NOTE

– FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is the exchange price that would be received for 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 on the measurement date. There are

three

levels of inputs that

may

be used to measure fair values:

Level

Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of 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.

Level

Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The following is a description of the Company’s valuation methodologies used to measure and disclose the fair values of its financial assets and liabilities on a recurring or nonrecurring basis:

Securities:

The fair values for securities are determined by quoted market prices, if available (Level

). For securities where quoted prices are

not

available, fair values are calculated based on market prices of similar securities (Level

). For securities where quoted prices or market prices of similar securities are

not

available, fair values are calculated using discounted cash flows or other market indicators (Level

). During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

Impaired Loans:

At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals

may

utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level

classification of the inputs for determining fair value. Non-real estate collateral

may

be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level

fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate Owned:

Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals

may

classification of the inputs for determining fair value. In some instances, fair value adjustments can be made based on a quoted price from an observable input, such as a purchase agreement. Such adjustments would be classified as a Level

classification.

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with management’s own assumptions of fair value based on factors that include recent market data or industry-wide statistics.

On an as-needed basis, the Company reviews the fair value of collateral, taking into consideration current market data, as well as all selling costs that typically approximate

10%.

Interest Rate Swap Agreements

The fair value of interest rate swap agreements is determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash receipts (or payments) are based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves (Level

Assets

and Liabilities

Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below:

	Fair Value Measurements at March 31, 2020 Using
	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 sponsored entity securities		----	$	16,016			----
Agency mortgage-backed securities, residential		----		96,175			----
Interest rate swap derivatives		----		985			----
Interest rate swap derivatives		----		(985	)		----

	Fair Value Measurements at December 31, 2019 Using
	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 sponsored entity securities		----	$	16,736			----
Agency mortgage-backed securities, residential		----		88,582			----
Interest rate swap derivatives		----		465			----
Interest rate swap derivatives		----		(465	)		----

There were

transfers between Level

and Level

during

2020

2019.

Assets

and Liabilities

Measured on a Nonrecurring Basis

Assets and liabilities measured at fair value on a nonrecurring basis are summarized below:

	Fair Value Measurements at March 31, 2020, Using
Assets:	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans:
Commercial real estate:
Owner-occupied		----		----	$	459
Commercial and Industrial		----		----		777

	Fair Value Measurements at December 31, 2019, Using
Assets:	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans:
Commercial real estate:
Owner-occupied		----		----	$	1,644
Commercial and Industrial		----		----		4,559

March 31, 2020,

the recorded investment of impaired loans measured for impairment using the fair value of collateral for collateral-dependent loans totaled

$2,090,

with a corresponding valuation allowance of

$854,

resulting in an increase of

$854

in provision expense during the

three

months ended

March 31, 2020,

with

corresponding charge-offs recognized. This is compared to an increase of

$163

in provision expense during the

three

months ended

March 31, 2019,

with

corresponding charge-offs recognized. At

December 31, 2019,

the recorded investment of impaired loans measured for impairment using the fair value of collateral for collateral-dependent loans totaled

$7,010,

with a corresponding valuation allowance of

$807,

resulting in an increase of

$807

in provision expense during the year ended

December 31, 2019,

with

corresponding charge-offs recognized.

There was

other real estate owned that was measured at fair value less costs to sell at

March 31, 2020

and

December 31, 2019.

There were

corresponding write downs during the

three

months ended

March 31, 2020

and

2019.

The following table presents quantitative information about Level

fair value measurements for financial instruments measured at fair value on a non-recurring basis at

March 31, 2020

and

December 31, 2019:

March 31, 2020

Fair

Value

Valuation

Technique(s)

Unobservable

Input(s)

Range

(Weighted Average)

Impaired loans:

Commercial real estate:

Owner-occupied

459

Sales approach

Adjustment to comparables

10%

50%

27.8%

Commercial and industrial

777

Sales approach

Adjustment to comparables

24%

50%

28.9%

March 31, 2020

Fair

Value

Valuation

Technique(s)

Unobservable

Input(s)

Range

(Weighted Average)

Impaired loans:

Commercial real estate:

Owner-occupied

1,644

Sales approach

Adjustment to comparables

20%

9.7%

Commercial and industrial

4,559

Sales approach

Adjustment to comparables

61%

10.3%

The carrying amounts and estimated fair values of financial instruments at

March 31, 2020

and

December

31,

2019

are as follows:

			Fair Value Measurements at March 31, 2020 Using:
	Carrying Value		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	66,671	$	66,671	$	----	$	----	$	66,671
Certificates of deposit in financial institutions		2,360		----		2,360		----		2,360
Securities available for sale		112,191		----		112,191		----		112,191
Securities held to maturity		11,808		----		6,420		5,695		12,115
Loans, net		766,357		----		----		761,147		761,147
Interest rate swap derivatives		985		----		985		----		985
Accrued interest receivable		2,650		----		385		2,265		2,650

Financial liabilities:
Deposits		845,879		213,262		635,176		----		848,438
Other borrowed funds		32,459		----		33,792		----		33,792
Subordinated debentures		8,500		----		5,979		----		5,979
Interest rate swap derivatives		985		----		985		----		985
Accrued interest payable		1,565		1		1,564		----		1,565

			Fair Value Measurements at December 31, 2019 Using:
	Carrying Value		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	52,356	$	52,356	$	----	$	----	$	52,356
Certificates of deposit in financial institutions		2,360		----		2,360		----		2,360
Securities available for sale		105,318		----		105,318		----		105,318
Securities held to maturity		12,033		----		6,446		5,958		12,404
Loans, net		766,502		----		----		771,285		771,285
Interest rate swap derivatives		465		----		465		----		465
Accrued interest receivable		2,564		----		315		2,249		2,564

Financial liabilities:
Deposits		821,471		222,607		599,937		----		822,544
Other borrowed funds		33,991		----		34,345		----		34,345
Subordinated debentures		8,500		----		6,275		----		6,275
Interest rate swap derivatives		465		----		465		----		465
Accrued interest payable		1,589		3		1,586		----		1,589

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do

not

reflect any premium or discount that could result from offering for sale at

one

time the Company’s entire holdings of a particular financial instrument. Because

market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.