Fair Value Measurements and Disclosures

3 Months Ended

Mar. 31, 2014

Fair Value Disclosures [Abstract]

Fair Value Measurements and Disclosures

NOTE 2

Fair Value Measurements

Effective January 1, 2008, the Corporation adopted ASC 820, which provides a framework for measuring fair value under GAAP.  ASC 820 applies to all financial statement elements that are being measured and reported on a fair value basis.

The Corporation utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.  Securities available for sale are recorded at fair value on a recurring basis.  From time to time, the Corporation may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans and foreclosed real estate. Additionally, the Corporation is required to disclose, but not record, the fair value of other financial instruments.

Fair Value Hierarchy:

Under ASC 820, the Corporation groups assets and liabilities 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.  These levels are:

Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

 Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.  Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Following is a description of valuation methodologies used for assets and liabilities which are either recorded or disclosed at fair value.

Cash and Cash Equivalents:

For disclosure purposes for cash, due from banks, federal funds sold and certificates of deposit in other banks, the carrying amount is a reasonable estimate of fair value.

Investment 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.  Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange and U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter market funds.  Level 2 securities include mortgage-backed securities issued by government sponsored enterprises and state, county and municipal bonds.  Securities classified as Level 3 include asset-backed securities in less liquid markets.

Investment Securities Held to Maturity:

Investment securities held to maturity are not recorded at fair value on a recurring basis. For disclosure purposes, fair value measurement is based upon quoted prices, if available.

Federal Home Loan Bank Stock:

For disclosure purposes, the carrying value of other investments approximates fair value.

Loans:

The Corporation does not record loans at fair value on a recurring basis.  However, from time to time, a loan is considered impaired and a specific allocation is established within the allowance for loan losses.  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.  Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 310,  Accounting by Creditors for Impairment of a Loan, (ASC 310).  The fair value of impaired loans is estimated using one of three methods, including collateral value, market value of similar debt, and discounted cash flows.  Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.  In accordance with ASC 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy.  When the fair value of the collateral is based on an observable market price or a current appraised value, the Corporation records the impaired loan 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 Corporation records the impaired loan as nonrecurring Level 3.

For disclosure purposes, the fair value of fixed rate loans which are not considered impaired, 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. For unimpaired variable rate loans, the carrying amount is a reasonable estimate of fair value for disclosure purposes.

Foreclosed Assets:

Other real estate properties are adjusted to fair value upon transfer of the loans to other real estate. Subsequently, other real estate assets are 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 Corporation records the other 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 Corporation records the other real estate asset as nonrecurring Level 3.

Deposits:

For disclosure purposes, the fair value of demand deposits, savings accounts, NOW accounts and money market deposits is the amount payable on demand at the reporting date, while the fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using current rates at which comparable certificates would be issued.

Federal Funds Purchased:

For disclosure purposes, the carrying amount for Federal funds purchased is a reasonable estimate of fair value due to the short-term nature of these financial instruments.

FHLB Advances:

For disclosure purposes, the fair value of the FHLB fixed rate borrowing is estimated using discounted cash flows, based on the current incremental borrowing rates for similar types of borrowing arrangements.

Commitments to Extend Credit and Standby Letters of Credit:

Because commitments to extend credit and standby letters of credit are made using variable rates and have short maturities, the carrying value and the fair value are immaterial for disclosure.

Assets Recorded at Fair Value on a Recurring Basis:

The table below presents the recorded amount of assets measured at fair value on a recurring basis as of March 31, 2014 and December 31, 2013.

March 31, 2014	Level 1		Level 2		Level 3		Total
Investment securities available for sale:
U.S. Government Agency securities	$	0	$	28,971,937	$	0	$	28,971,937
State and municipal securities		0		851,215		0		851,215
Residential mortgage-backed securities		0		8,339,827		0		8,339,827
Corporate notes		0		2,491,300		0		2,491,300
Total	$	0	$	40,654,279	$	0	$	40,654,279

December 31, 2013		Level 1		Level 2		Level 3		Total
Investment securities available for sale:
U.S. Government Agency securities	$	0	$	23,580,234	$	0	$	23,580,234
State and municipal securities		0		1,440,379		0		1,440,379
Residential mortgage-backed securities		0		8,795,491		0		8,795,491
Corporate notes		0		2,469,515		0		2,469,515
Equity securities		175,149		0		0		175,149
Total	$	175,149	$	36,285,619	$	0	$	36,460,768

Assets Recorded at Fair Value on a Nonrecurring Basis:

The Corporation may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP.  These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period.  Assets measured at fair value on a nonrecurring basis are included in the table below as of March 31, 2014 and December 31, 2013.

March 31, 2014	Level 1		Level 2		Level 3		Total
Foreclosed assets	$	0	$	0	$	608,741	$	608,741
Impaired loans		0		0		2,546,617		2,546,617
Total assets at fair value	$	0	$	0	$	3,155,358	$	3,155,358

December 31, 2013	Level 1		Level 2		Level 3		Total
Foreclosed assets	$	0	$	0	$	405,508	$	405,508
Impaired loans		0		0		2,997,359		2,997,359
Total assets at fair value	$	0	$	0	$	3,402,867	$	3,402,867

Foreclosed properties that are included above as measured at fair value on a nonrecurring basis are those properties that resulted from a loan that had been foreclosed and charged down or have been written down subsequent to foreclosure. Foreclosed properties are generally recorded at the appraised value less estimated selling costs in the range of 15 – 20%. Loans that are reported above as being measured at fair value on a nonrecurring basis are generally impaired loans that have been either partially charged off or have specific reserves assigned to them. Nonaccrual impaired loans that are collateral dependent are generally written down to a range of 80 – 85% of appraised value which considers the estimated costs to sell. Specific reserves are established for impaired loans based on appraised value of collateral or discounted cash flows.

The carrying amount and estimated fair values of the Corporation’s assets and liabilities which are required to be either disclosed or recorded at fair value at March 31, 2014, and December 31, 2013, are as follows:

	Estimated Fair Value
	Carrying
31-Mar-14	Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	48,277,611	$	48,277,611	$	0	$	0	$	48,277,611
Certificates of deposit in other banks		3,430,000		3,430,000		0		0		3,430,000
Investment securities available for sale		40,654,279		0		40,654,279		0		40,654,279
Investment securities held to maturity		58,974,050		0		59,818,406		0		59,818,406
Federal Home Loan Bank stock		1,641,000		0		1,641,000		0		1,641,000
Loans, net		219,754,804		0		218,130,671		2,546,617		220,677,288
Liabilities:
Deposits		330,865,357		0		331,041,552		0		331,041,552
FHLB advances		29,000,000		0		29,468,520		0		29,468,520

	Estimated Fair Value
	Carrying
31-Dec-13	Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	35,370,160	$	35,370,160	$	0	$	0	$	35,370,160
Certificates of deposit in other banks		3,430,000		3,430,000		0		0		3,430,000
Investment securities available for sale		36,460,768		175,000		36,285,768		0		36,460,768
Investment securities held to maturity		59,624,039		0		60,019,146		0		60,019,146
Federal Home Loan Bank stock		1,721,000		0		1,721,000		0		1,721,000
Loans, net		215,610,347		0		213,507,879		2,997,359		216,505,238
Liabilities:
Deposits		310,434,539		0		310,657,316		0		310,657,316
FHLB advances		29,000,000		0		29,571,780		0		29,571,780

Limitations:

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statement element. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates included herein are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the fair value of assets and liabilities that are not required to be recorded or disclosed at fair value like premises and equipment. 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 the estimates.