The Company uses fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic of FASB ASC 820, fair value is 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. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Bank's various assets and liabilities. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions. In accordance with this guidance, the Company groups its assets and liabilities carried or disclosed at fair value in three levels as follows:

o Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

o Quoted prices for identical or similar assets or liabilities in markets that are not active.

o Inputs other than quoted prices that are observable, either directly or indirectly, for the term of the asset or liability (e.g., interest rates, yield curves, credit risks, prepayment speeds or volatilities) or “market corroborated inputs.”

o Prices or valuation techniques that require inputs that are both unobservable (i.e. supported by little or no market activity) and that are significant to the fair value of the assets or liabilities.

o These assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

An asset’s or liability’s financial categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.

Securities Available for Sale: Where quoted prices are available in an active market, securities would be classified within Level 1 of the valuation hierarchy. Level 1 securities include money market funds. 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 flow. Level 2 securities include U.S. agency securities and mortgage backed agency securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

Loans Held for Sale. Fair values are estimated by using actual quoted market bids on a loan by loan basis.

Loans Held at Fair Value. Fair values are estimated based on the present value of future cashflows for each asset based on their unique characteristics, market-based assumptions for prepayment speeds, discount rates, default and voluntary prepayments as well as assumptions for losses and recoveries.

Assets on the consolidated balance sheets measured at fair value on a recurring basis are summarized below.

(in 000’s)		Fair Value Measurements at Reporting Date Using:
	Assets/Liabilities Measured at Fair Value at December 31, 2013	Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Investment securities available-for-sale:
U.S. Government agency securities	$3,802	$-	$3,802	-
Government Sponsored Enterprises residential mortgage-backed securities	5,649	-	$5,649	-
Money Market Funds	129	129	-	-
Total	$9,580	$129	$9,541	-
Loans held for sale	$1,646	$-	$1,646	-
Loans held at fair value	$447	$-	$-	$447

When estimating the fair value of our Level 3 financial instruments, management uses various observable and unobservable inputs. These inputs include estimated cashflows, prepayment speeds, average projected default rate and discount rates as follows:

(in 000’s)
Assets measured at fair value	Fair value	Principal valuation techniques	Significant observable inputs	Range of inputs
Loans held at fair value:	$447	Discounted cash flow	Constant prepayment rate	7.74% to 7.985%
			Weighted average discount rate	9.106% to 9.111%
			Weighted average life	4.04 yrs to 4.08 yrs
			Average projected default rate	18%

Due to the inherent uncertainty of determining the fair value of assets that do not have a readily available market value, fair value as determined by management may fluctuate from period to period.

The following table summarizes additional information about assets measured at fair value on a recurring basis for which level 3 inputs were utilized to determine fair value for the year ended December 31, 2013:

(in 000’s)		Fair Value Measurements at Reporting Date Using:
	Assets/Liabilities Measured at Fair Value at December 31, 2012	Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Investment securities available-for-sale:
Government Sponsored Enterprises residential mortgage-backed securities	$898	$-	$898	-
Money Market Funds	129	129	-	-
Total	$1,027	$129	$898

As of December 31, 2013 and 2012, the fair value of the Bank’s available-for-sale securities portfolio was approximately $9,580,000 and $1,027,000, respectively. All the residential mortgage-backed securities were issued or guaranteed by the Government National Mortgage Association (“GNMA”), the Federal National Mortgage Association (“FNMA”) or the Federal Home Loan Mortgage Corporation (“FHLMC”). The underlying loans for these securities are residential mortgages that are geographically dispersed throughout the United States. The valuation of AFS securities using Level 2 inputs was primarily determined using the market approach, which uses quoted prices for similar instruments and model-based valuation techniques for which the significant assumptions can be corroborated by market data. There were no transfers between Level 1 and Level 2 assets during the years ended December 31, 2013 or 2012.

Certain assets are not measured at fair value on a recurring basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

Impaired Loans (net of specific reserves): The carrying value of certain impaired loans is derived in accordance with FASB ASC Topic 310, “Receivables”. Impairment is determined based on the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Appraised and reported values for collateral dependent

Other real estate owned: Other real estate owned (“OREO”) consists of properties acquired as a result of foreclosures and deeds in-lieu-of foreclosure. Properties are classified as OREO and are reported at the lower of cost or fair value less cost to sell. The valuation allowance for OREO at December 31, 2013 and 2012 was approximately $157,000 and $233,000, respectively.

The following table presents the assets and liabilities carried on the consolidated balance sheets by level within the fair value hierarchy as of December 31, 2013, for which a nonrecurring change in fair value has been recorded during the year ended December 31, 2013.

(in 000’s)

Total

Quoted Prices in Active markets for Identical Assets

(Level 1)

Significant Other Observable Inputs

(Level 2)

Significant Unobservable Inputs

(Level 3)

Total fair value gain (loss) during the year ended

December 31, 2013

Impaired Loans

$1,304

(59)

Other real estate owned

433

(157)

The following table presents the assets carried on the consolidated balance sheets by level within the fair value hierarchy as of December 31, 2012, for which a nonrecurring change in fair value has been recorded during the year ended December 31, 2012.

(in 000’s)

Total

Quoted Prices in Active markets for Identical Assets

(Level 1)

Significant Other Observable Inputs

(Level 2)

Significant Unobservable Inputs

(Level 3)

Total fair value gain (loss) during the year ended

December 31, 2012

Impaired Loans

$1,501

$(843)

Other real estate owned

775

(232)

FASB ASC Topic 825 “Disclosure About Fair Value of Financial Instruments”, requires the disclosure of the fair value of financial instruments. The methodology for estimating the fair value of financial assets that are measured on a recurring or non recurring basis are discussed above.

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

Cash and cash equivalents, accrued interest receivable, and accrued interest payable: The carrying amounts reported in the balance sheet approximates fair value.

Investment securities: Fair values for investment securities available for sale are as described above. Investment securities held to maturity are determined in a similar manner.

Loans Held for Sale. Fair values for loans held for sale are estimated by using actual quoted market bids on a loan by loan basis.

Loans (other than impaired loans): The fair value of loans was estimated using a discounted cash flow analysis, which considered estimated prepayments, amortizations, and non performance risk. Prepayments and discount rates were based on current marketplace estimates and rates.

Loans Held at Fair Value. The fair value of loans was estimated based on the present value of future cashflows for each asset based on their unique characteristics, market-based assumptions for prepayment speeds, default and voluntary prepayments as well as loan specific assumptions for losses and recoveries.

Deposit liabilities: The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings, and certain types of money market accounts) are equal to the amounts payable on demand at the reporting date (e.g., their carrying amounts). The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit approximate the fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation. The Treasury Yield Curve was utilized for discounting cash flows as it approximates the average marketplace certificate of deposit rates across the relevant maturity spectrum.

Commitments to extend credit: The carrying amounts for commitments to extend credit approximate fair value as such commitments are not substantially different from the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparts. Such amounts were not significant.

	Level in	2013		2012
	Value	Carrying	Fair	Carrying	Fair
Assets:	Hierarchy	Amount	Value	Amount	Value
Cash and cash equivalents	Level 1	$5,790	$5,790	$10,236	$10,236
Available for sale securities	(1)	9,580	9,580	1,027	1,027
Held to maturity securities	Level 2	-	-	11,895	12,486
Loans held for sale	Level 2	1,646	1,646	-	-
Loans, net of allowance for loan losses	(2)	42,711	43,304	41,502	40,325
Interest receivable	Level 2	256	256	310	310
Liabilities:
Demand deposits	Level 2	28,658	28,658	29,851	29,851
Savings deposits	Level 2	12,988	12,988	14,239	14,239
Time deposits	Level 2	15,463	15,472	16,886	16,902
Interest Payable	Level 2	13	13	30	30

(2) Level 2 for non-impaired loans; Level 3 for impaired loans; Level 3 for $447,000 held at fair value.