NOTE 6 – FAIR VALUES OF FINANCIAL INSTRUMENTS

The estimated fair values of recognized financial instruments as of September 30, 2017 and December 31, 2016 are as follows:


(Dollars in thousands)	Carrying Value		Level I		Level II		Level III		Fair Value
September 30, 2017
Financial assets
Cash and cash equivalents	$	45,372	$	45,372	$	—	$	—	$	45,372
Securities available-for-sale		98,048		1,088		96,960		—		98,048
Securities held-to-maturity		26,475		—		26,431		—		26,431
Restricted stock		4,614		4,614		—		—		4,614
Loans held for sale		1,108		1,108		—		—		1,108
Net loans		504,022		—		—		507,303		507,303
Bank-owned life insurance		13,131		13,131		—		—		13,131
Accrued interest receivable		1,701		1,701		—		—		1,701
Mortgage servicing rights		266		—		—		266		266
Financial liabilities
Deposits	$	571,626	$	459,054	$	—	$	112,960	$	572,014
Short-term borrowings		45,057		45,057		—		—		45,057
Other borrowings		21,596		—		—		20,734		20,734
Accrued interest payable		92		92		—		—		92

December 31, 2016
Financial assets
Cash and cash equivalents	$	36,838	$	36,838	$	—	$	—	$	36,838
Securities available-for-sale		103,875		1,081		102,794		—		103,875
Securities held-to-maturity		23,883		—		23,444		—		23,444
Restricted stock		4,614		4,614		—		—		4,614
Net loans		470,158		—		—		471,815		471,815
Bank-owned life insurance		10,361		10,361		—		—		10,361
Accrued interest receivable		1,409		1,409		—		—		1,409
Mortgage servicing rights		261		—		—		261		261
Financial liabilities
Deposits	$	540,785	$	428,676	$	—	$	112,642	$	541,318
Short-term borrowings		48,742		48,742		—		—		48,742
Other borrowings		12,385		—		—		12,511		12,511
Accrued interest payable		76		76		—		—		76

For purposes of the above disclosures of estimated fair value, the following assumptions are used:

Cash and cash equivalents; Loans held for sale; Accrued interest receivable; Short-term borrowings and Accrued interest payable

The fair value of the above instruments is considered to be carrying value, classified as Level I in the fair value hierarchy.

Securities

The fair value of securities available-for-sale and securities held-to-maturity which are measured on a recurring basis are determined primarily by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on securities’ relationship to other similar securities, classified as Level I or Level II in the fair value hierarchy.

Net loans

The fair value for loans is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality. Where quoted market prices were available, primarily for certain residential mortgage loans, such market rates were utilized as estimates for fair value. Fair value of non-accrual loans is based on carrying value, classified as Level III.

Bank-owned life insurance

The carrying amount of bank-owned life insurance is based on the cash surrender value of the policies and is a reasonable estimate of fair value, classified as Level I.

Restricted stock

Restricted stock includes Federal Home Loan Bank Stock and Federal Reserve Bank Stock. It is not practicable to determine the fair value of regulatory equity securities due to restrictions placed on their transferability. Fair value is based on carrying value, classified as Level I.

Mortgage servicing rights

The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates discounted cash flow and repayment assumptions based on management’s best judgment, classified as Level III.

Deposits

The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rates are estimated using market rates currently offered for similar instruments with similar remaining maturities, resulting in a Level III classification. Demand, savings, and money market deposit accounts are valued at the amount payable on demand as of quarter end, resulting in a Level I classification.

Other borrowings

The fair value of Federal Home Loan Bank advances are estimated using a discounted cash flow analysis based on the current borrowing rates for similar types of borrowings, resulting in a Level III classification.

The Company also has unrecognized financial instruments at September 30, 2017 and December 31, 2016. These financial instruments relate to commitments to extend credit and letters of credit. The aggregated contract amount of such financial instruments was approximately $177.8 million at September 30, 2017 and $163.7 million at December 31, 2016. Such amounts are also considered to be the fair values.

The fair value estimates of financial instruments are made at a specific point in time based on relevant market information. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument over the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Since no ready market exists for a significant portion of the financial instruments, fair value estimates are largely based on judgments after considering such factors as future expected credit losses, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates.