NOTE 6 — FAIR VALUE MEASUREMENTS

The Company determines the fair market values of its financial instruments based on the fair value hierarchy established in ASC Topic 820, Fair Value Measurements and Disclosures, which requires an entity to maximize the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The guidance also describes three levels of inputs that may be used to measure fair value.

· Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

· Level 2 - Inputs other than quoted prices included with Level 1 that are observable for the asset or liability either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived from or corroborated by market data by correlation or other means.

· Level 3 - Unobservable inputs for determining the fair value of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

Securities: The fair value of available-for-sale securities are determined by various valuation methodologies. Where quoted market prices are available in an active market, securities are classified within Level 1. The Company has no securities classified within Level 1. If quoted market prices are not available, then fair values are estimated by using pricing models or quoted prices of securities with similar characteristics. For these investments, the pricing applications apply available information as applicable through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to prepare evaluations. They also use model processes, such as the Option Adjusted Spread model to assess interest rate impact and develop prepayment scenarios. In the case of municipal securities, information on the Bloomberg terminal such as credit ratings, credit support, and call features are used to set the matrix values for the issues, which will be used to determine the yields from which the market values are calculated each month. Because they are not price quote valuations, the pricing methods are considered Level 2 inputs. At this time all of the Company’s securities fall within the Level 2 hierarchy for pricing. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The Company currently has no securities classified within Level 3. During the nine months ended September 30, 2013, there were no transfers between Level 1 and Level 2. The valuation methodology was consistent for the nine months ended September 30, 2013 and the year ended December 31, 2012.

Foreclosed Assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Foreclosed assets are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Appraisals for both foreclosed assets and collateral-dependent impaired loans are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the loan department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value.

Assets measured at fair value on a recurring basis segregated by fair value hierarchy level during the periods ended September 30, 2013 and December 31, 2012 are summarized below:

	Fair Value Measurements at September 30, 2013 Using:
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Assets:	(Level 1)		(Level 2)		(Level 3)		Total
Securities:
U.S. government agency obligations	$	—	$	32,338,410	$	—	$	32,338,410
State and municipal securities	—		42,459,962		—		42,459,962
Other securities	—		248,501		—		248,501
Mortgage-backed: residential	—		34,778,454		—		34,778,454
Total securities available for sale	$	—	$	109,825,327	$	—	$	109,825,327

	Fair Value Measurements at December 31, 2012 Using:
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Assets:	(Level 1)		(Level 2)		(Level 3)		Total
Securities:
U.S. government agency obligations	$	—	$	19,793,502	$	—	$	19,793,502
State and municipal securities	—		36,403,923		—		36,403,923
Other securities	—		248,501		—		248,501
Mortgage-backed: residential	—		31,834,154		—		31,834,154
Total securities available for sale	$	—	$	88,280,080	$	—	$	88,280,080

Assets measured at fair value on a nonrecurring basis by fair value hierarchy level during the periods ended September 30, 2013 and December 31, 2012 are summarized below:

	Fair Value Measurements at September 30, 2013 Using:
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Assets:	(Level 1)		(Level 2)		(Level 3)		Total

Foreclosed assets:
Real estate:
One-to-four family	$	—	$	—	$	103,500	$	103,500
Multi-family	—		—		118,100		118,100
Commercial	—		—		788,070		788,070
Construction and land	—		—		2,687,740		2,687,740

Total foreclosed assets	$	—	$	—	$	3,697,410	$	3,697,410

Impaired loans:
Real estate loans:
One-to-four family	$	—	$	—	$	1,026,195	$	1,026,195
Commercial	—		—		878,549		878,549
	—		—		1,904,744		1,904,744

Commercial business	—		—		89,836		89,836

Consumer:
Home Equity	—		—		29,591		29,591
	—		—		29,591		29,591

Total impaired loans	$	—	$	—	$	2,024,171	$	2,024,171

	Fair Value Measurements at December 31, 2012 Using:
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Assets:	(Level 1)		(Level 2)		(Level 3)		Total

Foreclosed assets:
Real estate:
Commercial	$	—	$	—	$	755,000	$	755,000
Construction and land	—		—		2,926,988		2,926,988

Total foreclosed assets	$	—	$	—	$	3,681,988	$	3,681,988

Impaired loans:
Real estate loans:
One-to-four family	$	—	$	—	$	1,355,785	$	1,355,785
Multi-family	—		—		2,255,959		2,255,959
Commercial	—		—		500,590		500,590
	—		—		4,112,334		4,112,334

Commercial business	—		—		235,183		235,183

Consumer:
Automobile and other	—		—		7,163		7,163
	—		—		7,163		7,163

Total impaired loans	$	—	$	—	$	4,354,680	$	4,354,680

Foreclosed assets are collateral dependent and are recorded at the lesser of the recorded investment in the receivable or the appraised value less costs to sell and may be revalued on a nonrecurring basis. Foreclosed assets measured at fair value less costs to sell on a nonrecurring basis at September 30, 2013, had a net carrying amount of $3,697,410, which is made up of the outstanding balance of $4,818,317, net of cumulative write-downs of $1,120,907. During the three and nine months ended September 30, 2013, we recorded write-downs of $86,500 and $359,907, respectively. At December 31, 2012, foreclosed assets had a carrying amount of $3,681,988, which was made up of the outstanding balance of $4,342,988, net of write-downs of $661,000. During the three and nine months ended September 30, 2012, we recorded write-downs of $40,000 and $369,500, respectively.

Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal balance of $2,460,215, with a valuation allowance of $436,044 at September 30, 2013, resulting in a net increase in provision for loan losses of $36,160 and $302,351 for the three and nine months ended September 30, 2013, respectively. At December 31, 2012, impaired loans had a principal balance of $5,187,080 with a valuation allowance of $832,400. Provisions for loan losses on impaired loans during the three and nine months ended September 30, 2012 decreased $323,000 and increased $614,000, respectively.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30, 2013:

Fair Value

Valuation
Techniques

Unobservable Inputs

Range

Weighted
Average

Foreclosed assets:

Real estate:

One-to-four family

103,500

Sales Comparison

Adjustment for difference between comparable sales

-2% to 20%

8.3

Multi-family

118,100

Sales Comparison

Adjustment for difference between comparable sales

2% to 26%

21.3

Commercial

788,070

Sales Comparison

Adjustment for difference between comparable sales

1% to 24%

10.5

Construction and land

2,687,740

Sales Comparison

Adjustment for difference between comparable sales

-59% to 47%

-3.1

Impaired loans:

Real estate loans:

One-to-four family

1,026,195

Sales Comparison

Adjustment for difference between comparable sales

-10% to 27%

4.2

Commercial

878,549

Sales Comparison

Adjustment for difference between comparable sales

-83% to 67%

-37.7

Commercial business

89,836

Sales Comparison

Adjustment for difference between comparable sales

-17% to 16%

2.7

Home Equity

29,591

Sales Comparison

Adjustment for difference between comparable sales

-9% to -3%

-5.6

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2012:

Fair Value

Valuation
Techniques

Unobservable Inputs

Range

Weighted
Average

Foreclosed assets:

Real estate:

Commercial

755,000

Sales Comparison

Adjustment for difference between comparable sales

1% to 24%

10.5

Construction and land

2,926,988

Sales Comparison

Adjustment for difference between comparable sales

-4% to 47%

19.3

Impaired loans:

Real estate loans:

One-to-four family

1,355,785

Sales Comparison

Adjustment for difference between comparable sales

-5% to 9%

5.7

Multi-family

2,255,959

Sales Comparison

Adjustment for difference between comparable sales

1% to 18%

10.0

Commercial

500,590

Sales Comparison

Adjustment for difference between comparable sales

5% to 17%

12.3

Commercial business

235,183

Sales Comparison

Adjustment for difference between comparable sales

4% to 50%

22.8

Automobile and other

7,163

Liquidation Value

Adjustment to reflect realizable value

-50% to 0%

-50.0