14.	Fair Value

Accounting standards define fair value as the price that would be received upon the sale of an asset or paid upon the transfer of a liability in an orderly transaction between market participants. The price in the principal market used to measure the fair value of the asset or liability is

not

adjusted for transaction costs. 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.

The standards require 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. The standards establish 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: 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, and other inputs that are observable or can be corroborated by observable market data.

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

The Company uses the following methods and significant assumptions to estimate the fair values of the following assets:

	●	Securities available for sale: The fair values of securities available for sale are determined by obtaining quoted prices from a nationally recognized securities pricing agent. If quoted market prices are not available, fair value is determined using quoted market prices for similar securities.

	●	Equity security at fair value: The Company’s investment in an equity mutual fund is valued based on the net asset value of the fund, which is classified as Level 1.

	●	Other real estate owned (“OREO”): Nonrecurring fair value adjustments to OREO reflect full or partial write-downs that are based on the OREO’s observable market price or current appraised value of the real estate. Since the market for OREO is not active, OREO subjected to nonrecurring fair value adjustments based on the current appraised value of the real estate are classified as Level 3. The appraised value is obtained annually from an independent third party appraiser and is reduced by expected sales costs, which has historically been 10% of the appraised value.

	●	Impaired loans: Nonrecurring fair value adjustments to impaired loans reflect full or partial write-downs and reserves that are based on the impaired loan’s observable market price or current appraised value of the collateral. Since the market for impaired loans is not active, such loans subjected to nonrecurring fair value adjustments based on the current appraised value of the collateral are classified as Level 3. The appraised value is obtained annually from an independent third party appraiser and is reduced by expected sales costs, which has historically been 10% of the appraised value.

The following table summarizes financial assets measured at fair value on a recurring and nonrecurring basis as of

December 31, 2018

and

2017,

segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

	Carrying Value:
	Level 1		Level 2		Level 3		Total
December 31, 2018
Recurring
Available for sale securities
State and municipal	$	-	$	1,506,505	$	-	$	1,506,505
SBA pools		-		2,719,372		-		2,719,372
Mortgage-backed securities		-		22,366,114		-		22,366,114
	$	-	$	26,591,991	$	-	$	26,591,991

Equity security at fair value	$	503,827	$	-	$	-	$	503,827
Nonrecurring
Other real estate owned	$	-	$	-	$	210,150	$	210,150
Impaired loans		-		-		3,177,381		3,177,381

December 31, 2017
Recurring
Available for sale securities
State and municipal	$	-	$	1,539,207	$	-	$	1,539,207
SBA pools		-		3,199,846		-		3,199,846
Mortgage-backed securities		-		23,190,457		-		23,190,457
	$	-	$	27,929,510	$	-	$	27,929,510

Equity security at fair value	$	503,881	$	-	$	-	$	503,881
Nonrecurring
Other real estate owned	$	-	$	-	$	265,500	$	265,500
Impaired loans		-		-		5,055,969		5,055,969

Reconciliation of Level 3 Inputs

	Other Real			Impaired
	Estate Owned			Loans

December 31, 2017 fair value	$	265,500		$	5,055,969
Additions		-			1,747,826
Advances		-			19,086
Write-downs/charge-offs		(55,350	)		(690,000	)
Recoveries		-			197,660
Loan loss provision		-			127,213
Principal payments received		-			(3,280,373	)
December 31, 2018 fair value	$	210,150		$	3,177,381

The estimated fair value of financial instruments that are reported at amortized cost in the Company’s consolidated balance sheets, segregated by the level of the valuation inputs were as follows:

	December 31, 2018				December 31, 2017
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Financial assets
Level 2 inputs
Securities held to maturity		18,127,067		18,033,093		18,204,182		18,307,627
Mortgage loans held for sale		573,638		582,248		327,700		332,558
Federal Home Loan Bank stock		575,800		575,800		1,063,600		1,063,600
Level 3 inputs
Loans, net		340,900,635		337,385,842		332,533,706		332,689,848

Financial liabilities
Level 1 inputs
Noninterest-bearing deposits	$	62,717,520	$	62,717,520	$	64,403,133	$	64,403,133
Securities sold under repurchase agreements		11,012,000		11,012,000		21,768,507		21,768,507
Level 2 inputs
Interest-bearing deposits		291,995,483		281,761,483		255,393,291		244,403,291
Federal Home Loan Bank advances		3,000,000		2,971,000		17,000,000		16,957,000

The fair value of mortgage loans held for sale is determined by the expected sales price. Beginning in the

first

quarter of

2018,

the fair value of loans were determined using an exit price methodology as prescribed by FASB Accounting Standards Update

2016

01,

which became effective in the

first

quarter of

2018.

The exit price estimation of fair value is based on the present value of the expected cash flows. The projected cash flows are based on the contractual terms of the loans, adjusted for prepayments and use of a discount rate based on the relative risk of the cash flows, taking into account the loan type, maturity of the loan, liquidity risk, servicing costs, and a required return on debt and capital (Level

In addition, an incremental liquidity discount is applied to certain loans, using historical sales of loans during periods of similar economic conditions as a benchmark. In comparison, loan fair values as of

December 31, 2017

were estimated based on an entrance price methodology. As a result, the fair value adjustments as of

December 31, 2018

and

December 31, 2017

are

not

comparable.

The fair values of interest-bearing checking, savings, and money market deposit accounts are equal to their carrying amounts. The fair values of fixed-maturity time deposits are estimated based on interest rates currently offered for deposits of similar remaining maturities.

The fair value of credit commitments are considered to be the same as the contractual amounts, and are

not

included in the table above. These commitments generate fees that approximate those currently charged to originate similar commitments.