FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein 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. Therefore, any aggregate unrealized gains or losses should not be interpreted as a forecast of future earnings or cash flows. Furthermore, the fair values disclosed should not be interpreted as the aggregate current value of the Company.

Valuation Methodology

During the three months ended March 31, 2018, the Company implemented “ASU 2016-01 - Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 requires public business entities to use the exit prices when measuring the fair value of financial instruments for disclosure purposes. The other requirements of ASU 2016-01 are described in Note 1. Fair values at December 31, 2019 and December 31, 2018 were measured using an “exit price” notion.

The exit price notion uses a similar approach as the Company’s previous methodology for valuations that used discounted cash flows, but also incorporates other factors, such as enhanced credit risk, illiquidity risk and market factors that sometimes exist in exit prices in dislocated markets. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The implementation of ASU 2016-01 was most impactful to the Company’s loan portfolio because the Company’s other financial instruments have one or several other compensating factors (e.g., quoted market prices, lower credit risk, limited liquidity risk, short durations, etc.).

Investment securities - Fair values are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

FHLB stock – Fair values are at cost, which is the carrying value of the securities.

Accrued Interest Receivable – Carrying amount is the estimated fair value.

Investment in bank owned life insurance (“BOLI”) – Fair values are at cash surrender value.

Loans receivable – The fair values for non-impaired loans are estimated using discounted cash flow analysis, applying interest rates currently being offered for loans with similar terms and credit quality. Internal prepayment risk models are used to adjust contractual cash flows.

Management estimates the fair value of impaired loans using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. After evaluating the underlying collateral, the fair value is determined by allocating specific reserves from the allowance for loan losses to the impaired loans.

Deposits - The fair value of checking accounts, saving accounts and money market accounts were the amount payable on demand at the reporting date.

Time certificates - The fair value was determined using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar products.

Long-term debt and short-term borrowings - These were valued using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar borrowings.

Guaranteed preferred beneficial interest in junior subordinated securities (TRUPs) - These were valued using discounted cash flows. The discount rate was equal to the rate currently offered on similar borrowings.

Subordinated notes - These were valued using discounted cash flows. The discount rate was equal to the rate currently offered on similar borrowings.

Off-balance sheet instruments - The Company charges fees for commitments to extend credit. Interest rates on loans for which these commitments are extended are normally committed for periods of less than one month. Fees charged on standby letters of credit and other financial guarantees are deemed to be immaterial and these guarantees are expected to be settled at face amount or expire unused. It is impractical to assign any fair value to these commitments.

The Company’s estimated fair values of financial instruments are presented in the following tables.



December 31, 2019					Fair Value Measurements
(dollars in thousands) Description of Asset	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Investment securities - AFS	$	208,187	$	208,187	$	—	$	208,187	$	—
Investment securities - HTM
Equity securities carried at fair value through income	4,669		4,669		0		4,669		—
Non-marketable equity securities in other financial institutions	209		209		—		209		—
FHLB Stock	3,447		3,447		—		3,447		—
Loans Receivable	1,445,109		1,424,506		—		—		1,424,506
Accrued Interest Receivable	5,019		5,019		—		5,019		—
Investment in BOLI	37,180		37,180		—		37,180		—
Liabilities
Savings, NOW and money market accounts	$	1,117,668	$	1,117,668	$	—	$	1,117,668	$	—
Time deposits	394,169		396,492		—		396,492		—
Short-term borrowings	5,000		5,007		—		5,007		—
Long-term debt	40,370		40,588		—		40,588		—
TRUPs	12,000		10,129		—		10,129		—
Subordinated notes	23,000		23,031		—		23,031		—



December 31, 2018					Fair Value Measurements
(dollars in thousands) Description of Asset	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Investment securities - AFS	$	119,976	$	119,976	$	—	$	119,976	$	—
Investment securities – HTM	96,271		93,745		999		92,746		—
Equity securities carried at fair value through income	4,428		4,428		—		4,428		—
Non-marketable equity securities in other financial institutions	209		209		—		209		—
FHLB Stock	3,821		3,821		—		3,821		—
Loans Receivable	1,337,129		1,298,465		—		—		1,298,465
Accrued Interest Receivable	4,957		4,957		—		4,957		—
Investment in BOLI	36,295		36,295		—		36,295		—
Liabilities
Savings, NOW and money market accounts	$	982,600	$	982,600	$	—	$	982,600	$	—
Time deposits	447,029		446,683		—		446,683		—
Short-term borrowings	35,000		35,016		—		35,016		—
Long-term debt	20,436		20,568		—		20,568		—
TRUPs	12,000		10,924		—		10,924		—
Subordinated notes	23,000		23,085		—		23,085		—

At December 31, 2019 and 2018, the Company had outstanding loan commitments of $96.6 million and $47.3 million, respectively, and standby letters of credit of $22.3 million and $21.2 million respectively. Additionally, at December 31, 2019 and 2018, customers had $230.5 million and $211.5 million, respectively, available and unused on lines of credit, which include lines of credit for commercial customers, home equity loans as well as builder and construction lines. Based on the short-term lives of these instruments, the Company does not believe that the fair value of these instruments differs significantly from their carrying values.

The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2019 and 2018, respectively. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amount presented herein.