Note

Fair Value Disclosure

FASB ASC

820

“Fair Value Measurement” defines fair value and provides the framework for measuring fair value and required disclosures about fair value measurements. Fair value is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the transaction date. ASC

820

establishes a fair value hierarchy that prioritizes the inputs used in valuation methods to determine fair value.

The

three

levels of fair value hierarchy are as follows:

Level I –

Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets. These generally provide the most reliable evidence and are used to measure fair value whenever available.

Level II –

Fair value is based on significant inputs, other than Level I inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data. Level II inputs include quoted market prices in active markets for similar assets, quoted market prices in markets that are

not

active for identical or similar assets, and other observable inputs.

Level III –

Fair value would be based on significant unobservable inputs. Examples of valuation methodologies that would result in Level III classification include option pricing models, discounted cash flows, and other similar techniques.

This hierarchy requires the use of observable market data when available. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement.

The following table presents the financial assets measured at fair value on a recurring basis and reported on the Consolidated Statement of Financial Condition as of the dates indicated, by level within the fair value hierarchy. The majority of the Company’s securities are included in Level II of the fair value hierarchy. Fair values for Level II securities were primarily determined by a

third

party pricing service using both quoted prices for similar assets, when available, and model-based valuation techniques that derive fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates. The standard inputs that are normally used include benchmark yields of like securities, reportable trades, broker/dealer quotes, issuer spreads,

two

-sided markets, benchmark securities, bids, offers, and reference data including market research publications.

			(Dollars in thousands)
	Fair Value Hierarchy		September 30, 2017		December 31, 2016
Available for Sales Securities:
U.S. Government Agencies		Level II	$	58,380	$	66,156
Obligations of States and Political Subdivisions		Level II		37,808		35,735
Mortgage-Backed Securities - Government-Sponsored Enterprises		Level II		17,859		2,619
Equity Securities - Mutual Funds		Level I		510		507
Equity Securities - Other		Level I		1,332		1,191
Total Available for Sale Securities			$	115,889	$	106,208

The following table presents the financial assets measured at fair value on a nonrecurring basis on the Consolidated Statement of Financial Condition as of the dates indicated by level within the fair value hierarchy. The table also presents the significant unobservable inputs used in the fair value measurements. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves. Techniques used to value the collateral that secure the impaired loans include quoted market prices for identical assets classified as Level I inputs or observable inputs, employed by certified appraisers, for similar assets classified as Level II inputs. In cases where valuation techniques included inputs that are unobservable and are based on estimates and assumptions developed by management based on the best information available under each circumstance, the asset valuation is classified as Level III inputs.

(Dollars in thousands)

Fair Value at

Significant

Financial Asset

Fair Value
Hierarchy

September 30,
2017

December 31,
2016

Valuation
Techniques

Significant
Unobservable Inputs

Unobservable
Input Value

Impaired Loans

Level III

2,271

2,497

Market Comparable Properties

Marketability Discount

10%

30%

(1)

OREO

Level III

169

Market Comparable Properties

Marketability Discount

10%

50%

(1)

(

)

Range includes discounts taken since appraisal and estimated values.

Impaired loans are evaluated when a loan is identified as impaired and valued at the lower of cost or fair value at that time. Fair value is measured based on the value of the collateral securing these loans and is classified as Level III in the fair value hierarchy. At

September 30, 2017

and

December 31, 2016,

the fair value of impaired loans consists of the loan balances of

$3.3

million and

$3.7

million, respectively, less their specific valuation allowances of

$1.0

million and

$1.2

million, respectively.

Other real estate owned (OREO) properties are evaluated at the time of acquisition and recorded at fair value, less estimated selling costs. After acquisition, other real estate owned is recorded at the lower of cost or fair value, less estimated selling costs. The fair value of an other real estate owned property is determined from a qualified independent appraisal and is classified as Level III in the fair value hierarchy. During the

three

months ended

September 30, 2017,

one

residential real estate loan for

$14,000

moved into OREO. During the

nine

months ended

September 30, 2017,

two

residential real estate loans for

$155,000

and

$14,000

moved into OREO. During the

nine

months ended

September 30, 2016,

two

commercial real estate properties for

$3.2

million were foreclosed on, moved into OREO, evaluated for fair value and recorded a prior

first

quarter gain on the valuation adjustment on foreclosed real estate for approximately

$566,000.

This recognized gain on the valuation adjustment was supported by independent appraisals of the

two

properties. One property was subject to a tentative sales agreement with a current customer which closed in the prior year. The other property was transferred into premises and equipment of the Company due to its location and the Company’s need of a new headquarters location.

Financial instruments are defined as cash, evidence of an ownership in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a

second

entity on potentially favorable or unfavorable terms.

Fair value 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. If

readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses and other factors, as determined through various option pricing formulas or simulation modeling. As many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting estimated fair values

may

not

be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in the assumptions on which the estimated fair values are based

may

have significant impact on the resulting estimated fair values.

As certain assets such as deferred tax assets and premises and equipment are

not

considered financial instruments, the estimated fair value of financial instruments would

not

represent the full value of the Company.

The Company employs simulation modeling in determining the estimated fair value of financial instruments for which quoted market prices are

not

available, based upon the following assumptions:

Cash and Due From Banks, Restricted Stock, Bank-Owned Life Insurance, Accrued Interest Receivable, Short-Term Borrowings, and Accrued Interest Payable

The fair value is equal to the current carrying value.

Investment Securities

The fair value of investment securities is equal to the available quoted market price. If

quoted market price is available, fair value is estimated using the quoted market price for similar securities or matrix pricing, 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.

Loans Receivable

For variable-rate loans that reprice frequently and with

significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage 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 are estimated using discounted cash flow analyses, using market interest rates for comparable loans. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposit Liabilities

The fair values disclosed for demand deposits, are, by definition, equal to the amount payable on demand at the reporting date. The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates on comparable instruments to a schedule of aggregated expected monthly maturities on time deposits.

Borrowed Funds

Fair values of borrowed funds are estimated using discounted cash flow analyses based on current market rates for similar types of borrowing arrangements.

Commitments to Extend Credit

These financial instruments are generally

not

subject to sale and estimated fair values are

not

readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment or letter of credit, and the fair value determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, are

not

considered material for disclosure. The contractual amounts of unfunded commitments and letters of credit are presented in Note

The following table presents the estimated fair values of the Company’s financial instruments at the dates indicated.

		(Dollars in thousands)
		September 30, 2017				December 31, 2016
	Fair Value Hierarchy	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial Assets:
Cash and Due From Banks:
Interest Bearing	Level I	$	31,979	$	31,979	$	7,699	$	7,699
Non-Interest Bearing	Level I		11,766		11,766		6,583		6,583
Investment Securities:
Available for Sale	See Above		115,889		115,889		106,208		106,208
Loans, Net	Level III		695,718		706,433		674,094		684,777
Restricted Stock	Level II		3,712		3,712		3,665		3,665
Bank-Owned Life Insurance	Level II		19,035		19,035		18,687		18,687
Accrued Interest Receivable	Level II		2,572		2,572		2,441		2,441

Financial Liabilities:
Deposits	Level II		762,374		738,836		698,218		697,806
Short-term Borrowings	Level II		24,662		24,662		27,027		27,027
Other Borrowed Funds	Level II		24,500		24,671		28,000		28,098
Accrued Interest Payable	Level II		413		413		334		334