FAIR VALUE MEASUREMENTS

12 Months Ended

Dec. 31, 2014

NOTE N – FAIR VALUE MEASUREMENTS

ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements, but clarifies and standardizes some divergent practices that have emerged since prior guidance was issued. ASC 820 creates a three-level hierarchy under which individual fair value estimates are to be ranked based on the relative reliability of the inputs used in the valuation.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Fair Value Hierarchy

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

		Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.
		Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.
		Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flows models and similar techniques.

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

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 include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include U.S. government agencies – GSE’s, mortgage-backed securities issued by GSE’s and municipal bonds. Securities classified as Level 3 include asset-backed securities in less liquid markets.

The following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value on a recurring basis as of December 31, 2014 and December 31, 2013 (dollars in thousands):

			Quoted Prices in		Significant
Investment securities			Active Markets		Other		Significant
available for sale			for Identical		Observable		Unobservable
December 31, 2014	Fair value		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)

U.S. government agencies – GSE's	$	27,921	$	-	$	27,921	$	-
Mortgage-backed securities - GSE’s		53,304		-		53,304		-
Municipal bonds		21,010		-		21,010		-
Total	$	102,235	$	-	$	102,235	$	-

			Quoted Prices in		Significant
Investment securities			Active Markets		Other		Significant
available for sale			for Identical		Observable		Unobservable
December 31, 2013	Fair value		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)

U.S. government agencies – GSE's	$	34,665	$	-	$	34,665	$	-
Mortgage-backed securities - GSE’s		41,065		-		41,065		-
Municipal bonds		8,106		-		8,106		-
Total	$	83,836	$	-	$	83,836	$	-

Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and a specific reserve in the allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 310,”Receivables”. The fair value of impaired loans is estimated using one of several methods, including collateral value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At December 31, 2014, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where a specific reserve is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

The significant unobservable input used in the fair value measurement of the Company’s impaired loans range between 5 - 47% and 6-55% discount from appraisals for expected liquidation and sales costs at December 31, 2014 and 2013, respectively.

Foreclosed Real Estate

Foreclosed real estate are properties recorded at the lower of cost or net realizable value, less the estimated costs to sell, at the date of foreclosure. Inputs include appraised values on the properties or recent sales activity for similar assets in the property’s market. Therefore, foreclosed real estate is classified within Level 3 of the hierarchy.

The significant unobservable input used in the fair value measurement of the Company’s foreclosed real estate range between 5 – 90% and 6 – 20% discount from appraisals for expected liquidation and sales costs at December 31, 2014 and 2013, respectively.

The following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value on a nonrecurring basis as of December 31, 2014 and

December 31, 2013 (dollars in thousands):

			Quoted Prices in		Significant
			Active Markets		Other		Significant
Asset Category			for Identical		Observable		Unobservable
December 31, 2014	Fair value		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Impaired loans	$	6,896	$	-	$	-	$	6,896
Foreclosed real estate		1,585		-		-		1,585
Total	$	8,481	$	-	$	-	$	8,481

			Quoted Prices in		Significant
			Active Markets		Other		Significant
Asset Category			for Identical		Observable		Unobservable
December 31, 2013	Fair value		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Impaired loans	$	8,477	$	-	$	-	$	8,477
Foreclosed real estate		2,008		-		-		2,008
Total	$	10,485	$	-	$	-	$	10,485

As of December 31, 2014, the Bank identified $15.6 million in impaired loans, of which $7.6 million were carried at fair value on a non-recurring basis which included $6.0 million in loans that required a specific reserve of $687,000, and an additional $1.6 million in other loans without specific reserves that had charge-offs. As of December 31, 2013, the Bank identified $19.0 million in impaired loans, of which $9.9 million were carried at fair value on a non-recurring basis which included $7.4 million in loans that required a specific reserve of $1.1 million, and an additional $2.1 million in other loans without specific reserves that had charge-offs.

Financial instruments include cash and due from banks, interest-earning deposits with banks, investments, loans, deposit accounts and borrowings. Due to the nature of the Company’s business, a significant portion of its assets and liabilities consist of financial instruments, the estimated values of which are disclosed. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no active market readily exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

The following table presents the carrying values and estimated fair values of the Company's financial instruments at December 31, 2014 and 2013:

	December 31, 2014
	Carrying		Estimated
	Amount		Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets:
Cash and due from banks	$	14,417	$	14,417	$	14,417	$	-	$	-
Certificates of deposits		1,000		1,000		1,000		-		-
Interest-earning deposits in other banks		22,810		22,810		22,810		-		-
Federal funds sold and repurchase agreements		20,183		20,183		20,183		-		-
Investment securities available for sale		102,235		102,235		-		102,235		-
Loans, net		545,194		555,736		-		-		555,736
Accrued interest receivable		2,416		2,416		-		-		2,416
Stock in the FHLB		1,524		1,524		-		-		1,524
Other non-marketable securities		896		896		-		-		896

Financial liabilities:
Deposits	$	618,902	$	621,049	$	-	$	621,049	$	-
Short-term debt		20,733		20,593		-		20,593		-
Long-term debt		25,591		20,771		-		20,771		-
Accrued interest payable		276		276		-		-		276

	December 31, 2013
	Carrying		Estimated
	Amount		Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets:
Cash and due from banks	$	20,151	$	20,151	$	20,151	$	-	$	-
Interest-earning deposits in other banks		49,690		49,690		49,690		-		-
Federal funds sold		3,028		3,028		3,028		-		-
Investment securities available for sale		83,836		83,836		-		83,836		-
Loans, net		339,446		353,439		-		-		353,439
Accrued interest receivable		1,650		1,650		-		-		1,650
Stock in the FHLB		796		796		-		-		796
Other non-marketable securities		1,055		1,055		-		-		1,055

Financial liabilities:
Deposits	$	448,458	$	452,529	$	-	$	452,529	$	-
Short-term debt		6,305		6,305		-		6,305		-
Long-term debt		12,372		7,517		-		7,517		-
Accrued interest payable		225		225		-		-		225

Cash and Due from Banks, Certificates of Deposits, Interest-Earning Deposits in Other Banks and Federal Funds Sold

The carrying amounts for cash and due from banks, interest-earning deposits in other banks and federal funds sold approximate fair value because of the short maturities of those instruments.

Investment Securities Available for Sale

Fair value for investment securities available for sale equals quoted market price if such information is available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans

For certain homogenous categories of loans, such as residential mortgages, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. However, the values likely do not represent exit prices due to distressed market conditions.

Stock in Federal Home Loan Bank of Atlanta

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

Other Non-Marketable Securities

The fair value of equity instruments in other non-marketable securities is assumed to approximate carrying value.

Deposits

The fair value of demand deposits is the amount payable on demand at the reporting date. The fair values of time deposits are estimated using the rates currently offered for instruments of similar remaining maturities.

Short Term Debt

Short term debt consists of repurchase agreements and FHLB advances with maturities of less than twelve months. The carrying values of these instruments is a reasonable estimate of fair value.

Long Term Debt

The fair values of long term debt are based on discounting expected cash flows at the interest rate for debt with the same or similar remaining maturities and collateral requirements.

Accrued Interest Receivable and Accrued Interest Payable

The carrying amounts of accrued interest receivable and payable approximate fair value, because of the short maturities of these instruments.

Financial Instruments with Off-Balance Sheet Risk

With regard to financial instruments with off-balance sheet risk, it is not practicable to estimate the fair value of future financing commitments.

- 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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