Note 16 - Disclosures About Fair Value of Assets and Liabilities

12 Months Ended

Dec. 31, 2020

Notes to Financial Statements

Fair Value Disclosures [Text Block]

NOTE 16:         DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES

ASC Topic 820, Fair Value Measurements, defines fair value as 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. Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes 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

The following is a description of the inputs and valuation methodologies used for assets and liabilities measured at fair value on a 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. Level 1 securities include equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. government agencies, municipals, U.S. corporate and government sponsored and other mortgage-backed securities. The Company has no Level 3 securities.

Derivative financial instruments (Cash flow hedges): The Company’s open derivative positions are interest rate swap agreements. Those classified as Level 2 open derivative positions are valued using externally developed pricing models based on observable market inputs provided by a third party and validated by management. The Company has considered counterparty credit risk in the valuation of its interest rate swap assets.

The following table presents the fair value measurements of assets recognized in the accompanying consolidated balance sheets 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, 2020 and 2019 (dollar amounts in thousands):

As of December 31, 2020
Financial assets:
	Level 1 inputs		Level 2 inputs		Level 3 inputs		Total fair value
Debt securities:
U.S. Government agencies	$	-	$	6,284	$	-	$	6,284
Municipals		-		61,969		-		61,969
Corporates		-		30,601		-		30,601
Mortgage-backed securities - private label - commercial		-		5,444		-		5,444
Mortgage-backed securities - private label - consumer		-		9,452		-		9,452
Government sponsored mortgage-backed securities and SBA loan pools		-		50,371		-		50,371
Available-for-sale securities	$	-	$	164,121	$	-	$	164,121
Financial liabilities:
Interest Rate Swaps	$	-	$	4,941	$	-	$	4,941

As of December 31, 2019
Financial assets:
	Level 1 inputs		Level 2 inputs		Level 3 inputs		Total fair value
Debt securities:
U.S. Government agencies	$	-	$	2,488	$	-	$	2,488
Municipals		-		36,175		-		36,175
Corporates		-		15,535		-		15,535
Mortgage-backed securities - private label		-		13,811		-		13,811
Government sponsored mortgage-backed securities and SBA loan pools		-		50,236		-		50,236
Available-for-sale securities	$	-	$	118,245	$	-	$	118,245
Financial liabilities:
Interest Rate Swaps	$	-	$	1,628	$	-	$	1,628

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

Foreclosed Assets Held for Sale: Fair value is estimated using recent appraisals, comparable sales and other estimates of value obtained principally from independent sources, adjusted for selling costs. Foreclosed assets held for sale are classified within Level 3 of the valuation hierarchy.

Impaired loans (Collateral Dependent): Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2020 and 2019 (dollar amounts in thousands):

Impaired loans:
	Level 1 inputs		Level 2 inputs		Level 3 inputs		Total fair value
December 31, 2020	$	-	$	-	$	5,809	$	5,809
December 31, 2019	$	-	$	-	$	1,483	$	1,483

Foreclosed assets held for sale:
	Level 1 inputs		Level 2 inputs		Level 3 inputs		Total fair value
December 31, 2020	$	-	$	-	$	371	$	371
December 31, 2019	$	-	$	-	$	233	$	233

The following table presents quantitative information about unobservable inputs used in nonrecurring Level 3 fair value measurements (dollar amounts in thousands):

	Fair Value December 31, 2020		Valuation Technique	Unobservable Input	Range (Weighted Average)
Impaired loans (collateral dependent)	$	5,809	Market Comparable	Discount to reflect realizable value	1%	-	80%	(7%)
Foreclosed assets held for sale	$	371	Market Comparable	Discount to reflect realizable value	4%	-	4%	(4%)

	Fair Value December 31, 2019		Valuation Technique	Unobservable Input	Range (Weighted Average)
Impaired loans (collateral dependent)	$	1,483	Market Comparable	Discount to reflect realizable value	0%	-	100%	(22%)
Foreclosed assets held for sale	$	233	Market Comparable	Discount to reflect realizable value	30%	-	30%	(30%)

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

Cash and cash equivalents, interest-bearing deposits and Federal Home Loan Bank stock

The carrying amounts reported in the consolidated balance sheets approximate those assets' fair value.

Held-to-maturity securities

Fair value is based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans

The fair value of loans is estimated on an exit price basis incorporating contractual cash flow, prepayment discount spreads, credit loss and liquidity premiums.

Deposits

Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount approximates fair value. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturities.

Federal Home Loan Bank advances

The fair value of advances is estimated by using rates on debt with similar terms and remaining maturities.

Subordinated debentures and Note Payable to Bank

For these variable rate instruments, the carrying amount is a reasonable estimate of fair value. There is currently a limited market for similar debt instruments and the Company has the option to call the subordinated debentures at an amount close to its par value.

Subordinated notes

For these fixed rate instruments, the fair value is calculated over the remaining term of the notes compared to similar duration products. There is currently a limited market for similar debt instruments and the Company has the option to call the subordinated notes at par in 2025.

Interest payable

The carrying amount approximates fair value.

Commitments to originate loans, 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 credit worthiness 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 letters of credit and lines of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.

The following table presents estimated fair values of the Company’s financial instruments at December 31, 2020 and 2019.

	December 31, 2020						December 31, 2019
	Carrying Amount		Fair Value		Hierarchy Level		Carrying Amount		Fair Value		Hierarchy Level
Financial assets:
Cash and cash equivalents	$	148,422,908	$	148,422,908		1	$	92,671,909	$	92,671,909		1
Interest-bearing time deposits at other institutions		4,760,089		4,771,605		2		250,000		250,315		2
Federal Home Loan Bank stock		3,896,900		3,896,900		2		3,757,500		3,757,500		2
Mortgage loans held for sale		11,359,174		11,626,174		2		2,786,564		2,786,564		2
Loans, net		742,149,271		737,701,011		3		720,732,402		718,594,936		3
Interest receivable		4,060,795		4,060,795		2		3,511,875		3,511,875		2
Financial liabilities:
Deposits		938,672,541		939,806,149		2		821,406,532		822,046,988		2
FHLB advances		66,000,000		66,089,183		2		65,000,000		65,015,635		2
Subordinated debentures issued to Capital Trusts		15,465,000		15,465,000		3		15,465,000		15,465,000		3
Subordinated notes, net		19,564,131		25,608,997		3		-		-		-
Note payable to bank		-		-		3		11,200,000		11,200,000		3
Interest payable		932,172		932,172		2		793,746		793,746		2
Unrecognized financial instruments (net of contractual value):
Commitments to extend credit		-		-		-		-		-		-
Unused lines of credit		-		-		-		-		-		-