Fair Value of Financial Instruments

The Company is required to disclose fair values for its financial instruments. Fair values are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Also, it is the Company’s general practice and intention to hold most of its financial instruments to maturity and not to engage in trading or sales activities. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These fair values are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions can significantly affect the fair values.

Fair values have been determined by the Company using historical data and an estimation methodology suitable for each category of financial instruments. The Company’s fair values, methods, and assumptions are set forth below for the Company’s other financial instruments.

As certain assets and liabilities, such as deferred tax assets, premises and equipment, and many other operational elements of the Company, are not considered financial instruments but have value, this fair value of financial instruments would not represent the full market value of the Company.

The fair values of the Company’s financial instruments not recorded at fair value on a recurring or nonrecurring basis are as follows at September 30, 2018 and December 31, 2017:



	Carrying		Fair		Fair Value Measurements at September 30, 2018
(In Thousands)	Value		Value		Level I		Level II		Level III
Financial assets:
Cash and cash equivalents (1)	$	72,347	$	72,347	$	72,347	$	—	$	—
Restricted investment in bank stock	17,834		17,834		—		17,834		—
Loans held for sale (1)	3,727		3,727		3,727		—		—
Loans, net	1,355,762		1,353,088		—		—		1,353,088
Bank-owned life insurance (1)	28,472		28,472		28,472		—		—
Accrued interest receivable (1)	5,353		5,353		5,353		—		—

Financial liabilities:
Interest-bearing deposits	$	897,366	$	863,487	$	597,024	$	—	$	266,463
Noninterest-bearing deposits (1)	313,111		313,111		313,111		—		—
Short-term borrowings (1)	164,465		164,465		164,465		—		—
Long-term borrowings	138,970		137,028		—		—		137,028
Accrued interest payable (1)	1,051		1,051		1,051		—		—

(1) The financial instrument is carried at cost at September 30, 2018, which approximate the fair value of the instruments



	Carrying		Fair		Fair Value Measurements at December 31, 2017
(In Thousands)	Value		Value		Level I		Level II		Level III
Financial assets:
Cash and cash equivalents	$	27,243	$	27,243	$	27,243	$	—	$	—
Investment securities:
Available for sale	111,143		111,143		2,516		108,627		—
Trading	190		190		190		—		—
Restricted investment in bank stock	13,332		13,332		—		13,332		—
Loans held for sale	1,196		1,196		1,196		—		—
Loans, net	1,233,756		1,264,584		—		—		1,264,584
Bank-owned life insurance	27,982		27,982		27,982		—		—
Accrued interest receivable	4,321		4,321		4,321		—		—

Financial liabilities:
Interest-bearing deposits	$	843,004	$	838,441	$	611,187	$	—	$	227,254
Noninterest-bearing deposits	303,316		303,316		303,316		—		—
Short-term borrowings	100,748		100,748		100,748		—		—
Long-term borrowings	70,970		70,280		—		—		70,280
Accrued interest payable	502		502		502		—		—

(1) The financial instrument is carried at cost at September 30, 2018, which approximate the fair value of the instruments

The methods and assumptions used by the Company in estimating fair values of financial instruments at September 30, 2018 is in accordance with ASC Topic 825, Financial Instruments, as amended by ASU 2016-01 which requires public entities to use exit pricing in the calculation of the above tables. Prior period fair value calculations were ran on the assumption of entry pricing and therefore the comparability between the periods above are diminished.

Restricted Stock:

The carrying value of restricted securities such as stock in the Federal Home Loan Bank ("FHLB") and other bankers' bank stock approximates fair value.

Loans:

Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, financial, and agricultural, commercial real estate, residential real estate, construction real estate, and installment loans to individuals. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories.

The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Company’s historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions.

Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discounted rates are judgmentally determined using available market information and specific borrower information.

Deposits:

The fair value of deposits with no stated maturity, such as savings, NOW, and money market accounts, is equal to the amount payable on demand. The fair value of certificates of deposit is based on the discounted value of contractual cash flows.

Long Term Borrowings:

The fair value of long term borrowings is based on the discounted value of contractual cash flows.

Commitments to Extend Credit, Standby Letters of Credit, and Financial Guarantees Written:

There is no material difference between the notional amount and the estimated fair value of off-balance sheet items. The contractual amounts of unfunded commitments and letters of credit are presented in Note 9 (Off-Balance Sheet Risk).