NOTE 15 – FAIR VALUE

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures, the fair value of a financial instrument 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 is best determined based upon 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.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

The Fair Value Hierarchy

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 - Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets and liabilities.

Level 2 - Valuation is based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets and 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 asset or liability.

Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

In accordance with FASB’s guidance, impaired loans where an allowance is established based on the fair value of collateral and real estate acquired through foreclosure requires classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company measures and records the loan or real estate acquired through foreclosure as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company measures and records the loan or real estate acquired through foreclosure as nonrecurring Level 3. The value of real estate collateral is determined based on appraisals by qualified licensed appraisers hired by the Company. Impaired loans and real estate acquired through foreclosure are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

Assets Recorded at Fair Value on a Recurring Basis

The following methods and assumptions were used by the Company to measure certain assets recorded at fair value on a recurring basis in the consolidated financial statements.

Investment Securities Available for Sale

The fair value of investment securities available for sale is the market value based on quoted market prices when available (Level 1). If listed prices or quotes are not available, fair value is based upon quoted market prices for similar assets or, due to the limited market activity of the instrument, externally developed models that use significant observable inputs (Level 2) or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3). It includes model pricing, defined as valuing securities based upon their relationship with other benchmark securities and market information from third party sources. In the absence of current market activity, securities may be evaluated either by reference to similarly situated bonds or based on the liquidation value or restructuring value of the underlying assets. There was no change in valuation techniques used to measure fair value of securities available for sale for the six-months ended June 30, 2017. The tables below present the recorded amount of assets measured at fair value on a recurring basis at June 30, 2017 and December 31, 2016:


					Significant Other		Significant Other
	Carrying Value		Quoted Prices		Observable Inputs		Unobservable
June 30, 2017	(Fair Value)		(Level 1)		(Level 2)		Inputs (Level 3)
U.S. government agency	$	6,830,275	$	—	$	6,830,275	$	—
U.S. treasury securities		8,723,910		—		8,723,910		—
Residential mortgage-backed securities		35,438,343		—		35,438,343		—
State and municipal		2,607,968		—		2,607,968		—
Corporate obligations		8,824,315		—		8,824,315		—
Equity securities		37,280		37,280		—		—
	$	62,462,091	$	37,280	$	62,424,811	$	—


					Significant Other		Significant Other
	Carrying Value		Quoted Prices		Observable Inputs		Unobservable
December 31, 2016	(Fair Value)		(Level 1)		(Level 2)		Inputs (Level 3)
U.S. government agency	$	7,773,118	$	—	$	7,773,118	$	—
U.S. treasury securities		8,623,259		—		8,623,259		—
Residential mortgage-backed securities		30,813,481		—		30,813,481		—
State and municipal		2,637,280		—		2,637,280		—
Corporate obligations		10,328,455		—		10,328,455		—
Equity securities		57,134		57,134		—		—
	$	60,232,727	$	57,134	$	60,175,593	$	—

Assets Recorded at Fair Value on a Nonrecurring Basis

On a nonrecurring basis, the Company may be required to measure certain assets at fair value in accordance with U.S. GAAP. These adjustments to fair value usually result from application of lower of cost or fair value accounting or write-downs of individual assets due to impairment.

The following methods and assumptions were used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the consolidated financial statements:

Loans Held for Sale

Loans held for sale are recorded at the lower of cost or estimated market value on an aggregate basis. Market value is determined based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale. As such, the Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the six-month period ended June 30, 2017 or the year ended December 31, 2016.

Impaired Loans

Loans for which it is probable that payment of principal and interest will not be made in accordance with the contractual terms of the loan are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC Topic 310, using the present value of expected cash flows, the loan’s observable market price, or the fair value of collateral (less estimated selling costs) if the loan is collateral dependent. A specific allowance for loan loss is then established or a charge-off is recorded if the loan is collateral dependent and the loan is classified at a Level 3 in the fair value hierarchy. Appraised collateral values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the borrower’s business. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the factors identified above. Valuation techniques are consistent with those applied in prior periods.

Real Estate Acquired Through Foreclosure

Real estate acquired through foreclosure (“REO”) is adjusted to fair value upon transfer of the loan to REO and is classified at a Level 3 in the fair value hierarchy. Subsequently, the REO is carried at the lower of carrying value or fair value. The estimated fair value for REO included in Level 3 is determined by independent market based appraisals and other available market information, less estimated costs to sell, that may be reduced further based on market expectations or an executed sales agreement. If the fair value of REO deteriorates subsequent to the period of transfer, the REO is also classified at a Level 3 in the fair value hierarchy. Valuation techniques are consistent with those techniques applied in prior periods.

The tables below presents the recorded assets measured at fair value on a nonrecurring basis at June 30, 2017 and December 31, 2016:


					Significant Other		Significant Other
	Carrying Value		Quoted Prices		Observable Inputs		Unobservable
June 30, 2017	(Fair Value)		(Level 1)		(Level 2)		Inputs (Level 3)
Impaired loans	$	788,067	$	—	$	—	$	788,067
Real estate acquired through foreclosure		1,147,546		—		—		659,876
	$	1,935,613	$	—	$	—		1,447,943


					Significant Other		Significant Other
	Carrying Value		Quoted Prices		Observable Inputs		Unobservable
December 31, 2016	(Fair Value)		(Level 1)		(Level 2)		Inputs (Level 3)
Impaired loans	$	819,877	$	—	$	—	$	819,877
Real estate acquired through foreclosure		1,224,939		—		—		1,224,939
	$	2,044,816	$	—	$	—		2,044,816

Quantitative Information about Level 3 Fair Value Measurements

June 30, 2017

Fair Value

Valuation Technique

Unobservable Input

Range

Impaired loans

788,067

Appraisal of collateral (1)

Appraisal adjustments (2)

0% - 10%

Real estate acquired through foreclosure

1,147,546

Appraisal of collateral (1)

Appraisal adjustments (2)

0% - 10%

Estimated selling cost (2)

0% - 10%

Quantitative Information about Level 3 Fair Value Measurements

December 31, 2016

Fair Value

Valuation Technique

Unobservable Input

Range

Impaired loans

819,877

Appraisal of collateral (1)

Appraisal adjustments (2)

0% - 10%

Real estate acquired through foreclosure

1,224,939

Appraisal of collateral (1)

Appraisal adjustments (2)

0% - 10%

Estimated selling cost (2)

0% - 10%

(1)

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level 3 inputs which are not observable.

(2)

Appraisals may be adjusted by management for qualitative factors such as estimated selling cost. The range and weighted average of estimated selling cost and other appraisal adjustments are presented as a percent of the appraisal.

Fair Value of Financial Instruments

The Company discloses fair value information about financial instruments, for which it is practicable to estimate the value, whether or not such financial instruments are recognized on the balance sheets. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by a quoted market price, if one exists.

Quoted market prices, where available, are shown as estimates of fair market values. Because no quoted market prices are available for a significant part of the Company's financial instruments, the fair values of such instruments have been derived based on the amount and timing of estimated future cash flows and using market discount rates.

Present value techniques used in estimating the fair value of many of the Company's financial instruments are significantly affected by the assumptions used. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate cash settlement of the instrument. Additionally, the accompanying estimates of fair values are only representative of the fair values of the individual financial assets and liabilities and should not be considered an indication of the fair value of the Company.

The following disclosure of estimated fair values of the Company's financial instruments at June 30, 2017 and December 31, 2016 is made in accordance with the requirements of ASC Topic 820:


	Level in Fair	June 30, 2017				December 31, 2016
	Value	Carrying		Estimated fair		Carrying		Estimated fair
	Hierarchy	Amount		value		Amount		value
Financial assets:
Cash and cash equivalents	Level 1	$	41,666,202	$	41,666,202	$	40,027,456	40,027,456
Investment securities available for sale (debt)	Level 2		62,424,811		62,424,812		60,175,593	60,175,593
Investment securities available for sale (equity)	Level 1		37,280		37,280		57,134	57,134
Investment securities held to maturity (debt)	Level 2		1,116,070		1,110,435		1,158,238	1,149,342
Restricted equity securities	Level 2		2,364,795		2,364,795		1,823,195	1,823,195
Loans held for sale	Level 2		2,893,943		2,893,943		1,613,497	1,613,497
Loans, net of allowance	Level 3		505,987,115		506,743,662		484,280,560	487,325,072
Accrued interest receivable	Level 2		1,870,876		1,870,876		1,884,945	1,884,945

Financial liabilities:
Deposits	Level 3		535,921,682		536,188,844		526,458,394	526,119,460
Accrued interest payable	Level 2		41,545		41,545		16,406	16,406
Borrowings	Level 2		35,000,000		35,000,000		20,000,000	20,000,000

The following methods and assumptions were used to estimate the fair value of each category of financial instruments for which it is practicable to estimate that value:

Cash and due from banks, federal funds sold and overnight investments. The carrying amount approximated the fair value.

Investment securities (available for sale). See recurring fair value measurements above for methods.

Investment securities (held to maturity). The fair value of debt securities is based upon quoted prices for similar assets or externally developed models that use significant observable inputs.

Restricted equity securities. Since these stocks are restricted as to marketability, the carrying value approximated fair value.

Loans held for sale. The carrying amount approximated the fair value. Loans held for sale are recorded at the lower of cost or estimated market value on an aggregate basis. Market value is determined based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale.

Loans. The fair value of loans, except for PCI loans that are collateral-dependent, was estimated by computing the discounted value of estimated cash flows, adjusted for probable credit losses, for pools of loans having similar characteristics. The discount rate was based upon the current market rate for a similar loan. The fair value of PCI loans that are collateral-dependent was determined based on the estimated fair value of collateral less estimated costs to sell. Nonperforming loans have an assumed interest rate of 0%.

Accrued interest receivable and payable. The carrying amount approximated the fair value of accrued interest, considering the short-term nature of the instrument and its expected collection.

Deposit liabilities. The fair value of demand, money market savings and regular savings deposits, which have no stated maturity, were considered equal to their carrying amount, representing the amount payable on demand. The fair value of time deposits was based upon the discounted value of contractual cash flows at current rates for deposits of similar remaining maturity.

Short-term borrowings. The carrying amount of fixed rate FHLB advances and ACBB borrowings approximated fair value due to the short-term nature of the instrument. The carrying amount of variable rate FHLB advances and ACBB borrowings approximated the fair value.

Off-balance sheet instruments. The Company charges fees for commitments to extend credit. Interest rates on loans, for which these commitments are extended, are normally committed for periods of less than one month. Fees charged on standby letters of credit and other financial guarantees are deemed to be immaterial and these guarantees are expected to be settled at face amount or expire unused. It is impractical to assign any fair value to these commitments.