Fair Value Measurement

3 Months Ended

Mar. 31, 2012

Fair Value Measurement

Note 11 – Fair Value Measurement

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. The tables below present information about the Company’s assets measured at fair value on a recurring and non-recurring basis as of March 31, 2012 and December 31, 2011, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. No liabilities were measured at fair value at March 31, 2012 and December 31, 2011.

The fair value hierarchy is as follows:

· Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

· Level 2 Inputs - Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

· Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

The following section describes the valuation methodologies used for assets measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Financial assets measured at fair value on a recurring basis include the following:

Securities Available for Sale. The securities classified as available for sale, are reported at fair value utilizing Level 2 inputs. For these securities, 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 following table presents the balances of securities available for sale as of March 31, 2012 and December 31, 2011.

			Quoted Prices		Significant
			in Active		Other
			Markets for		Observable		Significant
			Identical Assets		Inputs		Unobservable Inputs
Description	Balance		(Level 1)		(Level 2)		(Level 3)
Securities Available for Sale
at March 31, 2012
Municipal bonds	$	790,188	$	-	$	790,188	$	-
Mortgage-backed securities		1,902,845		-		1,902,845		-
Total	$	2,693,033	$	-	$	2,693,033	$	-
at December 31, 2011
Municipal bonds	$	796,098	$	-	$	796,098	$	-
Mortgage-backed securities		2,176,322		-		2,176,322		-
Total	$	2,972,420	$	-	$	2,972,420	$	-

Certain financial assets are measured at fair value on a nonrecurring basis in accordance with U.S. GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

Impaired loans  

Collateral-dependent impaired loans are carried at the fair value of the collateral less estimated costs to sell. The fair value of collateral is determined based on appraisals. In some cases, adjustments were made to the appraised values for various factors including age of the appraisal, age of comparables included in the appraisal, and known changes in the market and in the collateral. When significant adjustments were based on unobservable inputs, the resulting fair value measurement has been categorized as a Level 3 measurement. Otherwise, collateral-dependent impaired loans are categorized under Level 2.

Impaired loans that are not collateral dependent are carried at the present value of expected future cash flows discounted at the loan’s effective interest rate. Troubled debt restructurings are also carried at the present value of expected future cash flows. However, expected cash flows for troubled debt restructurings are discounted using the loan’s original effective interest rate rather than the modified interest rate. Since fair value of these loans is based on management’s own projection of future cash flows, the fair value measurements are categorized as Level 3 measurements.

The following presents impaired loans measured at fair value on a non-recurring basis as of March 31, 2012 and December 31, 2011.

			Quoted Prices		Significant
			in Active		Other
			Markets for		Observable		Significant
			Identical Assets		Inputs		Unobservable Inputs
Description	Balance		(Level 1)		(Level 2)		(Level 3)
Impaired loans net of ALLL
at March 31, 2012	$	2,392,901	$	-	$	537,982	$	1,854,919
at December 31, 2011	$	3,496,396	$	-	$	1,142,547	$	2,353,849

For Level 3 impaired loans, the fair value of collateral is based on appraisals that are greater than six months old. Management has not made adjustments for the age of the appraisals based on their estimate that the values of the properties have not changed materially since the appraisal date. These estimates are based on qualitative judgments made by management on a case-by-case basis.

Other Real Estate Owned  

Real estate acquired through foreclosure or other proceedings (other real estate owned) is initially recorded at fair value at the date of foreclosure less estimated costs of disposal, which establishes a new cost. After foreclosure, valuations are periodically performed, and foreclosed assets held for sale are carried at the lower of cost or fair value, less estimated costs of disposal. The fair values of real properties initially are determined based on appraisals. In some cases, adjustments were made to the appraised values for various factors including age of the appraisal, age of comparables included in the appraisal, and known changes in the market or in the collateral. Subsequent valuations of the real properties are based on management estimates or on updated appraisals. Other real estate owned is categorized under Level 3 when significant adjustments are made by management to appraised values based on unobservable inputs. Otherwise, other real estate owned is categorized under Level 2 if their values are based solely on appraisals. 

The following table summarizes the Company’s OREO that was measured at fair value on a nonrecurring basis as of March 31, 2012 and December 31, 2011:

			Quoted Prices		Significant
			in Active		Other
			Markets for		Observable		Significant
			Identical Assets		Inputs		Unobservable Inputs
Description	Balance		(Level 1)		(Level 2)		(Level 3)
Other real estate owned net
of valuation allowance
at March 31, 2012	$	-	$	-	$	-	$	-
at December 31, 2011	$	439,317	$	-	$	439,317	$	-

Disclosure of fair value information about financial instruments is required, whether or not the financial instruments are recognized in the balance sheet at fair value or historical cost. 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. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The following methods and assumptions were used to estimate the fair value of financial instruments for which it is practicable to estimate that value. For cash and cash equivalents, Federal Home Loan Bank stock, loans held for sale, variable-rate loans, accrued interest receivable and payable, demand deposits and savings, and short-term borrowings, the carrying amount is estimated to be fair value. For securities, fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are based in quoted market prices of comparable instruments. The fair values for fixed-rate loans are estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms. The fair value of life insurance is based on the cash surrender value, as determined by the insurer. Fair values for deposit liabilities with a stated maturity date (time deposits) and for certificates of deposit in other banks are estimated using a discounted cash flow calculation that applies interest rates currently being offered on these accounts to a schedule of aggregated expected monthly maturities on time deposits. The fair value of non-interest bearing demand deposits is the amount payable on demand at the reporting date. The fair value of long-term debt is determined utilizing the current market for like-kind instruments of a similar maturity and structure. The fair value of financial instruments with off-balance sheet risk is not considered to be material, so they are not included in the tables below.

The carrying values and estimated fair values of financial instruments at March 31, 2012 and December 31, 2011 are as follows:

	Fair Value Measurements at March 31, 2012 using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs		Fair
		Value		(Level 1)		(Level 2)		(Level 3)		Value
Financial assets:
Cash and cash equivalents	$	22,421,641	$	22,421,641	$	-	$	-	$	22,421,641
Interest-bearing deposits with other banks		13,091,252		-		-		13,103,000		13,103,000
Investment securities available for sale		2,693,033		-		2,693,033		-		2,693,033
Investment securities held to maturity		9,000,590		-		9,205,064		-		9,205,064
Stock investments		667,700		-		-		667,700		667,700
Loans, net		53,955,980		-		537,982		53,696,709		54,234,691
Accrued interest receivable		265,631		-		265,631		-		265,631
Bank owned life insurance		1,836,283		-		1,836,283		-		1,836,283
Trups common securities		93,000		-		-		93,000		93,000
Financial liabilities:
Deposits
Non-interest bearing demand deposits	$	49,288,661	$	-	$	49,288,661	$	-	$	49,288,661
Interest-bearing deposits		49,725,704		-		-		49,732,088		49,732,088
Accrued interest payable		161,160		-		161,160		-		161,160
Subordinated Debentures		3,093,000		-		-		3,093,000		3,093,000

	Fair Value Measurements at December 31, 2011 using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs		Fair
		Value		(Level 1)		(Level 2)		(Level 3)		Value
Financial assets:
Cash and cash equivalents	$	17,524,054	$	17,524,054	$	-	$	-	$	17,524,054
Interest-bearing deposits with other banks		13,339,252		-		-		13,345,914		13,345,914
Investment securities available for sale		2,972,420		-		2,972,420		-		2,972,420
Investment securities held to maturity		9,652,630		-		9,860,534		-		9,860,534
Stock investments		667,700		-		-		667,700		667,700
Loans, net		55,235,841		-		1,142,547		54,130,648		55,273,195
Accrued interest receivable		275,976		-		275,976		-		275,976
Bank owned life insurance		1,819,191		-		1,819,191		-		1,819,191
Trups common securities		93,000		-		-		93,000		93,000
Financial liabilities:		98,103,558
Deposits
Non-interest bearing demand deposits	$	47,188,644	$	-	$	47,188,644	$	-	$	47,188,644
Interest-bearing deposits		50,914,914		-		-		50,926,890		50,926,890
Accrued interest payable		139,646		-		139,646		-		139,646
Subordinated Debentures		3,093,000		-		-		3,093,000		3,093,000