7. Fair value estimates:

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosure under GAAP. Fair value estimates are calculated without attempting to estimate the value of anticipated future business and the value of certain assets and liabilities that are not considered financial. Accordingly, such assets and liabilities are excluded from disclosure requirements.

In accordance with FASB ASC 820, “Fair Value Measurements and Disclosures,” fair value is the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. 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. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets. In many cases, these values cannot be realized in immediate settlement of the instrument.

Current 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 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.

In accordance with GAAP, the Company groups its assets and liabilities generally measured at fair value into three levels based on market information or other fair value estimates in which the assets and liabilities are traded or valued and the reliability of the assumptions used to determine fair value. These levels include:

Level 1: Unadjusted quoted prices of identical assets or liabilities in active markets that the entity 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; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

An asset’s or liability’s placement in the fair value hierarchy is based on the lowest level of input that is significant to the fair value estimate.

The following methods and assumptions were used by the Company to calculate fair values and related carrying amounts of financial instruments:

Cash and cash equivalents: The carrying values of cash and cash equivalents as reported on the balance sheet approximate fair value.

Investment securities: The fair values of U.S. Treasury securities and marketable equity securities are based on quoted market prices from active exchange markets. The fair values of debt securities are based on pricing from a matrix pricing model.

Loans held for sale: The fair values of loans held for sale are based upon current delivery prices in the secondary mortgage market.

Net loans: For adjustable-rate loans that re-price frequently and with no significant credit risk, fair values are based on carrying values. The fair values of other non-impaired loans are estimated using discounted cash flow analysis, using interest rates currently offered in the market for loans with similar terms to borrowers of similar credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis determined by the loan review function or underlying collateral values, where applicable.

Mortgage servicing rights: To determine the fair value, the Company estimates the present value of future cash flows incorporating assumptions such as cost of servicing, discount rates, prepayment speeds and default rates.

Accrued interest receivable: The carrying value of accrued interest receivable as reported on the balance sheet approximates fair value.

Restricted equity securities: The carrying values of restricted equity securities approximate fair value, due to the lack of marketability for these securities.

Deposits: The fair values of noninterest-bearing deposits and savings, NOW and money market accounts are the amounts payable on demand at the reporting date. The fair value estimates do not include the benefit that results from such low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. The carrying values of adjustable-rate, fixed-term time deposits approximate their fair values at the reporting date. For fixed-rate time deposits, the present value of future cash flows is used to estimate fair values. The discount rates used are the current rates offered for time deposits with similar maturities.

Short-term borrowings: The carrying values of short-term borrowings approximate fair value.

Long-term debt: The fair value of fixed-rate long-term debt is based on the present value of future cash flows. The discount rate used is the current rate offered for long-term debt with the same maturity.

Accrued interest payable: The carrying value of accrued interest payable as reported on the balance sheet approximates fair value.

Off-balance sheet financial instruments:

The majority of commitments to extend credit, unused portions of lines of credit and standby letters of credit carry current market interest rates if converted to loans. Because such commitments are generally unassignable of either the Company or the borrower, they only have value to the Company and the borrower. None of the commitments are subject to undue credit risk. The estimated fair values of off-balance sheet financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of off-balance sheet financial instruments was not material at September 30, 2016 and December 31, 2015.

Assets and liabilities measured at fair value on a recurring basis at September 30, 2016 and December 31, 2015 are summarized as follows:


	Fair Value Measurement Using
			Quoted Prices in	Significant		Significant
			Active Markets for	Other Observable		Unobservable
			Identical Assets	Inputs		Inputs
September 30, 2016	Amount		(Level 1)	(Level 2)		(Level 3)
U.S. Government-sponsored enterprises	$	67,656	$	$	67,656	$
State and Municipals:
Taxable		15,754			15,754
Tax-exempt		118,297			118,297
Mortgage-backed securities:
U.S. Government agencies		23,381			23,381
U.S. Government-sponsored enterprises		24,825			24,825
Total	$	249,913	$	$	249,913	$


	Fair Value Measurement Using
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
December 31, 2015	Amount		(Level 1)		(Level 2)		(Level 3)
U.S. Treasury securities	$	9,999	$	9,999			$
U.S. Government-sponsored enterprises		69,060			$	69,060
State and Municipals:
Taxable		16,545				16,545
Tax-exempt		124,924				124,924
Mortgage-backed securities:
U.S. Government agencies		31,568				31,568
U.S. Government-sponsored enterprises		32,839				32,839
Total	$	284,935	$	9,999	$	274,936	$

Assets and liabilities measured at fair value on a nonrecurring basis at September 30, 2016 and December 31, 2015 are summarized as follows:

Fair Value Measurement Using

Quoted Prices in

Significant

Active Markets for

Other Observable

Unobservable

Identical Assets

Inputs

September 30, 2016

Amount

(Level 1)

(Level 2)

(Level 3)

Impaired loans

5,266

Other real estate owned

682

Fair Value Measurement Using

Quoted Prices in

Significant Other

Significant

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

December 31, 2015

Amount

(Level 1)

(Level 2)

(Level 3)

Impaired loans

4,944

Other real estate owned

878

Fair values of impaired loans are based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:


	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value				Range
September 30, 2016	Estimate		Valuation Techniques	Unobservable Input	(Weighted Average)
Impaired loans	$	5,266	Appraisal of collateral	Appraisal adjustments	17.7% to 94.0% (62.5)%
				Liquidation expenses	3.0% to 6.0% (5.2)%
Other real estate owned	$	682	Appraisal of collateral	Appraisal adjustments	25.0% to 50.5% (33.7)%
				Liquidation expenses	3.0% to 6.0% (5.0)%


	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value				Range
December 31, 2015	Estimate		Valuation Techniques	Unobservable Input	(Weighted Average)
Impaired loans	$	4,944	Appraisal of collateral	Appraisal adjustments	3.3% to 97.0% (61.7)%
				Liquidation expenses	3.0% to 6.0% (5.4)%
Other real estate owned	$	878	Appraisal of collateral	Appraisal adjustments	20.0% to 77.3% (30.3)%
				Liquidation expenses	3.0% to 6.0% (5.0)%

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 Inputs which are not identifiable.

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

The carrying and fair values of the Company’s financial instruments at September 30, 2016 and December 31, 2015 and their placement within the fair value hierarchy are as follows:


					Fair Value Hierarchy
					Quoted
					Prices in
					Active		Significant
					Markets for		Other		Significant
					Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
September 30, 2016	Value		Value		(level 1)		(level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	31,914	$	31,914	$	31,914
Investment securities:
Available-for-sale		249,913		249,913			$	249,913
Held-to-maturity		10,864		11,546				11,546
Loans held for sale		360		359				359
Net loans		1,506,679		1,517,858					$	1,517,858
Accrued interest receivable		5,309		5,309				5,309
Mortgage servicing rights		681		1,551				1,551
Restricted equity securities		6,911		6,911				6,911
Total	$	1,812,631	$	1,825,361
Financial liabilities:
Deposits	$	1,565,810	$	1,567,788				1,567,788
Short-term borrowings		75,300		75,300				75,300
Long-term debt		58,685		60,560				60,560
Accrued interest payable		434		434			$	434
Total	$	1,700,229	$	1,704,082


					Fair Value Hierarchy
					Quoted
					Prices in
					Active		Significant
					Markets for		Other		Significant
					Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
December 31, 2015	Value		Value		(level 1)		(level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	32,917	$	32,917	$	32,917
Investment securities:
Available-for-sale		284,935		284,935	$	9,999	$	274,936
Held-to-maturity		12,109		12,606				12,606
Loans held for sale
Net loans		1,327,890		1,330,900					$	1,330,900
Accrued interest receivable		5,796		5,796				5,796
Mortgage servicing rights		465		1,543				1,543
Restricted equity securities		5,403		5,403				5,403
Total	$	1,669,515	$	1,674,100
Financial liabilities:
Deposits	$	1,455,810	$	1,455,979				1,455,979
Short-term borrowings		38,325		38,325				38,325
Long-term debt		60,354		61,412				61,412
Accrued interest payable		560		560			$	560
Total	$	1,555,049	$	1,556,276