11. FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2018

Assets and liabilities measured at fair value on a recurring and non-recurring basis are presented in the following table

FAIR VALUE MEASUREMENTS

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of September 30, 2018 and December 31, 2017. They indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In 2018, the Company adopted the provisions of Accounting Standard Update 2016-01 “Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). ASU 2016-01 requires the Company to use the exit price notion when measuring the fair value of financial instruments. The Company used the exit price notion for valuing financial instruments in 2018 and the entry price notion for valuing financial instruments in 2017. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

The carrying amounts and estimated fair values of the Company’s financial instruments are as follows (dollars in thousands):

	Carrying		Fair Value Measurements Using:
September 30, 2018	Amount		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and due from banks	$	24,634	$	24,634	$	—	$	—	$	24,634
Federal funds sold		10,000		10,000		—		—		10,000
Interest-bearing deposits in banks		1,746		—		1,746		—		1,746
Available-for-sale securities		277,269		4,963		273,306		—		277,269
Held-to-maturity securities		311		—		328		—		328
FHLB stock		3,932		N/A		N/A		N/A		N/A
Net loans and leases:		310,322		—		—		306,226		306,226
Accrued interest receivable		1,919		—		983		936		1,919
Financial liabilities:
Deposits:
Noninterest-bearing	$	209,322	$	209,322	$	—	$	—	$	209,322
Savings		74,765		74,765		—		—		74,765
Money market		150,050		150,050		—		—		150,050
NOW accounts		64,682		64,682		—		—		64,682
Time Deposits		77,001		—		76,687		—		76,687
Short-term borrowings		6,500		6,500		—		—		6,500
Long-term borrowings		9,000		—		9,124		—		9,124
Accrued interest payable		69		7		62		—		69

	Carrying		Fair Value Measurements Using:
December 31, 2017	Amount		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and due from banks	$	38,467	$	38,467	$	—	$	—	$	38,467
Interest-bearing deposits in banks		1,746		—		1,750		—		1,750
Available-for-sale securities		262,322		66		262,256		—		262,322
Held-to-maturity securities		378		—		404		—		404
FHLB stock		3,932		N/A		N/A		N/A		N/A
Net loans and leases:		308,713		—		—		317,900		317,900
Accrued interest receivable		1,956		—		1,124		832		1,956
Financial liabilities:
Deposits:
Noninterest-bearing	$	215,528	$	215,528	$	—	$	—	$	215,528
Savings		66,130		66,130		—		—		66,130
Money market		130,032		130,032		—		—		130,032
Interest checking		64,709		64,709		—		—		64,709
Time Deposits		79,681		—		79,614		—		79,614
Short-term borrowings		3,500		3,500		—		—		3,500
Long-term borrowings		12.000		—		11,978		—		11,978
Accrued interest payable		65		4		61		—		65

Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented.

The following methods and assumptions were used by the Company to estimate the fair values of its financial instruments at December 31, 2017:

Cash and due from banks: The carrying amounts of cash and short-term instruments, including Federal funds sold, approximate fair values and are classified as Level 1.

Interest-bearing deposits in banks: The fair values of interest-bearing deposits in banks are estimated by discounting their future cash flows using rates at each reporting date for instruments with similar remaining maturities offered by comparable financial institutions and are classified as Level 2.

Investment securities: For investment securities, fair values are based on quoted market prices, where available, and are classified as Level 1. If quoted market prices are not available, fair values are estimated using quoted market prices for similar securities and indications of value provided by brokers and are classified as Level 2.

FHLB stock: It is not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.

Loans and leases: Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality also resulting in a Level 3 classification.

Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. For time deposits, the fair values for fixed rate certificates of deposit are estimated using a discounted cash flow methodology that applies market interest rates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

Short-term and long-term borrowings: The fair value of short-term borrowings is estimated to be the carrying amount and is classified as Level 1. The fair value of long-term borrowings is estimated using a discounted cash flow analysis using interest rates currently available for similar debt instruments and are classified as Level 2.

Accrued interest receivable and payable: The carrying amount of accrued interest receivable approximates fair value resulting in a Level 3 classification and the carrying amount of accrued interest payable approximates fair value resulting in a Level 2 classification.

Off-balance sheet instruments: Fair values for off-balance sheet, credit-related 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 commitments was not material at December 31, 2017.

Assets and liabilities measured at fair value on a recurring and non-recurring basis along with any related gain or loss recognized in the income statement due to fair value changes are presented in the following table:

Description			Fair Value Measurements Using						Total Gains
(dollars in thousands)	Fair Value		Level 1		Level 2		Level 3		(Losses)
September 30, 2018
Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
US Government Agencies and Sponsored Entities	$	250,290	$	—	$	250,290	$	—	$	—
Obligations of states and political subdivisions		15,541		—		15,541		—		—
Corporate bonds		6,475		—		6,475		—		—
U.S. Treasury bonds		4,963		4,963		—		—		—
Total recurring	$	277,269	$	4,963	$	272,306	$	—	$	—
Assets and liabilities measured on a nonrecurring basis:
Impaired loans:
Real estate:
Commercial	$	5,131	$	—	$	—	$	5,131	$	—
Other real estate owned
Land		961		—		—		961		—
Total nonrecurring	$	6,902	$	—	$	—	$	6,902	$	—
Description			Fair Value Measurements Using						Total Gains
(dollars in thousands)	Fair Value		Level 1		Level 2		Level 3		(Losses)
December 31, 2017
Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
US Government Agencies and
Sponsored Agencies	$	232,869	$	—	$	232,869	$	—	$	—
Corporate Debt securities		6,626		—		6,626
Obligations of states and political subdivisions		22,715		—		22,715		—		—
Corporate stock		112		66		46		—		—
Total recurring	$	262,322	$	66	$	262,256	$	—	$	—
Assets and liabilities measured on a nonrecurring basis:
Impaired loans:
Commercial	$	1,598	$	—	$	—	$	1,598	$	(1,073	)
Real estate:
Commercial		178		—		—		178		—
Residential		329		—		—		329		—
Other real estate owned
Land		961		—		—		961		—
Total nonrecurring	$	3,066	$	—	$	—	$	3,066	$	(1,073	)

There were no significant transfers between Levels 1 and 2 during the three-month and nine-month periods ended September 30, 2018 or the twelve months ended December 31, 2017.

The following methods were used to estimate the fair value of each class of financial instrument above:

Available-for-sale securities – Fair values for investment securities are based on quoted market prices, if available, and are considered Level 1, or evaluated using pricing models that vary by asset class and incorporate available trade, bid and other market information and are considered Level 2. Pricing applications apply available information, as applicable, through processes such as benchmark curves, benchmarking to like securities, sector groupings and matrix pricing.

Impaired loans – The fair value of collateral dependent impaired loans adjusted for specific allocations of the allowance for loan losses is generally based on recent real estate appraisals and/or evaluations. These appraisals and/or evaluations may utilize a single valuation approach or a combination of approaches including comparable sales, cost and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income and other available data. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for all Level 3 nonrecurring impaired loans is the sales comparison approach less a reserve for past dues taxes and selling costs ranging from 8% to 10%.

Other real estate owned – Certain commercial and residential real estate properties classified as OREO are measured at fair value, less costs to sell. Fair values are based on recent real estate appraisals and/or evaluations. These appraisals and/or evaluations may use a single valuation approach or a combination of approaches including comparable sales, cost and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income and other available data. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for all Level 3 nonrecurring OREO is the sales comparison approach less selling costs ranging from 8% to 10%.