Note 15: Disclosures About Fair Value of Assets and Liabilities

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:

Level 1 Quoted prices in active markets for identical assets or liabilities.

Level 2 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 for substantially the full-term of the assets or liabilities.

Level 3 Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities.

Recurring Measurements

The following tables present the fair value measurements of assets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2019 and 2018:


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

December 31, 2019
Mortgage-backed securities of government sponsored entities	$	6,733,213	$	—	$	6,733,213	$	—
Mortgage servicing rights		1,213,815		—		—		1,213,815

December 31, 2018
Mortgage-backed securities of government sponsored entities	$	630,361	$	—	$	630,361	$	—
Mortgage servicing rights		1,252,740		—		—		1,252,740

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

Available-for-sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. In certain cases where Level 1 and Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

Mortgage Servicing Rights

Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models having significant inputs of loan balance, weighted average coupon, weighted average maturity, escrow payments, servicing fees, prepayment speeds, float, cost to service, ancillary income, and discount rate. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy.

Mortgage servicing rights are tested for impairment. Management measures mortgage servicing rights through use of a third-party independent valuation. Inputs to the model are reviewed by management.

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements related to mortgage servicing rights recognized in the accompanying balance sheets using significant unobservable (Level 3) inputs:


	2019		2018

Fair value as of the beginning of the period	$	1,252,740	$	909,821
Recognition of mortgage servicing rights on the sale of loans		245,790		309,712
Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model		(284,715)		33,207

Fair value at the end of the period	$	1,213,815	$	1,252,740

Mortgage servicing rights are carried in the balance sheet at fair value and the changes in fair value are reported in other noninterest income in the period in which the changes occur.

Nonrecurring Measurements

The following table presents the fair value of assets measured at fair value on a nonrecurring basis and the level of hierarchy in which the fair value measurements fall at December 31, 2019 and 2018:


	Fair Value Measurements Using
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs
	Amount		(Level 1)		(Level 2)		(Level 3)

December 31, 2019

Collateral-dependent impaired loans	$	51,568	$	—	$	—	$	51,568

December 31, 2018

Collateral-dependent impaired loans	$	744,381	$	—	$	—	$	744,381

Collateral-dependent Impaired Loans

The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by management. Appraisals are reviewed for accuracy and consistency by management. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by management by comparison to historical results.

Unobservable (Level 3) Inputs

The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at December 31, 2019 and 2018:


					Range
	Fair Value		Valuation	Unobservable	(Weighted
	December 31, 2019		Technique	Inputs	Average)
Mortgage servicing rights	$	1,213,815	Discounted cash flow	Discount rate PSA prepayment speeds	10% 89%-173%
Impaired loans (collateral dependent)	$	51,568	Market comparable properties	Marketability discount	10%-15% (12%)


					Range
	Fair Value		Valuation	Unobservable	(Weighted
	December 31, 2018		Technique	Inputs	Average)
Mortgage servicing rights	$	1,252,740	Discounted cash flow	Discount rate PSA prepayment speeds	10% 113%‑218%
Impaired loans (collateral dependent)	$	744,381	Market comparable properties	Marketability discount	10%‑15% (12%)

Fair Value of Financial Instruments

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value.

Cash and cash equivalents, Federal Home Loan Bank Stock and Interest Receivable

The carrying amount approximates fair value.

Loans Held for Sale

Fair value of loans held for sale is based on quoted market prices, where available, or is determined by discounting estimated cash flows using interest rates approximating the Company’s current origination rates for similar loans and adjusted to reflect the inherent credit risk.

Loans

The estimated fair value of loans as of December 31, 2019 follows the guidance in ASU 2016-01, which prescribes an “exit price” in estimating and disclosing the fair value of financial instruments. The fair value calculation at that date discounted estimated cash flows using rates that incorporated discounts for credit, liquidity and marketability factors. The fair values at December 31, 2018 used an “entry price.” The fair value calculation for that date discounted estimated cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same maturities. As a result, the fair value disclosures for December 31, 2019 and 2018 are not directly comparable.

Federal Home Loan Bank Lender Risk Account Receivable

The fair value of the Federal Home Loan Bank lender risk account receivable is estimated by discounting the estimated remaining cash flows of each strata of the receivable at current rates applicable to each strata for the same remaining maturities.

Deposits

Deposits include demand deposits and savings accounts. The carrying amount approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

Federal Home Loan Bank Advances

Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. Fair value of long-term debt is based on quoted market prices or dealer quotes for the identical liability when traded as an asset in an active market. If a quoted market price is not available, an expected present value technique is used to estimate fair value.

Stock Subscription Proceeds in Escrow, Advances from Borrowers for Taxes and Insurance and Interest Payable

The carrying amount approximates fair value.

Commitments to Originate Loans, Forward Sale Commitments, Letters of Credit and Lines of Credit

The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of forward sale commitments is estimated based on current market prices for loans of similar terms and credit quality. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. At December 31, 2019 and 2018, the fair value of commitments was not material.

The following table presents estimated fair values of the Company’s financial instruments carried at cost at December 31, 2019 and 2018:


	Fair Value Measurements Using
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs
	Amount		(Level 1)		(Level 2)		(Level 3)

December 31, 2019
Financial Assets:
Cash and cash equivalents	$	37,735,266	$	37,735,266	$	—	$	—
Loans held for sale		3,114,081		—		3,178,068		—
Loans, net of allowance for loan losses		179,332,026		—		—		175,117,724
Federal Home Loan Bank stock		2,657,400		—		2,657,400		—
Interest receivable		624,333		—		624,333		—
Federal Home Loan Bank lender risk account receivable		1,713,240		—		—		1,820,707

Financial Liabilities:
Deposits		143,410,707		66,172,775		78,065,313		—
Federal Home Loan Bank advances		47,172,066		—		47,707,920		—
Stock subscription proceeds in escrow		23,407,011		23,407,011		—		—
Advances from borrowers for taxes and insurance		1,806,638		—		1,806,638		—
Interest payable		91,636		—		91,636		—

December 31, 2018
Financial Assets:
Cash and cash equivalents	$	11,089,189	$	11,089,189	$	—	$	—
Loans held for sale		1,282,000		—		1,307,890		—
Loans, net of allowance for loan losses		170,365,031		—		—		174,545,610
Federal Home Loan Bank stock		2,583,100		—		2,583,100		—
Interest receivable		569,659		—		569,659		—
Federal Home Loan Bank lender risk account receivable		1,703,276		—		—		1,677,187

Financial Liabilities:
Deposits		142,391,756		61,842,846		80,152,017		—
Federal Home Loan Bank advances		28,580,438		—		28,460,471		—
Advances from borrowers for taxes and insurance		1,799,419		—		1,799,419		—
Interest payable		53,945		—		53,945		—