Note 19. Fair Value Measurements and Fair Values of Financial Instruments

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 sales transaction on the dates 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 maybe different than the amounts reported at each year-end.

FASB ASC Topic 820, “Financial Instruments”, requires disclosure of the fair value of financial assets and liabilities, including those financial assets and liabilities that are not measured and reported at fair value on a recurring and nonrecurring basis. The Corporation does not report any nonfinancial assets at fair value. FASB ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC Topic 820 are as follows:

Level 1: Valuation is based on unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. There may be substantial differences in the assumptions used for securities within the same level. For example, prices for U.S. Agency securities have fewer assumptions and are closer to level 1 valuations than the private label mortgage backed securities that require more assumptions and are closer to level 3 valuations.

Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Corporation’s assumptions regarding what market participants would assume when pricing a financial instrument.

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The level within the hierarchy does not represent risk.

The fair value of the Corporation's financial instruments are as follows:



	December 31, 2018
	Carrying		Fair
(Dollars in thousands)	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	52,957	$	52,957	$	52,957	$	—	$	—
Restricted stock		452		452		—		452		—
Loans held for sale		118		118		—		118		—
Net loans		960,960		941,930		—		—		941,930
Accrued interest receivable		4,103		4,103		—		4,103		—

Financial assets, available for sale:
Debt securities		131,472		131,472		—		131,472		—

Financial assets, fair value:
Equity securities		374		374		374		—		—

Financial liabilities:
Deposits	$	1,082,629	$	1,082,425	$	—	$	1,082,425	$	—
Accrued interest payable		193		193		—		193		—

	December 31, 2017
	Carrying		Fair
(Dollars in thousands)	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	58,603	$	58,603	$	58,603	$	—	$	—
Investment securities available for sale		127,336		127,336		365		126,971		—
Restricted stock		456		456		—		456		—
Loans held for sale		442		442		—		442		—
Net loans		931,908		929,891		—		—		929,891
Accrued interest receivable		3,847		3,847		—		3,847		—

Financial liabilities:
Deposits	$	1,047,181	$	1,046,476	$	—	$	1,046,476	$	—
Accrued interest payable		149		149		—		149		—

Recurring Fair Value Measurements

For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2018 and 2017 are as follows:



(Dollars in Thousands	Fair Value at December 31, 2018
Asset Description	Level 1		Level 2		Level 3		Total
Equity securities	$	374	$	—	$	—	$	374
U.S. Government and Agency securities		—		9,076		—		9,076
Municipal securities		—		67,647		—		67,647
Trust Preferred Securities		—		3,758		—		3,758
Agency mortgage-backed securities		—		44,658		—		44,658
Private-label mortgage-backed securities		—		488		—		488
Asset-backed securities		—		5,845		—		5,845
Total assets	$	374	$	131,472	$	—	$	131,846



(Dollars in Thousands)	Fair Value at December 31, 2017
Asset Description	Level 1		Level 2		Level 3		Total
Equity securities	$	365	$	—	$	—	$	365
U.S. Government and Agency securities		—		11,472		—		11,472
Municipal securities		—		57,772		—		57,772
Trust Preferred Securities		—		5,817		—		5,817
Agency mortgage-backed securities		—		50,937		—		50,937
Private-label mortgage-backed securities		—		946		—		946
Asset-backed securities		—		27		—		27
Total assets	$	365	$	126,971	$	—	$	127,336

Investment securities: Level 1 securities represent equity securities that are valued using quoted market prices from nationally recognized markets. Level 2 securities represent debt securities that are valued using a mathematical model based upon the specific characteristics of a security in relationship to quoted prices for similar securities.

Nonrecurring Fair Value Measurements

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2018 and 2017 are as follows:



(Dollars in Thousands)	Fair Value at December 31, 2018
Asset Description	Level 1		Level 2		Level 3		Total
Other real estate owned (1)	$	—	$	—	$	71	$	71
Total assets	$	—	$	—	$	71	$	71



(Dollars in Thousands)	Fair Value at December 31, 2017
Asset Description	Level 1		Level 2		Level 3		Total
Other real estate owned (1)	$	—	$	—	$	90	$	90
Total assets		—	$	—	$	90	$	90

(1) Includes assets directly charged-down to fair value during the year-to-date period.

The Corporation used the following methods and significant assumptions to estimate the fair values for financial assets measured at fair value on a nonrecurring basis.

Other real estate: The fair value of other real estate, upon initial recognition, is obtained through a process similar to the valuation process for impaired loans. In connection with the measurement and initial recognition of the foregoing assets, the Corporation recognizes charge-offs through the allowance for loan losses.

The Corporation did not record any liabilities at fair value for which measurement of the fair value was made on a nonrecurring basis at December 31, 2018. For financial assets and liabilities measured at fair value on a recurring basis, there were no transfers of financial assets or liabilities between Level 1 and Level 2 during the period ending December 31, 2018.

The following table presents additional quantitative information about Level 3 assets measured at fair value on a nonrecurring basis:


(Dollars in Thousands)		Quantitative Information about Level 3 Fair Value Measurements
December 31, 2018		Fair Value	Valuation Technique	Unobservable Input	(Weighted Average)
Other real estate owned	$	71	Appraisal	N/A	—
				Cost to sell	8% (8%)

					Range
December 31, 2017		Fair Value	Valuation Technique	Unobservable Input	(Weighted Average)
Other real estate owned	$	90	Appraisal	N/A	—
				Cost to sell	8% (8%)