Fair Value of Assets and Liabilities

6 Months Ended

Jun. 30, 2012

Fair Value of Assets and Liabilities [Abstract]

Fair Value of Assets And Liabilities

NOTE 9. FAIR VALUE OF ASSETS AND LIABILITIES

Determination of Fair Value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic (FASB ASC 820), the fair value of a financial instrument 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 Company’s various financial instruments. 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 recent 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.

Fair Value Hierarchy

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 - Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traced in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 - Valuation is based on inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in 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 asset or liability.

Level 3 - Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 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 determination of fair value requires significant management judgment or estimation.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

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

Cash, Due From Banks, Interest-Bearing Deposits at Other Financial Institutions, and Federal Funds Sold: The carrying amounts of cash, due from banks, interest-bearing deposits at other financial institutions, and federal funds sold approximates fair value.

Securities: Where quoted prices are available in an active market, we classify the securities within level 1 of the valuation hierarchy. Level 1 securities include highly liquid government bonds and exchange-traded equities.

If quoted market prices are not available, we estimate fair values using pricing models and discounted cash flows that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, and credit spreads. Examples of such instruments, which would generally be classified within level 2 of the valuation hierarchy, include GSE obligations, corporate bonds, and other securities. Mortgage-backed securities are included in level 2 if observable inputs are available. In certain cases where there is limited activity or less transparency around inputs to the valuation, we classify those securities in level 3.

Loans: The carrying amount of variable-rate loans that reprice frequently and have no significant change in credit risk approximates fair value. Fair value of fixed rate loans is estimated using discounted contractual cash flow analyses, using market interest rates for comparable loans. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposits: The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date. The carrying amounts of variable-rate certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation using market interest rates currently being offered for certificates of similar maturities.

Federal Home Loan Bank (“FHLB”) advances and other borrowings: Fair values of fixed rate FHLB advances and other borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. The carrying values of variable rate FHLB advances and other borrowings approximate fair value.

Trust Preferred Securities: The fair value of the Company’s variable rate trust preferred securities approximates the carrying value.

Accrued Interest: The carrying amounts of accrued interest approximate fair value.

Assets and Liabilities Measured at Fair Value:

Assets measured at fair value are summarized below:

	June 30, 2012
	Total		Level 1		Level 2		Level 3		Total Gains (Losses)
Assets
Recurring fair value measurements:
Debt securities available for sale:
U.S. Government sponsored enterprises (GSEs)	$	1,994,310	$	—	$	1,994,310	$	—
State, county and municipals		10,200,012		—		10,200,012		—
Mortgage-backed securities GSE residential		30,798,664		—		30,798,664		—
Trust preferred securities		365,438		—		—		365,438
Total debt securities available for sale		43,358,424		—		42,992,986		365,438
Equity securities		50,000		—		—		50,000
Investment securities available for sale	$	43,408,424	$	—	$	42,992,986	$	415,438
Nonrecurring fair value measurements:
Impaired loans	$	23,395,570	$	—	$	—	$	23,395,570	$	(245,761	)
Foreclosed real estate		—		—		—		—		—
Total nonrecurring fair value measurements	$	23,395,570	$	—	$	—	$	23,395,570	$	(245,761	)

	December 31, 2011
	Total		Level 1		Level 2		Level 3		Total Gains (Losses)
Assets
Recurring fair value measurements:
Debt securities available for sale:
State, county and municipals	$	15,964,231	$	—	$	15,964,231	$	—
Mortgage-backed securities GSE residential		25,924,471		—		25,924,471		—
Trust preferred securities		627,875		—		—		627,875
Total debt securities available for sale		42,516,577		—		41,888,702		627,875
Equity securities		50,000		—		—		50,000
Investment securities available for sale	$	42,566,577	$	—	$	41,888,702	$	677,875
Nonrecurring fair value measurements:
Impaired loans	$	21,155,090	$	—	$	—	$	21,155,090	$	(2,844,797	)
Foreclosed real estate		998,820		—		—		998,820		(166,680	)
Total nonrecurring fair value measurements	$	22,153,910	$	—	$	—	$	22,153,910	$	(3,011,477	)

In relation to the securities classified as available-for-sale which are reported at fair value utilizing Level 2 inputs, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. The investments in the Company’s portfolio are generally not quoted on an exchange but are actively traded in the secondary institutional markets.

The available-for-sale securities which are reported at fair value using Level 3 inputs are evaluated on a regular basis by management using unobservable inputs developed through consideration of the financial condition of the issuer.

Presented below are the changes in the individual securities, balances or fair values of those available-for-sale securities reported using Level 3 inputs during the six months ended June 30, 2012 and for the year ended December 31, 2011.

	June 30, 2012								December 31, 2011
	Debt Securities Available for Sale			Equity Securities		Total			Debt Securities Available for Sale		Equity Securities		Total
Opening balance	$	627,875		$	50,000	$	677,875		$	627,875	$	50,000	$	677,875
Total gains or losses for the period
Loss on OTTI Impairment included in earnings		(262,437	)		—		(262,437	)		—		—		—
Included in other comprehensive income		—			—		—			—		—		—
Closing balance	$	365,438		$	50,000	$	415,438		$	627,875	$	50,000	$	677,875

Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value. Fair value is measured based on the value of the collateral securing these loans and is classified at a Level 3 in the fair value hierarchy. Collateral may include real estate, or business assets including equipment, inventory and accounts receivable. Write downs of impaired loans are estimated using the present value of the expected cash flows or the appraised value of the underlying collateral discounted as necessary due to the unobservable inputs of management’s estimates of changes in economic conditions, and estimates related to the cost of selling or holding the collateral. The unobservable inputs can range widely based on the market for the underlying collateral.

Foreclosed real estate is adjusted to fair value upon transfer of the loans to foreclosed real estate. Subsequently, foreclosed real estate 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 management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed real estate as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed real estate as nonrecurring Level 3. Valuation of foreclosed real estate presented as nonrecurring Level 3 is based upon unobservable inputs developed by management through consideration of changes in the real estate market and estimates of cost associated with selling or holding the property. Due to fluctuations in market conditions, these inputs can range widely.

The Company did not identify any liabilities that are required to be presented at fair value as of June 30, 2012 and as of December 31, 2011.

The carrying amount and fair values for other financial instruments that are not measured at fair value on a recurring basis at June 30, 2012, December 31, 2011, and June 30, 2011 are as follows:

	June 30, 2012
	Carrying		Fair Value Level
	Amount		Level 1		Level 2		Level 3		Total
Financial assets:
Interest-bearing deposits at other financial institutions	$	698,819	$	698,819	$	—	$	—	$	698,819
Federal funds sold		2,990,000		2,990,000		—		—		2,990,000
Restricted equity securities		714,500		—		714,500		—		714,500
Loans, net		213,473,537		—		—		215,415,077		215,415,077
Financial liabilities:
Deposits		276,648,251		—		274,242,087		—		274,242,087
Note payable		275,250		—		—		275,250		275,250
Federal Home Loan Bank advances		5,500,000		—		5,500,355		—		5,500,355
Company guaranteed trust preferred securities		3,403,000		—		—		3,403,000		3,403,000

	December 31, 2011				June 30, 2011
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Interest-bearing deposits at other financial institutions	$	635,511	$	635,511	$	577,192	$	577,192
Federal funds sold		595,000		595,000		4,130,000		4,130,000
Restricted equity securities		792,900		792,900		910,300		910,300
Loans, net		215,018,097		217,575,824		225,166,605		227,831,633
Financial liabilities:
Deposits		276,898,782		276,218,543		281,808,258		279,833,832
Note payable		275,250		275,250		275,250		275,250
Federal Home Loan Bank advances		5,500,000		5,499,756		5,500,000		5,520,763
Company guaranteed trust preferred securities		3,403,000		3,403,000		3,403,000		3,403,000