FAIR VALUE ACCOUNTING

Fair Value Hierarchy and Fair Value Measurement

We group our assets and liabilities that are recorded 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 – Valuations based on quoted prices in active markets for identical assets or liabilities. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.


•	Level 2 – Valuations based on quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-based valuations for which all significant assumptions are observable or can be corroborated by observable market data.


•	Level 3 – Valuations based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Valuations are determined using pricing models and discounted cash flow models and includes management judgment and estimation which may be significant.

The following table presents our assets and liabilities related to continuing operations, which are measured at fair value on a recurring basis for each of the fair value hierarchy levels, as of June 30, 2015 and December 31, 2014:



	Fair Value Measurements at Reporting Date Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Description
Assets at June 30, 2015
Investment securities—available for sale
U.S. government agency obligations	$	13,208,848	$	—	$	13,208,848	$	—
Mortgage-backed securities	1,156,997		—		1,156,997		—
Municipal securities	2,972,571		—		2,972,571		—
Mortgage loans held for sale	193,948,066		—		193,948,066		—
Derivative financial asset	4,622,913		—		4,622,913		—
Derivative financial liability	$	679,709	$	—	$	679,709	$	—
Assets at December 31, 2014
Investment securities—available for sale
U.S. government agency obligations	$	20,453,875	$	—	$	20,453,875	$	—
Mortgage-backed securities	1,283,633		—		1,283,633		—
Municipal securities	1,987,854		—		1,987,854		—
Mortgage loans held for sale	147,690,276		—		147,690,276		—
Derivative financial asset	1,514,083		—		1,514,083		—
Derivative financial liability	$	1,195,405	$	—	$	1,195,405	$	—

The following table provides quantitative disclosures about the fair value measurements of our assets related to continuing operations which are measured at fair value on a nonrecurring basis as of June 30, 2015 and December 31, 2014.



	Fair Value Measurements at Reporting Date Using
Description	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
At June 30, 2015
Real estate owned
Real estate construction	$	—	$	—	$	—	$	—
Restructured and impaired loans, net	3,167,282		—		—		3,167,282
At December 31, 2014
Real estate owned
Real estate construction	$	144,000	$	—	$	—	$	144,000
Restructured and impaired loans, net	6,381,231		—		—		6,381,231

There were no residential real estate properties classified as other real estate at June 30, 2015, and one property valued at $144,000 at December 31, 2014.

The following table displays quantitative information about Level 3 Fair Value Measurements for June 30, 2015 and December 31, 2014.



	Fair Value Measurement at June 30, 2015
	Fair Value		Valuation Technique	Unobservable Inputs	Weighted Average
Commercial	$	144,715	Market comparables	Discount applied to market comparables (1)	58	%
Real Estate
Construction	153,265		Market comparables	Discount applied to market comparables (1)	35	%
Residential (1-4 family)	1,206,005		Market comparables	Discount applied to market comparables (1)	17	%
Home equity lines	432,776		Market comparables	Discount applied to market comparables (1)	22	%
Multifamily	—		—	—	—
Commercial	1,230,521		Market comparables	Discount applied to market comparables (1)	11	%
Consumer
Consumer and installment loans	—		—	—	—
Total restructures and impaired loans	$	3,167,282
Real estate owned	$	—	—	Discount applied to market comparables (1)	—



	Fair Value Measurement at December 31, 2014
	Fair Value		Valuation Technique	Unobservable Inputs	Weighted Average
Commercial	$	1,108,698	Market comparables	Discount applied to market comparables (1)	34	%
Real Estate
Construction	236,754		Market comparables	Discount applied to market comparables (1)	36	%
Residential (1-4 family)	3,231,952		Market comparables	Discount applied to market comparables (1)	22	%
Home equity lines	438,500		Market comparables	Discount applied to market comparables (1)	22	%
Multifamily	—		—	—	—
Commercial	1,365,327		Market comparables	Discount applied to market comparables (1)	13	%
Consumer
Consumer and installment loans	—		—	—	—
Total restructures and impaired loans	$	6,381,231
Real estate owned	$	144,000	Market comparables	Discount applied to market comparables (1)	11	%

(1) A discount percentage is applied based on age of independent appraisals, current market conditions, and experience within the local markets.

For the three months ended June 30, 2015, we recorded a gain of $6,135 and a loss of $18,291 on the sale of other real estate owned. For the six months ended June 30, 2015, a gain of $6,135 and a loss of $57,170 were recorded for a net loss of $51,035. For the three and six months ended June 30 2014, we reported a loss of $33,263. Gains or losses on sale of other real estate owned are included in foreclosed property expense.

At the time a loan secured by real estate becomes real estate owned, we record the property at fair value net of estimated selling costs. Upon foreclosure and through liquidation, we evaluate the property’s fair value as compared to its carrying amount and record a valuation adjustment when the carrying amount exceeds fair value. Any valuation adjustments at the time a loan becomes real estate owned is charged to the allowance for loan losses. Any subsequent valuation adjustments are applied to earnings in our consolidated statements of income. No valuation adjustments related to other real estate owned were recorded in the three and six months ended June 30, 2015 or 2014. Adjustments, when necessary, are included in foreclosed property expense.

Valuation Methods

The following notes summarize the significant assumptions used in estimating the fair value of financial instruments:

Short-term financial instruments are valued at their carrying amounts and included in the Company’s balance sheet, which are reasonable estimates of fair value due to the relatively short period to maturity of the instruments. This approach applies to cash and cash equivalents, loans held for sale and overnight borrowings.

Investment securities – available-for-sale are valued at quoted market prices, if available. For securities for which no quoted market price is available, we estimate the fair value on the basis of quotes for similar instruments or other available information. Investment securities classified as available-for-sale are reported at their estimated fair value with unrealized gains and losses reported in accumulated other comprehensive income. To the extent that the cost basis of investment securities exceeds the fair value and the unrealized loss is considered to be other than temporary, an impairment charge is recognized and the amount recorded in accumulated other comprehensive income or loss is reclassified to earnings as a realized loss. The specific identification method is used in computing realized gains or losses.

Mortgage loans held for sale are recorded at their fair value when originated and reevaluated quarterly, based on our expected return from the secondary market.

Loans held for investment are valued on the basis of estimated future receipts of principal and interest, which are discounted at various rates. Loan prepayments are assumed to occur at the same rate as in previous periods when interest rates were at levels similar to current levels. Future cash flows for homogeneous categories of consumer loans, such as motor vehicle loans, are estimated on a portfolio basis and discounted at current rates offered for similar loan terms to new borrowers with similar credit profiles.

The carrying amounts of accrued interest approximate fair value.

Interest rate lock commitments ("IRLC") are recorded at fair value, which is based on estimated future receipts net of estimated future expenses when the underlying loan is sold on the secondary market, using observable Level 2 market inputs, reflecting current market inputs as of the measurement date.

Restricted equity securities are recorded at cost, which approximates fair value.

Bank owned life insurance represents insurance policies on officers of the Bank. The cash values of the policies are estimated using information provided by insurance carriers. These policies are carried at their cash surrender value, which approximates the fair value.

The fair value of demand deposits and deposits with no defined maturity is taken to be the amount payable on demand at the reporting date. The fair value of fixed-maturity deposits is estimated using rates currently offered for deposits of similar remaining maturities. The intangible value of long-term relationships with depositors is not taken into account in estimating the fair values disclosed.

The fair value of Level 2 borrowings is determined based on quoted prices from FHLB for borrowings with similar characteristics and maturities. The determination of the fair value of Level 3 borrowings is made using pricing models and discounted cash flow models, and includes management judgment and estimation, which may be significant.

Derivative financial instruments are recorded at fair value using observable Level 2 market inputs related to:

•Loans held for sale forward sales commitments are recorded at their fair value based on the estimated number of days remaining in the IRLC at the measurement date and expected return from the secondary market. Forward mortgage loan sales commitments are recorded at their fair value based on the gain or loss that would occur if the loan were paired off with an investor at measurement date. A derivative asset of $4,622,913 and a derivative liability of $679,709 related to loans held for sale were recorded at June 30, 2015. At December 31, 2014, a derivative asset of $1,514,083 and a derivative liability of $1,195,405 were recorded.

Real Estate Owned is carried at the fair value less estimated selling costs. Upon foreclosure and through liquidation, we evaluate the property's fair value as compared to its carrying amount and record a valuation adjustment when the carrying amount exceeds fair value less selling costs. Any valuation adjustments at the time a loan becomes real estate owned is charged to the allowance for loan losses. Fair value is determined through an appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data (Level 2). When evaluating fair value, management may discount the appraisal further if, based on their understanding of the market conditions, it is determined the collateral is further impaired below the appraisal value (Level 3). Any subsequent valuation adjustments are applied to earnings in our consolidated statements of income. We did not record any losses due to valuation adjustments for the three months and six months ended June 30, 2015 or 2014. We recorded no losses due to valuation adjustments on real estate owned within foreclosed property expense in the year ended December 31, 2014.

Restructured and Impaired Loans measurement is generally based on the present value of expected future cash flows discounted at the loan's effective interest rate, unless in the case of collateral-dependent loans, the observable market price, or the fair value of the collateral can be readily determined. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data (Level 2). When evaluating fair value, management may discount the appraisal further if, based on their understanding of the market conditions, it is determined the collateral is further impaired below the appraised value (Level 3). The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Restructured and impaired loans are periodically reevaluated to determine if additional adjustments to the carrying value are necessary.

It is not practicable to separately estimate the fair values for off-balance-sheet credit commitments, including standby letters of credit and guarantees written, due to the lack of cost-effective reliable measurement methods for these instruments.

Fair Value of Financial Instruments

The following table presents the carrying amounts and fair value of our financial instruments at June 30, 2015 and December 31, 2014. GAAP defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than through a forced or liquidation sale for purposes of this disclosure. The carrying amounts in the table are included in the balance sheet under the indicated captions.



			Fair Value Measurements at June 30, 2015 using
	Carrying Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying Value		Level 1		Level 2		Level 3		Balance
Assets
Cash and cash equivalents	$	101,920,540	$	101,920,540	$	—	$	—	$	101,920,540
Investment securities available for sale	17,338,416		—		17,338,416		—		17,338,416
Mortgage loans held for sale	193,948,066		—		193,948,066		—		193,948,066
Loans held for investment (net)	784,285,281		—		—		800,572,485		800,572,485
Accrued interest receivable	2,122,302		—		2,122,302		—		2,122,302
Restricted equity securities	4,706,000		—		4,706,000		—		4,706,000
Bank owned life insurance	10,464,611		—		10,464,611		—		10,464,611
Derivative financial assets	4,622,913		—		4,622,913		—		4,622,913
Liabilities
Deposits	$	979,023,157	$	—	$	976,454,770	$	—	$	976,454,770
Borrowings	56,025,500		—		46,035,219		5,721,861		51,757,080
Accrued interest payable	177,907		—		177,907		—		177,907
Derivative financial liabilities	679,709		—		679,709		—		679,709

			Fair Value Measurements at December 31, 2014 using
	Carrying Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying Value		Level 1		Level 2		Level 3		Balance
Assets
Cash and cash equivalents	$	65,428,974	$	65,428,974	$	—	$	—	$	65,428,974
Investment securities available for sale	23,725,362		—		23,725,362		—		23,725,362
Loans held for sale	147,690,276		—		147,690,276		—		147,690,276
Loans held for investment (net)	763,640,698		—		—		776,974,812		776,974,812
Accrued interest receivable	2,087,880		—		2,087,880		—		2,087,880
Restricted equity securities	3,632,500		—		3,632,500		—		3,632,500
Bank owned life insurance	9,656,803		—		9,656,803		—		9,656,803
Derivative financial assets	1,514,083				1,514,083				1,514,083
Liabilities
Deposits	$	919,413,913	$	—	$	917,008,847	$	—	$	917,008,847
Borrowings	21,075,497		—		11,109,566		5,641,087		16,750,653
Accrued interest payable	43,280		—		43,280		—		43,280
Derivative financial liability	1,195,405		—		1,195,405		—		1,195,405