Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2011

Fair Value of Financial Instruments [Abstract]

Fair Value of Financial Instruments

10. Fair Value of Financial Instruments:

The Company reports certain assets and liabilities at their estimated fair value. These assets and liabilities are classified and disclosed in one of three categories based on the inputs used to develop the measurements. The categories, which establish a hierarchy for ranking the quality and reliability of the information used to determine fair value, are: Level 1 — Quoted market prices in active markets for identical assets or liabilities, Level 2 — Observable market based inputs or unobservable inputs that are corroborated by market data, or Level 3 — Unobservable inputs that are not corroborated by market data.

The Company is required to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized in the statement of condition, for which it is practical to estimate its fair value. Certain financial instruments and all nonfinancial instruments are excluded from these disclosure requirements. Significant assets and liabilities that are not considered financial instruments include deferred income taxes and bank premises and equipment. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. In preparing these disclosures, Management made highly sensitive estimates and assumptions in developing the methodology to be utilized in the computation of fair value. These estimates and assumptions were formulated based on judgments regarding economic conditions and risk characteristics of the financial instruments that were present at the time the computations were made. Events may occur that alter these conditions and may change the assumptions as well. A change in the assumptions might affect the fair value of the financial instruments disclosed in this footnote. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax consequences related to the realization of the unrealized gains and losses have not been computed or disclosed herein. These methods and assumptions are set forth below.

Cash and Due from Banks

The carrying amount shown as cash and due from banks approximates fair value.

Federal Funds Sold

The carrying amount shown as federal funds sold approximates fair value.

Available for Sale Securities

The fair value of available for sale securities is based on quoted market prices. The Company’s available for sale securities are reported at their estimated fair value, which is determined utilizing several sources. The primary source is Interactive Data Corporation, which utilizes pricing models that vary based on asset class and include available trade, bid and other market information and whose methodology includes broker quotes, proprietary models and vast descriptive databases. The other source for determining fair value is matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark securities. All of the Company’s available for sale securities are Level 2 assets.

Held to Maturity Securities

The fair value of held to maturity securities is based on quoted market prices.

Other Investments

The carrying amount shown as other investments approximates fair value.

Federal Home Loan Bank Stock

The carrying amount shown as Federal Home Loan Bank Stock approximates fair value.

Loans

The fair value of fixed rate 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 for the remaining maturities. The cash flows considered in computing the fair value of such loans are segmented into categories relating to the nature of the contract and collateral based on contractual principal maturities. Appropriate adjustments are made to reflect probable credit losses. Cash flows have not been adjusted for such factors as prepayment risk or the effect of the maturity of balloon notes. The fair value of floating rate loans is estimated to be its carrying value. At each reporting period, the Company determines which loans are impaired. Accordingly, the Company’s impaired loans are reported at their estimated fair value on a non-recurring basis. An allowance for each impaired loan, which are generally collateral-dependent, is calculated based on the fair value of its collateral. The fair value of the collateral is based on appraisals performed by third-party valuation specialists. Factors including the assumptions and techniques utilized by the appraiser are considered by Management. If the recorded investment in the impaired loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as a non-recurring Level 2 asset. 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 impaired loan as a non-recurring Level 3 asset.

Other Real Estate

In the course of lending operations, Management may determine that it is necessary to foreclose on the related collateral. Other real estate acquired through foreclosure is carried at fair value, less estimated costs to sell. The fair value of the collateral is based on appraisals performed by third-party valuation specialists. Factors including the assumptions and techniques utilized by the appraiser are considered by Management. If the current appraisal is more than one year old and/or the loan balance is more than $200,000, a new appraisal is obtained. Otherwise, the Bank’s in-house property evaluator and Management will determine the fair value of the collateral, based on comparable sales, market conditions, Management’s plans for disposition and other estimates of fair value obtained from principally independent sources, adjusted for estimated selling costs. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the other real estate as a non-recurring Level 2 asset. 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 other real estate as a non-recurring Level 3 asset.

Cash Surrender Value of Life Insurance

The carrying amount of cash surrender value of bank-owned life insurance approximates fair value.

Deposits

The fair value of non-interest bearing demand and interest bearing savings and demand deposits is the amount reported in the financial statements. The fair value of time deposits is estimated by discounting the cash flows using current rates of time deposits with similar remaining maturities. The cash flows considered in computing the fair value of such deposits are based on contractual maturities, since approximately 98% of time deposits provide for automatic renewal at current interest rates.

Federal Funds Purchased and Securities Sold under Agreements to Repurchase

The carrying amount shown as federal funds purchased and securities sold under agreements to repurchase approximates fair value.

Borrowings from Federal Home Loan Bank

The fair value of FHLB fixed rate borrowings is estimated using discounted cash flows based on current incremental borrowing rates for similar types of borrowing arrangements. The Company has no FHLB variable rate borrowings.

Commitments to Extend Credit and Standby Letters of Credit

Because commitments to extend credit and standby letters of credit are generally short-term and at variable rates, the contract value and estimated value associated with these instruments are immaterial.

The balances of available for sale securities, which are the only assets measured at fair value on a recurring basis, by level within the fair value hierarchy and by investment type, as of September 30, 2011 and December 31, 2010 are as follows:

			Fair Value Measurement Using
September 30, 2011:	Total		Level 1	Level 2		Level 3
U.S. Treasuries	$	99,271,371	$	$	99,271,371	$
U.S. Government agencies		160,599,068			160,599,068
Mortgage-backed securities		5,058,995			5,058,995
States and political subdivisions		38,681,109			38,681,109
Equity securities		649,983			649,983
Total	$	304,260,526	$	$	304,260,526	$

			Fair Value Measurement Using
December 31, 2010:	Total		Level 1	Level 2		Level 3
U.S. Treasuries	$	26,508,971	$	$	26,508,971	$
U.S. Government agencies		218,595,943			218,595,943
States and political subdivisions		41,323,566			41,323,566
Equity securities		649,983			649,983
Total	$	287,078,463	$	$	287,078,463	$

Impaired loans, which are measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of September 30, 2011 and December 31, 2010 are as follows:

			Fair Value Measurement Using
	Total		Level 1	Level 2	Level 3
September 30, 2011	$	44,923,400	$	$	$	44,923,400
December 31, 2010		14,294,758				14,294,758

The following table presents a summary of changes in the fair value of impaired loans which are measured using level 3 inputs:

	For the Nine Months			For the Year
	Ended			Ended
	September 30, 2011			December 31, 2010
Balance, beginning of period	$	14,294,758		$	20,110,330
Additions to impaired loans and troubled debt restructurings		38,015,735			5,519,905
Principal payments, charge-offs and transfers to other real estate		(6,997,012	)		(12,286,059	)
Change in allowance for loan losses on impaired loans		(390,081	)		950,583
Balance, end of period	$	44,923,400		$	14,294,758

Other real estate, which is measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of September 30, 2011 and December 31, 2010 are as follows:

			Fair Value Measurement Using
	Total		Level 1	Level 2		Level 3
September 30, 2011	$	6,962,738	$	$	3,803,000	$	3,159,738
December 31, 2010		5,744,150			1,248,816		4,495,334

The following table presents a summary of changes in the fair value of other real estate which is measured using level 3 inputs:

	For the Nine			For the Year
	Months Ended			Ended
	September 30, 2011			December 31, 2010
Balance, beginning of period	$	4,495,334		$	1,521,313
Loans transferred to ORE		3,029,510			4,466,221
Sales and transfers to Level 2		(3,774,100	)		(1,414,850	)
Writedowns		(591,006	)		(77,350	)
Balance, end of period	$	3,159,738		$	4,495,334

The carrying value and estimated fair value of financial assets and financial liabilities at September 30, 2011 and December 31, 2010, are as follows:

	September 30, 2011				December 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial Assets:
Cash and due from banks	$	31,932,887	$	31,932,887	$	24,146,939	$	24,146,939
Available for sale securities		304,260,526		304,260,526		287,078,463		287,078,463
Held to maturity securities		1,917,039		2,003,692		1,914,879		2,010,430
Other investments		3,843,455		3,843,455		3,926,371		3,926,371
Federal Home Loan Bank stock		1,714,600		1,714,600		2,281,200		2,281,200
Loans, net		415,132,698		420,081,198		403,248,499		407,363,159
Cash surrender value of life insurance		16,066,420		16,066,420		15,951,117		15,951,117
Financial Liabilities:
Deposits:
Non-interest bearing		111,213,054		111,213,054		108,277,985		108,277,985
Interest bearing		376,641,037		377,719,904		375,861,530		376,715,446
Total deposits		487,854,091		488,932,958		484,139,515		484,993,431
Federal funds purchased and securities sold under agreements to repurchase		172,940,667		172,940,667		140,102,019		140,102,019
Borrowings from Federal Home Loan Bank		30,101,572		32,032,055		42,957,016		43,990,270