Accounting guidance requires the Company to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. Therefore, the fair value presented herein may not be comparable to prior periods. Methodologies utilized are as follows:

Fair value is intended to represent the price that would be received in an orderly transaction between market participants as of the measurement date. In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, at least one significant assumption not observable in the market is utilized. These unobservable assumptions reflect estimates that market participants would use in pricing assets or liabilities. Inputs to these valuation techniques are subjective in nature, involve uncertainties and require significant judgement and therefore cannot be determined with precision. Accordingly, the fair value estimates presented are not necessarily indicative of the amounts to be realized in a current market exchange.

Accounting guidance also indicates that fair value estimates are presented according to a fair value hierarchy comprised of three levels. The levels are based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The level within the fair value hierarchy for assets or liabilities are based on the highest level of input that is significant to the fair value measurement (with Level 1 considered highest and Level 3 considered lowest). A brief description of each level follows:

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the consolidated financial statements:

Securities available for sale: Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data (Level 2). If the inputs used to provide the evaluation for certain securities are unobservable and/or there is little, if any, market activity, then the security would fall to the lowest level of the hierarchy (Level 3). The Company’s investment portfolio is primarily valued using fair value measurements that are considered to be Level 2. The Company has contracted with a third-party portfolio accounting service vendor for valuation of its securities. The vendor’s primary source for security valuation is Interactive Data Corporation (“IDC”). IDC utilizes evaluated pricing models that vary by asset class and include available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.

Interest rate swaps: The Company utilizes interest rate swap agreements as part of the management of interest rate risk to modify the repricing characteristics of certain portions of the Company’s interest-bearing assets and liabilities. The Company has contracted with a third party to provide valuations for interest rate swaps using standard valuation techniques and therefore classifies such valuation as Level 2. The Company has considered counterparty credit risk in the valuation of its interest rate swap assets and has considered its own credit risk in the valuation of its interest rate swap liabilities.

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2018 and 2017 by levels within the valuation hierarchy:

	Fair Value Measurements
(In thousands)	Balance		Level 1		Level 2		Level 3
Assets at December 31, 2018:
Available for sale securities:
Obligations of U.S. Government corporations and agencies	$	56,409	$	-	$	56,409	$	-
Obligations of states and political subdivisions		14,580		-		14,580		-
Corporate bonds		895		-		895		-
Total available for sale securities		71,884		-		71,884		-
Mutual funds		382		382		-		-
Interest rate swaps		367		-		367		-
Total assets at fair value	$	72,633	$	382	$	72,251	$	-
Liabilities at December 31, 2018:
Interest rate swaps	$	38	$	-	$	38	$	-
Total liabilities at fair value	$	38	$	-	$	38	$	-
Assets at December 31, 2017:
Available for sale securities:
Obligations of U.S. Government corporations and agencies	$	52,377	$	-	$	52,377	$	-
Obligations of states and political subdivisions		15,255		-		15,255		-
Corporate bonds		4,139		-		4,139		-
Mutual funds		382		382		-		-
Total available for sale securities		72,153		382		71,771		-
Interest rate swaps		233		-		233		-
Total assets at fair value	$	72,386	$	382	$	72,004	$	-
Liabilities at December 31, 2017:
Interest rate swaps	$	119	$	-	$	119	$	-
Total liabilities at fair value	$	119	$	-	$	119	$	-

In accordance with accounting guidance, certain assets are measured at fair value on a nonrecurring basis. The following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a nonrecurring basis in the consolidated financial statements:

Mortgage Loans Held for Sale: Mortgage loans held for sale are carried at lower of cost or market value. These loans currently consist of 1-4 family residential loans originated for sale in the secondary market. Fair value is 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 (Level 2). No nonrecurring fair value adjustments were recorded on mortgage loans held for sale during 2018 and 2017. Net gains and losses on the sale of loans are recorded as a component of noninterest income on the consolidated statements of operations.

Impaired Loans: A loan is designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loans or the fair value of the collateral securing the loans, or the present value of the cash flows. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Company’s collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal, of one year or less, conducted by an independent, licensed appraiser using observable market data (Level 2). However, if the collateral is in the process of construction or if an appraisal of the real estate property is more than one year old and not solely based on observable market comparables or management determines the fair value of the collateral is further impaired below the appraised value, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal, of one year or less, if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3). Any fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of operations.

Other Real Estate Owned: OREO is measured at fair value less estimated selling costs. Fair value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral. The Company considers OREO as Level 3.

The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis during the period:

The following table displays quantitative information about Level 3 Fair Value Measurements measured at fair value on a nonrecurring basis for December 31, 2018 and 2017:

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. 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 instruments. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Cash and cash equivalents: The carrying amounts of cash and short-term instruments with a maturity of three months or less approximate fair value. Instruments with maturities of greater than three months are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar instruments.

Securities: For securities held for investment purposes, fair values are based on quoted market prices or dealer quotes. If quoted market prices are not available, fair values are based on quoted market prices for similar securities. Restricted investments are carried at cost based on redemption provisions of the issuers.

Mortgage loans held for sale: Fair value for mortgage loans held for sale is based on the price secondary markets are currently offering for similar loans.

Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (e.g., 1-4 family residential), credit card loans, and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for other loans (i.e., commercial real estate and investment property mortgage loans, commercial and industrial loans) are estimated using discounted cash flow analyses, using interest rates currently offered for loans with similar terms to borrowers of similar credit quality. Fair value for impaired loans is described above.

Accrued Interest: The carrying amounts of accrued interest approximate fair value.

Bank-owned life insurance: The carrying amount of life insurance contracts is assumed to be a reasonable fair value. Life insurance contracts are carried on the balance sheets at their redemption value. This redemption value is based on existing market conditions and therefore represents the fair value of the contract.

Interest Rate Swaps: The fair values are based on quoted market prices or mathematical models using current and historical data.

Deposits: The fair values disclosed for demand deposits (i.e., interest and noninterest-bearing checking, savings and money market accounts) are, by definition, equal to the amount payable at the reporting date (that is, their carrying amounts). Fair values of fixed rate time deposits are estimated using a discounted cash flow calculation that applies interest rates currently offered to a schedule of aggregated expected monthly maturities on time deposits.

Borrowings: The fair values of the Company’s FHLB advances and other borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Off-Balance Sheet Financial Instruments: The fair value of commitments to extend credit is estimated using the fees currently charged to enter 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 standby letters 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 estimated fair values and related carrying amounts of the Company’s financial instruments are as follows:

	December 31, 2018
(In thousands)	Carrying Amount		Level 1		Level 2		Level 3		Fair Value
Assets
Cash and short-term investments	$	67,110	$	67,110	$	-	$	-	$	67,110
Securities available for sale		71,884		-		71,884		-		71,884
Restricted investments		2,240		-		2,240		-		2,240
Loans, net		544,188		-		534,634		2,438		537,072
Accrued interest receivable		1,942		-		1,942		-		1,942
Mutual Funds		382		382		-		-		382
Interest rate swaps		367		-		367		-		367
Bank-owned life insurance		13,595		-		13,595		-		13,595
Total financial assets	$	701,708	$	67,492	$	624,662	$	2,438	$	694,592

Liabilities
Deposits	$	635,638	$	-	$	634,917	$	-	$	634,917
FHLB advances		23,780		-		23,633		-		23,633
Junior subordinated debt		4,124		-		4,414		-		4,414
Accrued interest payable		300		-		300		-		300
Interest rate swaps		38		-		38		-		38
Total financial liabilities	$	663,880	$	-	$	663,302	$	-	$	663,302

	December 31, 2017
(In thousands)	Carrying Amount		Level 1		Level 2		Level 3		Fair Value
Assets
Cash and short-term investments	$	29,300	$	29,091	$	-	$	-	$	29,091
Securities available for sale		72,153		382		71,771		-		72,153
Restricted investments		1,546		-		1,546		-		1,546
Loans, net		497,705		-		494,143		46		494,189
Accrued interest receivable		1,940		-		1,940		-		1,940
Interest rate swaps		233		-		233		-		233
Bank-owned life insurance		13,234		-		13,234		-		13,234
Total financial assets	$	616,111	$	29,473	$	582,867	$	46	$	612,386

Liabilities
Deposits	$	570,023	$	-	$	569,297	$	-	$	569,297
FHLB advances		7,860		-		7,766		-		7,766
Junior subordinated debt		4,124		-		4,116		-		4,116
Accrued interest payable		128		-		128		-		128
Interest rate swaps		119		-		119		-		119
Total financial liabilities	$	582,254	$	-	$	581,426	$	-	$	581,426

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.