NOTE 20 — FAIR VALUE

Fair value estimates, methods, and assumptions are set forth below for the Corporation’s financial instruments:

Cash, cash equivalents, and interest-bearing deposits - The carrying values approximate the fair values for these assets.

Securities - Fair values are based on quoted market prices where available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Federal Home Loan Bank stock - Federal Home Loan Bank stock is carried at cost, which is its redeemable value and approximates its fair value, since the market for this stock is limited.

Loans - Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, residential mortgage, and other consumer. The fair value of loans is calculated by discounting scheduled cash flows using discount rates reflecting the credit and interest rate risk inherent in the loan using an exit notion as of December 31, 2019. As of December 31, 2018 an entrance price was used to measure the fair value of loans.

The methodology in determining fair value of nonaccrual loans is to average them into the blended interest rate at 0% interest. This has the effect of decreasing the carrying amount below the risk-free rate amount and, therefore, discounts the estimated fair value.

Impaired loans are measured at the estimated fair value of the expected future cash flows at the loan’s effective interest rate or the fair value of the collateral for loans which are collateral dependent. Therefore, the carrying values of impaired loans approximate the estimated fair values for these assets.

Deposits - The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits and savings, is equal to the amount payable on demand at the reporting date. The fair value of time deposits is based on the discounted value of contractual cash flows applying interest rates currently being offered on similar time deposits.

Borrowings - Rates currently available for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. The fair value of borrowed funds due on demand is the amount payable at the reporting date.

Accrued interest - The carrying amount of accrued interest approximates fair value.

Off-balance-sheet instruments - The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the current interest rates, and the present creditworthiness of the counterparties. Since the differences in the current fees and those reflected to the off-balance-sheet instruments at year-end are immaterial, no amounts for fair value are presented.

The following table presents information for financial instruments at December 31 (dollars in thousands):


		December 31, 2019				December 31, 2018
	Level in Fair	Carrying		Estimated		Carrying		Estimated
	Value Hierarchy	Amount		Fair Value		Amount		Fair Value

Financial assets:
Cash and cash equivalents	Level 1	$	49,826	$	49,826	$	64,157	$	64,157
Interest-bearing deposits	Level 2		10,295		10,295		13,452		13,452
Securities available for sale	Level 2		106,569		106,569		115,260		115,260
Securities available for sale	Level 3		1,403		1,403		1,488		1,488
Federal Home Loan Bank stock	Level 2		4,924		4,924		4,924		4,924
Net loans	Level 3		1,053,468		1,055,985		1,033,681		1,013,214
Accrued interest receivable	Level 3		3,751		3,751		3,005		3,005

Total financial assets		$	1,230,236	$	1,232,753	$	1,235,967	$	1,215,500

Financial liabilities:
Deposits	Level 2	$	1,075,677	$	1,044,267	$	1,097,537	$	1,047,709
Borrowings	Level 2		64,551		64,403		57,536		56,771
Accrued interest payable	Level 3		569		569		391		391

Total financial liabilities		$	1,140,797	$	1,109,239	$	1,155,464	$	1,104,871

Limitations - Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Corporation’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. Significant assets and liabilities that are not considered financial assets or liabilities include premises and equipment, other assets, and other liabilities. 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 the estimates.

The following is information about the Corporation’s assets and liabilities measured at fair value on a recurring basis at December 31, 2019 and the valuation techniques used by the Corporation to determine those fair values.

Level 1:In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access.

Level 2:Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3:Level 3 inputs are unobservable inputs, including inputs available in situations where there is little, if any, market activity for the related asset or liability.

The fair value of all investment securities at December 31, 2019 and 2018 were based on level 2 and level 3 inputs. There are no other assets or liabilities measured on a recurring basis at fair value. For additional information regarding investment securities, please refer to “Note 3 — Investment Securities.” The table below shows investment securities measured at fair value on a recurring basis (dollars in thousands):


			Quoted Prices		Significant		Significant
			in Active Markets		Other Observable		Unobservable
	Balance at		for Identical Assets		Inputs		Inputs
(dollars in thousands)	December 31, 2019		(Level 1)		(Level 2)		(Level 3)
Assets

Corporate	$	20,938	$	—	$	20,438	$	500
US Agencies		14,496		—		14,496		—
US Agencies - MBS		34,526		—		34,526		—
Obligations of state and political subdivisions		38,012		—		37,024		903
	$	107,972


			Quoted Prices		Significant		Significant
			in Active Markets		Other Observable		Unobservable
	Balance at		for Identical Assets		Inputs		Inputs
(dollars in thousands)	December 31, 2018		(Level 1)		(Level 2)		(Level 3)
Assets

Corporate	$	20,064	$	—	$	19,564	$	500
US Agencies		15,970		—		15,970		—
US Agencies - MBS		32,840		—		32,840		—
Obligations of state and political subdivisions		47,874		—		46,886		988
	$	116,748

The Corporation had no other Level 3 assets or liabilities on a recurring basis as of December 31, 2019.

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Corporation’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

The Corporation also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets include loans and other real estate held for sale. The Corporation has estimated the fair values of these assets using Level 3 inputs, specifically discounted cash flow projections.

The table below shows the activity in level three assets for the years ended, December 31, 2019 and 2018 (dollars in thousands):


	Balance at						Transfers						Balance
	Beginning		Net Gains (losses)				in (out) of						at end
	of Period		Realized		Unrealized		Level 3		Purchases		Sales		of Period
Year Ended December 31, 2019
Corporate	$	500	$	—	$	—	$	—	$	—	$	—	$	500
Obligations of state and political subdivisions		988		—		—		—		—		—		988


	Balance at						Transfers						Balance
	Beginning		Net Gains (losses)				in (out) of						at end
	of Period		Realized		Unrealized		Level 3		Purchases		Sales		of Period
Year Ended December 31, 2018
Corporate	$	500	$	—	$	—	$	—	$	—	$	—	$	500
Obligations of state and political subdivisions		1,000		—		—		(12)		—		—		988

Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2019


			Quoted Prices		Significant		Significant
			in Active Markets		Other Observable		Unobservable		Total Losses for
	Balance at		for Identical Assets		Inputs		Inputs		Twelve months ended
(dollars in thousands)	December 31, 2019		(Level 1)		(Level 2)		(Level 3)		December 31, 2019
Assets

Impaired loans	$	12,823	$	—	$	—	$	12,823	$	280
Other real estate held for sale		2,194		—		—		2,194		212
									$	492

Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2018


			Quoted Prices		Significant		Significant
			in Active Markets		Other Observable		Unobservable		Total Losses for
	Balance at		for Identical Assets		Inputs		Inputs		Year Ended
(dollars in thousands)	December 31, 2018		(Level 1)		(Level 2)		(Level 3)		December 31, 2018
Assets

Impaired loans	$	8,818	$	—	$	—	$	8,818	$	198
Other real estate held for sale		3,119		—		—		3,119		182
									$	380

The Corporation had no investments subject to fair value measurement on a nonrecurring basis.

Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. The Corporation estimates the fair value of the loans based on the present value of expected future cash flows or collateral values using management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals).