Note 11 – Fair Values of Financial Instruments and Interest Rate Risk

ASC 825, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those that are not measured and reported at fair value on a recurring basis or non-recurring basis.

The fair value estimates presented at September 30, 2017 and December 31, 2016 are based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price an asset could be sold at or the price at which a liability could be settled. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, the Company has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. The estimated fair values disclosed in the following table do not represent market values of all assets and liabilities of the Company and should not be interpreted to represent the underlying value of the Company. The following table reflects a comparison of carrying amounts and the estimated fair value of the financial instruments as of September 30, 2017 and December 31, 2016:

September 30, 2017
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	92,583		92,583	$	90,093	$	2,490	$	—
Securities available for sale		97,717		97,717		—		97,717		—
Securities held to maturity		11,493		11,575		—		11,575		—
Loans held for investment, net		349,919		354,125		—		—		354,125
Loans held for sale		2,725		2,725		—		2,725		—
Restricted stock		1,068		1,068		1,068		—		—
Accrued interest receivable		1,516		1,516		—		—		1,516

FINANCIAL LIABILITIES
Deposits	$	527,253	$	500,388	$	—	$	500,388	$	—
Short-term borrowings		1,788		1,788		—		1,788		—
Junior subordinated debt		9,534		9,651		—		—		9,651
Accrued interest payable		151		151		—		—		151

December 31, 2016
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	45,968	$	45,995	$	43,478	$	2,517	$	—
Securities available for sale		105,899		105,899		4,014		101,885		—
Securities held to maturity		11,990		11,934		—		11,934		—
Loans held for investment, net		339,122		337,348		—		—		337,348
Loans held for sale		5,823		5,685		—		5,685		—
Restricted stock		1,052		1,052		1,052		—		—
Accrued interest receivable		1,629		1,629		—		—		1,629

FINANCIAL LIABILITIES
Deposits		485,719		447,784		—		447,784		—
Short-term borrowings		2,674		2,674		—		2,674		—
Junior subordinated debt		9,534		9,673		—		—		9,673
Accrued interest payable		151		151		—		—		151

The following methods and assumptions were used by the Company in estimating the fair value of financial instruments:

•

Cash and cash equivalents – The carrying amount of cash and cash equivalents approximate their fair values due to the short period of time until their expected realization and are recorded in Level 1 with the exception of time deposits due from banks that are in Level 2.

•

Securities available for sale – Securities available for sale are carried at fair value based on quoted and observable market prices and are recorded in Levels 1 and 2. Also see discussion in Note 5.

•

Securities held to maturity – Securities held to maturity are carried at amortized cost and are recorded in Level 2.

•

Loans – The fair value of loans is estimated based on discounted expected cash flows using the current interest rates at which similar loans would be made and carried in Level 3. Loans held for sale, which represent current mortgage production forward sales not yet delivered, are valued based on secondary market prices. The fair value of loans does not consider the lack of liquidity and uncertainty in the market that would affect the valuation. Loans held for sale are recorded in Level 2.

•

Restricted stock – It is not practicable to determine fair value of restricted stock which is comprised of Federal Home Loan Bank and Federal Reserve Bank stock due to restrictions placed on its transferability and it is presented at its carrying value and is recorded in Level 1 due to the redemption provisions of the Federal Home Loan Bank and the Federal Reserve Bank.

•

Accrued interest receivable and payable – Both accrued interest receivable and payable are recorded in Level 3, as there are not active markets for these.

•

Deposits – The fair value of deposits is estimated based on discounted cash flow analyses using offered market rates and is recorded in Level 2. The fair value of deposits does not consider any customer related intangibles.

•

Borrowings – The fair value disclosed for short-term borrowings, which are composed of overnight borrowings and debt due within one year approximate the carrying value for such debt and is recorded in Level 2. The estimated fair value for long-term borrowings are estimated based on discounted cash flow analyses using offered market rates. Total borrowings are carried in Level 2. Junior subordinated debt is fair valued based on discounted cash flow analyses and is recorded in Level 3.

At September 30, 2017, the Company’s subsidiary bank had outstanding standby letters of credit and commitments to extend credit. These off-balance sheet financial instruments are generally exercisable at the market rate prevailing at the date the underlying transaction will be completed; therefore, the fair value is the fee the Bank is expected to receive. This amount is deemed immaterial by management. See Note 9.