7.	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

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

Significant other observable inputs other than Level

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

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

●

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

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

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

March 31, 2019

and

December 31, 2018,

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
March 31, 2019
Recurring
Available for sale securities
State and municipal	$	-	$	1,133,290	$	-	$	1,133,290
SBA pools		-		2,604,110		-		2,604,110
Mortgage-backed securities		-		26,864,371		-		26,864,371
	$	-	$	30,601,771	$	-	$	30,601,771

Equity security at fair value
Mutual fund	$	514,717	$	-	$	-	$	514,717

Nonrecurring
Other real estate owned	$	-	$	-	$	210,150	$	210,150
Impaired loans		-		-		3,163,793		3,163,793

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
Mutual fund	$	503,827	$	-	$	-	$	503,827

Nonrecurring
Other real estate owned	$	-	$	-	$	210,150	$	210,150
Impaired loans		-		-		3,177,381		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:

	March 31, 2019				December 31, 2018
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Financial assets
Level 2 inputs
Securities held to maturity	$	18,065,993	$	18,236,185	$	18,127,067	$	18,033,093
Mortgage loans held for sale		417,465		426,075		573,638		582,248
Federal Home Loan Bank stock		503,700		503,700		575,800		575,800
Level 3 inputs
Loans, net		335,142,379		331,705,398		340,900,635		337,385,842

Financial liabilities
Level 1 inputs
Noninterest-bearing deposits	$	60,431,904	$	60,431,904	$	62,717,520	$	62,717,520
Securities sold under repurchase agreements		9,132,795		9,132,795		11,012,000		11,012,000
Level 2 inputs
Interest-bearing deposits		304,755,581		297,345,581		291,995,483		281,761,483
Federal Home Loan Bank advances		3,000,000		2,983,000		3,000,000		2,971,000

The fair value of mortgage loans held for sale is determined by the expected sales price. The fair value of loans were determined using an exit price methodology as prescribed by ASU

2016

01.

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.

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.