Fair Value Measurements

ASC Topic

820,

“Fair Value Measurements and Disclosures

”

defines fair value, establishes a framework for measuring fair value, and sets forth disclosures about fair value measurements. ASC Topic

825,

“Financial Instruments

”

allows entities to choose to measure certain financial assets and liabilities at fair value. The Company has

not

elected the fair value option for any of its financial assets or liabilities.

ASC Topic

820

defines fair value as the price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. It also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This Topic describes

three

levels of inputs that

may

be used to measure fair value:

Level

Quoted prices for identical assets or liabilities in active markets that the entity has the ability to access at the measurement date.

Level

Significant other observable inputs other than Level

prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are

not

active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level

Significant unobservable inputs that reflect a reporting entity’s own assumptions supported by little or

market activity about the assumptions that market participants would use in pricing the asset or liability.

Following is a description of the valuation method used for financial instruments measured at fair value on a recurring basis. For this disclosure, the Company only has available for sale debt securities, equity securities, and money market mutual funds classified as cash equivalents that meet the requirement. The carrying value of the

$38.0

million and

$36.7

million in money market mutual funds at

June 30, 2018

and

December 31, 2017,

respectively, is equivalent to its fair value and based on Level

inputs.

Available for sale

debt

securities

and equity securities

Valued primarily by independent

third

party pricing services under the market valuation approach that include, but are

not

limited to, the following inputs:

●

Mutual funds and equity securities are priced utilizing real-time data feeds from active market exchanges for identical securities and are considered Level

inputs.

●

Government-sponsored agency debt securities, obligations of states and political subdivisions, mortgage-backed securities, corporate bonds, and other similar investment securities are priced with available market information through processes using benchmark yields, matrix pricing, prepayment speeds, cash flows, live trading data, and market spreads sourced from new issues, dealer quotes, and trade prices, among others sources and are considered Level

inputs.

Fair value disclosure for available for sale debt securities and equity securities classified as investments on the balance sheet as of

June 30, 2018

and

December 31, 2017

are as follows:

			Fair Value Measurements Using
(In thousands) June 3 0 , 2018	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Available For Sale Securities
Obligations of U.S. government-sponsored entities	$	33,824	$	-	$	33,824	$	-
Obligations of states and political subdivisions		103,429		-		103,429		-
Mortgage-backed securities – residential		172,838		-		172,838		-
Mortgage-backed securities – commercial		46,909		-		46,909		-
Asset-backed securities		15,499		-		15,499		-
Corporate debt securities		7,480		-		7,480		-
Total available for sale securities	$	379,979	$	-	$	379,979	$	-
Equity Securities
Mutual funds and equity securities	$	1,573	$	1,573	$	-	$	-

December 31, 2017

Available For Sale Securities
Obligations of U.S. government-sponsored entities	$	43,208	$	-	$	43,208	$	-
Obligations of states and political subdivisions		114,249		-		114,249		-
Mortgage-backed securities – residential		193,393		-		193,393		-
Mortgage-backed securities – commercial		49,352		-		49,352		-
Asset-backed securities		15,574		-		15,574		-
Corporate debt securities		7,542		-		7,542		-
Total available for sale securities	$	423,318	$	-	$	423,318	$	-
Equity Securities
Mutual funds and equity securities	$	935	$	935	$	-	$	-

The Company is required to measure and disclose certain other assets and liabilities at fair value on a nonrecurring basis in periods following their initial recognition. The Company’s disclosure about assets and liabilities measured at fair value on a nonrecurring basis consists of collateral-dependent impaired loans and OREO.

Adjustments to the fair value of collateral-dependent loans are recorded by either direct loan charge-offs through the allowance for loan losses or an adjustment to the specific reserve through an increase or decrease to the provision for loan losses. The fair value of collateral-dependent impaired loans with specific allocations of the allowance for loan losses is measured based on recent appraisals of the underlying collateral. These appraisals

may

utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraisers take absorption rates into consideration and adjustments are routinely made in the appraisal process to identify differences between the comparable sales and income data available. Such adjustments consist mainly of estimated costs to sell that are

not

included in certain appraisals or to update appraised collateral values as a result of market declines of similar properties for which a newer appraisal is available. These adjustments can be significant and typically result in a Level

classification of the inputs for determining fair value.

OREO includes properties acquired by the Company through, or in lieu of, actual loan foreclosures and is carried at fair value less estimated costs to sell. Fair value of OREO at acquisition is generally based on

third

party appraisals of the property that includes comparable sales data and is considered as Level

inputs. The carrying value of each OREO property is updated at least annually and more frequently when market conditions significantly impact the value of the property. If the carrying amount of the OREO exceeds fair value less estimated costs to sell, an impairment loss is recorded through noninterest expense.

The following table represents the carrying amount of assets measured at fair value on a nonrecurring basis and still held by the Company as of the dates indicated. The amounts in the table only represent assets whose carrying amount has been adjusted during the period in a manner as described above; therefore, these amounts will differ from the total amounts outstanding. With the exception of those calculated using the collateral valuation method, collateral-dependent impaired loan amounts in the tables below exclude restructured loans that are measured based on present value techniques, which are outside the scope of the fair value reporting framework.

			Fair Value Measurements Using
(In thousands) Description	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 3 0 , 201 8
Collateral-dependent Impaired Loans
Real estate mortgage – construction and land development	$	1,271	$	-	$	-	$	1,271
Real estate mortgage – residential		4,163		-		-		4,163
Total	$	5,434	$	-	$	-	$	5,434

OREO
Construction and land development	$	1,074	$	-	$	-	$	1,074
Total	$	1,074	$	-	$	-	$	1,074

			Fair Value Measurements Using
(In thousands) Description	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 201 7
Collateral-dependent Impaired Loans
Real estate mortgage – construction and land development	$	1,553	$	-	$	-	$	1,553
Real estate mortgage – residential		4,687		-		-		4,687
Real estate mortgage – farmland and other commercial enterprises		2,645		-		-		2,645
Total	$	8,885	$	-	$	-	$	8,885

OREO
Construction and land development	$	3,468	$	-	$	-	$	3,468
Residential real estate		157		-		-		157
Farmland and other commercial enterprises		821		-		-		821
Total	$	4,446	$	-	$	-	$	4,446

The following table represents fair value adjustments recorded in earnings for the periods indicated on assets measured at fair value on a nonrecurring basis.

	Three months ended June 30,				Six months ended June 30,
(In thousands)	2018		2017		2018		2017
Net decrease in fair value:
Collateral-dependent impaired loans	$	22	$	25	$	47	$	27
OREO		462		138		479		202
Total	$	484	$	163	$	526	$	229

The following table presents quantitative information about unobservable inputs for assets measured on a nonrecurring basis using Level

measurements. As described above, the fair value of real estate securing collateral-dependent impaired loans and OREO are based on current

third

party appraisals. It is sometimes necessary, however, for the Company to discount the appraisal amounts supporting its impaired loans and OREO. These discounts relate primarily to marketing and other holding costs that are

not

included in certain appraisals or to update values as a result of market declines of similar properties for which newer appraisals are available. Discounts

may

also result from contracts to sell properties entered into during the period. The range of discounts is presented in the table below for

2018

and

2017.

(In thousands)	Fair Value		Valuation Technique	Unobservable Inputs	Range			Weighted Average
June 3 0 , 201 8
Collateral-dependent impaired loans	$	5,434	Discounted appraisals	Marketability discount		-%			-	%
OREO	$	1,074	Discounted appraisals	Marketability discount	0%	-	6.0%		5.3	%
December 31, 201 7
Collateral-dependent impaired loans	$	8,885	Discounted appraisals	Marketability discount	0%	-	22.8%		3.1	%
OREO	$	4,446	Discounted appraisals	Marketability discount	0%	-	71.7%		4.0	%

Fair Value of Financial Instruments

The table that follows represents the estimated fair values of the Company’s financial instruments made in accordance with the requirements of ASC Topic

825,

“Financial Instruments

”

ASC Topic

825

requires disclosure of fair value information about financial instruments, whether or

not

recognized in the balance sheet for which it is practicable to estimate that value. The estimated fair value amounts have been determined by the Company using available market information and present value or other valuation techniques. These derived fair values are subjective in nature, involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. ASC Topic

825

excludes certain financial instruments and all nonfinancial instruments from the disclosure requirements. Accordingly, the aggregate fair value amounts presented are

not

intended to represent the underlying value of the Company.

The following table presents the estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at

June 30, 2018

and

December 31, 2017.

Information for available for sale investment securities is presented within this footnote in greater detail above. In accordance with the prospective adoption of ASU

2016

01,

the fair values as of

June 30, 2018

were measured using an exit price notion.

					Fair Value Measurements Using
(In thousands)	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 3 0 , 201 8
Assets
Cash and cash equivalents	$	93,246	$	93,246	$	93,246	$	-	$	-
Held to maturity investment securities		2,837		2,868		-		2,868		-
Loans, net		1,054,214		1,035,437		-		-		1,035,437
Accrued interest receivable		4,797		4,797		-		4,797		-
Federal Home Loan Bank and Federal Reserve Bank Stock		12,996		12,996		-		-		12,996

Liabilities
Deposits		1,334,787		1,334,390		1,135,600		-		198,790
Securities sold under agreements to repurchase		33,532		33,534		-		33,534		-
Federal Home Loan Bank advances		3,392		3,439		-		3,439		-
Subordinated notes payable to unconsolidated trusts		33,506		24,301		-		-		24,301
Accrued interest payable		396		396		-		396		-

December 31, 201 7
Assets
Cash and cash equivalents	$	120,408	$	120,408	$	120,408	$	-	$	-
Held to maturity investment securities		3,364		3,478		-		3,478		-
Loans, net		1,025,480		1,012,959		-		-		1,012,959
Accrued interest receivable		4,935		4,935		-		4,935		-
Federal Home Loan Bank and Federal Reserve Bank Stock		13,235		13,235		-		-		13,235

Liabilities
Deposits		1,379,903		1,380,122		1,157,045		-		223,077
Securities sold under agreements to repurchase		34,252		34,257		-		34,257		-
Federal Home Loan Bank advances		3,479		3,546		-		3,546		-
Subordinated notes payable to unconsolidated trusts		33,506		22,709		-		-		22,709
Accrued interest payable		261		261		-		261		-