Note 13 – Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 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 instrument.

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 market 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.

ASC Topic 860 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC Topic 860 are as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

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

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy utilized at June 30, 2018 and December 31, 2017, respectively, are as follows:



		(Level 1)		(Level 2)
		Quoted		Significant		(Level 3)
		Prices in Active		Other		Significant
		Markets for		Observable		Unobservable
Description	Identical Assets		Inputs		Inputs		Total

		(In Thousands)
U.S. Government agency obligations	$	-	$	7,982	$	-	$	7,982
Municipal bonds		-		35,919		-		35,919
U.S. Government Sponsored Enterprise (GSE) -
Mortgage-backed securities - residential		-		48,135		-		48,135
June 30, 2018 Securities available for sale	$	-	$	92,036	$	-	$	92,036

U.S. Government agency obligations	$	-	$	9,988	$	-	$	9,988
Municipal bonds		-		38,321		-		38,321
U.S. Government Sponsored Enterprise (GSE) -
Mortgage-backed securities - residential		-		41,987		-		41,987
December 31, 2017 Securities available for sale	$	-	$	90,296	$	-	$	90,296

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2018 and December 31, 2017, respectively, are as follows:



		(Level 1)		(Level 2)
		Quoted		Significant		(Level 3)
		Prices in Active		Other		Significant
		Markets for		Observable		Unobservable
Description	Identical Assets		Inputs		Inputs		Total
		(In Thousands)
June 30, 2018 Impaired loans	$	-	$	-	$	1,001	$	1,001
June 30, 2018 Other real estate owned	$	-	$	-	$	297	$	297
December 31, 2017 Impaired loans	$	-	$	-	$	980	$	980
December 31, 2017 Other real estate owned	$	-	$	-	$	458	$	458

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include Level 3 input which are not identifiable. Fair values may also include qualitative adjustments by management based on economic conditions and liquidation expenses.

Impaired loans are those that are accounted for under existing FASB guidance, in which the Bank has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the

properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

At June 30, 2018, of the impaired loans having an aggregate balance of $8.4 million, $7.2 million did not require a valuation allowance because the value of the collateral, including estimated selling costs, securing the loan was determined to meet or exceed the balance owed on the loan. Of the remaining $1.2 million in impaired loans, an aggregate valuation allowance of $207 thousand was required to reflect what was determined to be a shortfall in the value of the collateral as compared to the balance on such loans.

Real estate properties acquired through, or in lieu of, foreclosure are to be sold and are carried at fair value less estimated cost to sell. Fair value is based upon independent market prices or appraised value of the property. These assets are included in Level 3 fair value based upon the lowest level of input that is significant to the fair value measurement.

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
Description	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)

		(Dollars In Thousands)
June 30, 2018:
Impaired loans	$	1,001	Appraisal of collateral	Appraisal adjustments (1)	0% to -25% (-18.6%)
				Liquidation expenses (2)	0% to -8.5% (-8.1%)
Other real estate owned	$	297	Listings, Letters of Intent	Liquidation expenses (2)	-5% (-5%)
			& Third Party Evaluations
December 31, 2017:
Impaired loans	$	980	Appraisal of collateral	Appraisal adjustments (1)	0% to -25% (-23.2%)
				Liquidation expenses (2)	0% to -8.5% (-7.7%)
Other real estate owned	$	458	Listings, Letters of Intent	Liquidation expenses (2)	-5% (-5%)
			& Third Party Evaluations

Appraisals may be adjusted by management for qualitative factors including economic conditions and the age of the appraisal. The range and weighted average of appraisal adjustments are presented as a percent of the appraisal.

Appraisals and pending agreements of sale are adjusted by management for liquidation expenses. The range and weighted average of liquidation expense adjustments are presented as a percent of the appraisal or pending agreement of sale.

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at June 30, 2018 and December 31, 2017:

Securities Available for Sale (Carried at Fair Value)

The fair value of securities available for sale are determined by matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted prices. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things.

The estimated fair values of the Company’s financial instruments were as follows at June 30, 2018 and December 31, 2017:



						(Level 1)
						Quoted		(Level 2)		(Level 3)
						Prices in Active		Significant Other		Significant
		Carrying		Fair Value		Markets for		Observable		Unobservable
		Amount		Estimate		Identical Assets		Inputs		Inputs

	(In Thousands)
June 30, 2018:
Financial assets:
Cash and cash equivalents	$	32,147	$	32,147	$	32,147	$	-	$	-
Securities available-for-sale		92,036		92,036		-		92,036		-
Loans receivable, net of allowance		917,776		904,731		-		-		904,731
Restricted investments in bank stock		1,784		1,784		-		1,784		-
Accrued interest receivable		1,995		1,995		-		1,995		-
Financial liabilities:
Deposits		929,588		928,070		-		928,070		-
Securities sold under agreements to
repurchase and federal funds purchased		17,129		17,116		-		17,116		-
Short-term borrowings		28,740		28,740		-		28,740		-
Accrued interest payable		906		906		-		906		-
Off-balance sheet financial instruments:
Commitments to grant loans		-		-		-		-		-
Unfunded commitments under lines of credit		-		-		-		-		-
Standby letters of credit		-		-		-		-		-

December 31, 2017:
Financial assets:
Cash and cash equivalents	$	33,534	$	33,534	$	33,534	$	-	$	-
Securities available-for-sale		90,296		90,296		-		90,296		-
Loans receivable, net of allowance		851,711		849,328		-		-		849,328
Restricted investments in bank stock		583		583		-		583		-
Accrued interest receivable		1,983		1,983		-		1,983		-
Financial liabilities:
Deposits		900,854		900,232		-		900,232		-
Securities sold under agreements to
repurchase and federal funds purchased		9,999		9,994		-		9,994		-
Accrued interest payable		874		874		-		874		-
Off-balance sheet financial instruments:
Commitments to grant loans		-		-		-		-		-
Unfunded commitments under lines of credit		-		-		-		-		-
Standby letters of credit		-		-		-		-		-