FAIR VALUES OF FINANCIAL INSTRUMENTS

3 Months Ended

Mar. 31, 2017

NOTE 7 – FAIR VALUES OF FINANCIAL INSTRUMENTS

The following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at March 31, 2017 and December 31, 2016.

Available-for-sale Securities – Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly-liquid government bonds, mortgage products and exchange-traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include certain collateralized mortgage and debt obligations and certain municipal securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include certain residual municipal securities and other less liquid securities.

Loans Held for Sale – The fair value of loans held for sale is based on quoted market prices from Freddie Mac. Freddie Mac quotes are updated daily and represent prices at which loans are exchanged in high volumes and in a liquid market.

Other Real Estate – Other real estate is fair valued under Level 3 based on property appraisals less estimated disposition costs, which include both observable and unobservable inputs, at the time of transfer and as appropriate thereafter.

Loans Held for Investment – Loans held for investment are generally not recorded at fair value on a recurring basis. Periodically, the Bank records nonrecurring adjustments to the carrying value of these loans based on fair value measurements for loans subject to impairment. The fair value of impaired loans is typically determined using a combination of observable inputs, such as interest rates, contract terms, appraisals of collateral supporting the loan and recent comparable sales of similar properties, and unobservable inputs such as creditworthiness, disposition costs and underlying cash flows associated with the loan. Since the estimates of fair value utilized for loans also involve unobservable inputs, valuations of impaired loans have been classified as Level 3.

The following table sets forth by level, within the fair value hierarchy, the Company’s assets at fair value:

	Fair Value Measurements Using
	Quoted Prices		Significant
	in Active		Other		Significant
	Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	Level 1		Level 2		Level 3		Fair Value

March 31, 2017
Recurring basis
Mortgage-backed securities	$	-	$	25,557,962	$	-	$	25,557,962
U.S. Government agencies		-		2,322,251		-		2,322,251
Municipal obligations		-		1,828,917		-		1,828,917
Nonrecurring basis
Loans held for sale		-		7,453,804		-		7,453,804
Impaired loans		-		-		5,902,986		5,902,986

Totals	$	-	$	37,162,934	$	5,902,986	$	43,065,920

December 31, 2016
Recurring basis
Mortgage-backed securities	$	-	$	27,128,396	$	-	$	27,128,396
U.S. Government agencies		-		2,525,737		-		2,525,737
Municipal obligations		-		1,844,999		-		1,844,999
Nonrecurring basis
Loans held for sale		-		14,221,163		-		14,221,163
Impaired loans		-		-		5,968,221		5,968,221

Totals	$	-	$	45,720,295	$	5,968,221	$	51,688,516

The fair values of certain of these instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments and because management does not intend to sell these financial instruments, the Bank does not know whether the fair values shown represent values at which the respective financial instruments could be sold individually or in the aggregate.

The following tables present estimated fair values of the Company’s financial instruments at March 31, 2017 and December 31, 2016.

					Quoted Prices		Significant
					in Active		Other		Significant
					Markets for		Observable		Unobservable
	Carrying				Identical Assets		Inputs		Inputs
	Amount		Fair Value		Level 1		Level 2		Level 3
	(Dollars in thousands)
At March 31, 2017
Financial assets:
Cash and due from banks	$	5,101	$	5,101	$	5,101	$	-	$	-
Interest-bearing deposits with banks		8,935		8,935		8,935		-		-
Available-for-sale securities		29,709		29,709		-		29,709		-
Loans held for sale		7,454		7,454		-		7,454		-
Loans held for investment, net		257,730		258,113		-		-		258,113
Stock in financial institutions		3,586		3,586		-		3,586		-

Financial liabilities:
Demand deposits, savings and NOW deposits		169,867		164,076		-		164,076		-
Time deposits		60,300		60,304		-		60,304		-
Federal Home Loan Bank advances		50,000		50,081		-		50,081		-

At December 31, 2016
Financial assets:
Cash and due from banks	$	4,766	$	4,766	$	4,766	$	-	$	-
Interest-bearing deposits with banks		11,645		11,645		11,645		-		-
Available-for-sale securities		31,499		31,499		-		31,499		-
Loans held for sale		14,221		14,221		-		14,221		-
Loans held for investment, net		241,399		241,440		-		-		241,440
Stock in financial institutions		3,575		3,575		-		3,575		-

Financial liabilities:
Demand deposits, savings and NOW deposits		160,961		156,529		156,529		-		-
Time deposits		63,561		63,588		-		63,588		-
Federal Home Loan Bank advances		50,000		50,176		-		50,176		-

The following methods and assumptions were used to estimate the fair value of the additional classes of financial instruments shown:

Cash and Due from Banks, Interest-Bearing Deposits with Banks and Stock in Financial Institutions– The carrying amount approximates fair value.

Deposits and Federal Home Loan Bank (FHLB) Advances – Deposits include demand deposits, savings accounts, NOW accounts and money market deposits. The carrying amount approximates fair value. The fair value of fixed-maturity time deposits and FHLB advances is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits and advances of similar remaining maturities.

- 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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