Disclosure Regarding Fair Value of Financial Statements

9 Months Ended

Sep. 30, 2016

Fair Value Disclosures [Abstract]

Disclosure Regarding Fair Value of Financial Statements

Note 4: Disclosure Regarding Fair Value of Financial Statements

Fair value measurements apply whenever GAAP requires or permits assets or liabilities to be measured at fair value either on a recurring or nonrecurring basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. The fair value standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs.  Observable inputs, which are developed based on market data we have obtained from independent sources, are ones that market participants would use in pricing an asset or liability.  Unobservable inputs, which are developed based on the best information available in the circumstances, reflect our estimate of assumptions that market participants would use in pricing an asset or liability.

The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:

• Level 1: valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets.

• Level 2: valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by market data.

• Level 3: valuation is derived from other valuation methodologies, including discounted cash flow models and similar techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in determining fair value.

Fair value estimates are made at a specific point of time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale our entire holdings of a particular financial instrument. Because no active market exists for a significant portion of our financial instruments, fair value estimates are based on judgements regarding future expected loss experience, current economic conditions, current interest rates and prepayment trends, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in any of these assumptions used in calculating fair value also would affect significantly the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis:

Investment Securities Available for Sale

Securities available for sale are recorded at fair value on a recurring basis and are based upon quoted prices if available. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, or by dealers or brokers in active over-the counter markets. Level 2 securities include mortgage backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Derivative Instruments

Derivative instruments include interest rate lock commitments and forward sale commitments. These instruments are valued based on the change in the value of the underlying loan between the commitment date and the end of the period. We classify these instruments as Level 3. The fair value of these commitments was not significant at September 30, 2016 or December 31, 2015.

We had no embedded derivative instruments requiring separate accounting treatment. We had freestanding derivative instruments consisting of fixed rate conforming loan commitments as interest rate locks and commitments to sell fixed rate conforming loans on a best efforts basis. We do not currently engage in hedging activities. Based on short term fair value of the mortgage loans held for sale (derivative contract), our derivative instruments were immaterial to our consolidated financial statements as of September 30, 2016 and December 31, 2015.

Assets and liabilities measured at fair value on a recurring basis at September 30, 2016 and December 31, 2015 are as follows:

		September 30, 2016
		Quoted Market Price in active markets		Significant Other Observable Inputs		Significant Unobservable Inputs
		(Level 1)		(Level 2)		(Level 3)		Total
U.S. Treasury Notes	$	24,330,157	$	—	$	—	$	24,330,157
Government-Sponsored Enterprises		—		47,375,962		—		47,375,962
Municipal Securities		—		31,982,158		11,394,331		43,376,489
Total	$	24,330,157	$	79,358,120	$	11,394,331	$	115,082,608

		December 31, 2015
		Quoted Market Price in active markets		Significant Other Observable Inputs		Significant Unobservable Inputs
		(Level 1)		(Level 2)		(Level 3)		Total
U.S. Treasury Notes	$	34,633,673	$	—	$	—	$	34,633,673
Government-Sponsored Enterprises		—		51,284,332		—		51,284,332
Municipal Securities		—		28,861,902		5,217,678		34,079,580
Total	$	34,633,673	$	80,146,234	$	5,217,678	$	119,997,585

There were no liabilities recorded at fair value on a recurring basis as of September 30, 2016 or December 31, 2015.

The following table reconciles the changes in assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2016 and September 30, 2015, respectively:

	Three Months Ended
	September 30,
	2016		2015
Beginning Balance	$	7,704,814	$	3,289,314
Total gains or (losses)
(realized/unrealized)
included in earnings
Included in other comprehensive income		27,965		(19,967	)
Purchases, issuances and settlements		3,717,482		1,930,000
Transfers in and/or out of level 3		—		—
Ending balance	$	11,394,331	$	5,199,347

	Nine Months Ended
	September 30,
	2016		2015
Beginning Balance	$	5,217,678	$	1,377,089
Total gains or (losses)
(realized/unrealized)
included in earnings
Included in other comprehensive income		5,171		(52,742	)
Purchases, issuances and settlements		6,171,482		3,875,000
Transfers in and/or out of level 3		—		—
Ending balance	$	11,394,331	$	5,199,347

There were no transfers between fair value levels during the three or nine months ended September 30, 2016 or September 30, 2015.

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis:

Other Real Estate Owned (OREO)

Loans, secured by real estate, are adjusted to the lower of the recorded investment in the loan or the fair value of the real estate upon transfer to OREO. Subsequently, OREO is carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or our estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraisal, we record the asset as nonrecurring Level 2. When an appraised value is not available or we determine the fair value of the collateral is further impaired below the appraised value and there is no observable market price, we record the asset as nonrecurring Level 3.

Impaired Loans

Impaired loans are carried at the lower of recorded investment or fair value. The fair value of the collateral less estimated costs to sell is the most frequently used method. Typically, we review the most recent appraisal and if it is over 12 to 18 months old we may request a new third party appraisal. Depending on the particular circumstances surrounding the loan, including the location of the collateral, the date of the most recent appraisal and the value of the collateral relative to the recorded investment in the loan, we may order an independent appraisal immediately or, in some instances, may elect to perform an internal analysis. Specifically as an example, in situations where the collateral on a non-performing commercial real estate loan is out of our primary market area, we would typically order an independent appraisal immediately, at the earlier of the date the loan becomes non-performing or immediately following the determination that the loan is impaired. However, as a second example, on a non-performing commercial real estate loan where we are familiar with the property and surrounding areas and where the original appraisal value far exceeds the recorded investment in the loan, we may perform an internal analysis whereby the previous appraisal value would be reviewed considering recent current conditions, and known recent sales or listings of similar properties in the area, and any other relevant economic trends. This analysis may result in the call for a new appraisal. These valuations are reviewed and updated on a quarterly basis.

In accordance with Accounting Standards Codification (“ASC”) 820 “Fair Value Measurement”, impaired loans, where an allowance is established based on the fair value of collateral, require classification in the fair value hierarchy. At September 30, 2016 and December 31, 2015, substantially all of the impaired loans were evaluated based on the fair value of the collateral. These impaired loans are classified as Level 3. Impaired loans measured using discounted future cash flows are not deemed to be measured at fair value.

Loans Held for Sale

Loans held for sale include mortgage loans and are carried at the lower of cost or market value. The fair values of mortgage loans held for sale are based on current market rates from investors within the secondary market for loans with similar characteristics. Carrying value approximates fair value. These loans are classified as Level 2.

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

The following table presents information about certain assets and liabilities measured at fair value on a nonrecurring basis at September 30, 2016, and December 31, 2015:

		September 30, 2016
		Quoted Market Price in Active Markets		Significant Other Observable Inputs		Significant Unobservable Inputs
		(Level 1)		(Level 2)		(Level 3)		Total
Impaired loans	$	—	$	—	$	4,258,608	$	4,258,608
Other real estate owned		—		—		521,943		521,943
Loans held for sale		—		4,962,967		—		4,962,967
Total	$	—	$	4,962,967	$	4,780,551	$	9,743,518

		December 31, 2015
		Quoted Market Price in Active Markets		Significant Other Observable Inputs		Significant Unobservable Inputs
		(Level 1)		(Level 2)		(Level 3)		Total
Impaired loans	$	—	$	—	$	4,201,489	$	4,201,489
Other real estate owned		—		—		620,394		620,394
Loans held for sale		—		5,820,239		—		5,820,239
Total	$	—	$	5,820,239	$	4,821,883	$	10,642,122

There were no liabilities measured at fair value on a nonrecurring basis as of September 30, 2016 or December 31, 2015.

The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at September 30, 2016:

		Inputs
	Valuation Technique	Unobservable Input	General Range of Inputs
Impaired Loans	Discounted Appraisals	Collateral Discounts	0 – 35%
Other Real Estate Owned	Appraisal Value/ Comparison Sales/Other Estimates	Appraisals and/or Sales of Comparable Properties	Appraisals Discounted 10% to 20% for Sales Commissions and Other Holding Costs

Accounting standards require disclosure of fair value information for all of our assets and liabilities that are considered financial instruments, whether or not recognized on the balance sheet, for which it is practicable to estimate fair value. Fair value estimates are made as of a specific point in time based on the characteristics of the financial instruments and the relevant market information. When available, quoted market prices are used. In other cases, fair values are based on estimates using present value or other valuation techniques. These techniques involve uncertainties and are significantly affected by the assumptions used and the judgments made regarding risk characteristics of various financial instruments, discount rates, prepayments, and estimates of future cash flows, future expected loss experience and other factors. Changes in assumptions could significantly affect these estimates. Derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may or may not be realized in an immediate sale of the instrument.

Under the accounting standard, fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of the assets and liabilities that are not financial instruments. Accordingly, the aggregate fair value amounts of existing financial instruments do not represent the underlying value of those instruments on our books.

The following describes the methods and assumptions we use in estimating the fair values of financial instruments:

a. Cash and due from banks, interest-bearing deposits in other banks

The carrying value approximates fair value. All mature within 90 days and do not present unanticipated credit concerns.

b. Investment securities available for sale

The fair value of investment securities is derived from quoted market prices.

c. Loans

The carrying values of variable rate consumer and commercial loans and consumer and commercial loans with remaining maturities of three months or less, approximate fair value. The fair values of fixed rate consumer and commercial loans with maturities greater than three months are determined using a discounted cash flow analysis and assume the rate being offered on these types of loans at September 30, 2016 and December 31, 2015, approximate market.

The carrying value of mortgage loans held for sale approximates fair value. For lines of credit, the carrying value approximates fair value.

d. Deposits

The estimated fair value of deposits with no stated maturity is equal to the carrying amount. The fair value of time deposits is estimated by discounting contractual cash flows, using interest rates currently being offered on the deposit products. The fair value estimates for deposits do not include the benefit that results from the low cost funding provided by the deposit liabilities as compared to the cost of alternative forms of funding (deposit base intangibles).

e. Short-term borrowings

The carrying amount approximates fair value due to the short-term nature of these instruments.

f. Accrued interest receivable and payable

Since these financial instruments will typically be received or paid within three months, the carrying amounts of such instruments are deemed to be a reasonable estimate of fair value.

g. Loan commitments

Estimates of the fair value of these off-balance sheet items are not made because of the short-term nature of these arrangements and the credit standing of the counterparties.

The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of our financial instruments as of September 30, 2016 and December 31, 2015. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization.

	September 30, 2016
		Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	7,187,028	$	7,187,028	$	7,187,028	$		$
Interest-bearing deposits in other banks		14,576,120		14,576,120		14,576,120
Investments available for sale		115,082,608		115,082,608		24,330,157		79,358,120		11,394,331
Mortgage loans to be sold		4,962,967		4,962,967				4,962,967
Loans		266,383,656		266,185,324						266,185,324
Accrued interest receivable		1,018,121		1,018,121				1,018,121
Financial Liabilities:
Demand deposits		321,889,866		321,889,866				321,889,866
Time deposits		43,516,688		43,525,203				43,525,203
Accrued interest payable		48,158		48,158				48,158

	December 31, 2015
		Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	5,295,924	$	5,295,924	$	5,295,924	$		$
Interest-bearing deposits in other banks		23,898,862		23,898,862		23,898,862
Investments available for sale		119,997,585		119,997,585		34,633,673		80,146,234		5,217,678
Mortgage loans to be sold		5,820,239						5,820,239
Loans		242,622,705		242,581,154						242,581,154
Accrued interest receivable		1,284,063		1,284,063				1,284,063
Financial Liabilities:
Demand deposits		303,950,800		303,950,800				303,950,800
Time deposits		54,767,812		54,780,915				54,780,915
Accrued interest payable		73,421		73,421				73,421