Note 16. Fair Values of Financial Instruments

ASC Topic 825, Disclosure about Fair Value of Financial Instruments, requires the disclosure of the estimated fair values of financial instruments. Quoted market prices, where available, are shown as estimates of fair values. Because no quoted market prices are available for a significant part of the Company’s financial instruments, the fair values of such instruments have been derived based on the amount and timing of future cash flows and estimated discount rates.

Present value techniques used in estimating the fair value of the Company’s financial instruments are significantly affected by the assumptions used. Fair values derived from using present value techniques are not substantiated by comparisons to independent markets, and in many cases, could not be realized in immediate settlement of the instruments.

ASC Topic 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The following table presents the estimated fair value and the related carrying values of the Company’s financial instruments as December 31, 2018 and 2017. Items that are not financial instruments are not included.


	December 31, 2018				December 31, 2017
(dollars in thousands)	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash and due from banks	$	2,605	$	2,605	$	2,610	$	2,610
Interest-bearing deposits in other financial institutions		12,468		12,468		9,846		9,846
Federal funds sold		881		881		149		149
Investment securities available for sale		81,572		81,572		89,349		89,349
Investments in restricted stock		2,481		2,481		1,232		1,232
Ground rents		143		143		153		153
Loans, less allowance for credit losses		296,579		293,175		269,023		275,819
Accrued interest receivable		1,198		1,198		1,133		1,133
Cash value of life insurance		7,860		7,860		8,713		8,713

Financial liabilities:
Deposits		322,453		307,271		334,238		324,512
Long-term borrowings		—		—		—		—
Short-term borrowings		55,000		55,851		20,000		20,739
Accrued interest payable		152		152		101		101
Unrecognized financial instruments:
Commitments to extend credit		19,905		19,905		19,109		19,109
Standby letters of credit		1,059		1,059		71		71

The following table presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments.


(dollars in thousands)
	Carrying		Fair
December 31, 2018	Amount		Value		Level 1		Level 2	Level 3

Financial instruments - Assets
Cash and cash equivalents	$	15,954	$	15,954	$	15,954	—	$	—
Loans receivable, net		296,579		293,175		—	—		293,175
Cash value of life insurance		7,860		7,860		—	7,860		—
Financial instruments - Liabilities
Deposits		322,453		307,271		219,952	87,319		—
Long-term debt		—		—		—	—		—
Short-term debt		55,000		55,851		—	55,851		—

For purposes of the disclosures of estimated fair value, the following assumptions were used.

Loans. The estimated fair value for loans is determined by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Investment securities. Fair values for investment securities are based on quoted market prices, where applicable. When quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Deposits. The estimated fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW accounts and money market accounts, is equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The fair value of certificates of deposit is based on the rates currently offered for deposits of similar maturities. The fair value estimates do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.

Borrowings. The estimated fair value approximates carrying value for short-term borrowings. The fair value of long-term fixed rate borrowings is estimated by discounting future cash flows using current interest rates currently offered for similar financial instruments over the same maturities.

Other assets and liabilities. The estimated fair values for cash and due from banks, interest-bearing deposits in other financial institutions, Federal funds sold, accrued interest receivable and payable, and short-term borrowings are considered to approximate cost because of their short-term nature. Other assets and liabilities of the Bank that are not defined as financial instruments are not included in the above disclosures, such as property and equipment. In addition, non-financial instruments typically not recognized in the financial statements nevertheless may have value but are not included in the above disclosures. These include, among other items, the estimated earnings power of core deposit accounts, the trained work force, customer goodwill, and similar items.