7.	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 year-ends 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.

Assets measured at fair value on a recurring basis.

The Corporation used the following methods and significant assumptions to estimate the fair value of the following assets:

Debt securities available-for-sale, equity securities

– 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.

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)		(Level 3)
Description	Total		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
September 30, 2019:
Securities available-for-sale
U.S. Treasury	$	4,026	$	4,026	$	—	$	—
U.S. government sponsored entities and agencies		8,080		—		8,080		—
U.S. agency mortgage-backed securities: residential		44,538		—		44,538		—
U.S. agency collateralized mortgage obligations: residential		30,557		—		30,557		—
State and political subdivision		20,910		—		20,910		—
Corporate debt securities		9,788		—		6,288		3,500
Total available-for-sale securities	$	117,899	$	4,026	$	110,373	$	3,500

Equity securities	$	23	$	23	$	—	$	—

December 31, 2018:
Securities available-for-sale
U.S. Treasury	$	4,445	$	4,445	$	—	$	—
U.S. government sponsored entities and agencies		16,783		—		16,783		—
U.S. agency mortgage-backed securities: residential		27,176		—		27,176		—
U.S. agency collateralized mortgage obligations: residential		18,664		—		18,664		—
State and political subdivisions		22,732		—		22,732		—
Corporate debt securities		7,918		—		4,418		3,500
Total available-for-sale securities	$	97,718	$	4,445	$	89,773	$	3,500

Equity securities	$	7	$	7	$	—	$	—

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

months ended

September 30, 2019

, the Corporation reclassified

one

corporate security from Level

to Level

For the same period in

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

2018,

the Corporation sold

$25,000

in equity securities from Level

The following table presents changes in Level

assets measured on a recurring basis for the

three

and

nine

month periods ended

September 30, 2019

and

2018

(Dollar amounts in thousands)	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019			2018
Balance at the beginning of the period	$	3,000	$	3,500	$	3,500		$	8,132
Total gains or losses (realized/unrealized):
Included in earnings		—		—		—			1
Included in other comprehensive income		—		—		—			—
Purchased into Level 3		500		—		500			—
Sold out of Level 3		—		—		—			(25	)
Transfers in and/or out of Level 3		—		—		(500	)		(4,608	)
Balance at the end of the period	$	3,500	$	3,500	$	3,500		$	3,500

Assets measured at fair value on a non-recurring basis.

The Corporation used the following methods and significant assumptions to estimate the fair value of the following assets:

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, 2019

and

December 31, 2018

, the Corporation did

not

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

three

month period ended

September 30, 2019

there was

additional provision for loan losses recorded for impaired loans. There was additional provision for loan losses recorded for impaired loans of

$63,000

during the

nine

month period ended

September 30, 2019

, however, the loan was charged-off prior to the end of the

second

quarter. There were

additional provisions recorded for impaired loans during the same periods in

2018

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, 2019

and

2018

, respectively, the Corporation had

OREO measured at fair value. During the

three

month periods ended

September 30, 2019

and

2018

, there was

expense recorded associated with the write-down of OREO. During the

nine

month periods ended

September 30, 2019

and

2018

, there was expense recorded of

$35,000

and

$11,000,

respectively. The related properties were sold prior to the end of the respective reporting periods. As of

December 31, 2018

, OREO measured at fair value less costs to sell had a net carrying amount of

$160,000,

which consisted of the outstanding balance of

$415,000

less write-downs of

$255,000

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 appraised value 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 non-recurring basis, the fair value measurements by level within the fair value hierarchy are as follows:

(Dollar amounts in thousands)			(Level 1)		(Level 2)		(Level 3)
Description	Total		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
December 31, 2018:
Other real estate owned	$	160	$	—	$	—	$	160
Total	$	160	$	—	$	—	$	160

The following table presents quantitative information about Level

fair value measurements for assets measured at fair value on a non-recurring basis:

(Dollar amounts in thousands)			Valuation	Unobservable	Weighted
			Techniques(s)	Input (s)	Average
December 31, 2018:
Other real estate owned	$	160	Sales comparison approach	Adjustment for differences between comparable sales		10	%

September 30, 2019

and

December 31, 2018

was an impaired residential mortgage loan totaling

$68,000

and

$61,000,

respectively, and an impaired home equity loan totaling

$4,000

and

$6,000,

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

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

(Dollar amounts in thousands)
	Carrying		Fair Value Measurements using:
Description	Amount		Total		Level 1		Level 2		Level 3
September 30, 2019:
Financial Assets:
Cash and cash equivalents	$	49,302	$	49,302	$	49,302	$	—	$	—
Interest earning time deposits		10,198		10,198		—		10,198		—
Securities - available-for-sale		117,899		117,899		4,026		110,373		3,500
Securities - equities		23		23		23		—		—
Loans held for sale		154		154		—		154		—
Loans, net		688,357		682,392		—		—		682,392
Federal bank stock		5,856		N/A		N/A		N/A		N/A
Accrued interest receivable		2,754		2,754		122		442		2,190
Total	$	874,542	$	862,722	$	53,473	$	121,167	$	688,082
Financial Liabilities:
Deposits		808,025		814,778		580,820		233,958		—
Borrowed funds		33,800		34,417		—		34,417		—
Accrued interest payable		652		652		50		602		—
Total	$	842,477	$	849,847	$	580,870	$	268,977	$	—

	Carrying		Fair Value Measurements using:
	Amount		Total		Level 1		Level 2		Level 3
December 31, 2018:
Financial Assets:
Cash and cash equivalents	$	10,955	$	10,955	$	10,955	$	—	$	—
Interest earning time deposits		6,738		6,738		—		6,738		—
Securities - available-for-sale		97,718		97,718		4,445		89,773		3,500
Securities - equities		7		7		7		—		—
Loans held for sale		—		—		—		—		—
Loans, net		708,664		702,747		—		—		702,747
Federal bank stock		6,351		N/A		N/A		N/A		N/A
Accrued interest receivable		2,570		2,570		63		351		2,156
Total	$	833,003	$	820,735	$	15,470	$	96,862	$	708,403
Financial Liabilities:
Deposits		761,546		767,009		539,946		227,063		—
Borrowed funds		45,350		44,869		—		44,869		—
Accrued interest payable		495		495		30		465		—
Total	$	807,391	$	812,373	$	539,976	$	272,397	$	—

This information should

not

be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation's assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation's disclosures and those of other companies

may

not

be meaningful.