NOTE H — DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES

ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy has been established that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 Quoted prices in active markets for identical assets or liabilities.

Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Recurring Measurements: Available-for-sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. The security valued in Level 1 is a mutual fund.

Level 2 securities include U.S. Government agency and U.S. Government-sponsored enterprise pass-through mortgage-backed securities and collateralized mortgage obligations. Level 2 securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs, and the values are reviewed by the Bank’s management. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of securities with similar characteristics and, because many fixed-income securities do not trade on a daily basis, apply available information through processes such as benchmark curves, benchmarking of like securities, sector grouping and matrix pricing. In addition, model processes, such as an option adjusted spread model is used to develop prepayment and interest rate scenarios for securities with prepayment features. The Company has reviewed the methodologies used by the third party and has determined that the securities are properly classified as Level 2.

The Company held no Level 3 securities in its available-for-sale portfolio on either March 31, 2015 or December 31, 2014.

The following table presents the fair value measurements of assets recognized in the accompanying consolidated condensed balance sheet measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2015 and December 31, 2014 (dollars in thousands):


			Fair Value Measurements Using
Available-for-sale securities:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
At March 31, 2015:
Ginnie Mae and GSE mortgage-backed pass-through securities	$	44,739	$	—	$	44,739	$	—
Ginnie Mae collateralized mortgage obligations		1,961		—		1,961		—
Mutual fund		1,894		1,894		—		—

	$	48,594	$	1,894	$	46,700	$	—

At December 31, 2014:
Ginnie Mae and GSE mortgage-backed pass-through securities	$	44,198	$	—	$	44,198	$	—
Ginnie Mae collateralized mortgage obligations		2,019		—		2,019		—
Mutual fund		1,867		1,867		—		—

	$	48,084	$	1,867	$	46,217	$	—

Transfers between Levels

Transfers between levels did not occur during the three months ended March 31, 2015.

Level 3 Reconciliation

There is no reconciliation for the three-month periods ended March 31, 2015 and March 31, 2014, respectively, as there were no fair value measurements using significant unobservable (Level 3) inputs for the available-for-sale portfolio during those periods.

Nonrecurring Measurements

Following is a description of valuation methodologies used for instruments measured at fair value on a non-recurring basis and recognized in the accompanying consolidated condensed balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy:

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 3 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. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by management. Appraisals are reviewed for accuracy and consistency by management. Appraisers are selected from the list of approved appraisers maintained by management. 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. These discounts and estimates are developed by management by comparison to historical results.

Other Real Estate Owned

Other real estate owned (“OREO”) is carried at the lower of fair value at acquisition date or current estimated fair value, less estimated cost to sell when the real estate is acquired. Estimated fair value of OREO is based on appraisals or evaluations. OREO is classified within Level 3 of the fair value hierarchy.

Appraisals of OREO are obtained when the real estate is acquired and subsequently as deemed necessary by management. Appraisals are reviewed for accuracy and consistency by management. Appraisers are selected from the list of approved appraisers maintained by management.

Loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. If the carrying amount exceeds fair value, impairment is recorded so that the servicing asset is carried at fair value. Fair value is determined based on market prices for comparable mortgage servicing contracts, when available, or alternatively based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes interest rate, prepayment speed, and default rate assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data.

The following table presents the fair value measurements of assets recognized in the accompanying balance sheet measured at fair value on a nonrecurring basis and the level within the ASC 820 fair value hierarchy in which the fair value measurements fall at March 31, 2015 and December 31, 2014:


			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
At March 31, 2015:
Impaired loans	$	824	$	—	$	—	$	824
Other real estate owned		—		—		—		—
At December 31, 2014:
Impaired loans	$	940	$	—	$	—	$	940
Other real estate owned		1,166		—		—		1,166
Mortgage servicing rights		530						530

Unobservable (Level 3) Inputs:

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at March 31, 2015 (dollars in thousands):

Fair Value

Valuation Technique

Unobservable Inputs

Rate/Rate Range

Impaired loans

824

Third party valuations

Discount to reflect realizable value

0.0% - 24.9

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at December 31, 2014 (dollars in thousands):


	Fair Value		Valuation Technique	Unobservable Inputs	Rate/Rate Range
Impaired loans	$	940	Third party valuations	Discount to reflect realizable value		0.6% - 64.9	%
Other real estate owned		1,166	Third party valuations	Discount to reflect realizable value		6.4% - 7.0	%
Mortgage servicing rights		530	Third party valuations	Discount rate		5.06% - 6.08	%
				Prepayment speed		10.22% - 22.74	%

Fair Value of Financial Instruments

Fair values are based on estimates using present value and other valuation techniques in instances where quoted market prices are not available. These techniques are significantly affected by the assumptions used, including discount rates and estimates of future cash flows. As such, the derived fair value estimates may not be realized upon an immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent, and should not be construed to represent, the underlying value of the Company.

The following table presents the estimates of fair value of financial instruments and the level within the fair value hierarchy in which the fair value measurements fall (dollars in thousands) at March 31, 2015:

Fair Value Measurements Using

Carrying
Value

Fair
Value

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant Other
Observable Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Assets

Cash and cash equivalents

35,266

—

Interest-bearing time deposits

4,164

4,183

—

Investment securities held to maturity

9,936

9,997

—

4,578

5,419

Loans held for sale

748

—

748

—

Loans

319,888

327,145

—

316,297

10,848

Stock in FHLB

3,753

—

3,753

—

Mortgage servicing rights

522

—

522

Interest and dividends receivable

1,163

—

1,163

—

Liabilities

Deposits

390,577

391,266

255,661

135,605

—

Borrowings

42,810

38,841

—

32,604

6,237

Drafts payable

1,129

—

1,129

—

Interest and dividends payable

416

—

416

—


Fair Value Measurements Using
	Carrying Value		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Cash and cash equivalents	$	33,142	$	33,142	$	33,142	$	—	$	—
Interest-bearing time deposits		4,164		4,162		4,162		—		—
Investment securities held to maturity		7,082		7,110		—		4,756		2,354
Loans held for sale		332		332		—		332		—
Loans		316,113		322,035		—		311,196		10,839
Stock in FHLB		3,753		3,753		—		3,753		—
Mortgage servicing rights		530		530		—		—		530
Interest and dividends receivable		1,179		1,179		—		1,179		—
Liabilities
Deposits		378,947		379,339		241,918		137,421		—
Borrowings		45,810		41,605		—		35,543		6,062
Drafts payable		1,298		1,298		—		1,298		—
Interest and dividends payable		97		97		—		97		—

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

Cash and Cash Equivalents and Stock in FHLB: The carrying amounts reported in the condensed consolidated balance sheets approximate those assets’ fair values.

Interest-bearing time deposits: The carrying amounts reported in the condensed consolidated balance sheets approximate those assets’ fair values.

Held to maturity securities: The carrying amount for March 31, 2015 and December 31, 2014 represents the amortized cost balance as of that date. Fair value is based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans held for sale: The carrying amount approximates fair value due to the insignificant time between originations and date of sale. The carrying amount is the amount funded.

Loans: The fair values for loans are estimated using a discounted cash flow calculation that applies external interest rates used to price new similar loans to a schedule of aggregated expected monthly maturities on loans.

Mortgage Servicing Rights: The initial amount recorded is an estimate of the fair value of the streams of net servicing revenues that will occur over the estimated life of the servicing arrangement, and the initial amount recorded is then amortized over the estimated life. Annually, a valuation of the servicing rights is performed by an independent third party and reviewed by the Bank’s management, with impairment, if any, recognized through a valuation allowance. The valuation is based on the discounted cash flow method utilizing Bloomberg’s Median Forecasted Prepayment Speeds for mortgage-backed securities assumed to possess enough similarities to the Bank’s servicing portfolio to facilitate a comparison.

Interest and Dividends Receivable/Payable: The fair value of accrued interest and dividends receivable/payable approximates carrying values.

Deposits: The fair values of non-maturity demand, savings, and money market accounts are equal to the amount payable on demand at the balance sheet date. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on deposits to a schedule of aggregated expected monthly maturities on deposits.

Borrowings: The fair value of borrowings is estimated using a discounted cash flow calculation, based on borrowing rates for periods comparable to the remaining terms to maturity of the borrowings.

Drafts Payable: The fair value approximates carrying value.