NOTE 11 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

Securities Available-for-sale

Where quoted market prices are available in an active market, securities are classified within Level I of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level II of the valuation hierarchy.

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Level 3 inputs were used in determining fair value.


(dollars in thousands)	Quantitative Information about Level 3 Fair Value Measurements
March 31, 2014	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)
Impaired Loans	$	326	Appraisal of collateral (1)	Appraisal adjustments (2)	-25.8% to 0% (-10.7%)
				Liquidation expenses (2)	13.9% to 28.5% (21.8%)
Mortgage Servicing Rights	$	1	Discounted Cash Flow	Prepayment rate (3)	7.8% to 17.2% (10.5%)
				Discount rate	9.5%

(dollars in thousands)	Quantitative Information about Level 3 Fair Value Measurements
December 31, 2013	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)
Impaired Loans	$	372	Appraisal of collateral (1)	Appraisal adjustments (2)	0%
				Liquidation expenses (2)	15.8% to 23.1% (20.5%)
Mortgage Servicing Rights	$	1	Discounted Cash Flow	Prepayment rate (3)	7.8% to 17.2% (10.5%)
				Discount rate	9.5%

(1)	The fair value is determined through independent appraisals by certified appraisers or internal evaluators of the underlying collateral.

(2)

Appraisals and evaluations may be adjusted by management for qualitative factors and estimated liquidation expenses. The range and weighted average of liquidation expenses are expressed as a percent of discounted collateral value and other appraisal adjustments are presented as a percentage of the appraised amounts.

(3)	Conditional prepayment rates reflect future long-run prepayment estimates by bond dealers for the nation as a whole as well as the Company’s actual prepayment history. Prepayment rates are highly sensitive to market interest rates.

Collateral-dependent Impaired Loans

The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level III of the fair value hierarchy.

The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral.

Mortgage Servicing Rights

Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models having significant inputs of discount rate and prepayment speed. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level III of the hierarchy. Mortgage servicing rights are tested for impairment on an annual basis.

The reported fair values of financial instruments are based on a variety of factors. Where possible, fair values represent quoted market prices for identical or comparable instruments. In other cases, fair values have been estimated based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates reflecting varying degrees of risk. Intangible values assigned to customer relationships are not reflected in the reported fair values. Accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of period end or that will be realized in the future.

The following methods and assumptions were used by the Company in estimating the fair value disclosures for financial instruments:

Cash and Cash Equivalents: The carrying amount for cash and cash equivalents is a reasonable estimate of fair value.

Investment Securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Loans Held for Sale: Loans held for sale are carried at cost. The fair value is based on what the secondary market would offer for loans with similar characteristics.

Loans: The fair value for net loans is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality. Where quoted market prices were available, primarily for certain residential mortgage loans, such market rates were utilized as estimates for fair value.

Accrued Interest Receivable: The carrying amount of accrued interest receivable approximates its fair value.

Deposits: Noninterest bearing and interest bearing demand deposits and savings deposits are valued at the amount payable on demand as of year end. The fair values for time deposits are based on discounted value of cash flows. The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities.

Federal Funds Purchased and Repurchase Agreements: The carrying amount for federal funds purchased and repurchase agreements are considered to be a reasonable estimate of fair value.

Federal Home Loan Bank Borrowings: The fair value of Federal Home Loan Bank borrowings is generally carried at amortized cost. We are required to estimate the fair value of these long-term borrowings. The discounted cash flow method is used to estimate the fair value of Federal Home Loan Bank borrowings.

Accrued Interest Payable: The carrying amount of accrued interest payable approximates its fair value.

Off-Balance-Sheet Instruments: The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The amount of fees currently charged on commitments is determined to be insignificant and, therefore, the carrying value and fair value of off-balance-sheet instruments are not shown.

The estimates of fair values of financial instruments are summarized as follows at March 31, 2014 and December 31, 2013:


	March 31, 2014
	Carrying		Estimated Fair Value
(Amounts Expressed in Thousands)	Amount		Level I		Level II		Level III		Total
Financial assets:
Cash and cash equivalents	$	23,852	$	23,852	$	—	$	—	$	23,852
Investment securities		205,679		196		205,483		—		205,679
Loans		89,104		—		—		90,096		90,096
Accrued interest receivable		1,298		1,298		—		—		1,298
Financial liabilities:
Deposits		279,554		193,847		65,407		—		259,254
Federal funds purchased and repurchase agreements		20,739		20,739		—		—		20,739
Federal Home Loan Bank borrowings		3,492		—		3,885		—		3,885
Accrued interest payable		124		124		—		—		124

	December 31, 2013
	Carrying		Estimated Fair Value
(Amounts Expressed in Thousands)	Amount		Level I		Level II		Level III		Total
Financial assets:
Cash and cash equivalents	$	31,875	$	31,875	$	—	$	—	$	31,875
Investment securities		199,955		195		199,760		—		199,955
Loans		91,537		—		—		91,413		91,413
Accrued interest receivable		1,168		1,168		—		—		1,168
Financial liabilities:
Deposits		285,877		195,135		67,308		—		262,443
Federal funds purchased and repurchase agreements		20,215		20,215		—		—		20,215
Federal Home Loan Bank borrowings		3,516		—		3,917		—		3,917
Accrued interest payable		134		134		—		—		134