14.	FAIR VALUES OF ASSETS AND LIABILITIES

Determination of Fair Value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of assets and liabilities 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 assets and liabilities. 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 asset or liability.

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

Cash and cash equivalents — The carrying amounts of cash and short-term instruments approximate fair values, based on the short-term nature of the assets.

 

Securities available for sale — All fair value measurements are obtained from a third party pricing service and are not adjusted by management. Marketable equity securities are measured at fair value utilizing quoted market prices (Level 1). Corporate bonds, obligations of government-sponsored enterprises, municipal bonds and mortgage-backed securities are determined by pricing models that consider standard input factors such as observable market data, benchmark yields, reported trades, broker/dealer quotes, credit spreads, benchmark securities, as well as new issue data, monthly payment information, and collateral performance, among others (Level 2).

Federal Home Loan Bank stock — The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.

Loans held for sale — The fair value is based on commitments in effect from investors or prevailing 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 non-accrual loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposits — The fair values disclosed for non-certificate accounts are, by definition, equal to the amount payable on demand at the reporting date which is their carrying amounts. 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.

Borrowings — The fair value is estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.

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

Forward loan sale commitments and derivative loan commitments — Forward loan sale commitments and derivative loan commitments are based on fair values of the underlying mortgage loans and the probability of such commitments being exercised. Management judgment and estimation is required in determining these fair value measurements.

Loan level interest rate swaps — The fair value is based on settlement values adjusted for credit risks associated with the counterparties and the Company and observable market interest rate curves.

Off-balance sheet credit-related 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. The fair value of these instruments is considered immaterial.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

 

		December 31, 2013
		Level 1				Level 2				Level 3				Total Fair Value
		(In thousands)
Assets:
Debt securities		$	—			$	145,788			$	—			$	145,788
Marketable equity securities			55,349				—				—				55,349
Derivative loan commitments			—				—				13				13
Forward loan sale commitments			—				—				75				75
Loan level interest rate swaps			—				—				57				57
Total assets		$	55,349			$	145,788			$	145			$	201,282
Liabilities:
Loan level interest rate swaps		$	—			$	—			$	57			$	57
Total liabilities		$	—			$	—			$	57			$	57

 

		December 31, 2012
		Level 1				Level 2				Level 3				Total Fair Value
		(In thousands)
Assets:
Debt securities		$	—			$	202,637			$	—			$	202,637
Marketable equity securities			60,148				—				—				60,148
Derivative loan commitments			—				—				288				288
Total assets		$	60,148			$	202,637			$	288			$	263,073
Liabilities:
Forward loan sale commitments		$	—			$	—			$	12			$	12
Total liabilities		$	—			$	—			$	12			$	12

For the year ended December 31, 2013, there were no transfers in or out of Levels 1 and 2 and the changes in Level 3 assets and liabilities that are measured at fair value on a recurring basis are as follows:

 

		Years Ended December 31,
		2013				2012
		(In thousands)
Derivative loan commitments and forward sale commitments, net:
Beginning balance		$	276			$	508
Total realized and unrealized losses included in net income			(188	)			(232	)
Ending balance		$	88			$	276
Total realized gain relating to instruments still held at year end		$	88			$	276

Assets Measured at Fair Value on a Non-recurring Basis

The Company may also be required, from time to time, to measure certain other assets on a non-recurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from the application of lower-of-cost-or market accounting or write-downs of individual assets.

The following tables summarize the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets. The gain/loss represents the amount of write-down, charge-off or specific reserve recorded during the periods noted on the assets held at period end. There were no liabilities measured at fair value on a non-recurring basis.

 

		December 31, 2013												Year Ended December 31, 2013
		Level 1				Level 2				Level 3				Total Losses
		(In thousands)
Impaired loans		$	—			$	—			$	8,000			$	(1,499	)
Foreclosed real esate			—				—				1,390				(413	)
		$	—			$	—			$	9,390			$	(1,912	)
		December 31, 2012												Year Ended December 31, 2012
		Level 1				Level 2				Level 3				Total Losses
		(In thousands)
Impaired loans		$	—			$	—			$	7,867			$	(1,025	)
Foreclosed real esate			—				—				2,604				(418	)
		$	—			$	—			$	10,471			$	(1,443	)

 

Certain impaired loans were adjusted to fair value, less cost to sell, of the underlying collateral securing these loans resulting in losses. The loss is not recorded directly as an adjustment to current earnings, but rather as a component in determining the allowance for loan losses. Fair value was measured using appraised values of collateral and adjusted as necessary by management based on unobservable inputs for specific properties.

Certain properties in foreclosed real estate were adjusted to fair value using appraised values of collateral, less cost to sell, and adjusted as necessary by management based on unobservable inputs for specific properties. The loss on foreclosed assets represents adjustments in valuation recorded during the time period indicated and not for losses incurred on sales.

Summary of Fair Values 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 do not represent the underlying fair value of the Company.

 

		Carrying				Fair Value
		Amount				Level 1				Level 2				Level 3				Total
		(In thousands)
December 31, 2013
Financial assets:
Cash and cash equivalents		$	86,271			$	86,271			$	—			$	—			$	86,271
Securities available for sale			201,137				55,349				145,788				—				201,137
Federal Home Loan Bank stock			11,907				—				—				11,907				11,907
Loans and loans held for sale, net			2,267,763				—				—				2,298,488				2,298,488
Accrued interest receivable			7,127				—				—				7,127				7,127
Financial liabilities:
Deposits			2,248,600				—				—				2,253,543				2,253,543
Borrowings			161,903				—				160,581				—				160,581
Accrued interest payable			818				—				—				818				818
On-balance sheet derivative financial instruments:
Assets:
Derivative loan commitments			13				—				—				13				13
Forward loan sale commitments:			75				—				—				75				75
Loan level interest rate swaps			57				—				—				57				57
Liabilities:
Loan level interest rate swaps			57				—				—				57				57
December 31, 2012
Financial assets:
Cash and cash equivalents		$	93,192			$	93,192			$	—			$	—			$	93,192
Securities available for sale			262,785				60,148				202,637				—				262,785
Federal Home Loan Bank stock			12,064				—				—				12,064				12,064
Loans and loans held for sale, net			1,800,841				—				—				1,843,529				1,843,529
Accrued interest receivable			6,745				—				—				6,745				6,745
Financial liabilities:
Deposits			1,865,433				—				—				1,874,226				1,874,226
Borrowings			161,254				—				164,176				—				164,176
Accrued interest payable			849				—				—				849				849
On-balance sheet derivative financial instruments:
Derivative loan commitments:
Assets			288				—				—				288				288
Forward loan sale commitments:
Liabilities			12				—				—				12				12