Note 7 – Fair Value of Financial Instruments –

Fair Value Disclosures

The Company groups its financial assets and liabilities measured at fair value in three levels. Fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the inputs used to develop those assumptions and measure fair value. The hierarchy requires companies to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

●

Level 1 – Includes the most reliable sources, and includes quoted prices in active markets for identical assets or liabilities.

●

Level 2 – Includes observable inputs. Observable inputs include inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates) as well as inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs).

●

Level 3 – Includes unobservable inputs and should be used only when observable inputs are unavailable.

Recurring Basis

Fair values of investment securities available for sale were primarily measured using information from a third-party pricing service. This pricing service provides information by utilizing evaluated pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and reference data from market research publications.

The following tables present the balance of assets and liabilities measured on a recurring basis as of September 30, 2016 and December 31, 2015. The Company did not record any liabilities at fair value for which measurement of the fair value was made on a recurring basis.

			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
September 30, 2016
Available for Sale:
U.S. Government Agencies	$	7,705	$	-	$	7,705	$	-
Corporate Securities		11,104		-		11,104		-
Mortgage-Backed Securities		108,721		-		108,721		-
Municipal Securities		81,528		-		81,528		-
Other Securities		614		-		614		-
Total	$	209,672	$	-	$	209,672	$	-


December 31, 2015
Available for Sale:
U.S. Government Agencies	$	13,667	$	-	$	13,667	$	-
Corporate Securities		11,072		-		11,072		-
Mortgage-Backed Securities		119,070		-		119,070		-
Municipal Securities		66,441		-		66,441		-
Other Securities		607		-		607		-
Total	$	210,857	$	-	$	210,857	$	-

Nonrecurring Basis

The Company has segregated all financial assets and liabilities that are measured at fair value on a nonrecurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below. The Company did not record any liabilities at fair value for which measurement of the fair value was made on a nonrecurring basis.

The fair value of the impaired loans is measured at the fair value of the collateral for collateral-dependent loans. Impaired loans are Level 2 assets measured using appraisals from external parties of the collateral less any prior liens. Repossessed assets are initially recorded at fair value less estimated cost to sell. The fair value of repossessed assets is based on property appraisals and an analysis of similar properties available. As such, the Bank records repossessed assets as Level 2.

			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
September 30, 2016
Assets:
Impaired Loans	$	13,538	$	-	$	13,538	$	-
Repossessed Assets		1,581		-		1,581		-
Total	$	15,119	$	-	$	15,119	$	-

December 31, 2015
Assets:
Impaired Loans	$	14,224	$	-	$	14,224	$	-
Repossessed Assets		2,033		-		2,033		-
Total	$	16,257	$	-	$	16,257	$	-

Fair Value Financial Instruments

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. 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. In accordance with generally accepted accounting principles, certain financial instruments and all non-financial instruments are excluded from these disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Short-Term Investments – For those short-term instruments, the carrying amount is a reasonable estimate of fair value.

Securities – Fair value of securities is based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans – The fair value for loans is estimated using discounted cash flow analyses, with interest rates currently being offered for similar loans to borrowers with similar credit rates. Loans with similar classifications are aggregated for purposes of the calculations. The allowance for loan losses, which was used to measure the credit risk, is subtracted from loans.

Cash Value of Bank-Owned Life Insurance (BOLI) – The carrying amount approximates its fair value.

Other Equity Securities – The carrying amount approximates its fair value.

Deposits – The fair value of demand deposits and certain money market deposits is the amount payable at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using discounted cash flow analyses, with interest rates currently offered for deposits of similar remaining maturities.

Borrowings – The fair value of FHLB advances and other long-term borrowings is estimated using the rates currently offered for advances of similar maturities. The carrying amount of short-term borrowings maturing within ninety days approximates the fair value.

Commitments to Extend Credit and Standby and Commercial Letters of Credit – The fair values of commitments to extend credit and standby and commercial letters of credit do not differ significantly from the commitment amount and are therefore omitted from this disclosure.

The estimated approximate fair values of the Bank’s financial instruments as of September 30, 2016 and December 31, 2015 are as follows:

					Quoted Prices in		Significant
					Active Markets		Other		Significant
					for Identical		Observable		Unobservable
	Carrying		Total		Assets		Inputs		Inputs
	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
September 30, 2016
Financial Assets:
Cash and Short-Term Investments	$	34,241	$	34,241	$	34,241	$	-	$	-
Securities		209,672		209,672		-		209,672		-
Mortgage Loans Held for Sale		240		240		-		240		-
Loans - Net		803,762		800,544		-		-		800,544
Cash Value of BOLI		22,415		22,415		-		22,415		-
Other Equity Securities		6,163		6,163		-		-		6,163
Total	$	1,076,493	$	1,073,275	$	34,241	$	232,327	$	806,707

Financial Liabilities:
Deposits	$	929,650	$	914,101	$	-	$	-	$	914,101
Borrowings		53,648		53,441		-		53,441		-
Total	$	983,298	$	967,542	$	-	$	53,441	$	914,101

					Quoted Prices in		Significant
					Active Markets		Other		Significant
					for Identical		Observable		Unobservable
	Carrying		Total		Assets		Inputs		Inputs
	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
December 31, 2015
Financial Assets:
Cash and Short-Term Investments	$	43,407	$	43,407	$	43,407	$	-	$	-
Securities		210,857		210,857		-		210,857		-
Loans - Net		765,148		761,241		-		-		761,241
Cash Value of BOLI		22,339		22,339		-		22,339		-
Other Equity Securities		5,350		5,350		-		-		5,350
Total	$	1,047,101	$	1,043,194	$	43,407	$	233,196	$	766,591

Financial Liabilities:
Deposits	$	904,236	$	897,771	$	-	$	-	$	897,771
Borrowings		54,579		54,561		-		54,561		-
Total	$	958,815	$	952,332	$	-	$	54,561	$	897,771