NOTE 15 – Fair Value

Accounting standards describe three levels of inputs that may be used to measure fair value (the fair value hierarchy). The level of an asset or liability within the fair value hierarchy is based on the lowest level of input significant to the fair value measurement of that asset or liability.

Following is a brief description of each level of the fair value hierarchy:

Level 1 - Fair value measurement is based on quoted prices for identical assets or liabilities in active markets.

Level 2 - Fair value measurement is based on: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active; or (3) valuation models and methodologies for which all significant assumptions are or can be corroborated by observable market data.

Level 3 - Fair value measurement is based on valuation models and methodologies that incorporate at least one significant assumption that cannot be corroborated by observable market data. Level 3 measurements reflect the Company’s estimates about assumptions market participants would use in measuring fair value of the asset or liability.

Some assets and liabilities, such as securities available for sale, are measured at fair value on a recurring basis under accounting principles generally accepted in the United States. Other assets and liabilities, such as impaired loans, may be measured at fair value on a nonrecurring basis.

Following is a description of the Company’s valuation methodology and significant inputs used for each asset and liability measured at fair value on a recurring or nonrecurring basis, as well as the classification of the asset or liability within the fair value hierarchy.

Available for sale securities - Available for sale securities may be classified as Level 1 or Level 2 measurements within the fair value hierarchy. Level 1 securities include equity securities traded on a national exchange. The fair value measurement of a Level 1 security is based on the quoted price of the security. Level 2 securities include U.S. government and agency securities, obligations of states and political subdivisions, corporate debt securities, and mortgage related securities. The fair value measurement of a Level 2 security is obtained from an independent pricing service and is based on recent sales of similar securities and other observable market data.

Loans - Loans are not measured at fair value on a recurring basis. However, loans considered to be impaired may be measured at fair value on a nonrecurring basis. The fair value measurement of an impaired loan that is collateral dependent is based on the fair value of the underlying collateral. Independent appraisals are obtained that utilize one or more valuation methodologies - typically they will incorporate a comparable sales approach and an income approach. Management routinely evaluates the fair value measurements of independent appraisers and adjusts those valuations based on differences noted between actual selling prices of collateral and the most recent appraised value. Such adjustments are usually significant, which results in a Level 3 classification. All other impaired loan measurements are based on the present value of expected future cash flows discounted at the applicable effective interest rate and, thus, are not fair value measurements.

Foreclosed assets- Real estate acquired through or in lieu of loan foreclosure are not measured at fair value on a recurring basis. However, foreclosed assets are initially measured at fair value (less estimated costs to sell) when they are acquired and may also be measured at fair value (less estimated costs to sell) if they become subsequently impaired. The fair value measurement for each asset may be obtained from an independent appraiser or prepared internally. Fair value measurements obtained from independent appraisers generally utilize a market approach based on sales of comparable assets and/or an income approach. Such measurements are usually considered Level 2 measurements. However, management routinely evaluates fair value measurements of independent appraisers by comparing actual selling prices to the most recent appraisals. If management determines significant adjustments should be made to the independent appraisals based on these evaluations, these measurements are considered Level 3 measurements. Fair value measurements prepared internally are based on management’s comparisons to sales of comparable assets, but include significant unobservable data and are therefore considered Level 3 measurements.

Assets measured at fair value on a recurring basis are summarized below:


	Recurring Fair Value Measurements Using
	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Instruments		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total

As of December 31, 2019
Assets:
Available for sale securities:
Obligations of the US government and US government sponsored agencies	$	—	$	958	$	—	$	958
Obligations of states and political subdivisions		—		8,605		—		8,605
Mortgage-backed securities		—		35,482		—		35,482
Certificates of deposit		—		1,017		—		1,017
Corporate debt securities		—		2,117		—		2,117
Total	$	—	$	48,179	$	—	$	48,179

As of December 31, 2018
Assets:
Available for sale securities:
Obligations of the US government and US government sponsored agencies	$	—	$	1,307	$	—	$	1,307
Obligations of states and political subdivisions		—		8,295		—		8,295
Mortgage-backed securities		—		28,536		—		28,536
Certificates of deposit		—		1,446		—		1,446
Corporate debt securities		—		4,167		—		4,167
Total	$	—	$	43,751	$	—	$	43,751

Information regarding the fair value of assets measured at fair value on a nonrecurring basis follows:


			Nonrecurring Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
	Assets		Identical		Observable		Unobservable
	Measured at		Instruments		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)

As of December 31, 2019
Assets:
Loans	$	897	$	—	$	—	$	897
Foreclosed assets		84		—		—		84

As of December 31, 2018
Assets:
Foreclosed assets	$	69	$	—	$	—	$	69

Loans with a carrying amount of $1,132 were considered impaired and were written down to their estimated fair value of $897 as of December 31, 2019. As a result, the Company recognized a specific valuation allowance against these impaired loans totaling $235 as of December 31, 2019. There were no loans recognized at fair value as of December 31, 2018.

Foreclosed assets with a carrying amount of $84 and $69 were determined to be at their fair value as of December 31, 2019 and December 31, 2018, respectively.

The following presents quantitative information about nonrecurring Level 3 fair value measurements:


					Range/Weighted
	Fair Value		Valuation Technique	Unobservable Input(s)	Average
As of December 31, 2019
Loans	$	897	Market and/or income approach	Management discount on appraised values	10	%	-	20	%
Foreclosed assets	$	84	Market and/or income approach	Management discount on appraised values	10	%	-	20	%

As of December 31, 2018
Foreclosed assets	$	69	Market and/or income approach	Management discount on appraised values	10	%	-	20	%

The carrying value and estimated fair value of financial instruments as of December 31, 2019 and 2018 follow:


	December 31, 2019
	Carrying			Fair Value
	Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	39,377	$	39,377	$	—	$	—
Available for sale securities		48,179		—		48,179		—
Loans held for sale		200		—		200		—
Loans		189,291		—		—		190,561
Accrued interest receivable		725		725		—		—
Cash value of life insurance		7,068		—		—		7,068
Other equity investments		780		—		—		780

Financial liabilities:
Deposits		217,252		150,024		—		67,391
Advance payments by borrowers for taxes and insurance		46		46		—		—
FHLB advances		11,500		—		—		11,509
Accrued interest payable		51		51		—		—


	December 31, 2018
	Carrying			Fair Value
	Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	4,488	$	4,488	$	—	$	—
Available for sale securities		43,751		—		43,751		—
Loans held for sale		679		—		679		—
Loans		198,694		—		—		199,048
Accrued interest receivable		768		768		—		—
Cash value of life insurance		7,007		—		—		7,007
Other equity investments		739		—		—		739

Financial liabilities:
Deposits		183,205		95,067		—		87,531
Advance payments by borrowers for taxes and insurance		55		55		—		—
FHLB advances		17,750		—		—		17,505
Accrued interest payable		70		70		—		—

Limitations - The fair value of a financial instrument is the current amount that would be exchanged between market participants, other than in a forced liquidation. Fair value is best determined based on quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Consequently, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters that could affect the estimates. Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business. Deposits with no stated maturities are defined as having a fair value equivalent to the amount payable on demand. This prohibits adjusting fair value derived from retaining those deposits for an expected future period of time. This component, commonly referred to as a deposit base intangible, is neither considered in the above amounts, nor is it recorded as an intangible asset on the consolidated balance sheets. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.