

Level I:		Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
Level II:		Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; inputs other than quoted prices that are observable for the asset or liability; inputs that are derived principally from or corroborated by observable market data by corroborated or other means. If the asset or liability has a specified (contractual) term, the Level II input must be observable for substantially the full term of the asset or liability.
Level III:		Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following table presents the assets reported on the consolidated statements of financial condition at their fair value as of June 30, 2013 and December 31, 2012, by level within the fair value hierarchy. No liabilities are carried at fair value. As required by the accounting standards, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Equity securities and U.S. Treasury Notes are valued at the closing price reported on the active market on which the individual securities are traded. Obligations of U.S. government corporations and agencies, mortgage-backed securities, asset-backed securities, obligations of states and political subdivisions and corporate bonds are valued at observable market data for similar assets.

 

(Dollars in thousands)		Level I				Level II				Level III				Total
June 30, 2013
Assets:
Securities available-for-sale
U.S. Treasury securities		$	1,093			$	—			$	—			$	1,093
Obligations of U.S. government corporations and agencies			—				32,859				—				32,859
Mortgage-backed securities in government sponsored entities			—				69,051				—				69,051
Asset-backed securities in government sponsored entities			—				2,820				—				2,820
Obligations of states and political subdivisions			—				17,109				—				17,109
Corporate bonds			—				4,469				—				4,469
Total debt securities			1,093				126,308				—				127,401
Equity securities in financial institutions			114				—				—				114
Loans held for sale			103				—				—				103
Total Assets		$	1,310			$	126,308			$	—			$	127,618
December 31, 2012
Assets:
Securities available-for-sale
U.S. Treasury securities		$	100			$	—			$	—			$	100
Obligations of U.S. government corporations and agencies			—				35,980				—				35,980
Mortgage-backed securities in government sponsored entities			—				69,039				—				69,039
Asset-backed securities in government sponsored entities			—				2,823				—				2,823
Obligations of states and political subdivisions			—				16,883				—				16,883
Corporate bonds			—				4,397				—				4,397
Total debt securities			100				129,122				—				129,222
Equity securities in financial institutions			69				—				—				69
Total Assets		$	169			$	129,122			$	—			$	129,291

The following table presents the assets measured on a nonrecurring basis on the Consolidated Balance Sheets at their fair value as of June 30, 2013 and December 31, 2012, by level within the fair value hierarchy. Impaired loans and other real estate are written down to fair value through the establishment of specific reserves. Techniques used to value the collateral that secure the impaired loans include: quoted market prices for identical assets classified as Level I inputs; observable inputs, employed by certified appraisers, for similar assets classified as Level II inputs. In cases where valuation techniques included inputs that are unobservable and are based on estimates and assumptions developed by management based on the best information available under each circumstance, the asset valuation is classified as Level III inputs.

The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates discounted cash flow and repayment assumptions based on management’s best judgment. As a result, these rights are measured at fair value on a nonrecurring basis and are classified within Level III of the fair value hierarchy.

 

(Dollars in thousands)		Level I				Level II				Level III				Total
June 30, 2013
Assets measured on a nonrecurring basis:
Impaired loans		$	—			$	—			$	7,775			$	7,775
Mortgage servicing rights			—				—				226				226
December 31, 2012
Impaired loans		$	—			$	—			$	9,412			$	9,412
Other real estate owned			—				—				25				25
Mortgage servicing rights			—				—				214				214

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level III inputs to determine fair value:

 

		Quantitative Information about Level III Fair Value Measurements
		Fair Value				Valuation		Unobservable
		Estimate				Techniques		Input		Range
(Dollars in thousands)
June 30, 2013
Impaired loans		$	6,652			Discounted cash flow		Remaining term Discount rate		9 mos to 29 yrs 4.63% to 12%
			1,123			Appraisal of collateral (1),(3)		Appraisal adjustments (2) Liquidation expense (2)		-20% to -25% -10%
Mortgage servicing rights			226			Discounted cash flow		Remaining term Discount rate		18 mos to 30 yrs 1.5%
December 31, 2012
Impaired loans		$	7,260			Discounted cash flow		Remaining term Discount rate		4 mos to 29 yrs 7.5% to 12%
			2,152			Appraisal of collateral (1),(3)		Appraisal adjustments (2) Liquidation expense (2)		-20% to -35% -10%
Other real estate owned			25			Appraisal of collateral (1), (3)		Management discount for property type (3)		0% to -67%
Mortgage servicing rights			214			Discounted cash flow		Remaining term Discount rate		24 mos to 30 yrs 1.5%

 

(1)	Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various inputs which are not identifiable.

(2)	Appraisals may be adjusted by management for qualitative factors such as estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

(3)	Includes qualitative adjustments by management and estimated liquidation expenses.