Fair Value Measurement

The following is a description of the valuation methodologies used for the Company’s assets that are measured on a recurring basis at estimated fair value:

Investment securities available-for-sale: Marketable equity securities and mutual funds have been valued using unadjusted quoted prices from active markets and therefore have been classified as Level 1. However, the majority of the Company’s AFS investment securities have been valued utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows.

Assets measured at fair value on a recurring basis at December 31, 2016 and 2015, segregated by fair value hierarchy level, are summarized below:



	Fair Value Measurement
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
December 31, 2016:
Investment securities available-for-sale
Debt securities:
U.S. Government-sponsored enterprises	$	10,040	$	—	$	10,040	$	—
Agency MBS	18,041		—		18,041		—
State and political subdivisions	27,372		—		27,372		—
Corporate	9,700		—		9,700		—
Total debt securities	65,153		—		65,153		—
Mutual funds	403		403		—		—
Total	$	65,556	$	403	$	65,153	$	—



	Fair Value Measurement
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
December 31, 2015:
Investment securities available-for-sale
Debt securities:
U.S. Government-sponsored enterprises	$	10,692	$	—	$	10,692	$	—
Agency MBS	11,058		—		11,058		—
State and political subdivisions	20,032		—		20,032		—
Corporate	11,983		—		11,983		—
Total debt securities	53,765		—		53,765		—
Mutual funds	345		345		—		—
Total	$	54,110	$	345	$	53,765	$	—

There were no significant transfers in or out of Levels 1 and 2 for the year ended December 31, 2016, nor were there any Level 3 assets at any time during the period. Certain other assets and liabilities are measured at fair value on a nonrecurring basis, that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Assets and liabilities measured at fair value on a nonrecurring basis in periods after initial recognition, such as impaired loans, HTM investment securities, MSRs and OREO, were not considered material at December 31, 2016 or 2015. The Company has not elected to apply the fair value method to any financial assets or liabilities other than those situations where other accounting pronouncements require fair value measurements.

FASB ASC Topic 825, Financial Instruments, requires disclosure of the estimated fair value of financial instruments. 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. Management’s estimates and assumptions are inherently subjective and involve uncertainties and matters of significant judgment. Changes in assumptions could dramatically affect the estimated fair values.

Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments may be excluded from disclosure requirements. Thus, the aggregate fair value amounts presented may not necessarily represent the actual underlying fair value of such instruments of the Company.

The following methods and assumptions were used by the Company in estimating the fair value of its significant financial instruments:

Cash and cash equivalents: The carrying amounts reported in the consolidated balance sheet for cash and cash equivalents approximate those assets' fair values and are classified as Level 1.

Interest bearing deposits in banks: Fair values for interest bearing deposits in banks are based on discounted present values of cash flows and are classified as Level 2.

Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair value measurements consider observable data which may include market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows. Investment securities are classified as Level 1 or Level 2 depending on availability of recent trade information.

Loans held for sale: The fair value of loans held for sale is estimated based on quotes from third party vendors, resulting in a Level 2 classification.

Loans: The fair values of loans are estimated for portfolios of loans with similar financial characteristics and segregated by loan class or segment. For variable-rate loan categories that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts adjusted for credit risk. The fair values for other loans (for example, fixed-rate residential, commercial real estate, and rental property mortgage loans as well as commercial and industrial loans) are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future cash flows, future expected loss experience and risk characteristics. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable. The fair value methods and assumptions that utilize unobservable inputs as defined by current accounting standards are classified as Level 3.

Accrued interest receivable and payable: The carrying amounts of accrued interest approximate their fair values and are classified as Level 1, 2 or 3 in accordance with the classification of the related principal's valuation.

Nonmarketable equity securities: It is not practical to determine the fair value of the nonmarketable securities, such as FHLB stock, due to restrictions placed on their transferability.

Deposits: The fair values disclosed for noninterest bearing deposits and other interest bearing nontime deposits are, by definition, equal to the amount payable on demand at the reporting date, resulting in a Level 1 classification. The fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar deposits to a schedule of aggregated expected maturities on such deposits, resulting in a Level 2 classification. At December 31, 2015, other interest bearing nontime deposits were classified as Level 2 as the fair value was estimated using a discounted cash flow calculation that applied interest rates that were being offered on similar deposits to a schedule of aggregated expected maturities on such deposits.

Borrowed funds: The fair values of the Company’s short-term debt approximate the carrying amounts reported in the consolidated balance sheet, resulting in a Level 1 classification. The fair values of the Company’s long-term debt are estimated using discounted cash flow analysis based on interest rates currently being offered on similar debt instruments, resulting in a Level 2 classification.

Off-balance-sheet financial 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 only commitments to extend credit that are normally longer than one year in duration are the home equity lines whose interest rates are variable quarterly. The only fees collected for commitments are an annual fee on credit card arrangements and often a flat fee on commercial lines of credit and standby letters of credit. The fair value of off-balance-sheet financial instruments as of the balance sheet dates was not significant.

As of the balance sheet dates, the estimated fair values and related carrying amounts of the Company's significant financial instruments were as follows:



	December 31, 2016
	Fair Value Measurement
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Financial assets
Cash and cash equivalents	$	39,275	$	39,275	$	39,275	$	—	$	—
Interest bearing deposits in banks	9,504		9,528		—		9,528		—
Investment securities	66,555		66,555		403		66,152		—
Loans held for sale	7,803		7,958		—		7,958		—
Loans, net
Residential real estate	171,538		173,024		—		—		173,024
Construction real estate	33,840		33,963		—		—		33,963
Commercial real estate	246,317		245,979		—		—		245,979
Commercial	41,708		41,491		—		—		41,491
Consumer	3,941		4,014		—		—		4,014
Municipal	31,348		31,749		—		—		31,749
Accrued interest receivable	2,259		2,259		—		414		1,845
Nonmarketable equity securities	2,354		N/A		N/A		N/A		N/A
Financial liabilities
Deposits
Noninterest bearing	112,384		112,384		112,384		—		—
Interest bearing	382,083		382,083		382,083		—		—
Time	103,193		102,594		—		102,594		—
Borrowed funds
Short-term	1,099		1,099		1,099		—		—
Long-term	30,496		30,423		—		30,423		—
Accrued interest payable	92		92		—		92		—



	December 31, 2015
	Fair Value Measurement
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Financial assets
Cash and cash equivalents	$	17,961	$	17,961	$	17,961	$	—	$	—
Interest bearing deposits in banks	12,753		12,610		—		12,610		—
Investment securities	59,327		59,226		345		58,881		—
Loans held for sale	5,635		5,745		—		5,745		—
Loans, net
Residential real estate	164,147		164,462		—		—		164,462
Construction real estate	42,419		41,956		—		—		41,956
Commercial real estate	227,686		230,282		—		—		230,282
Commercial	21,210		20,849		—		—		20,849
Consumer	3,939		4,032		—		—		4,032
Municipal	36,419		38,131		—		—		38,131
Accrued interest receivable	1,832		1,832		—		389		1,443
Nonmarketable equity securities	1,932		N/A		N/A		N/A		N/A
Financial liabilities
Deposits
Noninterest bearing	99,826		99,826		99,826		—		—
Interest bearing	310,203		310,200		—		310,200		—
Time	150,379		150,665		—		150,665		—
Borrowed funds
Short-term	3,622		3,621		3,621		—		—
Long-term	5,942		6,296		—		6,296		—
Accrued interest payable	269		269		—		269		—

The carrying amounts in the preceding tables are included in the consolidated balance sheets under the applicable captions.