Note 10. 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 period-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. The Corporation uses the exit price notion to measure the fair value of financial instruments.

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 following information regarding the fair value of the Corporation’s financial instruments 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.

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



	June 30, 2019
	Carrying		Fair
(Dollars in thousands)	Amount		Value		Level 1		Level 2		Level 3
Financial assets, carried at cost:
Cash and cash equivalents	$	82,447	$	82,447	$	82,447	$	—	$	—
Restricted stock		465		465		—		465		—
Loans held for sale		692		692				692
Net loans		969,904		959,048		—		—		959,048
Accrued interest receivable		4,246		4,246		—		4,246		—

Financial assets, available for sale
Debt securities		129,422		129,422		—		129,422		—

Financial assets, fair value
Equity securities		390		390		390		—		—

Financial liabilities:
Deposits	$	1,113,049	$	1,113,351	$	—	$	1,113,351	$	—
Accrued interest payable		411		411		—		411		—

	December 31, 2018
	Carrying		Fair
(Dollars in thousands)	Amount		Value		Level 1		Level 2		Level 3
Financial assets, carried at cost:
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		—

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 June 30, 2019 and December 31, 2018 are as follows:



(Dollars in Thousands	Fair Value at June 30, 2019
Asset Description	Level 1		Level 2		Level 3		Total
Equity securities, at fair value	$	390	$	—	$	—	$	390

Available for sale:
U.S. Government and Agency securities		—		10,555		—		10,555
Municipal securities		—		60,894		—		60,894
Trust Preferred Securities		—		3,896		—		3,896
Agency mortgage-backed securities		—		46,925		—		46,925
Private-label mortgage-backed securities		—		476		—		476
Asset-backed securities		—		6,676		—		6,676
Total assets	$	390	$	129,422	$	—	$	129,812



(Dollars in Thousands)	Fair Value at December 31, 2018
Asset Description	Level 1		Level 2		Level 3		Total
Equity securities, at fair value	$	374	$	—	$	—	$	374

Available for sale:
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

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 was as follows:




(Dollars in Thousands)	Fair Value at June 30, 2019
Asset Description	Level 1		Level 2		Level 3		Total
Impaired loans (1)	$	—	$	—	$	2,971	$	2,971
Total assets	$	—	$	—	$	2,971	$	2,971



(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

(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.

Impaired loans: Impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on customized discounting criteria.

Other real estate: The fair value of other real estate, upon initial recognition, is estimated using Level 2 inputs within the fair value hierarchy based on observable market data and Level 3 inputs based on customized discounting criteria. In connection with the measurement and initial recognition of these assets, the Corporation recognizes charge-offs through the allowance for loan losses. Subsequent charge-offs are recognized as an expense.

The Corporation did not record any liabilities at fair value for which measurement of the fair value was made on a nonrecurring basis at June 30, 2019 and 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 June 30, 2019.

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


(Dollars in Thousands)					Range
June 30, 2019		Fair Value	Valuation Technique	Unobservable Input	(Weighted Average)
Impaired loans (1)	$	2,971	Appraisal	Appraisal Adjustments (2)	11% - 48% (34%)
				Cost to sell	0% - 8% (8%)
(Dollars in Thousands)
December 31, 2018		Fair Value	Valuation Technique	Unobservable Input	Weighted Average
Other real estate owned (1)	$	71	Appraisal	Cost to sell	8% (8%)

(1) Includes assets directly charged-down to fair value during the year-to-date period.
(2) Qualitative adjustments are discounts specific to each asset and are made as needed.