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Note 11 - Fair Value and Interest Rate Risk
 6 Months Ended
Jun. 30, 2014
Fair Value Disclosures [Abstract]  
Fair Value Disclosures [Text Block]

Note 11:      Fair Value and Interest Rate Risk


The Company used fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. A description of the valuation methodologies used for assets and liabilities recorded at fair value, and for estimating fair value for financial and non-financial instruments not recorded at fair value, is set forth below.


Cash and due from banks, federal funds sold, short-term investments and accrued interest receivable and payable: The carrying amount is a reasonable estimate of fair value. These financial instruments are not recorded at fair value on a recurring basis.


Available-for-Sale Securities: These financial instruments are recorded at fair value in the financial statements. Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted prices are not available, then fair values are estimated by using pricing models (i.e., matrix pricing) or quoted prices of securities with similar characteristics and are classified within Level 2 of the valuation hierarchy. Examples of such instruments include U.S. government agency bonds and mortgage-backed securities, corporate bonds and money market preferred equity securities. The prices for these instruments are obtained through an independent pricing service or dealer market participants with whom the Company has historically transacted both purchases and sales of investment securities. Prices obtained from these sources include prices derived from market quotations and matrix pricings. The fair value measurements considered observable data may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Management reviews the data and assumptions used in pricing the securities by its third party provider to ensure the highest level of significant inputs are derived from market observable data. Level 3 securities are instruments for which significant unobservable input are utilized. Available-for-sale securities are recorded at fair value on a recurring basis.


Other Investments:The Bank’s investment portfolio includes the Solomon Hess SBA Loan Fund totaling $4.5 million. This investment is utilized for the purposes of the Bank satisfying its CRA lending requirements. As this fund operates as a private fund, shares in the Fund are not publicly traded and therefore have no readily determinable market value. An investment in the Fund is reported in the financial statements at cost, as adjusted for income, losses, and cash distributions attributable to the investment. 


Loans: For variable rate loans, which reprice frequently and have no significant change in credit risk, carrying values are a reasonable estimate of fair values, adjusted for credit losses inherent in the portfolios. The fair value of fixed rate loans is estimated by discounting the future cash flows using the period end rates, estimated by using local market data, at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, adjusted for credit losses inherent in the portfolios. The Company does not record loans at fair value on a recurring basis. However, from time to time, nonrecurring fair value adjustments to collateral-dependent impaired loans are recorded to reflect partial write-downs based on the observable market price or current appraised value of collateral. Fair values estimated in this manner do not fully incorporate an exit-price approach to fair value, but instead are based on a comparison to current market rates for comparable loans.


Other Real Estate Owned: The fair value of the Company’s OREO properties is based on the estimated current property valuations less estimated selling costs. When the fair value is based on current observable appraised values, OREO is classified within Level 2. The Company classifies the OREO within Level 3 when unobservable adjustments are made to appraised values. The Company does not record other real estate owned at fair value on a recurring basis.


Deposits: The fair value of demand deposits, regular savings and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit and other time deposits is estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities, estimated using local market data, to a schedule of aggregated expected maturities on such deposits. The Company does not record deposits at fair value on a recurring basis.


Short-term borrowings: The carrying amounts of borrowings under short-term repurchase agreements and other short-term borrowings maturing within 90 days approximate their fair values. The Company does not record short-term borrowings at fair value on a recurring basis.


Junior Subordinated Debt: Junior subordinated debt reprices quarterly and as a result the carrying amount is considered a reasonable estimate of fair value. The Company does not record junior subordinated debt at fair value on a recurring basis.


Federal Home Loan Bank Borrowings: The fair value of the advances is estimated using a discounted cash flow calculation that applies current Federal Home Loan Bank interest rates for advances of similar maturity to a schedule of maturities of such advances. The Company does not record these borrowings at fair value on a recurring basis.


Other Borrowings: The fair values of longer term borrowings are estimated using a discounted cash flow calculation that applies current interest rates for transactions of similar maturity to a schedule of maturities of such transactions. The Company does not record these borrowings at fair value on a recurring basis.


Off-balance sheet instruments: Fair values for the Company’s off-balance-sheet instruments (lending commitments) are based on interest rate changes and fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The Company does not record its off-balance-sheet instruments at fair value on a recurring basis.


The following table details the financial assets measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine fair value: 


(in thousands)

                               
   

Quoted Prices in

   

Significant

   

Significant

         
   

Active Markets

   

Observable

   

Unobservable

   

Balance

 
   

for Identical Assets

   

Inputs

   

Inputs

   

as of

 

June 30, 2014

 

(Level 1)

   

(Level 2)

   

(Level 3)

   

June 30, 2014

 
                                 

U.S. Government agency mortgage-backed securities

  $ -     $ 19,498     $ -     $ 19,498  

U.S. Government agency bonds

    -       7,344       -       7,344  

Corporate bonds

    -       8,844       -       8,844  
                                 

Securities available for sale

  $ -     $ 35,686     $ -     $ 35,686  

   

Quoted Prices in

   

Significant

   

Significant

         
   

Active Markets

   

Observable

   

Unobservable

   

Balance

 
   

for Identical Assets

   

Inputs

   

Inputs

   

as of

 

December 31, 2013

 

(Level 1)

   

(Level 2)

   

(Level 3)

   

December 31, 2013

 

U.S. Government agency mortgage-backed securities

  $ -     $ 21,752     $ -     $ 21,752  

U.S. Government agency bonds

    -       7,079       -       7,079  

Corporate bonds

    -       8,870       -       8,870  
              -       -          

Securities available for sale

  $ -     $ 37,701     $ -     $ 37,701  

There were no transfers of assets between levels 1, 2 or 3 as of June 30, 2014 or December 31, 2013. Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).


The following tables reflect financial assets measured at fair value on a non-recurring basis as of June 30, 2014 and December 31, 2013, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:          


   

Quoted Prices in

   

Significant

   

Significant

         

(in thousands)

 

Active Markets

   

Observable

   

Unobservable

         
   

for Identical Assets

   

Inputs

   

Inputs

   

Balance

 
   

(Level 1)

   

(Level 2)

   

(Level 3)

         

June 30, 2014

                               
                                 

Non-accrual loans

  $ -     $ -     $ 11,849     $ 11,849  
                                 

December 31, 2013

                               
                                 

Non-accrual loans

  $ -     $ -     $ 11,283     $ 11,283  

The Company discloses fair value information about financial instruments, whether or not recognized in the consolidated balance sheet, for which it is practicable to estimate that value. Certain financial instruments are excluded from disclosure requirements and, accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.


The estimated fair value amounts have been measured as of June 30, 2014 and December 31, 2013 and have not been reevaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair value of these financial instruments subsequent to the respective reporting dates may be different than amounts reported on those dates.


The information presented should not be interpreted as an estimate of the fair value of the Company since a fair value calculation is only required for a limited portion of the Company’s assets and liabilities. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other bank holding companies may not be meaningful.


The following is a summary of the carrying amounts and estimated fair values of the Company’s financial instruments not measured and not reported at fair value on the consolidated balance sheets at June 30, 2014 and December 31, 2013:


     

June 30, 2014

   

December 31, 2013

 

(in thousands)

Fair Value

 

Carrying

   

Estimated

   

Carrying

   

Estimated

 
  Hierarchy  

Amount

   

Fair Value

   

Amount

   

Fair Value

 

Financial Assets:

                                 

Cash and noninterest bearing balances due from banks

Level 1

  $ 1,584     $ 1,584     $ 1,570     $ 1,570  

Interest-bearing deposits due from banks

Level 1

    58,345       58,345       33,295       33,295  

Other investments

Level 2

    4,450       4,450       4,450       4,450  

Federal Reserve Bank stock

Level 1

    1,517       1,517       1,444       1,444  

Federal Home Loan Bank stock

Level 1

    4,143       4,143       4,143       4,143  

Loans receivable, net

Level 3

    402,786       407,430       418,148       424,831  

Accrued interest receivable

Level 1

    1,555       1,555       1,566       1,566  
                                   

Financial Liabilities:

                                 

Demand deposits

Level 1

  $ 61,685     $ 61,685     $ 55,358     $ 55,358  

Savings deposits

Level 1

    85,218       85,218       80,983       80,983  

Money market deposits

Level 1

    26,873       26,873       29,310       29,310  

NOW accounts

Level 1

    30,133       30,133       28,618       28,618  

Time deposits

Level 2

    222,523       223,029       235,935       236,602  

FHLB Borrowings

Level 2

    72,000       72,000       57,000       57,000  

Subordinated debentures

Level 2

    8,248       8,248       8,248       8,248  

Accrued interest payable

Level 1

    15       15       1,388       1,388  

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.


Off-balance sheet instruments


Loan commitments on which the committed interest rate is less than the current market rate were insignificant at June 30, 2014 and December 31, 2013. The estimated fair value of fee income on letters of credit at June 30, 2014 and December 31, 2013 was insignificant.