8. Fair Value Measurements

Fair value estimates are based on quoted market prices, if available, quoted market prices of similar assets or liabilities, or the present value of expected future cash flows and other valuation techniques. These valuations are significantly affected by discount rates, cash flow assumptions and risk assumptions used. Therefore, fair value estimates may not be substantiated by comparison to independent markets and are not intended to reflect the proceeds that may be realizable in an immediate settlement of the instruments.

Fair value is determined at one point in time and is not representative of future value. These amounts do not reflect the total value of a going concern organization. Management does not have the intention to dispose of a significant portion of its assets and liabilities and therefore, the unrealized gains or losses should not be interpreted as a forecast of future earnings and cash flows.

The following is a discussion of assets and liabilities measured at fair value and valuation techniques applied:

Securities:

The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3). In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) are used to support fair values of certain Level 3 investments, if applicable.

Impaired loans (generally carried at fair value):

The Company measures impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the lowest level of input that is significant to the fair value measurements.

Foreclosed real estate owned (carried at fair value):

Real estate properties acquired through, or in lieu of loan foreclosure are to be sold and are carried at fair value less estimated cost to sell. Fair value is based upon independent market prices, appraised value of the collateral or management’s estimation of the value of the collateral. These assets are included in Level 3 fair value based upon the lowest level of input that is significant to the fair value measurement.

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2017 and December 31, 2016 are as follows:



	Fair Value Measurement Using
	Reporting Date


Description	Total		Level 1		Level 2		Level 3
	(In thousands)

June 30, 2017
Available for Sale:
U.S. Treasury securities	$	1,994	$	-	$	1,994	$	-
States and political subdivisions		128,638		-		128,638		-
Corporate obligations		10,114		-		10,114		-
Mortgage-backed securities-government
sponsored agencies		159,495		-		159,495		-
Equity securities-financial services		426		426		-		-
Total	$	300,667	$	426	$	300,241	$	-


Description	Total		Level 1		Level 2		Level 3
	(In thousands)

December 31, 2016
Available for Sale:
U.S. Treasury securities	$	1,997	$	-	$	1,997	$	-
States and political subdivisions		125,101		-		125,101		-
Corporate obligations		10,112		-		10,112		-
Mortgage-backed securities-government
sponsored agencies		164,930		-		164,930		-
Equity securities-financial services		424		424		-		-
Total	$	302,564	$	424	$	302,140	$	-

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2017 and December 31, 2016 are as follows:



			Fair Value Measurement Reporting Date using Reporting Date

(In thousands)

Description	Total		Level 1		Level 2		Level 3
June 30, 2017
Impaired Loans	$	3,198	$	-	$	-	$	3,198
Foreclosed Real Estate Owned		4,523		-		-		4,523


December 31, 2016
Impaired Loans	$	2,624	$	-	$	-	$	2,624
Foreclosed Real Estate Owned		5,302		-		-		5,302

The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:



		Quantitative Information about Level 3 Fair Value Measurements
(dollars in thousands)	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)
June 30, 2017
Impaired loans	$	2,063	Appraisal of collateral(1)	Appraisal adjustments(2)	10% (10%)
Impaired loans	$	1,135	Present value of future cash flows	Loan discount rate	4.00-5.25% (5.11%)
				Probability of default	0%

Foreclosed real estate owned	$	4,523	Appraisal of collateral(1)	Liquidation Expenses(2)	10%



	Quantitative Information about Level 3 Fair Value Measurements
(dollars in thousands)	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)
December 31, 2016
Impaired loans	$	1,473	Appraisal of collateral(1)	Appraisal adjustments(2)	10% (10%)
Impaired loans	$	1,151	Present value of future cash flows	Loan discount rate	4-5.25% (5.11%)
				Probability of default	0%

Foreclosed real estate owned	$	5,302	Appraisal of collateral(1)	Liquidation Expenses(2)	10%

(1)

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable, less any associated allowance.

(2)

Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’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 Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at June 30, 2017 and December 31, 2016.

Cash and cash equivalents (carried at cost):

The carrying amounts reported in the consolidated balance sheet for cash and short-term instruments approximate those assets’ fair values.

Securities:

Loans receivable (carried at cost):

The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

Impaired loans (generally carried at fair value):

As of June 30, 2017, the fair value investment in impaired loans totaled $3,198,000 which included eight loan relationships that did not require a valuation allowance since either the estimated realizable value of the collateral or the discounted cash flows exceeded the recorded investment in the loan. As of June 30, 2017, the Company has recognized charge-offs against the allowance for loan losses on these impaired loans in the amount of $886,000 over the life of the loans.

As of December 31, 2016, the fair value investment in impaired loans totaled $2,624,000 which included seven loans that did not require a valuation allowance since the estimated realizable value of the collateral exceeded the recorded investment in the loan. As of December 31, 2016, the Company had recognized charge-offs against the allowance for loan losses on these impaired loans in the amount of $831,000 over the life of the loans.

Mortgage servicing rights (generally carried at cost)

The Company utilizes a third party provider to estimate the fair value of certain loan servicing rights. Fair value for the purpose of this measurement is defined as the amount at which the asset could be exchanged in a current transaction between willing parties, other than in a forced liquidation.

Foreclosed real estate owned (carried at fair value):

Regulatory stock (carried at cost):

The Company, as a member of the Federal Home Loan Bank (FHLB) system is required to maintain an investment in capital stock of its district FHLB according to a predetermined formula. This regulatory stock has no quoted market value and is carried at cost.

Bank owned life insurance (carried at cost):

The fair value is equal to the cash surrender value of the Bank owned life insurance.

Accrued interest receivable and payable (carried at cost):

The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.

Deposit liabilities (carried at cost except certificates of deposit which are at fair value):

The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Short-term borrowings (carried at cost):

The carrying amounts of short-term borrowings approximate their fair values.

Other borrowings (carried at cost):

Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.

Off-balance sheet financial instruments (disclosed at cost):

Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.

The estimated fair values of the Bank’s financial instruments were as follows at June 30, 2017 and December 31, 2016. (In thousands)



	Fair Value Measurements at June 30, 2017
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	16,403	$	16,403	$	16,403	$	-	$	-
Securities		300,667		300,667		426		300,241		-
Loans receivable, net		727,607		731,573		-		-		731,573
Mortgage servicing rights		215		239		-		-		239
Regulatory stock		2,435		2,435		2,435		-		-
Bank owned life insurance		36,575		36,575		36,575		-		-
Accrued interest receivable		3,417		3,417		3,417		-		-

Financial liabilities:
Deposits		932,471		932,127		649,897		-		282,230
Short-term borrowings		42,192		42,192		42,192		-		-
Other borrowings		25,330		25,183		-		-		25,183
Accrued interest payable		942		942		942		-		-

Off-balance sheet financial instruments:
Commitments to extend credit and outstanding letters of credit		-		-		-		-		-



	Fair Value Measurements at December 31, 2016
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	17,174	$	17,174	$	17,174	$	-	$	-
Securities		302,564		302,564		424		302,140		-
Loans receivable, net		707,426		716,661		-		-		716,661
Mortgage servicing rights		232		250		-		-		250
Regulatory stock		2,119		2,119		2,119		-		-
Bank owned life insurance		36,133		36,133		36,133		-		-
Accrued interest receivable		3,643		3,643		3,643		-		-

Financial liabilities:
Deposits		925,385		925,561		629,829		-		295,732
Short-term borrowings		32,811		32,811		32,811		-		-
Other borrowings		32,001		31,863		-		-		31,863
Accrued interest payable		1,069		1,069		1,069		-		-

Off-balance sheet financial instruments:
Commitments to extend credit and outstanding letters of credit		-		-		-		-		-