NOTE

- FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. GAAP established a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following levels:

Level I:

Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II:

Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair valued using other financial instruments, the parameters of which can be directly observed.

Level III:

Assets and liabilities that have little to

pricing observability as of the reported date. These items do

not

have

two

-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

The following tables present the assets measured on a recurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

			March 31, 2018
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a recurring basis:
U.S. government agency securities	$	-	$	8,305	$	-	$	8,305
Obligations of states and political subdivisions		-		65,579		-		65,579
Mortgage-backed securities in government-sponsored entities		-		17,378		-		17,378
Total debt securities		-		91,262		-		91,262
Equity securities in financial institutions		393		250		-		643
Total	$	393	$	91,512	$	-	$	91,905

			December 31, 2017
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a recurring basis:
U.S. government agency securities	$	-	$	8,719	$	-	$	8,719
Obligations of states and political subdivisions		-		67,429		-		67,429
Mortgage-backed securities in government-sponsored entities		-		18,510		-		18,510
Total debt securities		-		94,658		-		94,658
Equity securities in financial institutions		-		625		-		625
Total	$	-	$	95,283	$	-	$	95,283

nvestment

Securities Available for S

ale

- The Company obtains fair values from an independent pricing service which represent quoted prices for similar assets, fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level II).

Equity Securities

- Equity securities that are traded on a national securities exchange are valued at their last reported sales price as of the measurement date. Equity securities traded in the over-the-counter (“OTC”) markets and listed securities for which

sale was reported on that date are generally valued at their last reported “bid” price if held long, and last reported “ask” price if sold short. To the extent equity securities are actively traded and valuation adjustments are

not

applied, they are categorized in Level I of the fair value hierarchy. Equity securities traded on inactive markets or valued by reference to similar instruments are generally categorized in Level II of the fair value hierarchy. Equity securities are carried at fair value through net income at

March 31, 2018.

Impaired Loans

– The Company has measured impairment on collateral-dependent impaired loans generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent

third

-party appraisals of the properties. In some cases, management

may

adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management makes estimates about expected costs to sell the property which are also included in the net realizable value. If the fair value of the collateral-dependent loan is less than the carrying amount of the loan, a specific reserve for the loan is made in the allowance for loan losses or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included in the following table as a Level III measurement. If the fair value of the collateral exceeds the carrying amount of the loan, then the loan is

not

included in the following table as it is

not

currently being carried at its fair value. The fair values in the following table exclude estimated selling costs of

$573,000

March 31, 2018.

Other Real Estate Owned (OREO)

– OREO is carried at the lower of cost or fair value, which is measured at the date of foreclosure. If the fair value of the collateral exceeds the carrying amount of the loan,

charge-off or adjustment is necessary, the loan is

not

considered to be carried at fair value, and is therefore

not

included in the following table. If the fair value of the collateral is less than the carrying amount of the loan, management will charge the loan down to its estimated realizable value. The fair value of OREO is based on the appraised value of the property, which is generally unadjusted by management and is based on comparable sales for similar properties in the same geographic region as the subject property, and is included in the following table as a Level II measurement. In some cases, management

may

adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. In these cases, the loans are categorized in the following table as Level III measurement since these adjustments are considered to be unobservable inputs. Income and expenses from operations and further declines in the fair value of the collateral subsequent to foreclosure are included in net expenses from OREO.

The following tables present the assets measured on a nonrecurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Collateral-dependent impaired loans are carried at fair value if they have been charged down to fair value or if a specific valuation allowance has been established. A new cost basis is established at the time a property is initially recorded in OREO. OREO properties are carried at fair value if a devaluation has been taken to the property’s value subsequent to the initial measurement.

			March 31, 2018
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a non-recurring basis:
Impaired loans	$	-	$	-	$	1,734	$	1,734

			December 31, 2017
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a non-recurring basis:
Impaired loans	$	-	$	-	$	3,072	$	3,072
Other real estate owned		-		-		32		32

The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company uses Level III inputs to determine fair value:

Quantitative Information about Level III Fair Value Measurements

(Dollar amounts in thousands)

Fair Value Estimate

Valuation Techniques

Unobservable Input

Range (Weighted Average)

March 31, 2018

Impaired loans

1,734

Appraisal of collateral (1)

Appraisal adjustments (2)

100.0%

(40.58%)

Quantitative Information about Level III Fair Value Measurements

(Dollar amounts in thousands)

Fair Value Estimate

Valuation Techniques

Unobservable Input

Range (Weighted Average)

December 31, 2017

Impaired loans

3,072

Appraisal of collateral (1)

Appraisal adjustments (2)

86.1%

(13.8%)

Other real estate owned

Appraisal of collateral (1)

Appraisal adjustments (2)

10.0%

(

)

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level III inputs which are

not

identifiable, less any associated allowance.

(

)

Appraisals

may

be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

The estimated fair value of the Company’s financial instruments

not

recorded at fair value on a recurring basis is as follows:

	March 31, 2018
	Carrying								Total
	Value		Level I		Level II		Level III		Fair Value
	(Dollar amounts in thousands)
Financial assets:
Cash and cash equivalents (1)	$	33,258	$	33,258	$	-	$	-	$	33,258
Loans held for sale		937		-		937		-		937
Net loans		924,823		-		-		916,073		916,073
Bank-owned life insurance (1)		15,764		15,764		-		-		15,764
Federal Home Loan Bank stock (1)		3,679		3,679		-		-		3,679
Accrued interest receivable (1)		3,269		3,269		-		-		3,269

Financial liabilities:
Deposits	$	944,573	$	662,072	$	-	$	279,850	$	941,922
Short-term borrowings (1)		18,671		18,671		-		-		18,671
Other borrowings		19,028		-		-		19,030		19,030
Accrued interest payable (1)		573		573		-		-		573

(

)

This financial instrument is carried at cost at

March 31, 2018,

which approximates the fair value of the instrument.

	December 31, 2017
	Carrying								Total
	Value		Level I		Level II		Level III		Fair Value
	(Dollar amounts in thousands)
Financial assets:
Cash and cash equivalents	$	39,886	$	39,886	$	-	$	-	$	39,886
Loans held for sale		463		-		463		-		463
Net loans		916,023		-		-		913,323		913,323
Bank-owned life insurance		15,652		15,652		-		-		15,652
Federal Home Loan Bank stock		3,589		3,589		-		-		3,589
Accrued interest receivable		3,288		3,288		-		-		3,288

Financial liabilities:
Deposits	$	878,194	$	635,207	$	-	$	242,020	$	877,227
Short-term borrowings		74,707		74,707		-		-		74,707
Other borrowings		29,065		-		-		29,069		29,069
Accrued interest payable		578		578		-		-		578