Note 14 – Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

Fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

GAAP 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 are as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

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.

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy utilized at March 31, 2019 and December 31, 2018, respectively, are as follows:



		(Level 1)		(Level 2)
		Quoted		Significant		(Level 3)
		Prices in Active		Other		Significant
		Markets for		Observable		Unobservable
Description	Identical Assets		Inputs		Inputs		Total

		(In Thousands)
Municipal bonds	$	-	$	32,580	$	-	$	32,580
U.S. Government Sponsored Enterprise (GSE) -
Mortgage-backed securities - residential		-		52,774		-		52,774
March 31, 2019 Securities available for sale	$	-	$	85,354	$	-	$	85,354

U.S. Government agency obligations	$	-	$	2,997	$	-	$	2,997
Municipal bonds		-		34,878		-		34,878
U.S. Government Sponsored Enterprise (GSE) -
Mortgage-backed securities - residential		-		52,873		-		52,873
December 31, 2018 Securities available for sale	$	-	$	90,748	$	-	$	90,748

The fair value of securities available for sale are determined by 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 these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things.

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2019 and December 31, 2018, respectively, are as follows:



		(Level 1)		(Level 2)
		Quoted		Significant		(Level 3)
		Prices in Active		Other		Significant
		Markets for		Observable		Unobservable
Description	Identical Assets		Inputs		Inputs		Total
		(In Thousands)
March 31, 2019 Impaired loans	$	-	$	-	$	862	$	862
December 31, 2018 Impaired loans	$	-	$	-	$	868	$	868
December 31, 2018 Other real estate owned	$	-	$	-	$	135	$	135

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include Level 3 input which are not identifiable. Fair values may also include qualitative adjustments by management based on economic conditions and liquidation expenses.

Impaired loans are those that are accounted for under existing FASB guidance, in which the Bank has measured 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 expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

At March 31, 2019, of the impaired loans having an aggregate balance of $3.8 million, $2.7 million did not require a valuation allowance because the value of the collateral, including estimated selling costs, securing the loan was determined to meet or exceed the balance owed on the loan. Of the remaining $1.1 million in impaired loans, an aggregate valuation allowance of $215 thousand was required to reflect what was determined to be a shortfall in the value of the collateral as compared to the balance on such loans.

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

The following table presents 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
Description	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)

		(Dollars In Thousands)
March 31, 2019:
Impaired loans	$	862	Appraisal of collateral	Appraisal adjustments (1)	0% to -25% (-19.7%)
				Liquidation expenses (2)	0% to -8.5% (-8.0%)
December 31, 2018:
Impaired loans	$	868	Appraisal of collateral	Appraisal adjustments (1)	0% to -25% (-19.7%)
				Liquidation expenses (2)	0% to -8.5% (-8.0%)
Other real estate owned	$	135	Listings, Letters of Intent	Liquidation expenses (2)	-5% (-5%)
			& Third Party Evaluations

Appraisals may be adjusted by management for qualitative factors including economic conditions and the age of the appraisal. The range and weighted average of appraisal adjustments are presented as a percent of the appraisal.

Appraisals and pending agreements of sale are adjusted by management for liquidation expenses. The range and weighted average of liquidation expense adjustments are presented as a percent of the appraisal or pending agreement of sale.

The estimated fair values of the Company’s financial instruments were as follows at March 31, 2019 and December 31, 2018:



						(Level 1)
						Quoted		(Level 2)		(Level 3)
						Prices in Active		Significant Other		Significant
		Carrying		Fair Value		Markets for		Observable		Unobservable
		Amount		Estimate		Identical Assets		Inputs		Inputs

	(In Thousands)
March 31, 2019:
Financial assets:
Cash and cash equivalents	$	37,411	$	37,411	$	37,411	$	-	$	-
Securities available-for-sale		85,354		85,354		-		85,354		-
Loans receivable, net of allowance		960,407		959,404		-		-		959,404
Restricted investments in bank stock		878		878		-		878		-
Accrued interest receivable		2,253		2,253		-		2,253		-
Financial liabilities:
Deposits		1,001,150		1,001,356		-		1,001,356		-
Securities sold under agreements to
repurchase and federal funds purchased		10,950		10,941		-		10,941		-
Accrued interest payable		2,305		2,305		-		2,305		-
Off-balance sheet financial instruments:
Commitments to grant loans		-		-		-		-		-
Unfunded commitments under lines of credit		-		-		-		-		-
Standby letters of credit		-		-		-		-		-

December 31, 2018:
Financial assets:
Cash and cash equivalents	$	27,576	$	27,576	$	27,576	$	-	$	-
Securities available-for-sale		90,748		90,748		-		90,748		-
Loans receivable, net of allowance		949,944		935,500		-		-		935,500
Restricted investments in bank stock		2,794		2,794		-		2,794		-
Accrued interest receivable		2,178		2,178		-		2,178		-
Financial liabilities:
Deposits		931,515		930,306		-		930,306		-
Securities sold under agreements to
repurchase and federal funds purchased		18,883		18,869		-		18,869		-
Short-term borrowings		53,995		53,995		-		53,995		-
Accrued interest payable		1,689		1,689		-		1,689		-
Off-balance sheet financial instruments:
Commitments to grant loans		-		-		-		-		-
Unfunded commitments under lines of credit		-		-		-		-		-
Standby letters of credit		-		-		-		-		-