Fair Value

FASB Accounting Standards Codification (ASC) 820, Fair Value Measurement, 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. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset of liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.

ASC 820 requires the use of valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, ASC 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:


•	Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

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Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.


•	Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and liabilities carried at fair value.


•	Cash and due from banks, federal funds sold, and time deposits in other financial institutions. The carrying amount is a reasonable estimate of fair value.

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Securities available-for-sale. Investment securities classified as available-for-sale are reported at fair value on a recurring basis. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the bond’s terms and conditions, among other things.

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Loans receivable. The Company does not record loans at fair value on a recurring basis. For variable‑rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans are determined using estimated future cash flows, discounted at the interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. The Company does record nonrecurring fair value adjustments to loans to reflect (1) partial write‑downs to collateral value or (2) the establishment of specific loan reserves that are based on the observable market price of the loan or the appraised of the collateral. These loans are classified as Level 3.


•	FHLB and Bankers’ Bank stock. The value of FHLB and Bankers’ Bank stock is equivalent to its carrying value because the stock is redeemable at par value.


•	Accrued interest receivable and accrued interest payable. The recorded amount of accrued interest receivable and accrued interest payable approximates fair value as a result of the short‑term nature of the instruments.

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Deposits. The fair value of deposits with no stated maturity, such as passbook, money market, noninterest‑bearing checking, and NOW accounts, is equal to the amount payable on demand. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit that results from the low‑cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.


•	FHLB advances. The fair value of the FHLB advances is based on the discounted value of the cash flows. The discount rate is estimated using the rates currently offered for fixed‑rate advances of similar remaining maturities.

The following tables summarize financial assets measured at fair value on a recurring basis as of June 30, 2018 and December 31, 2017, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value. The Company has no liabilities measured at fair value in the consolidated balance sheets.



	June 30, 2018
	Level 1 inputs		Level 2 inputs		Level 3 inputs		Total fair value
U.S. agency securities	$	—	$	1,193,141	$	—	$	1,193,141
Mortgage-backed securities*	—		28,653,867		—		28,653,867
Municipal bonds	—		14,294,519		—		14,294,519
Total	$	—	$	44,141,527	$	—	$	44,141,527



	December 31, 2017
	Level 1 inputs		Level 2 inputs		Level 3 inputs		Total fair value
U.S. agency securities	$	—	$	1,233,795	$	—	$	1,233,795
Mortgage-backed securities*	—		26,784,589		—		26,784,589
Municipal bonds	—		15,111,097		—		15,111,097
Total	$	—	$	43,129,481	$	—	$	43,129,481



*All mortgage-backed securities are issued by FNMA, FHLMC, or GNMA and are backed by residential mortgage loans.

There have been no changes in valuation methodologies at June 30, 2018 compared to December 31, 2017 and there were no transfers between levels during the periods ended June 30, 2018 and December 31, 2017.

The Company is required to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These adjustments to fair value usually result from application of lower-of-cost or fair value accounting or write-downs of individual assets. As of June 30, 2018 and December 31, 2017, the Company did not have any material assets measured at fair value on a nonrecurring basis.

The estimated fair values of Company’s financial instruments (as described in note 1) at June 30, 2018 and December 31, 2017 were as follows:



		June 30, 2018				December 31, 2017
	Fair value	Carrying		Approximate		Carrying		Approximate
	hierarchy	amount		fair value		amount		fair value
Financial assets:
Cash and due from banks	Level 1	$	2,538,248	$	2,538,248	$	3,310,400	$	3,310,400
Federal funds sold	Level 1	914,000		914,000		2,672,000		2,672,000
Time deposits in other	Level 1
financial institutions		3,316,282		3,316,282		4,545,878		4,545,878
Securities available-for-sale	See previous table	44,141,527		44,141,527		43,129,481		43,129,481
Loans receivable, net	Level 2 (1)	65,588,876		66,104,876		68,411,395		69,008,986
FHLB stock	Level 1	710,000		710,000		703,400		703,400
Bankers’ Bank stock	Level 1	147,500		147,500		147,500		147,500
Accrued interest receivable	Level 1	418,494		418,494		439,855		439,855
Bank owned life insurance	Level 1	3,185,043		3,185,043		3,138,112		3,138,112
Financial liabilities:
Deposits	Level 2	82,184,677		74,264,677		87,740,194		87,828,194
FHLB advances	Level 2	14,000,000		14,054,000		14,000,000		14,052,000
Accrued interest payable	Level 1	29,436		29,436		13,982		13,982



(1) Impaired loans would have a fair value hierarchy of a Level 3. See previous disclosures.