15.	Fair Values of Financial Instruments

The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset or liability's level is based on the lowest level of input that is significant to the fair value measurement. There are

three

levels of inputs that

may

be used to measure fair value.

	Level 1:	Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Corporation has the ability to access at the measurement date.

	Level 2:	Significant other observable inputs other than Level 1 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 3:	Significant unobservable inputs that reflect the Corporation’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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 at year-end.

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 securities held by the Corporation. The Level

corporate debt securities valuations were supported by 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.

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
December 31, 2019:
Securities available-for-sale
U.S. government sponsored entities and agencies	$	7,077	$	—	$	7,077	$	—
U.S. agency mortgage-backed securities: residential		41,075		—		41,075		—
U.S. agency collateralized mortgage obligations: residential		32,837		—		32,837		—
State and political subdivision		27,796		—		27,796		—
Corporate debt securities		11,322		—		7,072		4,250
Total available-for-sale securities	$	120,107	$	—	$	115,857	$	4,250

Equity securities	$	19	$	19	$	—	$	—

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

2019,

certain corporate debt securities were purchased and placed into Level

because of a lack of observable market data. During

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,

$25,000

in Level

equity securities were sold from the portfolio. The following table presents changes in Level

assets measured on a recurring basis for the years ended

December

31,

2019

and

2018:

(Dollar amounts in thousands)	2019		2018
Balance at the beginning of the period	$	3,500	$	8,132
Total gains or losses (realized/unrealized):
Included in earnings		—		1
Purchased into Level 3		750		—
Sold out of Level 3		—		(25	)
Transfers in and/or out of Level 3		—		(4,608	)
Balance at the end of the period	$	4,250	$	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

December

31,

2019

and

2018,

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

2019

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

December

31,

2019,

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

$88,000,

which consisted of the outstanding balance of

$91,000

less write-downs of

$3,000.

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 at

December

31,

2019

and

2018,

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, 2019:
Other real estate owned	$	88	$	—	$	—	$	88
Total	$	88	$	—	$	—	$	88

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, 2019:
Other real estate owned	$	88	Sales comparison approach	Adjustment for differences between comparable sales		10%

December 31, 2018:
Other real estate owned	$	160	Sales comparison approach	Adjustment for differences between comparable sales		10%

Excluded from the tables above at

December

31,

2019

and

2018

was an impaired residential mortgage loan totaling

$67,000

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.

During the

first

quarter of

2018,

the Corporation adopted ASU

2016

that requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The following table sets forth the carrying amount and fair value of the Corporation’s financial instruments included in the consolidated balance sheet as of

December 31:

(Dollar amounts in thousands)
	Carrying		Fair Value Measurements using:
Description	Amount		Total		Level 1		Level 2		Level 3
December 31, 2019:
Financial Assets:
Cash and cash equivalents	$	14,986	$	14,986	$	14,986	$	—	$	—
Interest earning time deposits		9,698		9,698		—		9,698		—
Securities - available-for-sale		120,107		120,107		—		115,857		4,250
Securities - equities		19		19		19		—		—
Loans, net		695,348		697,990		—		—		697,990
Federal bank stock		5,790		N/A		N/A		N/A		N/A
Accrued interest receivable		2,600		2,600		78		419		2,103
Total	$	848,548	$	845,400	$	15,083	$	125,974	$	704,343
Financial Liabilities:
Deposits		787,124		793,999		569,357		224,642		—
Borrowed funds		28,550		29,133		—		29,133		—
Accrued interest payable		616		616		51		565		—
Total	$	816,290	$	823,748	$	569,408	$	254,340	$	—

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, 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.

Off-Balance Sheet Financial Instruments

The Corporation is party to credit related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and commercial letters of credit. Commitments to extend credit involve, to a varying degree, elements of credit and interest rate risk in excess of amounts recognized in the consolidated balance sheets. The Corporation’s exposure to credit loss in the event of non-performance by the other party for commitments to extend credit is represented by the contractual amount of these commitments, less any collateral value obtained. The Corporation uses the same credit policies in making commitments as for on-balance sheet instruments. The Corporation’s distribution of commitments to extend credit approximates the distribution of loans receivable outstanding.

The following table presents the notional amount of the Corporation’s off-balance sheet commitment financial instruments as of

December 31:

(Dollar amounts in thousands)	2019				2018
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	1,646	$	10,840	$	684	$	7,450
Unused lines of credit		21,928		88,071		16,287		81,261
Total	$	23,574	$	98,911	$	16,971	$	88,711

Commitments to make loans are generally made for periods of

days or less. Commitments to extend credit include agreements to lend to a customer as long as there is

violation of any condition established in the contract. These commitments generally have fixed expiration dates or other termination clauses and

may

require payment of a fee. Commitments to extend credit also include unfunded commitments under commercial and consumer lines of credit, revolving credit lines and overdraft protection agreements. These lines of credit

may

be collateralized and usually do

not

contain a specified maturity date and

may

be drawn upon to the total extent to which the Corporation is committed.

Standby letters of credit are conditional commitments issued by the Corporation usually for commercial customers to guarantee the performance of a customer to a

third

party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation generally holds collateral supporting those commitments if deemed necessary. Standby letters of credit, net of collateral maintained by the Bank, were

$548,000

and

$1.0

million at

December

31,

2019

and

2018,

respectively. The current amount of the liability as of

December

31,

2019

and

2018

for guarantees under standby letters of credit issued is

not

material.