Note

Fair Value Measurement

The Company uses a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company

’s market assumptions. The

three

levels of the fair value hierarchy based on these

two

types of inputs are as follows:

Level

- Valuation is based on quoted prices in active markets for identical assets and liabilities.

Level

- Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

Level

- Valuation is based on model-based techniques that use

one

or more significant inputs or assumptions that are unobservable in the market.

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the consolidated financial statements:

Securities available for sale:

Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level

). If quoted market prices are

not

available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and

may

determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level

The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of

September 30, 2017

and

December 31, 2016:

(Dollars in Thousands)

Carrying value at September 30, 2017

Description

Balance as of

September 30, 2017

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 agency securities

13,356

–

13,356

–

Mortgage-backed securities and CMO

’s

21,193

–

21,193

–

Corporate securities

6,558

–

6,558

–

Municipal securities

12,487

–

12,487

–

(Dollars in Thousands)

Carrying value at December 31, 2016

Description

Balance as of

December 31,

2016

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 agency securities

12,444

–

12,444

–

Mortgage-backed securities and CMO

’s

19,768

–

19,768

–

Corporate securities

5,066

–

5,066

–

Municipal securities

15,697

–

15,697

–

Certain assets are measured at fair value on a nonrecurring basis in accordance with generally accepted accounting principles (GAAP). Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the consolidated financial statements:

Impaired Loans:

The Company does

not

record loans at fair value on a recurring basis. However, from time to time a loan is considered impaired and a specific reserve 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. Once a loan is identified as individually impaired, management measures the extent of any loss. The fair value of impaired loans is estimated using

one

of several methods, including collateral value, market value, and discounted cash flow. Those impaired loans

not

requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investment in such loans. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. If carried at market price based on appraised value less selling costs using observable market data, it is recorded as nonrecurring Level

When an appraised value is

not

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

observable market price, the Company records the impaired loan as nonrecurring Level

Loans held for sale:

The carrying value of these loans approximates the fair value. These loans close in the name of the Bank’s consolidated joint venture subsidiary HomeTown Residential Mortgage, LLC, but are generally sold within a

two

-week period.

Other Real Estate Owned (OREO)

: The carrying amount of real estate owned by the Company resulting from foreclosures is estimated at the lesser of cost or the fair value of the real estate based on an observable market price or a current appraised value less selling costs. If carried at market price based on appraised value using observable market data, it is recorded as nonrecurring Level

When an appraised value is

not

available or is

not

current, or management determines the fair value of the real estate is further impaired below the appraised value or there is

observable market price, the Company records the real estate as nonrecurring Level

The following tables summarize the Company

’s assets that were measured at fair value on a nonrecurring basis as of

September 30, 2017

and

December 31, 2016.

(Dollars in Thousands)

Carrying value at September 30, 2017

Description

Balance as of

September 30,

2017

Quoted Prices

in Active Markets

for Identical Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Assets:

Loans held for sale

1,013

–

1,013

–

Other real estate owned

3,562

–

3,562

(Dollars in Thousands)

Carrying value at December 31, 2016

Description

Balance

as of

December 31,

2016

Quoted

Prices

in Active

Markets

for Identical

Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Assets:

Impaired loans, net of valuation allowance

–

Loans held for sale

678

–

678

–

Other real estate owned

3,794

–

3,794

September 30, 2017

and

December 31, 2016,

the Company did

not

have any liabilities measured at fair value on a nonrecurring basis.

The following table displays quantitative information about Level

Fair Value Measurements for

September 30, 2017:

(Dollars in Thousands)	Quantitative information about Level 3 Fair Value Measurements for September 30, 2017
Assets	Fair Value		Valuation Technique(s)	Unobservable input	Range (Weighted Average)
Other real estate owned	$	1,378	Discounted appraised value	Selling cost		6%	-	6%	(6%)
				Discount for lack of marketability and age of appraisal		4%	-	13%	(12%)

	$	2,184	Internal evaluations	Internal evaluations		4%	-	95%	(22%)

The following table displays quantitative information about Level

Fair Value Measurements for

December 31, 2016:

(Dollars in Thousands)	Quantitative information about Level 3 Fair Value Measurements for December 31, 2016
Assets	Fair Value		Valuation Technique(s)	Unobservable input	Range (Weighted Average)
Impaired loans	$	98	Discounted appraised value	Residual cash flows discount rate		6%	-	6%	(6%)

Other real estate owned	$	1,560	Discounted appraised value	Selling cost		6%	-	6%	(6%)
				Discount for lack of marketability and age of appraisal		4%	-	12%	(10%)

	$	2,234	Internal evaluations	Internal evaluations		4%	-	54%	(24%)

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

Cash and due from banks: The carrying amounts reported in the consolidated balance sheet for cash on hand and amounts due from correspondent banks approximate their fair values.

Federal funds sold: Federal funds sold consist of overnight loans to other financial institutions and mature within

one

three

days. At

September 30, 2017

and

December 31, 2016,

management believes the carrying value of federal funds sold approximates estimated market value.

Securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level

). If quoted market prices are

not

may

determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level

Restricted equity securities: For these restricted equity securities, the carrying amount is a reasonable estimate of fair value based on the redemption provisions of the related securities.

Loans held for sale: The carrying value of these loans approximates the fair value. These loans close in the name of the Bank

’s joint venture subsidiary HomeTown Residential Mortgage, LLC, but are generally sold within a

two

-week period.

Loans receivable: For variable-rate loans that reprice frequently and with

significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

Bank owned life insurance: The cash values of these policies are estimates using information provided by insurance carriers. The policies are carried at their cash surrender value, which approximates fair value.

Deposit liabilities: The fair values disclosed for demand and savings deposits are, by definition, equal to the amount payable on demand at the reporting date. The fair values for certificates of deposit and individual retirement accounts are estimated using a discounted cash flow calculation that applies interest rates currently being offered to a schedule of contractual maturities on such time deposits.

FHLB borrowings: The fair values for FHLB borrowings are estimated using a discounted cash flow calculation that applies interest rates currently being offered on FHLB borrowings to the contractual maturities on such FHLB borrowings.

Subordinated notes: The fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and

may

determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level

Other borrowings: The warehouse line of credit is a short term revolving credit facility used to fund mortgage loans originations until the underlying loan is sold. The warehouse line of credit, federal funds purchased, borrowings under repurchase agreements mature within

days and approximate their fair values.

Accrued interest: The carrying amount of accrued interest receivable and payable approximates fair value.

Off-balance sheet financial instruments: The fair values of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements. At

September 30, 2017

and

December 31, 2016,

the fair value of loan commitments and standby letters of credit were deemed to be immaterial.

The carrying amounts and approximate fair values of the Company's financial instruments are as follows at

September 30, 2017:

(Dollars in Thousands)			Fair value at September 30, 2017
Description	Carrying value as of September 30, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Approximate Fair Values
Financial assets
Cash and due from banks	$	34,755	$	34,755	$	–	$	–	$	34,755
Federal funds sold		132		132		–		–		132
Securities available for sale		53,594		–		53,594		–		53,594
Restricted equity securities		2,371		–		2,371		–		2,371
Loans held for sale		1,013		–		1,013		–		1,013
Loans, net		431,104		–		–		433,652		433,652
Bank owned life insurance		8,115		–		8,115		–		8,115
Accrued income		2,619		–		2,619		–		2,619
Financial liabilities
Total deposits		478,944		–		479,777		–		479,777
FHLB borrowings		11,361		–		11,386		–		11,386
Subordinated notes		7,247		–		7,954		–		7,954
Other borrowings		992		–		992		–		992
Accrued interest payable		508		–		508		–		508

The carrying amounts and approximate fair values of the Company's financial instruments are as follows at

December 31, 2016:

(Dollars in Thousands)			Fair value at December 31, 2016
Description	Carrying value as of December 31, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Approximate Fair Values
Financial assets
Cash and due from banks	$	18,229	$	17,479	$	760	$	–	$	18,239
Federal funds sold		42		42		–		–		42
Securities available for sale		52,975		–		52,975		–		52,975
Restricted equity securities		2,213		–		2,213		–		2,213
Loans held for sale		678		–		678		–		678
Loans, net		415,355		–		–		415,039		415,039
Bank owned life insurance		7,469		–		7,469		–		7,469
Accrued income		2,289		–		2,289		–		2,289
Financial liabilities
Total deposits		450,848		–		451,385		–		451,385
FHLB borrowings		8,000		–		8,031		–		8,031
Subordinated notes		7,224		–		8,012		–		8,012
Other borrowings		1,117		–		1,117		–		1,117
Accrued interest payable		386		–		386		–		386