Note

Fair Value Disclosure

FASB ASC

820

“Fair Value Measurement” defines fair value and provides the framework for measuring fair value and required disclosures about fair value measurements. Fair value is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the transaction date. ASC

820

establishes a fair value hierarchy that prioritizes the inputs used in valuation methods to determine fair value.

The

three

levels of fair value hierarchy are as follows:

	Level 1 –	Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets. These generally provide the most reliable evidence and are used to measure fair value whenever available.

	Level 2 –	Fair value is based on significant inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets, quoted market prices in markets that are not active for identical or similar assets, and other observable inputs.

	Level 3 –	Fair value is based on significant unobservable inputs. Examples of valuation methodologies that would result in Level 3 classification include option pricing models, discounted cash flows, and other similar techniques.

This hierarchy requires the use of observable market data when available. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement.

The following table presents the financial assets measured at fair value on a recurring basis and reported on the Consolidated Statement of Financial Condition as of the dates indicated, by level within the fair value hierarchy. The majority of the Company’s securities are included in Level

of the fair value hierarchy. Fair values for Level

securities were primarily determined by a

third

-party pricing service using both quoted prices for similar assets, when available, and model-based valuation techniques that derive fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates. The standard inputs that are normally used include benchmark yields of like securities, reportable trades, broker/dealer quotes, issuer spreads,

two

-sided markets, benchmark securities, bids, offers, and reference data including market research publications. There were

transfers into or out of Level

during the

three

months ended

March 31, 2020

or year ended

December 31, 2019.

	Fair Value	March 31,		December 31,
	Hierarchy	2020		2019
(Dollars in thousands)

Available for Sales Securities:
Debt Securities:
U.S. Government Agencies	Level 2	$	8,008	$	48,056
Obligations of States and Political Subdivisions	Level 2		24,884		25,843
Mortgage-Backed Securities - Government-Sponsored Enterprises	Level 2		136,232		120,776
Total Debt Securities			169,124		194,675

Marketable Equity Securities:
Mutual Funds	Level 1		1,013		997
Other	Level 1		1,274		1,713
Total Marketable Equity Securities			2,287		2,710
Total Available-for-Sale Securities		$	171,411	$	197,385

The following table presents the financial assets measured at fair value on a nonrecurring basis on the Consolidated Statement of Financial Condition as of the dates indicated by level within the fair value hierarchy. The table also presents the significant unobservable inputs used in the fair value measurements. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves. Techniques used to value the collateral that secure the impaired loans include quoted market prices for identical assets classified as Level

inputs or observable inputs, employed by certified appraisers, for similar assets classified as Level

inputs. In cases where valuation techniques included inputs that are unobservable and are based on estimates and assumptions developed by management based on the best information available under each circumstance, the asset valuation is classified as Level

inputs.

		Fair Value at
	Fair Value	March 31,		December 31,		Valuation	Significant
Financial Asset	Hierarchy	2020		2019		Techniques	Unobservable Inputs	Range
(Dollars in thousands)

Impaired Loans	Level 3	$	2,604	$	3,140	Market Comparable Properties	Marketability Discount	10%	to	30%	(1	)
OREO	Level 3		76		58	Market Comparable Properties	Marketability Discount	10%	to	50%	(1	)

(

) Range includes discounts taken since appraisal and estimated values.

Impaired loans are evaluated when a loan is identified as impaired and valued at the lower of cost or fair value at that time. Fair value is measured based on the value of the collateral securing these loans and is classified as Level

in the fair value hierarchy. At

March 31, 2020

and

December 31, 2019,

the fair value of impaired loans consists of the loan balances of

$3.3

million and

$4.0

million, respectively, less their specific valuation allowances of

$651,000

and

$884,000,

respectively.

OREO properties are evaluated at the time of acquisition and recorded at fair value, less estimated selling costs. After acquisition, OREO is recorded at the lower of cost or fair value, less estimated selling costs. The fair value of an OREO property is determined from a qualified independent appraisal and is classified as Level

in the fair value hierarchy.

For the

three

months ended

March 31, 2020,

one

commercial real estate OREO property with a fair value of

$18,000

sold at a gain of

$4,000.

In addition,

two

residential real estate loans for

$76,000

transferred to OREO.

For the

three

months ended

March 31, 2019,

one

commercial real estate OREO property with a fair value of

$697,000

was sold at a

$33,000

gain and

one

residential OREO property, with a fair value of

$46,000

was sold for a

$3,000

loss.

Financial instruments are defined as cash, evidence of an ownership in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a

second

entity on potentially favorable or unfavorable terms.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. If

readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses and other factors, as determined through various option pricing formulas or simulation modeling. As many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting estimated fair values

may

not

be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in the assumptions on which the estimated fair values are based

may

have significant impact on the resulting estimated fair values.

As certain assets such as deferred tax assets and premises and equipment are

not

considered financial instruments, the estimated fair value of financial instruments would

not

represent the full value of the Company.

The following table presents the estimated fair values of the Company’s financial instruments at the dates indicated.

		March 31, 2020				December 31, 2019
	Fair Value	Carrying		Fair		Carrying		Fair
	Hierarchy	Value		Value		Value		Value
(Dollars in thousands)

Financial Assets:
Cash and Due From Banks:
Interest Bearing	Level 1	$	64,004	$	64,004	$	68,798	$	68,798
Non-Interest Bearing	Level 1		14,095		14,095		11,419		11,419
Investment Securities:
Available for Sale	See Above		171,411		171,411		197,385		197,385
Loans, Net	Level 3		962,328		1,004,210		942,629		961,110
Restricted Stock	Level 2		3,590		3,590		3,656		3,656
Bank-Owned Life Insurance	Level 2		24,361		24,361		24,222		24,222
Accrued Interest Receivable	Level 2		3,274		3,274		3,297		3,297

Financial Liabilities:
Deposits	Level 2		1,106,640		1,116,037		1,118,359		1,128,078
Short-term Borrowings	Level 2		34,967		34,967		30,571		30,571
Other Borrowed Funds	Level 2		11,000		11,206		14,000		15,380
Accrued Interest Payable	Level 2		863		863		987		987