NOTE

–

FAIR VALUE MEASUREMENTS

ASC Topic

820,

Fair Value Measurements, defines fair value, establishes a framework for measuring fair value, establishes a

three

-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The

three

levels are defined as follow:

Level

Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level

Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level

Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

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. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstance that caused the transfer, which generally corresponds with the Company’s quarterly valuation process. During

2018,

there were

transfers between levels of the fair value hierarchy.

Assets and liabilities measured at fair value on a recurring and non-recurring basis for the years ended

December 31, 2018

and

2017

are summarized below:

	Fair Value Measurements at Dec ember 3 1 , 2018 Using
(in thousands)	Dec ember 3 1 , 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
U.S. agencies	$	44,106	$	0	$	44,106	$	0
Collateralized mortgage obligations		2,012		0		2,012		0
Municipalities		93,237		0		93,237		0
SBA pools		8,673		0		8,673		0
Corporate debt		20,587		0		20,587		0
Asset backed securities		38,096		0		38,096		0

Equity Securities:*
Mutual fund	$	3,106	$	3,106	$	0	$	0

Assets and liabilities measured on a non-recurring basis:
Impaired loans:
Land	$	226	$	0	$	0	$	226
Consumer residential		14		0		0		14

	Fair Value Measurements at December 31, 2017 Using
(in thousands)	December 31, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
U.S. agencies	$	29,972	$	0	$	29,972	$	0
Collateralized mortgage obligations		2,593		0		2,593		0
Municipalities		93,067		0		93,067		0
SBA pools		11,850		0		11,850		0
Corporate debt		18,789		0		18,789		0
Asset backed securities		22,977		0		22,977		0

Equity Securities:*
Mutual fund	$	3,112	$	3,112		0		0

Assets and liabilities measured on a non-recurring basis:
Impaired loans:
Land	$	313	$	0	$	0	$	313
Commercial and industrial		302		0		0		302
Consumer residential		16		0		0		16
Other real estate owned		253		0		0		253

* Effective

January 1, 2018,

the Company adopted ASU

2016

01,

which requires equity securities with readily determinable fair values to be measured at fair value with changes in the fair value recognized through net income. See Note

for additional information on this new accounting standard.

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Available-for-sale securities

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, if available. If quoted market prices are

not

available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions, and other factors such as credit loss assumptions. Level

securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level

securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level

include asset-backed securities in less liquid markets.

Impaired loans

- ASC Topic

820

applies to loans measured for impairment using the practical expedients permitted by ASC Topic

310,

Accounting by Creditors for Impairment of a Loan

. The Company does

not

record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will

not

be made in accordance with the contractual terms of the loan agreement are considered impaired. Impaired loans where an allowance is established based on the fair value of collateral less the cost related to liquidation of the collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as non-recurring Level

Likewise, when an appraised value is

not

available or management determines the fair value of the collateral is further impaired below the appraised value and there is

observable market price, the Company records the impaired loan as non-recurring Level

Other Real Estate Owned

- Other real estate assets (“OREO”) acquired through, or in lieu of, foreclosure are held-for-sale and are initially recorded at the lower of cost or fair value, less selling costs. Any write-downs to fair value at the time of transfer to OREO are charged to the allowance for loan losses, subsequent to foreclosure. Appraisals or evaluations are then done periodically thereafter charging any additional write-downs or valuation allowances to the appropriate expense accounts. Values are derived from appraisals of underlying collateral and discounted cash flow analysis. OREO is classified within Level

of the hierarchy.

Net realizable value of the underlying collateral is the fair value of the collateral less estimated selling costs and any prior liens. Appraisals, recent comparable sales, offers and listing prices are factored in when valuing the collateral. We review and verify the qualifications and licenses of the certified general appraisers used for appraising commercial properties or certified residential appraisers for residential properties. Real estate appraisals

may

utilize a combination of approaches including replacement cost, sales comparison and the income approach. Comparable sales and income data are analyzed by the appraisers and adjusted to reflect differences between them and the subject property such as type, leasing status and physical condition. When the appraisals are received, Management reviews the assumptions and methodology utilized in the appraisal, as well as the overall resulting value in conjunction with independent data sources such as recent market data and industry-wide statistics. We generally use a

discount for selling costs which is applied to all properties, regardless of size. Appraised values

may

be adjusted to reflect changes in market conditions that have occurred subsequent to the appraisal date, or for revised estimates regarding the timing or cost of the property sale. These adjustments typically range between

10%

and

20%

of the appraised value and are based on qualitative judgments made by management on a case-by-case basis.