NOTE 3 - FAIR VALUE MEASUREMENTS

The current accounting literature requires the disclosure of fair value information for financial instruments, whether or not they are recognized in the consolidated balance sheets, when it is practical to estimate the fair value. The guidance defines a financial instrument as cash, evidence of an ownership interest in an entity or contractual obligations which require the exchange of cash or other financial instruments. Certain items are specifically excluded from the disclosure requirements, including the Company’s common stock, premises and equipment, accrued interest receivable and payable, and other assets and liabilities.

The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments. Because no market value exists for a significant portion of the 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.

The Company has used management’s best estimate of fair value based on the above assumptions. Thus, the fair values presented may not be the amounts, which could be realized, in an immediate sale or settlement of the instrument. In addition, any income taxes or other expenses, which would be incurred in an actual sale or settlement, are not taken into consideration in the fair values presented.

The following methods and assumptions were used to estimate the fair value of significant financial instruments:

Cash and Due from Banks - The carrying amount for cash and due from banks is a reasonable estimate of fair value.

Federal Funds Sold - Federal funds sold are for a term of one day, and the carrying amount approximates the fair value.

Securities Available-for-sale - Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are 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.

With respect to securities available-for-sale, Level 1 includes those securities traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. 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.

Nonmarketable Equity Securities - The carrying amount for nonmarketable equity securities approximates the fair value since no readily available market exists for these securities.

Mortgage Loans Held for Sale - The carrying value for mortgage loans held for sale is a reasonable estimate for fair value considering the short time these loans are carried on the books. Management determined that only minor fluctuations occurred in fixed rate mortgage loans; therefore the carrying amount approximates fair value.

Loans Receivable - For certain categories of loans, such as variable rate loans which are repriced frequently and have no significant change in credit risk, fair values are based on the carrying amounts. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans.

Deposits - The fair value of demand deposits, savings, and money market accounts is the amount payable on demand at the reporting date. The fair values of certificates of deposit are estimated using a discounted cash flow calculation that applies current interest rates to a schedule of aggregated expected maturities.

Securities Sold Under Agreements to Repurchase - These repurchase agreements have a fixed rate. Due to the minor change in interest rates, management estimated the fair value using a discounted cash flow calculation that applies the Company’s current borrowing rate for the securities sold under agreements to repurchase.

Advances from Federal Home Loan Bank - The fair values of fixed rate borrowings are estimated using a discounted cash flow calculation that applies the Company’s current borrowing rate from the Federal Home Loan Bank. The carrying amounts of variable rate borrowings are reasonable estimates of fair value because they can be repriced frequently.

Junior Subordinated Debentures - The fair values of fixed rate junior subordinated debentures are estimated using a discounted cash flow calculation that applies the Company’s current borrowing rate. The carrying amounts of variable rate borrowings are reasonable estimates of fair value because they can be repriced frequently.

Employee Stock Ownership Plan Borrowings - The carrying value of the ESOP borrowing is a reasonable estimate of fair value because they can be repriced frequently.

Off-Balance Sheet Financial Instruments - Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

The carrying values and estimated fair values of the Company’s financial instruments are as follows:

	March 31, 2013
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	3,595,330	$	3,595,330	$	3,595,330	$	—	$	—
Interest bearing balances	17,813,864		17,813,864		17,813,864		—		—
Securities available-for-sale	94,699,269		94,699,269		—		94,699,269		—
Nonmarketable equity securities	1,449,400		1,449,400		—		—		1,449,400
Mortgage loans held for sale	—		—		—		—		—
Loans receivable	339,840,759		338,882,000		—		53,802,515		285,079,485

Financial Liabilities:
Demand deposit, interest-bearing transaction, and savings accounts	$	182,499,132	$	182,499,132	$	—	$	182,499,132	$	—
Certificates of deposit and other time deposits	273,120,180		272,888,000		—		272,888,000		—
Securities sold under agreements to repurchase	10,000,000		11,408,000		—		11,408,000		—
Advances from Federal Home Loan Bank	17,000,000		17,477,000		—		17,477,000		—
Junior subordinated debentures	14,434,000		14,494,554		—		—		14,494,554
ESOP borrowings	1,175,000		1,175,000		—		1,175,000		—

	December 31, 2012
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	1,977,621	$	1,977,621	$	1,977,621	$	—	$	—
Interest bearing balances	43,411,347		43,411,347		43,411,347		—		—
Securities available-for-sale	82,929,671		82,929,671		—		82,929,671		—
Nonmarketable equity securities	2,383,750		2,383,750		—		—		2,383,750
Mortgage loans held for sale	385,000		385,000		—		385,000		—
Loans receivable	339,727,732		340,179,000		—		54,421,546		285,757,454

Financial Liabilities:
Demand deposit, interest-bearing transaction, and savings accounts	$	171,453,057	$	171,453,057	$	—	$	171,453,057	$	—
Certificates of deposit and other time deposits	279,440,972		279,672,000		—		279,672,000		—
Securities sold under agreements to repurchase	10,000,000		11,508,000		—		11,508,000		—
Advances from Federal Home Loan Bank	34,000,000		34,478,000		—		34,478,000		—
Junior subordinated debentures	14,434,000		14,586,827		—		—		14,586,827
ESOP borrowings	1,225,000		1,225,000		—		1,225,000		—

	March 31, 2013				December 31, 2012
	Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value
Off-Balance Sheet Financial Instruments:
Commitments to extend credit	$	16,081,970	$	—	$	15,191,625	$	—
Letters of credit	418,058		—		399,041		—

Assets and liabilities that are carried at fair value are classified in one of the following three categories based on a hierarchy for ranking the quality and reliability of the information used to determine fair value:

Level 1 —		Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasuries, and money market funds.

Level 2 —		Observable market based inputs or unobservable inputs that are corroborated by market data. Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, mortgage-backed securities, municipal bonds, corporate debt securities, and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain derivative contracts and impaired loans.

Level 3 —		Unobservable inputs that are not corroborated by market data. Observable 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 the determination of fair value requires significant management judgment or estimation. For example, this category generally includes certain private equity instruments, retained residual interests in securitizations, residential mortgage servicing rights, and highly-structured or long-term derivative contracts.

In determining appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are subject to fair value disclosures. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3. Following is a description of valuation methodologies used for assets received of fair value on a recurring and nonrecurring basis.

Investment Securities Available for Sale

Measurement is on a recurring basis upon quoted market prices, if available. If quoted market prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for prepayment assumptions, projected credit losses, and liquidity. Level 1 securities include those traded on an active exchange or by dealers or brokers in active over-the-counter markets. Level 2 securities include securities issued by government sponsored enterprises, municipal enterprises, and mortgage-backed securities issued by government sponsored enterprises. Generally these fair values are priced from established pricing models.

Mortgage Loans Held for Sale

Mortgage loans held for sale are carried at the lower of cost of market value. The fair values of mortgage loans held for sale are based on commitments on hand from investors within the secondary market for loans with similar characteristics. As such, the fair value adjustments for mortgage loans held for sale is non-recurring Level 2.

Loans

Loans that are considered impaired are recorded at fair value on a non-recurring basis. Once a loan is considered impaired, the fair value is measured using one of several methods, including collateral liquidation value, market value of similar debt and discounted cash flows. Those impaired loans not requiring a specific charge against allowance represent loans for which the fair value of the expected repayments or collateral meet or exceed the recorded investment in the loan. At March 31, 2013, substantially all of the total impaired loans were evaluated based on the fair value of the underlying collateral.

When the Company records the fair value based on a current appraisal, the fair value measurement is considered a Level 2 measurement. When a current appraisal is not available or there is estimated further impairment below the current appraised value the measurement is considered a Level 3 measurement.

Other Real Estate Owned (OREO)

Other real estate owned is adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, other real estate owned 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 Bank records the other real estate owned as nonrecurrng Level 2. When an appraisal 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 that other real estate owned as non-recurring Level 3.

Assets measured at fair value on a recurring basis are as follows as of March 31, 2013 and December 31, 2012:

	Quoted market price in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
March 31, 2013
Government sponsored enterprises	$	—	$	6,984,618	$	—
Mortgage-backed securities	—		83,363,776		—
SBA loan pools	—		4,350,875		—
Available-for-sale investment securities	—		94,699,269		—
Total	$	—	$	94,699,269	$	—

December 31, 2012
Government sponsored enterprises	$	—	$	21,929,021	$	—
Mortgage-backed securities	—		61,000,650		—
Available-for-sale investment securities	—		82,929,671		—
Total	$	—	$	82,929,671	$	—

Assets measured at fair value on a nonrecurring basis are as follows as of March 31, 2013 and December 31, 2012:

	Quoted market price in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
March 31, 2013
Impaired loans	$	—	$	53,802,515	$	—
Other real estate owned	—		22,474,363		—
Mortgage loans held for sale	—		—		—
Total	$	—	$	76,276,878	$	—

December 31, 2012
Impaired loans	$	—	$	54,421,546	$	—
Other real estate owned	—		22,646,747		—
Mortgage loans held for sale	—		385,000		—
Total	$	—	$	77,453,293	$	—

The Company has no assets or liabilities whose fair values are measured using level 3 inputs.