NOTE

— FINANCIAL INSTRUMENTS

AND FAIR VALUE MEASUREMENTS

Fair values of financial instruments —

The consolidated financial statements include various estimated fair value information as of

December

31,

2019

and

2018.

Such information, which pertains to the Company’s financial instruments, does

not

purport to represent the aggregate net fair value of the Company. Further, the fair value estimates are based on various assumptions, methodologies, and subjective considerations, which vary widely among different financial institutions and which are subject to change.

We determine the fair values of our financial instruments based on the fair value hierarchy established under applicable accounting guidance which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value:

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. There were

transfers between levels during the years ended

December 31, 2019

and

2018.

Following is a description of valuation methodologies used for assets and liabilities in the tables below:

Cash and cash equivalents

–

The carrying amounts of cash and cash equivalents approximate their fair value and are considered a level

valuation.

Restricted Equity Securities-

The carrying amounts of the stock the Company owns in Federal Reserve Bank (“FRB”) and Federal Home Loan Bank (“FHLB”) approximate their fair value and are considered a level

valuation.

Loans receivable

— The fair value of the loan portfolio is estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The Company’s fair value model takes into account many inputs including loan discounts due to credit risk, current market rates on new loans, the U.S. treasury yield curve, LIBOR yield curve, rate floors, rate ceilings, remaining maturity, and average life based on specific loan type. Adoption of ASU

2016

during the

first

quarter of

2018

resulted in the use of an exit price rather than an entrance price to determine the fair value of loans

not

measured at fair value on a non-recurring basis. Loans are considered to be a level

valuation.

Deposit liabilities

— The fair values estimated for demand deposits (interest and non-interest checking, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts). The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. 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 the aggregate expected monthly maturities on time deposits. The fair value of deposits is determined by the Company’s internal assets and liabilities modeling system that accounts for various inputs such as decay rates, rate floors, FHLB yield curve, maturities and current rates offered on new accounts. Fair value on deposits is considered a level

valuation.

Interest receivable and payable -

The carrying amounts of accrued interest approximate their fair value and are considered to be a level

valuation.

Off-balance-sheet instruments

— Fair values for the Bank’s off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the credit standing of the counterparties. The Company considers the Bank’s off balance sheet instruments to be a level

valuation.

The estimated fair values of the Company’s financial instruments

not

measured at fair value as of

December 31, 2019

were as follows:

							Hierarchy
(in thousands)	Carrying			Fair			Valuation
	Amount			Value			Level
Financial assets:
Cash and cash equivalents	$	147,594		$	147,594		1
Restricted equity securities		4,761			4,761		2
Loans, net		741,047			742,484		3
Interest receivable		3,457			3,457		2

Financial liabilities:
Deposits		(1,019,929	)		(1,019,654	)	3
Interest payable		(50	)		(50	)	2

Off-balance-sheet assets (liabilities):
Commitments and standby letters of credit					(1,647	)	3

The estimated fair values of the Company’s financial instruments

not

measured at fair value as of

December 31, 2018

were as follows:

							Hierarchy
(in thousands)	Carrying			Fair			Valuation
	Amount			Value			Level
Financial assets:
Cash and cash equivalents	$	126,145		$	126,145		1
Restricted equity securities		4,357			4,357		2
Loans, net		702,220			697,369		3
Interest receivable		3,755			3,755		2

Financial liabilities:
Deposits		(986,495	)		(986,096	)	3
Interest payable		(40	)		(40	)	2

Off-balance-sheet assets (liabilities):
Commitments and standby letters of credit					(1,539	)	3

The following table presents the carrying value of recurring and nonrecurring financial instruments that were measured at fair value and that were still held in the condensed consolidated balance sheets at each respective period end, by level within the fair value hierarchy as of

December 31, 2019

and

2018.

	Fair Value Measurements at Dec ember 3 1 , 201 9 Using
(in thousands)	Dec ember 3 1 , 201 9		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	$	31,729	$	0	$	31,729	$	0
Collateralized mortgage obligations		1,614		0		1,614		0
Municipalities		90,571		0		90,571		0
SBA pools		6,395		0		6,395		0
Corporate debt		18,968		0		18,968		0
Asset backed securities		40,811		0		40,811		0

Equity Securities:*
Mutual fund	$	3,297	$	3,297	$	0	$	0

Assets and liabilities measured on a non-recurring basis:
Impaired loans:
Land	$	175	$	0	$	0	$	175
Consumer residential		248		0		0		248

	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		38,097		0		38,097		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

* 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 accounting standard.

Available-for-sale and equity securities

Investment securities 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 where significant inputs are unobservable.

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

There have been

significant changes in the valuation techniques during the year ended

December 31, 2019.