Fair Value Measurement

The Company utilizes FASB ASC Topic 820, Fair Value Measurement, as guidance for accounting for assets and liabilities carried at fair value. This standard defines fair value as the price that would be received, without adjustment for transaction costs, to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is a market based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The guidance in FASB ASC Topic 820 establishes a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The three levels of the fair value hierarchy are:


•	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 for similar assets or liabilities in active markets, 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 by little or no market activity).

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 AFS: The Company’s AFS 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.

Mutual funds: Mutual funds have been valued using unadjusted quoted prices from active markets and therefore have been classified as Level 1.

Assets measured at fair value on a recurring basis at September 30, 2019 and December 31, 2018, segregated by fair value hierarchy level, are summarized below:



	Fair Value Measurements
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2019:	(Dollars in thousands)
Debt securities AFS:
U.S. Government-sponsored enterprises	$	6,612	$	—	$	6,612	$	—
Agency mortgage-backed	47,034		—		47,034		—
State and political subdivisions	23,527		—		23,527		—
Corporate	8,101		—		8,101		—
Total debt securities	$	85,274	$	—	$	85,274	$	—

Other investments:
Mutual funds	$	612	$	612	$	—	$	—

December 31, 2018:
Debt securities AFS:
U.S. Government-sponsored enterprises	$	6,321	$	—	$	6,321	$	—
Agency mortgage-backed	36,252		—		36,252		—
State and political subdivisions	23,171		—		23,171		—
Corporate	7,661		—		7,661		—
Total debt securities	$	73,405	$	—	$	73,405	$	—

Other investments:
Mutual funds	$	556	$	556	$	—	$	—

There were no transfers in or out of Levels 1 and 2 during the three and nine months ended September 30, 2019, nor were there any Level 3 assets at any time during either 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 collateral-dependent impaired loans, MSRs and OREO, were not considered material at September 30, 2019 or December 31, 2018. 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.

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



	September 30, 2019
	Fair Value Measurements
	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	$	29,900	$	29,900	$	29,900	$	—	$	—
Interest bearing deposits in banks	7,062		7,150		—		7,150		—
Investment securities	85,886		85,886		612		85,274		—
Loans held for sale	13,561		13,833		—		13,833		—
Loans, net
Residential real estate	191,497		192,027		—		—		192,027
Construction real estate	62,651		62,296		—		—		62,296
Commercial real estate	281,417		283,431		—		—		283,431
Commercial	44,277		42,959		—		—		42,959
Consumer	3,546		3,496		—		—		3,496
Municipal	69,708		69,682		—		—		69,682
Accrued interest receivable	2,702		2,702		—		446		2,256
Nonmarketable equity securities	2,607		N/A		N/A		N/A		N/A
Financial liabilities
Deposits
Noninterest bearing	$	137,239	$	137,239	$	137,239	$	—	$	—
Interest bearing	419,646		419,646		419,646		—		—
Time	159,844		159,709		—		159,709		—
Borrowed funds
Long-term	47,164		46,918		—		46,918		—
Accrued interest payable	543		543		—		543		—



	December 31, 2018
	Fair Value Measurements
	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	$	37,289	$	37,289	$	37,289	$	—	$	—
Interest bearing deposits in banks	9,300		9,177		—		9,177		—
Investment securities	73,961		73,961		556		73,405		—
Loans held for sale	2,899		2,954		—		2,954		—
Loans, net
Residential real estate	186,225		183,836		—		—		183,836
Construction real estate	54,786		54,694		—		—		54,694
Commercial real estate	273,609		272,187		—		—		272,187
Commercial	46,943		45,713		—		—		45,713
Consumer	3,223		3,193		—		—		3,193
Municipal	72,874		72,689		—		—		72,689
Accrued interest receivable	2,812		2,812		—		423		2,389
Nonmarketable equity securities	2,376		N/A		N/A		N/A		N/A
Financial liabilities
Deposits
Noninterest bearing	$	132,971	$	132,971	$	132,971	$	—	$	—
Interest bearing	444,722		444,722		444,722		—		—
Time	129,077		127,554		—		127,554		—
Borrowed funds
Short-term	370		370		370		—		—
Long-term	27,451		27,374		—		27,374		—
Accrued interest payable	203		203		—		203		—

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