NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following summarizes the methods and significant assumptions used by the Company in estimating its fair value disclosures for financial instruments.

Level I: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II: Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.

Level III: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

Estimated fair values have been determined by the Company using historical data, as generally provided in the Company’s regulatory reports, and an estimation methodology suitable for each category of financial instruments. The Company’s fair value estimates, methods and assumptions are set forth below for the Company’s other financial instruments

Cash and cash equivalents: The carrying amounts for cash and cash equivalents approximate fair value because they have original maturities of 90 days or less and do not present unanticipated credit concerns.

Certificates of deposits: The fair values for loans are computed based on scheduled future cash flows of principal and interest, discounted at interest rates currently offered for loans with similar terms of borrowers of similar credit quality. No prepayments of principal are assumed.

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

Loans: The fair values for loans are computed based on scheduled future cash flows of principal and interest, discounted at interest rates currently offered for loans with similar terms of borrowers of similar credit quality. No prepayments of principal are assumed.

Loans held for sale: Loans held for sale are carried at the lower of cost or market value. These loans currently consist of one-to-four-family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level II).

Derivative on loans held for sale: Derivatives on loans held for sale are used to mitigate interest rate risk for residential mortgage loans held for sale and interest rate locks. These instruments are considered derivatives and are recorded at fair value, based on (i) committed sales prices from investors for commitments to sell mortgage loans or (ii) observable market data inputs for commitments to sell mortgage backed securities. The Company’s mortgage banking hedge instruments are classified as Level II. For mortgage interest rate locks, the fair value is based on either (i) the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis or (ii) the observable price for individual loans traded in the secondary market for loans that will be delivered on a mandatory basis. All of the Company’s mortgage interest rate locks are classified as Level II.

Bank Owned Life Insurance: Fair values of bank owned life insurance approximate the cash surrender value of the policies.

Accrued interest receivable and payable and repurchase agreements: The carrying values of accrued interest receivable and payable approximate their fair values.

Deposits: The fair values of demand deposits (i.e., non interest bearing checking, NOW and money market), savings accounts and other variable rate deposits approximate their carrying values. Fair values of fixed maturity deposits are estimated using a discounted cash flow methodology at rates currently offered for deposits with similar remaining maturities. Any intangible value of long-term relationships with depositors is not considered in estimating the fair values disclosed.

FHLB and other borrowings: The fair values for loans are computed based on scheduled future cash flows of principal and interest, discounted at interest rates currently offered for loans with similar terms of borrowers of similar credit quality. No prepayments of principal are assumed.

Subordinated debt: The fair values for loans are computed based on scheduled future cash flows of principal and interest, discounted at interest rates currently offered for loans with similar terms of borrowers of similar credit quality. No prepayments of principal are assumed.

Off-balance sheet instruments: The fair values of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of agreements and the present credit standing of the counterparties. The amounts of fees currently charged on commitments and standby letters of credit are deemed insignificant, and therefore, the estimated fair values and carrying values are not shown. The contractual amounts of unfunded commitments and letters of credit are presented in Note 7.

The carrying values and estimated fair values of the Company’s financial instruments are summarized as follows (in thousands):

Fair Value Measurements at

					Quoted
					Prices
					in Active		Significant
					Markets for		Other		Significant
			Estimated		Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
December 31, 2013	Value		Value		(Level 1)		(Level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	39,843	$	39,843	$	39,843	$	—	$	—
Certificates of deposits with other banks	9,427		9,616		—		—		9,616
Securities available-for-sale	106,411		106,411		187		106,224
Securities held-to-maturity	56,670		54,118		—		54,118		—
Loans held for sale	89,186		89,186				89,186
Loans	617,370		620,295		—		—		620,295
Derivative on loans held for sale	2,271		2,271		2,271		—		—
Bank owned life insurance	16,062		16,062		16,062		—		—
Accrued interest receivable	2,764		2,764		2,764		—		—

Financial liabilities:
Deposits	$	695,811	$	697,301	$	454,658	$	—	$	242,643
Repurchase agreements	81,578		81,578		81,578		—		—
FHLB and other borrowings	104,647		104,742		98,028		—		6,714
Accrued interest payable	327		327		327		—		—
Subordinated debt	4,124		3,153		3,153		—		—

December 31, 2012
Financial assets:
Cash and cash equivalents	$	25,340	$	25,340	$	25,340	$	—	$	—
Certificates of deposits	9,427		9,427		9,427		—		—
Securities available-for-sale	79,378		79,378		—		79,378		—
Securities held-to-maturity	35,370		36,218		—		36,218		—
Loans held for sale	85,529		85,529				85,529
Loans	442,367		453,082		—		—		453,082
Derivative on loans held for sale	1,261		1,261		1,261		—		—
Bank owned life insurance	10,524		10,524		10,524		—		—
Accrued interest receivable	1,778		1,778		1,778		—		—

Financial liabilities:
Deposits	$	486,519	$	498,244	$	328,777	$	—	$	169,467
Repurchase agreements	70,234		70,234		70,234		—		—
FHLB and other borrowings	91,617		94,487		—		—		94,487
Accrued interest payable	329		329		329		—		—
Subordinated debt	4,124		4,664		4,664		—		—

Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on-and-off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.