FAIR VALUE MEASUREMENT

3 Months Ended

Mar. 31, 2016

Fair Value Measured on a Recurring Basis.

The Company measures certain assets at fair value on a recurring basis, as described below.

Investment Securities Available-for-Sale

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities have historically included equity securities traded on an active exchange, such as the New York Stock Exchange. As of March 31, 2016, there were no Level 1 securities. Level 2 securities include taxable municipalities, mortgage-backed securities issued by government sponsored entities, and certain equity securities. The Company’s mortgage-backed securities were primarily issued by GNMA, FNMA, and FHLMC. As of March 31, 2016, all of the Company’s mortgage-backed securities were agency issued and designated as Level 2 securities. Securities classified as Level 3 include other debt securities in less liquid markets and with no quoted market price.

The following table presents information about assets measured at fair value on a recurring basis at March 31, 2016 and December 31, 2015 (amounts in thousands).



					Fair Value Measurements at
					March 31, 2016, Using
	Total Carrying Amount in the Consolidated Balance Sheet		Assets Measured at Fair Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Available-for-Sale Securities:	3/31/2016		3/31/2016		(Level 1)		(Level 2)		(Level 3)
Taxable municipal securities	$	25,420	$	25,420	$	—	$	25,420	$	—
Mortgage-backed securities:
GNMA	13,545		13,545		—		13,545		—
FNMA & FHLMC	30,984		30,984		—		30,984		—
Other debt securities	500		500		—		—		500
Equity securities	11		11		—		11		—
Total available-for-sale securities	$	70,460	$	70,460	$	—	$	69,960	$	500



					Fair Value Measurements at
					December 31, 2015, Using
	Total Carrying Amount in the Consolidated Balance Sheet		Assets Measured at Fair Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Available-for-Sale Securities:	12/31/2015		12/31/2015		(Level 1)		(Level 2)		(Level 3)
Taxable municipal securities	$	24,567	$	24,567	$	—	$	24,567	$	—
Mortgage-backed securities:
GNMA	13,530		13,530		—		13,530		—
FNMA & FHLMC	31,673		31,673		—		31,673		—
Other debt securities	500		500		—		—		500
Equity securities	11		11		—		11		—
Total available-for-sale securities	$	70,281	$	70,281	$	—	$	69,781	$	500

The following table presents the reconciliation for the three months ended March 31, 2016 and 2015 for all Level 3 assets that are measured at fair value on a recurring basis (amounts in thousands).



	Three Months Ended
	March 31,
Securities Available-for-Sale:	2016		2015
Beginning Balance	$	500	$	—
Total realized and unrealized gains or (losses):
Included in earnings	—		—
Included in other comprehensive income	—		—
Purchases, issuances and settlements	—		—
Ending Balance	$	500	$	—

Fair Value Measured on a Nonrecurring Basis.

The Company measures certain assets at fair value on a nonrecurring basis, as described below.

Loans Held for Sale

Loans held for sale are carried at the lower of cost or market value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies loans held for sale as a Level 2 valuation.

Impaired Loans

The Company does not record loans at fair value on a recurring basis. However, when a loan is considered impaired, it is evaluated for impairment and written down to its estimated fair value or an allowance for loan losses is established. When the fair value of an impaired loan is based on an observable market price or a current appraised value with no adjustments, the Company records the impaired loan as nonrecurring Level 2. When there is no observable market prices, an appraised value is not available, or the Company determines the fair value of the collateral is further impaired below the appraised value, the impaired loan is classified as nonrecurring Level 3.

Foreclosed Assets

Foreclosed assets are adjusted to fair value less estimated selling costs upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. Given the lack of observable market prices for identical properties, the Company records foreclosed assets as non-recurring Level 3.

Assets measured at fair value on a non-recurring basis are included in the tables below at March 31, 2016 and December 31, 2015 (amounts in thousands).



					Fair Value Measurements at
					March 31, 2016, Using
	Total Carrying Amount in the Consolidated Balance Sheet		Assets Measured at Fair Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	3/31/2016		3/31/2016		(Level 1)		(Level 2)		(Level 3)
Loans held for sale	$	730	$	730	$	—	$	730	$	—
Impaired loans	1,616		1,616		—		—		1,616
Foreclosed assets	2,482		2,482		—		—		2,482



					Fair Value Measurements at
					December 31, 2015, Using
	Total Carrying Amount in the Consolidated Balance Sheet		Assets Measured at Fair Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	12/31/2015		12/31/2015		(Level 1)		(Level 2)		(Level 3)
Loans held for sale	$	1,145	$	1,145	$	—	$	1,145	$	—
Impaired loans	3,540		3,540		—		—		3,540
Foreclosed assets	1,760		1,760		—		—		1,760

Quantitative Information about Level 3 Fair Value Measurements

The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a recurring and nonrecurring basis at March 31, 2016 (amounts in thousands, except percentages).



	Total Carrying Amount at March 31, 2016		Valuation Methodology	Range of Inputs
Recurring measurements:
Other debt securities	$	500	Probability of default	0%
			Loss given default	100%
Nonrecurring measurements:
Impaired loans	$	1,616	Collateral discounts	9 - 50%
Foreclosed assets	$	2,482	Discounted appraisals	10 - 30%

Collateral discounts to determine fair value on impaired loans varies widely and result from the consideration of the following factors: the age of the most recent appraisal, the type of asset serving as collateral, the expected marketability of the asset, its material or environmental condition, and comparisons to actual sales data of similar assets from both internal and external sources.

The following table reflects the general range of collateral discounts for impaired loans by segment.



Loan Segment:	Range of Percentages
Commercial construction and land development	10% - 40%
Commercial real estate	9% - 50%
Residential construction	9% - 30%
Residential mortgage	9% - 20%
All other segments	9% - 20%

As foreclosed assets are brought into other real estate owned through a process which requires a fair market valuation, further discounts typically reflect market conditions specific to the asset. These conditions are usually captured in subsequent appraisals which are required on an annual basis, and depending upon asset type and marketability demonstrate a more restrained variance than that noted above.

Fair Value of Financial Instruments

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

Cash and Cash Equivalents

The carrying amounts of cash and cash equivalents are equal to the fair value due to the liquid nature of the financial instruments.

Certificate of Deposits

These investments are valued at carrying amounts for fair value purposes.

Securities Available-for-Sale and Securities Held-to-Maturity

Fair values of investment securities are based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans Held For Sale

The fair value of mortgage loans held for sale is based on commitments on hand from investors within the secondary market for loans with similar characteristics.

Loans

The fair value of loans has been estimated utilizing the net present value of future cash flows based upon contractual balances, prepayment assumptions, and applicable weighted average interest rates, adjusted for a 5% current liquidity and market discount assumption. The Company has assigned no fair value to off-balance sheet financial instruments since they are either short term in nature or subject to immediate repricing.

FHLB Stock

The carrying amount of FHLB stock approximates fair value.

Deposits

The fair value of non-maturing deposits such as noninterest-bearing demand, money market, NOW, and savings accounts, are by definition, equal to the amount payable on demand. Fair value for maturing deposits such as CDs and IRAs are estimated using a discounted cash flow approach that applies current interest rates to expected maturities.

Borrowings, Subordinated Debentures, and Subordinated Promissory Notes

The fair value of borrowings, subordinated debentures, and subordinated promissory notes, is based on discounting expected cash flows at the interest rate from debt with the same or similar remaining maturities and collection requirements.

Accrued Interest Receivable and Payable

The carrying amounts of accrued interest approximates fair value.

The following table presents information for financial assets and liabilities as of March 31, 2016 and December 31, 2015 (amounts in thousands).



	March 31, 2016
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	43,061	$	43,061	$	43,061	$	—	$	—
Certificates of deposit	22,540		22,540		—		22,540		—
Securities available-for-sale	70,460		70,460		—		69,960		500
Securities held-to-maturity	62,212		63,368		—		63,368		—
Loans held for sale	730		730		—		730		—
Loans, net	466,759		440,375		—		—		440,375
FHLB stock	3,596		3,596		—		3,596		—
Accrued interest receivable	1,557		1,557		—		1,557		—

Financial liabilities:
Deposits	$	561,378	$	560,874	$	—	$	560,874	$	—
Subordinated debentures and subordinated promissory notes	23,872		23,872		—		—		23,872
Borrowings	70,000		71,914		—		71,914		—
Accrued interest payable	439		439		—		439		—



	December 31, 2015
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	26,755	$	26,755	$	26,755	$	—	$	—
Certificates of deposit	23,520		23,520		—		23,520		—
Securities available-for-sale	70,281		70,281		—		69,781		500
Securities held-to-maturity	65,354		65,633		—		65,633		—
Loans held for sale	1,145		1,145		—		1,145		—
Loans, net	448,697		423,285		—		—		423,285
FHLB stock	3,288		3,288		—		3,288		—
Accrued interest receivable	1,594		1,594		—		1,594		—

Financial liabilities:
Deposits	$	542,334	$	541,818	$	—	$	541,818	$	—
Subordinated debentures and subordinated promissory notes	23,872		23,872		—		—		23,872
Borrowings	60,000		61,709		—		61,709		—
Accrued interest payable	437		437		—		437		—

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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