DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES

9 Months Ended

Sep. 30, 2013

DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES

9.	DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES

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 measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:

Level 1

Quoted prices in active markets for identical assets or liabilities

Level 2

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 be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Recurring Measurements

The following table presents the fair value measurements of assets recognized in the accompanying condensed consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2013 and December 31, 2012:


			September 30, 2013
			Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
U.S. Government and
agencies	$	11,516,397	$	-	$	11,516,397	$	-
Mortgage-backed securities
(Government sponsored
enterprises - residential)		51,749,118		-		51,749,118		-
Municipal bonds		50,165,223		-		50,165,223		-

			December 31, 2012
			Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
U.S. Government and
agencies	$	10,328,880	$	-	$	10,328,880	$	-
Mortgage-backed securities
(Government sponsored
enterprises - residential)		51,956,481		-		51,956,481		-
Municipal bonds		53,102,462		-		53,102,462		-

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended September 30, 2013.

Available-for-Sale Securities – Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models. Such securities are classified in Level 2 of the valuation hierarchy. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

Nonrecurring Measurements

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2013 and December 31, 2012:


			September 30, 2013 Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans
(collateral dependent)	$	108,819	$	-	$	-	$	108,819
Real estate owned		226,793		-		-		226,793


			December 31, 2012 Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans
(collateral dependent)	$	1,032,580	$	-	$	-	$	1,032,580
Real estate owned		137,193		-		-		137,193

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Impaired Loans (Collateral Dependent) - The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.

The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary. Appraisals are reviewed for accuracy and consistency. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral.

Real Estate Owned – Foreclosed assets are carried at the lower of fair value at acquisition date or current estimated fair value, less estimated cost to sell when the real estate is acquired. Estimated fair value of foreclosed assets is based on appraisals or evaluations. Foreclosed assets are classified within Level 3 of the fair value hierarchy.

Appraisals of foreclosed assets are obtained when the real estate is acquired and subsequently as deemed necessary. Appraisals are reviewed for accuracy and consistency. Appraisers are selected from the list of approved appraisers maintained by management.

Unobservable (Level 3) Inputs

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements (dollars in thousands).

	Fair Value at 9/30/13		Valuation Technique	Unobservable Inputs	Range (Weighted Average)

Real Estate Owned	$	226,793	Market comparable properties	Comparability adjustments (%)	Not available

Collateral-dependent impaired loans		108,819	Market comparable properties	Marketability discount	20% – 30% (25%)

	Fair Value at 12/31/12		Valuation Technique	Unobservable Inputs	Range (Weighted Average)

Real Estate Owned	$	137,193	Market comparable properties	Comparability adjustments (%)	(26%)

Collateral-dependent impaired loans		1,032,580	Market comparable properties	Marketability discount	20% – 30% (25%)

Fair Value of Financial Instruments

The following table presents estimated fair values of the Company’s other financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2013 and December 31, 2012:


	September 30, 2013
			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Amount		(Level 1)		(Level 2)		(Level 3)
Financial Assets
Cash and cash equivalents	$	5,551,947	$	5,551,947	$	-	$	-
Interest earning time deposits in banks		2,972,000		-		2,972,000		-
Other investments		84,616		-		84,616		-
Loans held for sale		1,287,916		-		1,287,916		-
Loans, net of allowance for loan losses		174,332,494		-		-		172,583,139
Federal Home Loan Bank stock		1,113,800		-		1,113,800		-
Interest receivable		2,890,297		-		2,890,297		-
Financial Liabilities
Deposits		247,654,888		-		135,231,019		115,501,799
Other borrowings		24,945,748		-		24,945,748		-
Advances from borrowers for taxes
and insurance		427,713		-		427,713		-
Interest payable		221,594		-		221,594		-
Unrecognized financial instruments (net
of contract amount)
Commitments to originate loans		-		-		-		-
Letters of credit		-		-		-		-
Lines of credit		-		-		-		-

	December 31, 2012
			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Amount		(Level 1)		(Level 2)		(Level 3)
Financial Assets
Cash and cash equivalents	$	7,293,711	$	7,293,711	$	-	$	-
Interest earning time deposits in banks		2,972,000		-		2,972,000		-
Other investments		96,041		-		96,041		-
Loans held for sale		711,986		-		711,986		-
Loans, net of allowance for loan losses		173,753,059		-		-		172,609,490
Federal Home Loan Bank stock		1,113,800		-		1,113,800		-
Interest receivable		2,053,472		-		2,053,472		-
Financial Liabilities
Deposits		258,520,729		-		135,656,067		125,864,749
Short-term borrowings		12,740,610		-		12,740,610		-
Advances from borrowers for taxes
and insurance		832,345		-		832,345		-
Interest payable		276,757		-		276,757		-
Unrecognized financial instruments (net
of contract amount)
Commitments to originate loans		-		-		-		-
Letters of credit		-		-		-		-
Lines of credit		-		-		-		-

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying condensed consolidated balance sheets at amounts other than fair value.

Cash and Cash Equivalents, Interest-Earning Time Deposits in Banks, Interest Receivable, Federal Home Loan Bank Stock, and Other Investments - The carrying amount approximates fair value.

Loans Held for Sale - For homogeneous categories of loans, such as mortgage loans held for sale, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics.

Loans - The fair value of loans is estimated by discounting the future cash flows using the market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations.

Deposits - Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

Other Borrowings, Interest Payable, and Advances from Borrowers for Taxes and Insurance - The carrying amount approximates fair value.

Commitments to Originate Loans, Letters of Credit, and Lines of Credit - The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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