FAIR VALUE MEASUREMENT

The Company measures fair value under the fair value hierarchy described below.

Level

Quoted prices for identical instruments traded in active exchange markets.

Level

Quoted prices (unadjusted) for similar instruments in active markets, quoted prices for

identical or similar instruments in markets that are

not

active and model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data.

Level

Model based techniques that use

one

significant assumption

not

observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use on pricing the asset or liability. Valuation techniques include management judgment and estimation which

may

be significant.

In certain cases, the inputs used to measure fair value

may

fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company

’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques

may

require the transfer of financial instruments from

one

fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.

Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.

Fair Value of Financial Instruments

The carrying amounts and estimated fair values of finan

cial instruments, at

June 30, 2017

and

December

31,

2016

are as follows, in thousands:

			Fair Value Measurements at June 30, 2017 Using:
	Carrying Value		Level 1		Level 2		Level 3		Total Fair Value
Financial assets:
Cash and cash equivalents	$	68,851	$	68,851					$	68,851
Investment securities		112,329			$	112,329				112,329
Loans, net		471,418					$	471,540		471,540
FHLB stock		2,685								N/A
Accrued interest receivable		2,059		11		463		1,585		2,059
Financial liabilities:
Deposits		616,159		569,729		46,444				616,173
Repurchase agreements		4,325				4,325				4,325
Junior subordinated deferrable interest debentures		10,310						7,680		7,680
Accrued interest payable		58		9		36		13		58

			Fair Value Measurements at December 31, 2016 Using:
	Carrying Value		Level 1		Level 2		Level 3		Total Fair Value
Financial assets:
Cash and cash equivalents	$	62,646	$	62,646					$	62,646
Investment securities		101,595			$	101,595				101,595
Loans, net		456,580					$	459,618		459,618
FHLB stock		2,438								N/A
Accrued interest receivable		2,312		7		398		1,907		2,312
Financial liabilities:
Deposits		582,353		532,750		49,586				582,336
Repurchase agreements		7,547				7,547				7,547
Note payable		2,375						2,375		2,375
Junior subordinated deferrable interest debentures		10,310						7,762		7,762
Accrued interest payable		59		9		36		14		59

These estimates do

not

reflect any premium or discount that could result from offering the Company's entire holdings of a particular financial instrument for sale at

one

time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have

not

been considered in any of these estimates.

The following methods and assumptions were used by management to estimate the fair value of its financial instruments:

Cash and cash equivalents:

The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level

Investment securities:

Fair values for securities available for sale are generally determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level

Loans:

Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with

significant change in credit risk, fair values are based on carrying values resulting in a Level

classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level

classification. Impaired loans are valued at the lower of cost or fair value. The methods utilized to estimate the fair value of loans do

not

necessarily represent an exit price.

FHLB stock:

It was

not

practicable to determine the fair value of the FHLB stock due to restrictions placed on its transferability.

Deposits:

The fair values disclosed for demand deposits, including interest and non-interest demand accounts, savings, and certain types of money market accounts are, by definition, equal to the carrying amount at the reporting date resulting in a Level

classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level

classification.

Repurchase agreements:

The fair value of securities sold under repurchase agreements is estimated based on bid quotations received from brokers using observable inputs and are included as Level

Note payable:

The fair value of the Company’s Note Payable is estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level

classification.

Junior subordinated deferrable interest debentures:

The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level

classification.

Accrued interest

receivable

and payable:

The carrying amounts of accrued interest approximate fair value and are considered to be linked in classification to the asset or liability for which they relate.

Commitments to extend credit and letters of credit:

The fair value of commitments are estimated using the fees currently charged to enter into similar agreements and are

not

significant and, therefore,

not

presented. Commitments to extend credit are primarily for variable rate loans and letters of credit.

Because

market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. Those estimates that are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision are included in Level

Changes in assumptions could significantly affect the fair values presented.

The

following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of

June 30, 2017

and

December 31, 2016,

and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

Assets and liabilities measured at fair value on a recurring basis at

June 30, 2017

are summarized below, in thousands:

			Fair Value Measurements at June 30 , 2017 Using
	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
U.S. Government-sponsored agencies collateralized by mortgage obligations- residential	$	80,416			$	80,416
Obligations of states and political subdivisions		31,913				31,913
	$	112,329	$	-	$	112,329	$	-

Assets and liabilities measured at fair value on a recurring basis at

December 31, 2016

are summarized below, in thousands:

			Fair Value Measurements at December 31, 2016 Using
	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
U.S. Government-sponsored agencies collateralized by mortgage obligations- residential	$	74,911			$	74,911
Obligations of states and political subdivisions		26,684				26,684
	$	101,595	$	-	$	101,595	$	-

The fair value of securities available-for-sale equals quoted market price, if available. If quoted market prices are

not

available, fair value is determined using quoted market prices for similar securities or

matrix pricing. There were

changes in the valuation techniques used during

2017

2016.

Transfers between hierarchy measurement levels are recognized by the Company as of the beginning of the reporting period. Changes in fair market value are recorded in other comprehensive income.

Assets and liabilities measured at fair value on a non-recurring basis at

June 3

2017

are summarized below, in thousands:

			Fair Value Measurements at June 30, 2017 Using
	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses) Six Months Ended June 30, 2017
Assets:
Impaired loans:
Real estate – commercial	$	450	$	-	$	-	$	450	$	5
Equity lines of credit		102						102		(19	)
Total impaired loans		552		-		-		552		(14	)
Other real estate:
Real estate – residential		10						10		-
Real estate – commercial		193						193		(9	)
Real estate – construction and land development		641						641		-
Total other real estate		844		-		-		844		(9	)
	$	1,396	$	-	$	-	$	1,396	$	(23	)

Assets and liabilities measured at fair value on a non-recurring basis at

December 31, 2016

are summarized below, in thousands:

			Fair Value Measurements at December 31, 2016 Using
	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses) Six Months Ended June 30, 2016
Assets:
Impaired loans:
Real estate – commercial	$	453					$	453	$	(81	)
Equity lines of credit		83						83		1
Total impaired loans		536		-		-		536		(80	)
Other real estate:
Real estate – residential		10						10		-
Real estate – commercial		84						84		(9	)
Real estate – construction and land development		641						641		-
Total other real estate		735		-		-		735		(9	)
	$	1,271	$	-	$	-	$	1,271	$	(89	)

The Company has

liabilities which are reported at fair value.

The following methods were used to estimate fair value.

Collateral-Dependent Impaired Loans

: The Bank does

not

record loans at fair value on a recurring basis. However, from time to time, fair value adjustments are recorded on these loans to reflect partial write-downs, through charge-offs or specific reserve allowances, that are based on fair value estimates of the underlying collateral. The fair value estimates for collateral-dependent impaired loans are generally based on recent real estate appraisals or broker opinions, obtained from independent

third

parties, which are frequently adjusted by management to reflect current conditions and estimated selling costs (Level

). Net losses of

$14,000

and

$80,000

represent impairment charges recognized during the

six

months ended

June 30, 2017

and

2016,

respectively, related to the above impaired loans.

Other Real Estate:

Nonrecurring adjustments to certain real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value, less costs to sell. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized. Fair values are generally based on

third

party appraisals of the property which are commonly adjusted by management to reflect current conditions and selling costs (Level

Appraisals for both collateral-dependent impaired loans and other real estate are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Loan Administration Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On a quarterly basis, the Company compares the actual selling price of similar collateral that has been liquidated to the most recent appraised value for unsold properties to determine what additional adjustment, if any, should be made to the appraisal value to arrive at fair value. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available.

The following table presents quantitative information about Level

fair value measurements for financial instruments measured at fair value on a non-recurring basis at

June 30, 2017

and

December 31, 2016 (

dollars in thousands):

Description	Fair Value 6/30/2017		Fair Value 12/31/201 6		Valuation Technique	Significant Unobservable Input	Range (Weighted Average) 6/30/2017				Range (Weighted Average) 12/31/201 6
Impaired Loans:

RE – Commercial	$	45 0	$	453	Third Party appraisals	Management Adjustments to Reflect Current Conditions and Selling Costs			12%	(12%)			12%	(12%)

Equity Lines of Credit	$	102	$	83	Third Party appraisals	Management Adjustments to Reflect Current Conditions and Selling Costs	8%	-	10 %	( 8%)			8%	(8%)

Other Real Estate:

RE – Residential	$	10	$	10	Third Party appraisals	Management Adjustments to Reflect Current Conditions and Selling Costs			48%	(48%)			48%	(48%)

RE – Commercial	$	193	$	84	Third Party appraisals	Management Adjustments to Reflect Current Conditions and Selling Costs			7 %	( 7%)			4 0%	( 40%)

Land and Construction	$	641	$	641	Third Party appraisals	Management Adjustments to Reflect Current Conditions and Selling Costs	10%	-	36%	(33%)	10%	-	36%	(33%)