NOTE 6 – FAIR VALUES OF FINANCIAL INSTRUMENTS

The fair values of recognized financial instruments as of June 30, 2018 and December 31, 2017 are as follows:


(Dollars in thousands)	Carrying Value		Level I		Level II		Level III		Fair Value
June 30, 2018
Financial assets
Cash and cash equivalents	$	43,231	$	43,231	$	—	$	—	$	43,231
Securities available-for-sale		90,808		992		89,816		—		90,808
Securities held-to-maturity		21,882		—		21,173		—		21,173
Equity securities		94		48		—		46		94
Restricted stock		4,614		N/A		N/A		N/A		N/A
Loans held for sale		100		100		—		—		100
Net loans		529,509		—		—		524,812		524,812
Bank-owned life insurance		13,384		13,384		—		—		13,384
Accrued interest receivable		1,555		1,555		—		—		1,555
Mortgage servicing rights		270		—		—		270		270
Financial liabilities
Deposits	$	595,073	$	478,654	$	—	$	114,027	$	592,681
Short-term borrowings		44,155		44,155		—		—		44,155
Other borrowings		8,827		—		—		8,136		8,136
Accrued interest payable		66		66		—		—		66
December 31, 2017
Financial assets
Cash and cash equivalents	$	36,420	$	36,420	$	—	$	—	$	36,420
Securities available-for-sale		97,663		998		96,665		—		97,663
Securities held-to-maturity		25,758		—		25,491		—		25,491
Equity securities		89		89		—		—		89
Restricted stock		4,614		N/A		N/A		N/A		N/A
Loans held for sale		246		246		—		—		246
Net loans		511,226		—		—		513,106		513,106
Bank-owned life insurance		13,218		13,218		—		—		13,218
Accrued interest receivable		1,545		1,545		—		—		1,545
Mortgage servicing rights		270		—		—		270		270
Financial liabilities
Deposits	$	583,259	$	473,467	$	—	$	110,224	$	583,691
Short-term borrowings		39,480		39,480		—		—		39,480
Other borrowings		11,409		—		—		10,365		10,365

For purposes of the above disclosures of 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.

Equity investments with a readily determinable value are classified as Level I and equity investments without a readily determinable value are classified as Level III. The following table presents the carrying amount of equity investments without readily determinable fair values, the annual and cumulative amount of impairment, and the annual and cumulative amount of observable price changes for orderly transactions for the identical or a similar investment of the same issuer:


	June 30, 2018
(Dollars in thousands)	Year-to-Date		Life-to-Date
Amortized cost	$	44	$	44
Impairment		—		—
Observable price changes		2		2

Carrying value	$	46	$	46

Net loans

Effective first quarter 2018 the fair value of loans were determined using an exit price methodology as prescribed by ASU 2016-01.The exit price estimation of fair value is based on the future value of expected cash flows. The projected cash flows are based on the contractual terms of the loans, adjusted for prepayments and use of a current market rate based on the relative credit risk of the loan. In addition, an incremental liquidity discount is applied. In comparison, loan fair values as of December 31, 2017 were estimated based on an entrance price methodology. As a result the fair value adjustments as of June 30, 2018 and December 31, 2017 are not comparable, 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.

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 June 30, 2018 and December 31, 2017. These financial instruments relate to commitments to extend credit and letters of credit. The aggregated contract

amount of such financial instruments was approximately $174.7 million at June 30, 2018 and $178.2 million at December 31, 2017. 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. 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.