NOTE

- FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. GAAP establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following levels:

Level I:

Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II:

Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair valued using other financial instruments, the parameters of which can be directly observed.

Level III:

Assets and liabilities that have little to

pricing observability as of the reported date. These items do

not

have

two

-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

This hierarchy requires the use of observable market data when available.

The following tables present the assets measured on a recurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

			March 31, 2020
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a recurring basis:
Subordinated debt	$	-	$	4,221	$	-	$	4,221
Obligations of states and political subdivisions		-		81,256		-		81,256
Mortgage-backed securities in government-sponsored entities		-		17,482		-		17,482
Total debt securities		-		102,959		-		102,959
Equity securities in financial institutions		550		-		-		550
Total	$	550	$	102,959	$	-	$	103,509

			December 31, 2019
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a recurring basis:
Subordinated debt	$	-	$	4,126	$	-	$	4,126
Obligations of states and political subdivisions		-		82,977		-		82,977
Mortgage-backed securities in government-sponsored entities		-		18,630		-		18,630
Total debt securities		-		105,733		-		105,733
Equity securities in financial institutions		710		-		-		710
Total	$	710	$	105,733	$	-	$	106,443

Investment

Securities Available for S

ale

- The Company obtains fair values from an independent pricing service which represent quoted prices for similar assets, fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level II).

Equity Securities

- Equity securities that are traded on a national securities exchange are valued at their last reported sales price as of the measurement date. Equity securities traded in the over-the-counter (“OTC”) markets and listed securities for which

sale was reported on that date are generally valued at their last reported “bid” price if held long, and last reported “ask” price if sold short. To the extent equity securities are actively traded and valuation adjustments are

not

applied, they are categorized in Level I of the fair value hierarchy.

The following tables present the assets measured on a nonrecurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Collateral-dependent impaired loans are carried at fair value if they have been charged down to fair value or if a specific valuation allowance has been established. A new cost basis is established at the time a property is initially recorded in OREO. OREO properties are carried at fair value if a devaluation has been taken to the property’s value at initial foreclosure or subsequent to the initial measurement.

such devaluation occurred in the

three

months ended

March 31, 2020.

			March 31, 2020
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a non-recurring basis:
Impaired loans	$	-	$	-	$	4,566	$	4,566

			December 31, 2019
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a non-recurring basis:
Impaired loans	$	-	$	-	$	5,166	$	5,166

Impaired Loans

– The Company has measured impairment on collateral-dependent impaired loans generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent

third

-party appraisals of the properties. In some cases, management

may

adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management makes estimates about expected costs to sell the property which are also included in the net realizable value. If the fair value of the collateral-dependent loan is less than the carrying amount of the loan, a specific reserve for the loan is made in the allowance for loan losses or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included in the above table as a Level III measurement. If the fair value of the collateral exceeds the carrying amount of the loan, then the loan is

not

included in the above table as it is

not

currently being carried at its fair value. The fair values in the above table exclude estimated selling costs of

$2.0

million and

$2.1

million as of

March 31, 2020

and

December 31, 2019,

respectively.

The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company uses Level III inputs to determine fair value:

Quantitative Information about Level III Fair Value Measurements

(Dollar amounts in thousands)

Range (Weighted

Fair Value Estimate

Valuation Techniques

Unobservable Input

Average)

March 31, 2020

Impaired loans

4,566

Appraisal of collateral (1)

Appraisal adjustments (2)

35.4%

49.5%

(36.2%)

Quantitative Information about Level III Fair Value Measurements

(Dollar amounts in thousands)

Range (Weighted

Fair Value Estimate

Valuation Techniques

Unobservable Input

Average)

December 31, 2019

Impaired loans

5,166

Appraisal of collateral (1)

Appraisal adjustments (2)

40.3%

47.4%

(41.8%)

(

)

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level III inputs which are

not

identifiable, less any associated allowance.

(

)

Appraisals

may

be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

The estimated fair value of the Company’s financial instruments

not

recorded at fair value on a recurring basis is as follows:

	March 31, 2020
	Carrying								Total
	Value		Level I		Level II		Level III		Fair Value
	(Dollar amounts in thousands)
Financial assets:
Cash and cash equivalents	$	55,333	$	55,333	$	-	$	-	$	55,333
Loans held for sale		513		-		513		-		513
Net loans		988,756		-		-		983,780		983,780
Bank-owned life insurance		16,618		16,618		-		-		16,618
Federal Home Loan Bank stock		5,448		5,448		-		-		5,448
Accrued interest receivable		3,666		3,666		-		-		3,666

Financial liabilities:
Deposits	$	1,003,710	$	663,580	$	-	$	346,386	$	1,009,966
Short-term borrowings		60,000		60,000		-		-		60,000
Other borrowings		12,662		-		-		12,706		12,706
Accrued interest payable		980		980		-		-		980

	December 31, 2019
	Carrying								Total
	Value		Level I		Level II		Level III		Fair Value
	(Dollar amounts in thousands)
Financial assets:
Cash and cash equivalents	$	35,113	$	35,113	$	-	$	-	$	35,113
Loans held for sale		1,220		-		1,220		-		1,220
Net loans		977,490		-		-		974,213		974,213
Bank-owned life insurance		16,511		16,511		-		-		16,511
Federal Home Loan Bank stock		3,848		3,848		-		-		3,848
Accrued interest receivable		3,471		3,471		-		-		3,471

Financial liabilities:
Deposits	$	1,020,843	$	652,043	$	-	$	371,193	$	1,023,236
Short-term borrowings		5,075		5,075		-		-		5,075
Other borrowings		12,750		-		-		12,783		12,783
Accrued interest payable		917		917		-		-		917

All financial instruments included in the above tables, with the exception of net loans, deposits, and other borrowings, are carried at cost, which approximates the fair value of the instrument.