8.	Fair Value

Management uses its best judgment in estimating the fair value of the Corporation’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are

not

necessarily indicative of the amounts the Corporation could have realized in a sale transaction or exit price on the date indicated. The estimated fair value amounts have been measured as of their respective dates and have

not

been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates

may

be different than the amounts reported.

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are

three

levels of inputs that

may

be used to measure fair value.

Level

: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Corporation has the ability to access at the measurement date.

Level

: Significant other observable inputs other than Level

prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are

not

active; or other inputs that are observable or can be corroborated by observable market data.

Level

: Significant unobservable inputs that reflect the Corporation’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

An asset or liability’s level is based on the lowest level of input that is significant to the fair value measurement.

The Corporation used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Securities (debt-available for sale, equities)

– The fair value of all investment securities are based upon the assumptions market participants would use in pricing the security. If available, investment securities are determined by quoted market prices (Level

). Level

includes U.S. Treasury, federal agency securities and certain equity securities. For investment securities where quoted market prices are

not

available, fair values are calculated based on market prices on similar securities (Level

). Level

includes U.S. Government sponsored entities and agencies, mortgage-backed securities, collateralized mortgage obligations, state and political subdivision securities and certain corporate debt securities. For investment securities where quoted prices or market prices of similar securities are

not

available, fair values are calculated by using unobservable inputs (Level

) and

may

include certain corporate debt and equity securities held by the Corporation. The Level

corporate debt securities consist of certain subordinated notes which are priced at par because management has determined that the par value approximates the fair value of these instruments. The Level

equity security valuations were supported by an analysis prepared by the Corporation which relies on inputs such as the security issuer’s publicly attainable financial information, multiples derived from prices in observed transactions involving comparable businesses and other market, financial and nonfinancial factors.

Impaired loans –

At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive a specific allowance for loan losses. For collateral dependent loans, fair value is commonly based on real estate appraisals. These appraisals

may

utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level

classification of the inputs for determining fair value. Non-real estate collateral

may

be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level

classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. As of

September 30, 2018

and

December 31, 2017,

the Corporation did

not

have any impaired loans carried at fair value measured using the fair value of collateral. There was

additional provision for loan losses recorded for impaired loans during the

three

and

nine

month periods ended

September 30, 2018

and

2017.

Other real estate owned (OREO)

– Assets acquired through or instead of foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. Management’s ongoing review of appraisal information

may

result in additional discounts or adjustments to the valuation based upon more recent market sales activity or more current appraisal information derived from properties of similar type and/or locale. Such adjustments are usually significant and typically result in a Level

classification of the inputs for determining fair value. As of

September 30, 2018

and

December 31, 2017,

the Corporation did

not

have any OREO measured at fair value.

Appraisals for both collateral-dependent impaired loans and OREO are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed by the Corporation. Once received, management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Corporation compares the actual selling price of OREO that has been sold to the most recent appraisal to determine what additional adjustment should be made to the appraisal value to arrive at fair value. The most recent analysis performed indicated that a discount of

10%

should be applied.

For assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy are as follows:

(Dollar amounts in thousands)			(Level 1)		(Level 2)
			Quoted Prices in		Significant		(Level 3)
			Active Market		Other		Significant
			for Identical		Observable		Unobservable
Description	Total		Assets		Inputs		Inputs
September 30, 2018:
Securities available for sale
U.S. Treasury and federal agency	$	4,395	$	4,395	$	-	$	-
U.S. government sponsored entities and agencies		16,550		-		16,550		-
U.S. agency mortgage-backed securities: residential		27,664		-		27,664		-
U.S. agency collateralized mortgage obligations: residential		19,205		-		19,205		-
State and political subdivision		22,260		-		22,260		-
Corporate debt securities		7,435		-		3,935		3,500
Total	$	97,509	$	4,395	$	89,614	$	3,500

Equity securities	$	473	$	473	$	-	$	-

December 31, 2017:
Securities available for sale
U.S. Treasury and federal agency	$	4,472	$	4,472	$	-	$	-
U.S. government sponsored entities and agencies		13,926		-		13,926		-
U.S. agency mortgage-backed securities: residential		20,758		-		20,758		-
U.S. agency collateralized mortgage obligations: residential		21,924		-		21,924		-
State and political subdivisions		29,240		-		29,240		-
Corporate debt securities		9,030		-		1,032		7,998
Total	$	99,350	$	4,472	$	86,880	$	7,998

Equity securities	$	1,817	$	1,683	$	-	$	134

The Corporation’s policy is to transfer assets or liabilities from

one

level to another when the methodology to obtain the fair value changes such that there are more or fewer unobservable inputs as of the end of the reporting period.

During the

nine

month period ended

September 30, 2018

the Corporation reclassified a restricted bank stock from the equity security portfolio to other assets and certain corporate securities from Level

to Level

Also during the

nine

month period,

$25,000

in Level

equity securities were sold from the portfolio. For the same period in

2017,

the Corporation had

transfers between levels. The following table presents changes in Level

assets measured on a recurring basis for the

three

and

nine

month periods ended

September 30, 2018

and

2017:

(Dollar amounts in thousands)	Three months ended				Nine months ended
	September 30,				September 30,
	2018		2017		2018		2017
Balance at the beginning of the period	$	3,500	$	135	$	8,132	$	136
Total gains or losses (realized/unrealized):		-		-		-		-
Included in earnings		-		-		1		-
Included in other comprehensive income		-		(1)		-		(2)
Acquired		-		-		-		-
Sold out of Level 3		-		-		(25)		-
Transfers in and/or out of Level 3		-		-		(4,608)		-
Balance at the end of the period	$	3,500	$	134	$	3,500	$	134

The Corporation had

OREO assets measured at fair value on a non-recurring basis at

September 30, 2018

and

December 31, 2017.

The Corporation had an impaired residential mortgage loan totaling

$62,000

and an impaired home equity loan totaling

$6,000

September

30,

2018

which were classified as TDRs and measured using a discounted cash flow methodology. At

December 31, 2017

these loans were valued at

$68,000

and

$8,000,

respectively.

The following table sets forth the carrying amount and estimated fair values of the Corporation’s financial instruments included in the consolidated balance sheet as of

September 30, 2018

and

December

31,

2017:

(Dollar amounts in thousands)
	Carrying		Fair Value Measurements using:
Description	Amount		Total		Level 1		Level 2		Level 3
September 30, 2018:
Financial Assets:
Cash and cash equivalents	$	22,680	$	22,680	$	22,680	$	-	$	-
Securities-available for sale		97,509		97,509		4,395		89,614		3,500
Securities-equities		473		473		473		-		-
Loans held for sale		120		120		-		120		-
Loans, net		592,125		583,741		-		-		583,741
Federal bank stock		4,466		N/A		N/A		N/A		N/A
Accrued interest receivable		2,302		2,302		88		353		1,861
Total	$	719,675	$	706,825	$	27,636	$	90,087	$	589,102
Financial Liabilities:
Deposits		682,361		685,333		513,011		172,322		-
Borrowed funds		19,800		19,414		-		19,414		-
Accrued interest payable		460		460		38		422		-
Total	$	702,621	$	705,207	$	513,049	$	192,158	$	-

	Carrying		Fair Value Measurements using:
	Amount		Total		Level 1		Level 2		Level 3
December 31, 2017:
Financial Assets:
Cash and cash equivalents	$	14,374	$	14,374	$	14,374	$	-	$	-
Securities-available for sale		99,350		99,350		4,472		86,880		7,998
Securities-equities		1,817		1,817		1,683		-		134
Loans held for sale		504		504		-		504		-
Loans, net		577,234		577,616		-		-		577,616
Federal bank stock		4,662		N/A		N/A		N/A		N/A
Accrued interest receivable		2,217		2,217		59		338		1,820
Total	$	700,158	$	695,878	$	20,588	$	87,722	$	587,568
Financial Liabilities:
Deposits		654,643		657,414		483,956		173,458		-
Borrowed funds		26,000		25,499		-		25,499		-
Accrued interest payable		413		413		23		390		-
Total	$	681,056	$	683,326	$	483,979	$	199,347	$	-