FAIR VALUE MEASUREMENTS

6 Months Ended

Jun. 30, 2012

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

13. FAIR VALUE MEASUREMENTS

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other 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.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate fair value:

Securities:  The fair values of securities are obtained from a third party who utilizes quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing (Level 2 inputs), 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 quoted securities.

Servicing Rights: The fair value of SBA servicing rights is obtained from a third party using assumptions provided by the Company. The individual servicing rights are valued individually taking into consideration the original term to maturity, the current age of the loan and the remaining term to maturity. Their valuation methodology utilized for the servicing rights begins with projecting future cash flows for each servicing asset, based on its unique characteristics and market-based assumptions for prepayment speeds. The present value of the future cash flows are then calculated utilizing a market-based discount rate assumption. These inputs are generally observable in the marketplace resulting in a Level 2 classification.

Impaired Loans:  The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals or internal evaluations. Management usually adds discounts to third party appraisals. The appraisals are generally obtained annually and are performed by qualified licensed appraisers approved by the Board of Directors.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. The comparable sales approach evaluates the sales price of similar properties in the same market area.  This approach is inherently subjective due to the wide range of comparable sale dates. The income approach considers net operating income generated by the property and the investor’s required return.  This approach utilizes various inputs including lease rates and cap rates which are subject to judgment. Such adjustments can be significant and result in a Level 3 classification of the inputs for determining fair value.

Foreclosed Assets:  Commercial and residential real estate properties classified as foreclosed assets are measured at fair value, less costs to sell. Fair values are generally based on recent real estate appraisals or internal evaluations. Management usually adds discounts to third party appraisals. The appraisals are generally obtained annually and are performed by qualified licensed appraisers approved by the Board of Directors. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. The comparable sales approach evaluates the sales price of similar properties in the same market area.  This approach is inherently subjective due to the wide range of comparable sale dates. The income approach considers net operating income generated by the property and the investor’s required return.  This approach utilizes various inputs including lease rates and cap rates which are subject to judgment. Adjustments of the carrying amount utilizing this process result in a Level 3 classification.

Assets measured at fair value on a recurring basis are summarized below as of the periods ended June 30, 2012 and December 31, 2011:

 

			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
June 30, 2012	Total		(Level 1)		(Level 2)		(Level 3)
Available for sale securities:
US Treasury	$	5,603,515	$	5,603,515	$	0	$	0
US Government and
federal agency		18,781,514		0		18,781,514		0
Municipals		2,363,907		0		2,363,907		0
Mortgage-backed and
collateralized mortgage
obligations– residential		10,132,778		0		10,132,778		0
Total	$	36,881,714	$	5,603,515	$	31,278,199	$	0
Servicing assets	$	41,324	$	0	$	41,324	$	0
December 31, 2011
Available for sale securities:
US Treasury	$	4,067,656	$	4,067,656	$	0	$	0
US Government and
federal agency		15,572,588		0		15,572,588		0
Municipals		2,891,420		0		2,891,420		0
Mortgage-backed and
collateralized mortgage
obligations– residential		12,040,439		0		12,040,439		0
Total	$	34,572,103	$	4,067,656	$	30,504,447	$	0
Servicing assets	$	76,276	$	0	$	76,276	$	0

There were no transfers between levels during the first six months of 2012 or the three month periods ended June 30, 2012 or 2011. During the first quarter of 2011, there was a transfer of two federal agency securities with a fair value of $991,568 at March 31, 2011 from Level 1 to Level 2.

Assets measured at fair value on a non-recurring basis are summarized below as of the periods ended June 30, 2012 and December 31, 2011.  Impaired loans and foreclosed assets are included if the fair value of such assets was revised during the quarterly period then ended.

			Significant
			Unobservable Inputs
	Total		(Level 3)
June 30, 2012
Impaired loans:
Commercial	$	284,037	$	284,037
Commercial Real Estate:
General		0		0
Construction		91,835		91,835
Consumer:
Lines of credit		374		374
Other		97		97
Residential		388,606		388,606
Total	$	764,949	$	764,949
Foreclosed assets:
Commercial Real Estate:
General	$	1,319,449	$	1,319,449
Residential		73,238		73,238
Total	$	1,392,687	$	1,392,687
December 31, 2011
Impaired loans:
Commercial	$	19,686	$	19,686
Commercial Real Estate:
General		3,871,595		3,871,595
Construction		160,276		160,276
Consumer:
Lines of credit		48,269		48,269
Other		0		0
Residential		198,244		198,244
Total	$	4,298,070	$	4,298,070
Foreclosed assets:
Commercial Real Estate:
General	$	570,069	$	570,069
Construction		6,160		6,160
Residential		204,668		204,668
Total	$	780,897	$	780,897

As discussed previously, the Bank generally utilizes real estate appraisals or internal evaluations for the valuation of its impaired loans and foreclosed assets.  These valuations use either a comparable sales or income approach.  Adjustments are routinely made in the appraisal process by the appraisers to account for differences between the comparable sales and income data available. These adjustments can vary from 0 to 40% depending on the property type as well as various sales and property characteristics including but not limited to: date of sale, size and condition of facility, quality of construction and proximity to the subject property. Further unobservable inputs used in estimating fair value are additional discounts to the appraised value to consider: 1) selling costs where discounts can range from 2 to 15% and 2) the age of the appraisal with discounts ranging from 10 to 30%.

The following table presents information as of June 30, 2012 about significant unobservable inputs related to the Bank’s individually material Level 3 financial assets, by class, measured on a nonrecurring basis:

			Valuation	Significant Unobservable	Range		Weighted
	Fair Value		Technique (s)	Inputs	of Inputs		Average
June 30, 2012
Foreclosed assets:
Commercial Real Estate:
				Adjustments for differences between
General	$	773,919	Sales comparison approach	the comparable sales	(50.0)	- 9.4%	(26.4)	%
				Adjustments for differences in net
			Income approach	operating income expectations	10.0	%	10.0	%
Total	$	773,919

There were no individually material impaired loans marked to fair value during the quarterly period ended June 30, 2012.

The following two paragraphs describe the impairment charges recognized during the period:

The method used to determine the valuation of impaired loans depends on the anticipated source of repayment. Most of the Bank’s impaired loans are collateral dependent; only two impairments are measured using the cash flow method. Collateral dependent impaired loans are measured using the fair value of the collateral. At June 30, 2012, such impaired loans had a recorded investment of $6,638,184, with a valuation allowance of $2,429,453 compared to impaired loans with a recorded investment of $7,528,841 and a valuation allowance of $2,902,547 at December 31, 2011. The fair value of the collateral on the collateral dependent loans was determined using independent appraisals or internal evaluations and was adjusted for anticipated disposition costs. Increases to specific allocations on impaired, collateral dependent loans were $600,000 for the first six months of 2012. However, in total, the impact to the provision for loan losses from impaired, collateral dependent loans was $(473,000) for the six month period ended June 30, 2012.

At June 30, 2012 and December 31, 2011, foreclosed assets carried a fair value of $3,341,237 and $3,261,671 respectively. During the six month period ended June 30, 2012, eighteen properties included in this total were written down by $185,020. There were also eight properties totaling $1,051,028 (at fair value) added to other real estate owned during the first six months of 2012. The fair value of other real estate owned was determined primarily using independent appraisals or internal evaluations and was adjusted for anticipated disposition costs.

The carrying amounts and estimated fair values of financial instruments not previously presented above are as follows:

			Fair Value Measurements								December 31,
			at June 30, 2012 Using								2011
	Carrying										Carrying		Fair
	Amount		Level 1		Level 2		Level 3		Total		Amount		Value
	(in thousands)
Financial assets
Cash and cash equivalents	$	18,444	$	18,444	$	0	$	0	$	18,444	$	8,920	$	8,920
Loans held for sale		6,070		0		6,224		0		6,224		5,535		5,940
Loans, net (including impaired)		128,053		0		0		123,027		123,027		144,359		139,176
FHLB stock		451		N/A		N/A		N/A		N/A		451		N/A
Accrued interest receivable		649		18		160		471		649		746		746
Financial liabilities
Deposits		183,618		83,705		99,977		0		183,682		191,545		193,775
Federal funds purchased and
repurchase agreements		10,994		0		10,994		0		10,994		7,815		7,815
Subordinated debentures		4,500		0		0		1,125		1,125		4,500		1,125
Notes payable		5,000		0		0		900		900		5,000		500
Accrued interest payable		946		5		68		66		139		738		130

The methods and assumptions, not previously presented above, used to estimate fair values are described as follows:

(a) Cash and cash equivalents

The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

(b) FHLB stock

It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

(c) Loans

Fair values of loans, excluding loans held for sale, are estimated as follows:  For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification.  Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

(d) Deposits

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

(e) Federal funds purchased and repurchase agreements

The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification.

(f) Subordinated debentures and Notes payable

The fair values of the Company’s subordinated debentures and notes payable are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements and consideration of the Company’s liquidity, resulting in a Level 3 classification.

(g) Accrued interest receivable/payable

The carrying amounts of accrued interest approximate fair value resulting in a Level 1, 2 or 3 classification, depending on the associated asset or liability.

(h) Off-balance sheet instruments

Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.