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, 2018

and

December 31, 2017:

(Dollars in Thousands)

Carrying value at September 30, 2018

Description

Balance as of

September 30,

2018

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

10,800

–

10,800

–

Mortgage-backed securities and CMO’s

19,325

–

19,325

–

Corporate securities

6,588

–

6,588

–

Municipal securities

8,991

–

8,991

–

(Dollars in Thousands)

Carrying value at December 31, 2017

Description

Balance as of

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:

U.S. Government agency securities

13,435

–

13,435

–

Mortgage-backed securities and CMO’s

23,981

–

23,981

–

Corporate securities

7,067

–

7,067

–

Municipal securities

10,861

–

10,861

–

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, 2018

and

December 31, 2017.

(Dollars in Thousands)			Carrying value at September 30, 2018
Description	Balance as of September 30, 2018		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	$	1,378	$	–	$	1,378	$	–
Other real estate owned		3,196		–		697		2,499

(Dollars in Thousands)

Carrying value at December 31, 2017

Description

Balance as

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:

Loans held for sale

1,587

–

1,587

–

Other real estate owned

3,249

–

3,249

September 30, 2018

and

December 31, 2017,

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, 2018:

(Dollars in Thousands)	Quantitative information about Level 3 Fair Value Measurements for September 30, 2018
Assets	Fair Value		Valuation Technique(s)	Unobservable input	Range (Weighted Average)

Other real estate owned	$	1,922	Discounted appraised value	Selling cost	6%	-	10%	(8%)
				Discount for lack of marketability and age of appraisal	0%	-	10%	(0%)

	$	577	Internal evaluations	Internal evaluations	29%	-	29%	(29%)

The following table displays quantitative information about Level

Fair Value Measurements for

December 31, 2017:

(Dollars in Thousands)	Quantitative information about Level 3 Fair Value Measurements for December 31, 2017
Assets	Fair Value		Valuation Technique(s)	Unobservable input	Range (Weighted Average)

Other real estate owned	$	2,254	Discounted appraised value	Selling cost	6%	-	10%	(8%)
				Discount for lack of marketability and age of appraisal	0%	-	43%	(7%)

	$	995	Internal evaluations	Internal evaluations	19%	-	19%	(19%)

The following tables summarize the estimated fair values of the Company’s financial instruments at

September 30, 2018

and at

December 31, 2017.

The Company discloses fair value information about financial instruments, whether or

not

recognized in the statements of financial condition, for which it is practicable to estimate that value. The following estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, management judgment is required to interpret data and develop fair value estimates. Accordingly, the estimates below are

not

necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies

may

have a material effect on the estimated fair value amounts.

During the

first

quarter of

2018,

the Company adopted ASU

2016

Financial Instruments – Overall (Subtopic

825

): “Recognition and Measurement of Financial Assets and Financial Liabilities”, which among other things, requires a public business entity to base their fair value disclosures for financial instruments that are

not

measured at fair value in the financial statements on the exit price notion. In accordance with this guidance, the Company has adopted the exit price disclosure requirements for the below table on a prospective basis for the period ended

September 30, 2018.

The disclosure included for the period ended

December 31, 2017

continues to be presented utilizing the entry price assumption previously utilized.

Carrying amount and estimated fair values of financial instruments were as follows for the periods indicated:

(Dollars in Thousands)			Fair value at September 30, 2018
Description	Carrying value as of September 30, 2018		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	$	18,126	$	18,126	$	–	$	–	$	18,126
Federal funds sold		193		193		–		–		193
Securities available for sale		45,704		–		45,704		–		45,704
Restricted equity securities		2,359		–		2,359		–		2,359
Loans held for sale		1,378		–		1,378		–		1,378
Loans, net		462,396		–		–		453,266		453,266
Bank owned life insurance		8,147		–		8,147		–		8,147
Accrued income		2,639		–		2,639		–		2,639
Financial liabilities
Total deposits		483,497		–		483,157		–		483,157
FHLB borrowings		10,728		–		10,710		–		10,710
Subordinated notes		7,277		–		7,622		–		7,622
Other borrowings		1,348		–		1,348		–		1,348
Accrued interest payable		556		–		556		–		556

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

December 31, 2017:

(Dollars in Thousands)			Fair value at December 31, 2017
Description	Carrying value as of December 31, 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	$	21,714	$	21,714	$	–	$	–	$	21,714
Federal funds sold		180		180		–		–		180
Securities available for sale		55,344		–		55,344		–		55,344
Restricted equity securities		2,371		–		2,371		–		2,371
Loans held for sale		1,587		–		1,587		–		1,587
Loans, net		440,437		–		–		438,449		438,449
Bank owned life insurance		8,669		–		8,669		–		8,669
Accrued income		2,681		–		2,681		–		2,681
Financial liabilities
Total deposits		477,320		–		477,599		–		477,599
FHLB borrowings		11,028		–		11,150		–		11,150
Subordinated notes		7,254		–		7,890		–		7,890
Other borrowings		1,558		–		1,558		–		1,558
Accrued interest payable		368		–		368		–		368