(12) Fair Value Measurement

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale and trading securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a non-recurring basis, such as loans held-for-sale, loans held-for-investment and certain other assets. These non-recurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally corresponds with the Company’s quarterly valuation process.

Assets Recorded at Fair Value on a Recurring Basis

The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of December 31, 2018 and 2017.

December 31, 2018	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Treasury securities	$	50,682	$	50,682	$	—	$	—
Securities of U.S. government agencies and corporations		42,076		—		42,076		—
Obligations of states and political subdivisions		19,168		—		19,168		—
Collateralized mortgage obligations		63,799		—		63,799		—
Mortgage-backed securities		138,912		—		138,912		—

Total investments at fair value	$	314,637	$	50,682	$	263,955	$	—

December 31, 2017	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Treasury securities	$	18,464	$	18,464	$	—	$	—
Securities of U.S. government agencies and corporations		21,109		—		21,109		—
Obligations of states and political subdivisions		23,208		—		23,208		—
Collateralized mortgage obligations		66,083		—		66,083		—
Mortgage-backed securities		151,877		—		151,877		—

Total investments at fair value	$	280,741	$	18,464	$	262,277	$	—

There were no transfers of assets measured at fair value on a recurring basis between level 1 and level 2 of the fair value hierarchy.

Assets Recorded at Fair Value on a Non-recurring Basis

Assets measured at fair value on a non-recurring basis are included in the table below by level within the fair value hierarchy as of December 31, 2018 and 2017.

December 31, 2018	Total		Level 1		Level 2		Level 3
Impaired loans	$	300	$	—	$	—	$	300
Other real estate owned		1,092		—		—		1,092

Total assets at fair value	$	1,392	$	—	$	—	$	1,392

December 31, 2017	Total		Level 1		Level 2		Level 3
Impaired loans	$	1,468	$	—	$	—	$	1,468

Total assets at fair value	$	1,468	$	—	$	—	$	1,468

There were no liabilities measured at fair value on a recurring or non-recurring basis at December 31, 2018 and 2017.

Key methods and assumptions used in measuring the fair value of impaired loans and other real estate owned as of December 31, 2018 and 2017 were as follows:

	Method	Assumption Inputs
Impaired loans	Collateral, market, income, enterprise, liquidation and discounted cash flows	External appraised values, management assumptions regarding market trends or other relevant factors, selling costs generally ranging from 6% to 10%, or the amount and timing of cash flows based on the loan's effective interest rate.
Other real estate owned	Collateral	External appraised values, management assumptions regarding market trends or other relevant factors, selling costs generally ranging from 6% to 10%.

The following section describes the valuation methodologies used for assets recorded at fair value.

Investment Securities Available-for-Sale

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, if available. If quoted market prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions, and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets where valuations include significant unobservable assumptions.

Impaired Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, the Company measures impairment. The fair value of impaired loans is estimated using one of several methods, including the present value of expected cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. Those impaired loans not requiring charge-off or specific allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.

At December 31, 2018, certain impaired loans were considered collateral dependent and were evaluated based on the fair value of the underlying collateral securing the loan. Impaired loans where a charge-off is recorded based on the fair value of collateral require classification in the fair value hierarchy. When a loan is evaluated based on the fair value of the underlying collateral securing the loan, the Company records the impaired loan as non-recurring Level 3 given the valuation includes significant unobservable assumptions.

Other Real Estate Owned

Other real estate assets (“OREO”) acquired through, or in lieu of, foreclosure are held-for-sale and are initially recorded at the lower of cost or fair value, less selling costs. Any write-downs to fair value at the time of transfer to OREO are charged to the allowance for loan losses. Appraisals or evaluations are then done periodically thereafter charging any additional write-downs or valuation allowances to the appropriate expense accounts. Values are derived from appraisals of underlying collateral and discounted cash flow analysis. OREO is classified within Level 3 of the hierarchy given the valuation includes significant unobservable assumptions.

Disclosures about Fair Value of Financial Instruments

The following table summarizes fair value estimates for financial instruments for the years ended December 31, 2018 and 2017, excluding financial instruments recorded at fair value on a recurring basis (summarized in the first table in this note).

			2018				2017
	Level		Carrying amount		Fair value		Carrying amount		Fair value
Financial assets:
Cash and cash equivalents		1	$	116,032	$	116,032	$	152,892	$	152,892
Certificates of deposit		2		7,595		7,573		1,984		1,983
Other equity securities		3		6,019		6,019		5,567		5,567
Loans receivable:
Net loans		3		763,393		726,179		739,112		736,292
Loans held-for-sale		2		2,295		2,345		1,040		1,060
Interest receivable		2		4,158		4,158		4,117		4,117
Mortgage servicing rights		3		1,579		2,091		1,712		1,876
Financial liabilities:
Deposits		3		1,124,612		966,464		1,104,740		993,425
Interest payable		2		74		74		72		72

Limitations

On January 1, 2018 the Company adopted ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which required the fair value of our loans held for investment, which is recorded at amortized cost, to incorprate the exit price notion. As a result, the fair value of loans held for investment as of December 31, 2018 is not comparable to the fair value of loans held for investment as of December 31, 2017.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument and expected exit prices. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, 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 estimates.

Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include deferred tax liabilities and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in many of the estimates.