NOTE 9 — FAIR VALUE MEASUREMENTS

Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. This guidance provides additional information on determining when the volume and level of activity for the asset or liability has significantly decreased. The guidance also includes information on identifying circumstances when a transaction may not be considered orderly.

Fair value measurement and disclosure guidance provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with the fair value measurement and disclosure guidance.

This guidance clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The guidance provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.

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. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own belief about the assumptions market participants would use in pricing the asset or liability based upon the best information available in the circumstances. Fair value measurement and disclosure guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

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

Level 2 Inputs: 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 Inputs: 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).

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth as follows.

Financial Assets Measured at Fair Value on a Recurring Basis

At June 30, 2019 and December 31, 2018, securities measured at fair value on a recurring basis and the valuation methods used are as follows:


(Dollars in thousands)	Level 1		Level 2		Level 3		Total
June 30, 2019
Debt Securities Available-for-Sale:
U.S. Treasury securities	$	—	$	5,339	$	—	$	5,339
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		—		83,064		—		83,064
Other		—		20,052		—		20,052
Other mortgage backed debt securities		—		6,496		—		6,496
Obligations of state and political subdivisions		—		149,832		—		149,832
Asset backed securities		—		13,912		—		13,912
Corporate debt securities		—		26,883		—		26,883
Total debt securities available-for-sale		—		305,578		—		305,578
Marketable equity securities		1,671		—		—		1,671
Total recurring fair value measurements	$	1,671	$	305,578	$	—	$	307,249


(Dollars in thousands)	Level 1		Level 2		Level 3		Total
December 31, 2018
Available-for-Sale Debt Securities :
U.S. Treasury securities	$	—	$	5,295	$	—	$	5,295
Obligations of U.S. Government Corporations and Agencies:
Mortgaged-backed		—		64,876		—		64,876
Other		—		18,243		—		18,243
Other mortgage backed debt securities		—		4,749		—		4,749
Obligations of state and political subdivisions		—		182,278		—		182,278
Asset backed securities		—		14,370		—		14,370
Corporate debt securities		—		26,243		—		26,243
Total debt securities available-for-sale		—		316,054		—		316,054
Marketable equity securities		1,560		—		—		1,560
Total	$	1,560	$	316,054	$	—	$	317,614

The estimated fair values of equity securities classified as Level 1 are derived from quoted market prices in active markets; these assets consist mainly of stocks held in other banks. The estimated fair values of all debt securities classified as Level 2 are obtained from nationally-recognized third-party pricing agencies. The estimated fair values are derived primarily from cash flow models, which include assumptions for interest rates, credit losses, and prepayment speeds. The significant inputs utilized in the cash flow models are based on market data obtained from sources independent of the Corporation (observable inputs), and are therefore classified as Level 2 within the fair value hierarchy. The Corporation does not have any Level 3 inputs for securities. There were no transfers between Level 1 and Level 2 during 2019 or 2018.

Financial Assets Measured at Fair Value on a Nonrecurring Basis

At June 30, 2019 and December 31, 2018, impaired loans measured at fair value on a nonrecurring basis and the valuation methods used are as follows:


(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets at June 30, 2019
Impaired loans:
Commercial Real Estate	$	—	$	—	$	6,222	$	6,222
Residential Real Estate		—		—		189		189
Total impaired loans	$	—	$	—	$	6,411	$	6,411


(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets at December 31, 2018
Impaired loans:
Commercial Real Estate	$	—	$	—	$	6,400	$	6,400
Residential Real Estate		—		—		81		81
Total impaired loans	$	—	$	—	$	6,481	$	6,481

The Bank’s impaired loan valuation procedure for any loans greater than $250,000 requires an appraisal to be obtained and reviewed annually at year end. A quarterly collateral evaluation is performed which may include a site visit, property pictures and discussions with realtors and other similar business professionals to ascertain current values. For impaired loans less than $250,000 upon classification and annually at year end, the Bank completes a Certificate of Inspection, which includes an onsite inspection, insured values, tax assessed values, recent sales comparisons and a review of the previous evaluations. These assets are included as Level 3 fair values, based upon the lowest level that is significant to the fair value measurements. The fair value consists of the impaired loan balances less the valuation allowance and/or charge-offs. There were no transfers between valuation levels in 2019 and 2018.

Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis

At June 30, 2019 and December 31, 2018, foreclosed assets held for resale measured at fair value on a nonrecurring basis and the valuation methods used are as follows:


(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets at June 30, 2019
Foreclosed assets held for resale:
Commercial Real Estate	$	—	$	—	$	856	$	856
Residential Real Estate		—		—		—		—
Total foreclosed assets held for resale	$	—	$	—	$	856	$	856


(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets at December 31, 2018
Foreclosed assets held for resale:
Commercial Real Estate	$	—	$	—	$	856	$	856
Residential Real Estate		—		—		—		—
Total foreclosed assets held for resale	$	—	$	—	$	856	$	856

The Bank’s foreclosed asset valuation procedure requires an appraisal, which considers the sales prices of similar properties in the proximate vicinity, to be completed periodically with the exception of those cases which the Bank has obtained a sales agreement. These assets are included as Level 3 fair values, based upon the lowest level that is significant to the fair value measurements. There were no transfers between valuation levels in 2019 and 2018.

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Bank has utilized Level 3 inputs to determine the fair value:


	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value					Weighted
(Dollars in thousands)	Estimate		Valuation Technique	Unobservable Input	Range	Average
June 30, 2019
Impaired loans	$	3,388	Appraisal of collateral1,3	Appraisal adjustments2	(15%) – (73%)	(18%)
Impaired loans	$	3,023	Discounted cash flow	Discount rate	(7%) – (7%)	(7%)
Foreclosed assets held for resale	$	856	Appraisal of collateral1,3	Appraisal adjustments2	(16%) – (35%)	(18%)

December 31, 2018
Impaired loans	$	3,346	Appraisal of collateral1,3	Appraisal adjustments2	(15%) – (82%)	(18%)
Impaired loans	$	3,135	Discounted cash flow	Discount rate	(6%) – (7%)	(7%)
Foreclosed assets held for resale	$	856	Appraisal of collateral1,3	Appraisal adjustments2	(16%) – (35%)	(18%)

1Fair value is generally determined through independent appraisals of the underlying collateral, as defined by Bank regulators.

2Appraisals may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses. The typical range of appraisal adjustments are presented as a percent of the appraisal value.

3Includes qualitative adjustments by management and estimated liquidation expenses.

Fair Value of Financial Instruments


	Carrying		Fair Value Measurements at June 30, 2019
(Dollars in thousands)	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	7,465	$	7,465	$	—	$	—	$	7,465
Interest-bearing deposits in other banks		2,182		—		2,182		—		2,182
Time deposits with other banks		1,482		—		1,482		—		1,482
Restricted investment in bank stocks		6,474		—		6,474		—		6,474
Net loans		605,309		—		—		615,054		615,054
Mortgage servicing rights		288		—		—		288		288
Accrued interest receivable		3,934		—		3,934		—		3,934

FINANCIAL LIABILITIES:
Demand, savings and other deposits		491,328		—		491,328		—		491,328
Time deposits		215,397		—		215,416		—		215,416
Short-term borrowings		120,151		—		120,187		—		120,187
Long-term borrowings		45,000		—		45,815		—		45,815
Accrued interest payable		739		—		739		—		739

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS		—		—		—		—		—


	Carrying		Fair Value Measurements at December 31, 2018
(Dollars in thousands)	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	9,822	$	9,822	$	—	$	—	$	9,822
Interest-bearing deposits in other banks		1,128		—		1,128		—		1,128
Time deposits with other banks		1,482		—		1,469		—		1,469
Restricted investment in bank stocks		8,681		—		8,681		—		8,681
Net loans		599,647		—		—		597,548		597,548
Mortgage servicing rights		316		—		—		316		316
Accrued interest receivable		4,041		—		4,041		—		4,041

FINANCIAL LIABILITIES:
Demand, savings and other deposits		474,261		—		474,261		—		474,261
Time deposits		197,292		—		195,136		—		195,136
Short-term borrowings		174,445		—		174,491		—		174,491
Long-term borrowings		45,000		—		45,077		—		45,077
Accrued interest payable		785		—		785		—		785

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS		—		—		—		—		—