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Note 15 - Fair Value
12 Months Ended
Dec. 31, 2021
Notes to Financial Statements  
Fair Value Disclosures [Text Block]

15.

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 (an “exit” price). 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 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date.

 

 

Level 2: Significant other observable inputs other than Level 1 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 3: 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 1.

 

 

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 3. 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. State of Maryland regulations require that OREO is written down to $0 after a certain period of time.

 

 

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 3. 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 December 31, 2021 and 2020, 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

 

December 31, 2021

                

Recurring:

                

Available for sale securities

                

State and municipal

 $-  $763,498  $-  $763,498 

SBA pools

  -   1,397,762   -   1,397,762 

Corporate bonds

  -   8,584,207   650,000   9,234,207 

Mortgage-backed securities

  -   137,842,449   -   137,842,449 
  $-  $148,587,916  $650,000  $149,237,916 
                 

Equity security at fair value

 $543,605  $-  $-  $543,605 

Nonrecurring:

                

Other real estate owned, net

 $-  $-  $1,242,365  $1,242,365 

Impaired loans

  -   -   373,500   373,500 
                 

December 31, 2020

                

Recurring:

                

Available for sale securities

                

State and municipal

 $-  $986,532  $-  $986,532 

SBA pools

  -   1,783,807   -   1,783,807 

Corporate bonds

  -   6,697,431   100,000   6,797,431 

Mortgage-backed securities

  -   44,909,516   -   44,909,516 
  $-  $54,377,286  $100,000  $54,477,286 
                 

Equity security at fair value

 $552,566  $-  $-  $552,566 

Nonrecurring:

                

Other real estate owned, net

 $-  $-  $1,411,605  $1,411,605 

 

 

Reconciliation of Level 3 Inputs

 
     
  

Corporate

 
  

Bonds

 
     

December 31, 2020 fair value

 $100,000 

Additions

  650,000 

Principal payments received

  (100,000)

December 31, 2021 fair value

 $650,000 

 

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:

 

  

December 31, 2021

  

December 31, 2020

 
  

Carrying

  

Estimated

  

Carrying

  

Estimated

 
  

Amount

  

Fair Value

  

Amount

  

Fair Value

 

Financial assets

                

Level 1 inputs

                

Cash and cash equivalents

 $26,462,106  $26,462,106  $40,975,670  $40,975,670 

Level 2 inputs

                

Certificates of deposit in other banks

  350,000   350,000   850,000   850,000 

Accrued interest receivable

  1,609,063   1,609,063   2,057,491   2,057,491 

Securities held to maturity

  21,851,975   22,805,601   19,904,059   21,070,326 

Mortgage loans held for sale

  126,500   128,829   1,673,350   1,705,781 

Restricted stock, at cost

  675,400   675,400   900,500   900,500 

Bank owned life insurance

  11,556,163   11,556,163   11,297,342   11,297,342 

Level 3 inputs

                

Securities held to maturity

  3,073,040   3,073,040   3,174,460   3,174,460 

Loans, net

  482,011,334   487,012,970   521,690,514   527,132,047 
                 

Financial liabilities

                

Level 1 inputs

                

Noninterest-bearing deposits

 $124,175,615  $124,175,615  $103,155,113  $103,155,113 

Securities sold under repurchase agreements

  5,414,026   5,414,026   24,753,972   24,753,972 

Level 2 inputs

                

Interest-bearing deposits

  502,239,055   502,396,172   470,246,434   474,096,434 

Federal Home Loan Bank advances

  5,000,000   4,967,000   5,000,000   5,136,000 

Long-term debt

  16,978,905   17,298,111   16,973,280   17,018,416 

Accrued interest payable

  295,910   295,910   409,622   409,622