Note 8: Disclosures about Fair Value of Assets and Liabilities

9 Months Ended

Sep. 30, 2012

Fair Value Disclosures [Text Block]

Note 8: Disclosures about Fair Value of Assets and Liabilities

ASC Topic 820, Fair Value Measurements, defines fair value as 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.  Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The standard describes 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

The following is a description of the inputs and valuation methodologies used for assets measured at fair value on a recurring basis and recognized in the accompanying statements of financial condition, as well as the general classification of such assets pursuant to the valuation hierarchy.

Available-for-sale securities:  Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy.  Level 1 securities include equity securities.  If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.  For these investments, the inputs used by the pricing service to determine fair value may include one or a combination of observable inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bid offers and reference data market research publications and are classified within Level 2 of the valuation hierarchy.  Level 2 securities include U.S. government agencies and government sponsored mortgage-backed securities.  The Company has no Level 3 securities.

The following table presents the fair value measurements of assets recognized in the accompanying statements of financial condition 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, 2012 and December 31, 2011 (dollar amounts in thousands):

	Level 1 inputs		Level 2 inputs		Level 3 inputs		Total fair value
9/30/2012
Financial assets:
Equity securities	$	72	$	-	$	-	$	72
Debt securities:
U.S. government agencies		-		49,051		-		49,051
Municipals		-		8,856		-		8,856
Corporate Bonds		-		1,881		-		1,881
Government sponsored mortgage-backed securities		-		38,518		-		38,518
Available-for-sale securities	$	72	$	98,306	$	-	$	98,378

	Level 1 inputs		Level 2 inputs		Level 3 inputs		Total fair value
12/31/2011
Financial assets:
Equity securities	$	62	$	-	$	-	$	62
Debt securities:
U.S. government agencies		-		34,727		-		34,727
U.S. treasuries		2,043		-		-		2,043
Municipals		-		4,144		-		4,144
Government sponsored mortgage-backed securities		-		40,089		-		40,089
Available-for-sale securities	$	2,105	$	78,960	$	-	$	81,065

The following is a description of the valuation methodologies used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying statements of financial condition, as well as the general classification of such assets pursuant to the valuation hierarchy.

Foreclosed Assets Held for Sale:   Fair value is estimated using recent appraisals, comparable sales and other estimates of value obtained principally from independent sources, adjusted for selling costs.  Foreclosed assets held for sale are classified within Level 3 of the valuation hierarchy.

Impaired loans (Collateral Dependent):   Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment.  Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized.  This method requires the Company  to obtain a current independent appraisal or observable market price of the collateral as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value.  Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

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, 2012 and December 31, 2011 (dollar amounts in thousands):

	Level 1 inputs		Level 2 inputs		Level 3 inputs		Total fair value
Impaired loans:
September 30, 2012	$	-	$	-	$	16,172	$	16,172
December 31, 2011	$	-	$	-	$	11,243	$	11,243

	Level 1 inputs		Level 2 inputs		Level 3 inputs		Total fair value
Foreclosed assets held for sale:
September 30, 2012	$	-	$	-	$	4,923	$	4,923
December 31, 2011	$	-	$	-	$	3,626	$	3,626

There were no transfers between valuation levels for any asset during the nine months ended September 30, 2012 or 2011.  If valuation techniques are deemed necessary, the Company considers those transfers to occur at the end of the period when the assets are valued.

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurement (dollar amounts in thousands):

	Fair Value September 30, 2012		Valuation Technique	Unobservable Input	Range (Weighted Average)
Impaired loans (collateral dependent)	$	14,468	Market Comparable	Discount to reflect realizable value	0%	-	45%	(2%)
Impaired loans	$	1,704	Discounted cash flow	Discount rate		0%		(0%)
Foreclosed assets held for sale	$	4,923	Market Comparable	Discount to reflect realizable value	0%	-	44%	(13%)

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

Cash and cash equivalents, interest-bearing deposits and Federal Home Loan Bank stock

The carrying amounts reported in the balance sheets approximate those assets' fair value.

Held-to-maturity securities

Fair value is based on quoted market prices, if available.  If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

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.  The carrying amount of accrued interest approximates its fair value.

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 certificates of deposit is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturities.

Federal Home Loan Bank advances and securities sold under agreements to repurchase

The fair value of advances and securities sold under agreements to repurchase is estimated by using rates on debt with similar terms and remaining maturities.

Subordinated debentures

For these variable rate instruments, the carrying amount is a reasonable estimate of fair value.  There is currently a limited market for similar debt instruments and the Company has the option to call the subordinated debentures at an amount close to its par value.

Interest payable

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 credit worthiness 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 value of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.

The following tables present estimated fair values of the Company’s financial instruments at September 30, 2012 and December 31, 2011.

	September 30, 2012
					Fair Value Measurement Using
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	38,641,763	$	38,641,763	$	38,641,763	$	-	$	-
Held-to-maturity securities		189,278		202,799		-		202,799		-
Federal Home Loan Bank stock		3,805,500		3,805,500		-		3,805,500		-
Mortgage loans held for sale		4,366,040		4,366,040		-		4,366,040		-
Loans, net		461,900,086		469,879,406		-		-		469,879,406
Interest receivable		2,068,467		2,068,467		-		2,068,467		-
Financial liabilities:
Deposits		493,377,320		494,667,557		-		494,667,557		-
Federal Home Loan Bank advances		68,050,000		72,123,139		-		72,123,139		-
Securities sold under agreements to repurchase		25,000,000		25,117,215		-		25,117,215		-
Subordinated debentures		15,465,000		15,465,000		-		-		15,465,000
Interest payable		417,952		417,952		-		417,952		-
Unrecognized financial instruments (net of contractual value):
Commitments to extend credit		-		-		-		-		-
Unused lines of credit		-		-		-		-		-

	December 31, 2011
					Fair Value Measurement Using
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	26,574,082	$	26,574,082	$	26,574,082	$	-	$	-
Interest-bearing deposits		5,587,654		5,587,654		-		5,587,654
Held-to-maturity securities		218,571		235,574		-		235,574		-
Federal Home Loan Bank stock		3,846,900		3,846,900		-		3,846,900		-
Mortgage loans held for sale		3,702,849		3,702,849		-		3,702,849		-
Loans, net		478,960,736		485,714,408		-		-		485,714,408
Interest receivable		2,139,320		2,139,320		-		2,139,320		-
Financial liabilities:
Deposits		484,583,665		485,803,947		-		485,803,947		-
Federal Home Loan Bank advances		68,050,000		70,815,606		-		70,815,606		-
Securities sold under agreements to repurchase		25,000,000		25,025,344		-		25,025,344		-
Subordinated debentures		15,465,000		15,465,000		-		-		15,465,000
Interest payable		518,881		518,881		-		518,881		-
Unrecognized financial instruments (net of contractual value):
Commitments to extend credit		-		-		-		-		-
Unused lines of credit		-		-		-		-		-